We can’t afford to keep treating public infrastructure as a public asset

AACI | Vice President, The Regional Group of Companies Inc.
  • Nov. 30, 2016

The Liberals want to create an “infrastructure bank.”

John ClarkWe won’t get the full details until the 2017 budget, but we do know this much: This bank will operate at arm’s length from government. It will focus on what it considers to be priority infrastructure projects from across the country that are large enough to attract private investors. The bank’s staff will then partner with private investors and lever both public and private funds to get the work done.

This model may sound like a public-private partnership (P3), but will be more distant from government than a typical P3. The apparent intention is to make it more appealing and less politically risky to a broader pool of potential investors, such as pension funds looking for stable investments.

Mixed reactions

Clark Somerville, president of The Federation of Canadian Municipalities (FCM), favours the plan. He is of course speaking on behalf of communities across the country that are struggling with crumbling infrastructure in dire need of repair, replacement and expansion, from community services to roads, bridges and public transit.

Others are less enthusiastic. The Globe and Mail documented NDP Leader Thomas Mulcair’s reaction:

“The money for infrastructure is going to go through a privatization bank and we’re going to go through the same thing Ontarians saw in the case of Hydro One: privatization of things that belong to the public, including airports,” Mulcair said. “I don’t recall Mr. Trudeau saying anything about privatization of infrastructure in Canada. … So not only have all (the Liberals’) economic forecasts been wrong, what we’re learning today is they’re completely changing their economic strategy. Privatization was never part of the bargain.”

Mulcair went on to gripe about a federal deficit that’s now running far beyond what the Liberals talked about during the election campaign.

There is no free lunch

But how can he expect to reduce the strain on the public purse without attracting private sector dollars with investment opportunities they consider worthwhile and relatively free of political risk?

The issue is that we have a national infrastructure deficit that some estimates peg at $123 billion. While I love getting something for nothing, the reality is there is no free lunch.

People (read “NDP”) like to view public infrastructure as a non-commercial asset, but the way we use it proves otherwise. Our infrastructure is the spark plug that makes the country and the economy work.

You can monetize at least some of this infrastructure and we of course already do. We pay for use of our water, our electricity, our mass transit systems and our limited number of toll roads. Having user fees is, in my opinion, a good thing because having to pay a price will cause you to think about how much infrastructure you use.

Try to crunch these numbers without choking

The FCM puts the “value” of core municipal infrastructure at $1.1 trillion. I presume value means current replacement cost. This does not include provincial and federal infrastructure. For argument’s sake, let’s assume the total for all three levels of government is $2 trillion.

Also, let’s assume that economic growth and inflation cancel each other out, and on average, infrastructure lasts 40 years before it needs to be replaced. So at the municipal level alone, $1 trillion will have to be replaced over the next 40 years. That’s an average annual maintenance/replacement cost of $25 billion – forever.

In reality, this dollar amount would have to grow by about two per cent annually to account for inflation. That means by the 40th year, the annual expenditure would have more than doubled to $55 billion. And this is just to keep the current infrastructure in good shape. It doesn’t take into account the need for any new/expanded infrastructure … or what’s happening with provincial and federal assets.

How does this get paid for?

Well, it’s quite simple. There is only one revenue source – you and me. That $25 billion is the equivalent of $1,900 per Canadian household annually. With that annual inflation rate of two per cent, this rises to about $4,000 per household by year 40.

We can have all this paid for by the public purse, provided all of us pay that $1,900 per household in taxes (with an incremental increase in each year that follows). That $123 billion deficit is equal to just over $9,000 per household that needs to be spent in infrastructure repair in the short term. This is no small sum!

But having the cost rolled into the household tax bill makes it easy for us to lose sight of it. We slip into the self-delusion that the infrastructure we are using is somehow “free.” And free infrastructure gets used exorbitantly, which leads it to wear out faster.

We need accountability and discipline

User fees, on the other hand, force all of us to think about what we use. Having some level of user fee imposes some discipline and individual accountability for our behaviour and the demands we put on “public” assets. 

Whatever model we choose there is only us to pay for it. Bringing in private sector financing to help government at all levels overcome its infrastructure deficits will also bring in private sector financial discipline. While this would have to result in user fees to create an income stream to provide a return on investment, these user fees will bring similar discipline to our infrastructure use. It will also mean that you pay for what you use, instead of shouldering a cost share for something you don’t.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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