The growing federal role in local infrastructure faces systemic challenges that must be confronted and addressed, write Brian Lee Crowley and Sean Speer.

By Brian Lee Crowley and Sean Speer

Recent reports by think-tanks, media and stakeholders, and the Parliamentary Budget Office have documented Ottawa’s challenges in executing its much-vaunted infrastructure plan. Federal-provincial negotiations, bureaucratic red tape, and other impediments have conspired to delay spending and stall progress.

Only about half of the $14 billion earmarked for infrastructure in 2016 was committed to specific projects and about a quarter will fall behind schedule for the period between 2016 and 2018. This is important because it erodes the short-term economic benefits that were anticipated and as well as the case that deficit spending is driven by higher infrastructure expenditures.

These aren’t partisan shortcomings or obvious flaws in program design or a case of governmental incompetence. The problems are systemic. This experience highlights the limits of nationalizing local infrastructure decision-making and financing.

Why is nationalizing infrastructure policy wrong?

The current application-based model, whereby provinces and cities send projects to Ottawa and it decides which ones to fund, is systemically flawed for several reasons.

  • Ottawa is no position to make judgements about the relative utility of different regional or local projects. Why would national politicians and non-elected officials know which road projects in Moncton ought to be prioritized? They have no special knowledge or insights into local needs. The result is a tendency for political calculus to tip the scales for one project over another.
  • Nationalizing local spending risks creating regional animus. It’s one thing to pool resources for national priorities such as national defence or border security. It’s another thing for taxpayers in Red Deer to pay for local recreation centres or libraries in Sarnia or vice versa. The practical outcome is either an overemphasis on equitable distribution rather than selecting the best projects or the potential for political fissures to emerge.
  • It erodes political accountability and creates perverse incentives when the level of government managing the project is paying less than 30 cents on the dollar. Severing the link between financing and spending not only makes it harder for voters to hold officials accountable, it discourages long-term asset management planning. Why would local governments develop long-term plans for their infrastructure assets if they know the federal government will cover as much as 40 percent of their project costs? The growing federal role in funding local infrastructure is thus only contributing further to a tendency to political short-termism.
  • Federal funding also discourages user fees and other more rational means of financing capital projects. This invariably produces inefficiencies and distortions – including flat fees for municipal water services rather than consumption-based pricing. Why would local politicians have their voters pay the full cost of a project when Ottawa will help defray a significant share? The result is that local voters don’t have to face the full cost of their infrastructure choices, including future replacement costs.
  • Similarly, the infusion of federal funding and removal of the P3 screen (whereby projects at certain financial thresholds needed to be screened for public-private partnership opportunities) will create a bias in favour of public financing and public project management rather than encouraging lower levels of government to pursue P3s. Why would they bother when Ottawa is offering unconditional transfers? Cities resultantly miss out on the benefits of leveraging private expertise and de-risking.

There are no doubt other flaws – including (but not limited to) federal underinvestment in core areas such as trade-related infrastructure and First Nations infrastructure such as water, housing, and affordable energy. But most readers will get the point. The growing federal role in local infrastructure faces systemic challenges that must be confronted and addressed.

How we got here dates back to the early 2000s and involves governing choices by both major political parties. Where we go from here is the more pertinent question – especially in light of Ottawa’s ongoing infrastructure challenges.

How we got here dates back to the early 2000s and involves governing choices by both major political parties.

How can we fix the systemic challenges?

 There are better ways to fund municipal infrastructure that strengthen local autonomy and accountability and create the right incentives for local policymakers to execute proper pricing and long-term planning.

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 governments are required by law to have infrastructure management plans for each of their significant assets.[1] These plans must include proper pricing and long-term planning that provides for locally-financed replacements to valuable infrastructure when it wears out. This “life-cycle” model requires current policymakers to eschew short-termism and instead focus on future uses and needs, including how to pay for key assets.

A 2017 audit of New Zealand’s experience with lifecycle planning in particular and asset management plans in general provide some useful insights for Canadian policymakers. The keys are (1) evidence-based decision-making based on clear and publicly-available criteria, (2) asset management plans must be adhered to and drive financial and project decision-making over the medium- and long-term, and (3) the process of data collection and measurement must be clear and ongoing.

New Zealand’s experience with lifecycle planning in particular and asset management plans in general provide some useful insights

What does this mean for Canadian policymakers? How can we make our infrastructure process more strategic and less prone to politics?

The Trudeau government to its credit did allocate some federal resources to support local governments develop asset management plans in its first budget. But it’s not a condition for federal funding. It’s merely available to cities for “capacity building.”

Instead, Ottawa should henceforth make all project-based funding conditional on the recipients putting in place this kind of asset management plan. This will ensure that when the current building spree reaches the end of its useful life, provision for the next generation will have already been made and the dependence on Ottawa can be weened off.

The net result would be to devolve back to the municipalities the principal responsibility for project financing and project selection. This is ultimately the most effective way to solve the systemic challenges bedeviling Ottawa’s infrastructure plans.

 Brian Lee Crowley is the Managing Director and Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute.

(Image source: Office of the Prime Minister)

[1] New Zealand’s Local Government Act (Section 101B(1)) requires that “A local authority must, as part of its long-term plan, prepare and adopt an infrastructure strategy for at least 30 consecutive financial years” and (Section 101B(3)) that these strategies must include plans to “renew or replace existing assets, respond to growth or decline in the demand for services that rely on those assets, allow for planned increases or decreases in levels of services provided through those assets”, and so on.

MLI would not exist without the support of its donors. Please consider making a small contribution today.