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Risk & Reward

By ReNew Canada 11:09AM July 15, 2014

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With the recent provincial election, the majority Liberal government now has an excellent opportunity to proceed with its plan to invest $130 billion in infrastructure over the next 10 years. Strategic considerations and coordination will be crucial. In particular, an evidence-based approach is paramount when making decisions about where to invest for both new projects and the rehabilitation of existing assets. While this speaks to the fiscal constraints which all governments face, effective delivery of infrastructure programs will also benefit from more collaborative processes with all orders of government, the public, and specific sectors of the economy.

Municipal, provincial, and federal governments are gross fiscal beneficiaries of public investments in Ontario. Yet, while there has been an uptick in infrastructure commitments over the past number of years, the recent trend of 3.1 per cent of Ontario GDP invested is still well below the macroeconomic desirable level of 5.1 per cent. To better understand the effects of the relative contributions of different governments, we conducted research for the Residential and Civil Construction Alliance of Ontario to analyze how the risks and returns from public infrastructure investment in Ontario are currently apportioned between Ottawa, Queen’s Park and local municipalities.

Our analysis shows that if a sustainable public infrastructure investment strategy follows the premise of maximizing economic returns while minimizing the risks for “investors” (different levels government), then it would follow that to maximize the return on its assets, the federal government would contribute about 39 percent of the investment (about two per cent of Ontario GDP) while Queen’s Park and local municipalities would collectively contribute about 61 per cent (about three per cent of Ontario GDP). The current situation shows a different story, however, with the federal government covering only 12 per cent of the investment risk (about 0.37 per cent of GDP) with Queen’s Park and local municipalities collectively covering 88 per cent of the investment risk (about 2.8 per cent of GDP).

Unfortunately, the current asymmetry of risk-for-return apportionment puts Queen’s Park and local municipalities in a fiscal predicament in that they do not recover sufficient returns on their own investments to cover the costs. If the province attempts to increase infrastructure investments on its own without support from Ottawa, it will result in continued deficits or the need to seek other solutions (such as higher tax rates; asset sales). The experience for the federal government is somewhat different. As a significant net beneficiary of infrastructure investment in Ontario (through taxation), Ottawa is better able to run fiscal surpluses.

If balancing returns against the risks was an objective, then the federal government could move from its current level of about 0.37 per cent of GDP to a 2 per cent contribution (about $7.2 billion annually in the short-term), and still enjoy 65 per cent of the surpluses that accrue from Ontario infrastructure investments. Moreover, this adjustment would restore the ability of Queen’s Park and local municipalities to generate surpluses of their own from these infrastructure investments.

In the spirit of an evidence-based dialogue, there is a case to be made for increased federal government investment in Ontario infrastructure as justified through the sharing of the risks and returns. It’s this type of data-driven analysis we believe the Infrastructure for Jobs and Prosperity Act inspires (Bill 141 introduced in the last session, but yet to be passed) and it shows a clear objective need for Ottawa, Queen’s Park, and municipalities to work more closely together to determine long-term, sustainable approaches to infrastructure investment in Ontario.

The analysis referenced can be found at rccao.com/research/allreports.asp.

Paul Smetanin is the president of the Canadian Centre for Economic Analysis.

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