Canadian Infrastructure Financing

james tannerEssays

Canadian Infrastructure Financing

Issues:

1) Reports have indicated that there is a large and growing infrastructure deficit in Canada.

2) The Canadian Federal Government has recently committed to spending several billion dollars in infrastructure over the next ten years.

The first question is why was Canada in such a deficit problem? The second why are governments only willing to expedite such funding in downturns in the economy?

History

Canada only survived as an independent country because of special infrastructure projects funded primarily by the Federal Government. Shortly after Confederation Canada financed the transcontinental railway. In those days the Government was still worried about the potential forces from the US given the size of Canada and its small population. The Government financed the railway by offering huge amounts of land to the company who built the railway. The canal system, providing access to the Great Lakes was an essential infrastructure project. The building of ports on our coasts was needed to facilitate our exports of resources and imports from more industrialized economies. Government run postal and communication systems have been essential in such a large and spread out country.   Our Government created TCA or Air Canada, which was a very important innovation for such a large country. More topical was the creation of TransCanada PipeLines, which was created and financed through the actions of the Canadian Federal Government. Many of these projects were designed to allow Canada to be self-supporting rather than rely upon the USA for support from the south. Canada might not exist at all if not for the building of national infrastructure projects.

The irony of Obama rejecting the Keystone Pipeline Project as not in the interest of the US is remarkable for two reasons. 1) The impetus to build more north/ south pipelines was based upon a north American energy policy touted by the US and resulting from their need for more secure supplies of crude oil and natural gas. Canada reluctantly bought into this strategy eventually endorsing a free trade deal and further integrating the US economy with Canada. So the refusal to allow the Keystone Pipeline was a very important affront to Canadian good will and cooperation. 2) Canada now has been reminded that our economic interests as an independent country are not consistent with those of the USA. Therefore, we are now focused on building Canadian only infrastructure projects such as Energy East, or the Northern Gateway Pipeline.

Why infrastructure lost its funding

The traditional Canadian modus operandi has been cooperation of public and private entities to create healthy economic conditions. Infrastructure has often been supplied or subsidized by governments to allow industry to succeed in a vast and less populated environment. However, as the Canadian economy has become more diversified common economic expectations have assumed we can produce efficient capital markets. This error in thought has been promoted by marketeers and libertarian ideologues intensifying in the early 1980s and continuing until the recent capital market failure of 2008. This failure demonstrated once again that free market systems do not generate perfect capital market conditions no matter how much we hope they would.

So Government or public / private cooperation is a prerequisite to an efficient and balanced economic strategy and infrastructure plays a very important role in that formula.

Infrastructure includes things like bridges, highways and roads, water and electrical distribution systems, communication systems, waterways, ports, airports, in short anything that provides the framework for an economy to function. An additional portion of infrastructure is a public education system. So, primary, secondary and advanced educational facilities like buildings, schools, recreational and sports facilities would be included. Medical facilities could be considered infrastructure as well. Often any necessary economic function which is a natural monopoly could be considered a candidate for infrastructure status.

Different levels of government are responsible for these different types of infrastructure. Municipal governments are responsible for roads and local schools and sometimes recreational, health or medical facilities. They often are responsible for waterworks and some utilities. Provincial Governments are responsible for secondary educational facilities, highways, and large electrical and gas distributions systems as well as resource based facilities. The Federal Government would be involved in any facility which was interprovincial or international such as ports, larger pipelines and electrical lines, national communications and security, and the general economic health of Canada.

The levels of government most familiar or most involved with each area should be the level which ranks or promotes the building and operation of that level of infrastructure. That level of government should be most aware of the needs and uses of the proposed infrastructure. That is why that level of government should be primarily responsible for financing that infrastructure. Unfortunately, many municipalities in Canada cannot issue municipal bonds to finance these projects. It is my opinion that the Canadian government should develop a system of guaranteed municipal bonds to fund the much needed infrastructure projects in each municipality.

This system would work as follows:

A municipal government would submit its list of qualified infrastructure projects to their respective Provincial Governments for a ranking approval process. This process would allow Provinces to plan larger infrastructure projects and maximize use and efficiency between municipalities. The list of qualified projects would go to the Federal Government for a loan qualification process. This process would involve an assessment of the financial capability of the municipal government to service the bond proposed.

This would be done in conjunction with a new municipal bond market operated under the current national securities system. Interest rates, bond conditions and trading facility would be determined and the Federally regulated body would qualify the bonds for Guarantees by the federal government. The bonds would be tax free to the investor and only the municipalities who qualified would be permitted to issue the guaranteed bonds.

Municipalities that did not qualify would have to apply for grants to fund their municipal facilities or set up a system to collect enough taxes or contributions to allow their facilities to be built. The municipal bonds would show up as a liability on the financial statements of the Municipality but the budget of the municipality would only show the annual payments as part of their budgets. Municipalities would continue to be required to balance their budgets as before.

The loan guarantees would only show up as a contingent liability on the balance sheets of the Federal Government. The regulatory body would charge relatively small fees to create the bonds. Trading of the bonds would be permitted – even packaging of the bonds could be allowed.

This proposal would match the infrastructure cost with the human generation actually using the infrastructure. It would provide a source of infrastructure funding not currently available in Canada. And it would force municipalities to run their operations in a more financially conscious manner to qualify for the bond program.

This system is intended to help create an honest and useful capital market in Canada which helped the efficiency of capital markets and transfer of savings to useful and beneficial investments and capital formation and encourage all levels of government to qualify for such a program along with the benefits mentioned above.

It is interesting to note that Canadian Municipalities have the specialized knowledge about appropriate infrastructure projects which would efficiently benefit their communities. Provincial Governments understand the transportation infrastructure and education infrastructure issues that they face. The issue Canadians face is not what to build but how to finance it. This problem is based upon a mistake in the budgeting framework of Canadian Governments. These governments do not assign costs for infrastructure over the period that the infrastructure is used. This error causes intergenerational transfers of wealth, poor planning decisions and budgeting/ deficit problems.

The method of correcting this problem is to finance infrastructure by setting up a system of Canadian municipal tax free bonds. These bonds could be sponsored by the Federal Government.