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The new TTC station of the Toronto subway extension in Vaughan near the intersection of Highway 407 and Jane Street. (Peter Power/The Globe and Mail)
The new TTC station of the Toronto subway extension in Vaughan near the intersection of Highway 407 and Jane Street. (Peter Power/The Globe and Mail)

Ottawa needs a new model for infrastructure spending Add to ...

Just over a decade ago, Roy Romanow released his royal commission report on Canadian health care. The former Saskatchewan premier argued that we could buy change in the health care system. Ten years and billions of dollars later, the general assessment would be that we got the higher spending, but the problems are essentially unchanged.

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And yet here I am 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 knows that infrastructure is 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 the federal government helps to pay for infrastructure is actually part of the explanation behind crumbling bridges and sewers. Putting a few simple conditions on the money would put Canadians, 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 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. For example, a surprising share of municipal water is still unmetered and people pay a flat fee regardless of consumption. That’s 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, which can scrimp on upkeep for its roads, bridges and sewers and have it show up as “lower spending.”

As Trent University economics professor Harry Kitchen, an expert in local government, 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.

This implies, in addition to proper accounting, that local governments should rely more heavily on user fees and local taxes to pay for infrastructure, and they should price infrastructure use to take account of all these costs.

I am not suggesting 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 twist the arms of politicians at senior levels to pony up for their pet projects; as a result, projects are often delayed by political wrangling and the final result is serious overbuilding relative to what is really needed.

Ottawa thus contributes to the economic irrationality of municipal infrastructure by bailing out local governments that fail to properly account for, or sensibly manage, their assets and find their pockets empty when their roads and sewers reach the end of their useful life.

We could learn much from New Zealand, which has been at the forefront of 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, including proper long-term pricing that provides for locally financed replacement for infrastructure when it wears out.

We have to have a plan to escape the old dispensation, and that’s where buying change comes in. Ottawa should make infrastructure grants conditional on the recipients putting in place this kind of asset management plan. That way, provision for the next generation will be made and arm-wrestling with Ottawa, at least over infrastructure, will be a thing of the past.

Brian Lee Crowley is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa:www.macdonaldlaurier.ca.

Follow on Twitter: @brianleecrowley

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