In today's Report on Business from the Globe and Mail, MLI's Brian Lee Crowley proposes a new model for infrastructure investments in Canada
By Brian Lee Crowley, Globe & Mail Report on Business, April 4th, 2013
Just over a decade ago, Roy Romanow released his Royal Commission report on Canadian health care. The former Saskatchewan premier argued you could buy change in the Canadian health care system. Ten years and many billions of dollars later the general assessment would be that we got that higher spending, but the problems remain essentially unchanged.
And yet here I am about to make the case that Ottawa can fix a broken system by buying change—not in health care, but in infrastructure.
Anyone who has followed federal budgets in recent years will know that infrastructure has been a hot ticket item, and it has become almost indispensable during the stimulus years. The atrociously named "shovel-ready projects" have been as easy to sell to Ottawa as air-conditioners in July, with a large part of the rationale relying on the notion that Canada has a gaping infrastructure deficit.
Alas, the way Ottawa helps to pay for infrastructure is actually part of the explanation behind crumbling bridges and sewers, and putting a few simple conditions on the money would put us, and our infrastructure, on a much sounder footing.
I am not the first to observe that the way we finance much of our infrastructure (roads, water, sewers and the like) is economically irrational. In particular, many municipal services are provided to consumers at considerably less than the real long-term cost, on the assumption that politicians at senior levels will pick up a significant part of the replacement cost after the infrastructure's useful life is over.
The totally predictable result is both that infrastructure is poorly maintained and infrastructure is much more intensively used than if consumers had to pay the real cost of that use. Hence, for example, a surprising share of municipal water in Canada is still unmetered and people pay a flat fee regardless of consumption. A formula guaranteed to encourage heedless consumption of water.
A lot of this is easy to fix.
Take the nonsensical way the public sector accounts for its infrastructure. When the private sector acquires assets, they show up on the balance sheet as part of the value of the enterprise. If the company allows those assets to deteriorate, it shows up quickly in the audited accounts. Not so with the public sector, that can scrimp on upkeep for its roads, bridges and sewers and have it show up as "lower spending".
Similarly, as local government expert Harry Kitchen observed a couple of years ago, municipal infrastructure should ideally be financed by the residents who benefit from it, because this provides the surest guide to how much should be invested in what. When local voters have to face the full cost of their infrastructure choices, including future replacement costs, they are likely to be disciplined in those choices.
That implies, in addition to proper accounting, that local government should be making a lot more use of user fees and local taxes to pay for infrastructure, and they should price infrastructure use to take account of all these costs.
Nowhere have I suggested that Ottawa and the provinces should pick up the tab for local government's failure to run its infrastructure rationally. Unfortunately, local politicians regard it as a matter of commendable machismo that they can arm-twist politicians at senior levels to pony up for their pet projects, with the result that the projects are often delayed by political wrangling and the final outcome is serious overbuilding relative to what is really needed.
Ottawa thus contributes to the economic irrationality of municipal infrastructure by essentially bailing out local governments who have failed properly to account for their assets or to manage them sensibly and now find themselves with their pockets empty when their roads and sewers reach the end of their useful life.
We could learn much about how to do this from New Zealand, which has been at the forefront of so much creative thinking about sensible public sector management. Local government there is required by law to have an infrastructure management plan for each of their significant assets, a plan that includes proper long-term pricing that provides for locally-financed replacement valuable infrastructure when it wears out.
Of course we have to have a plan to escape the old dispensation, and that's where buying change comes in. Ottawa should make any infrastructure grants conditional on the recipients putting in place this kind of asset management plan. That way, when the current building spree reaches the end of its useful life, provision for the next generation will already have been made and arm-wrestling with Ottawa, at least over infrastructure, will be a thing of the past.
Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.