By Andrew Macklin
Governments across Canada continue to commit record levels of investment towards building new infrastructure to help support community growth, meet modern demand, and replace crumbling assets.
But in the rush to erect new hospitals, expand highways, and build new transit systems, one class of assets has, for the most part, been left behind: aging assets. These are the assets that, while not yet ready to be replaced, need a plan for how to keep them thriving for the communities they serve.
ReNew Canada, with support from KPMG, hosted an industry roundtable discussion to try and determine the issues that are preventing us from planning, funding, and re-developing the aging infrastructure assets across the country. We brought together industry stakeholders from across the public sector infrastructure spectrum in an attempt to determine a way forward to ensure that aging infrastructure assets receive consideration for government investment.
Defining the problem
Decades of under-investment, from all levels of government, has put Canada in a difficult position. Infrastructure assets were strained, pushed over-capacity due to driving expansion of cities. And as our focus has shifted to building assets to meet the growing demand, the assets that are strained continue to age, in need of investment to continue to serve the community. But in most cases, the only funding available to these is the bare minimum for asset management in a municipal budget, creating a need for band-aid solutions just to make them barely serviceable year-to-year.
The focus of infrastructure investment, at both the provincial and federal level, has been new projects and expansion projects. Both have a series of grants and funds that can be applied to in order to help provide funding to increase capacity in a given community. Asset owners apply, hope they receive funds, dedicated some of their own dollars to the project, finish procurement, get shovels in the ground, and then get the thing built. There are no funds to pay for the wear and tear to current assets that bear the brunt of activity while the new asset is being built, nor are there operations and maintenance (O&M) dollars to support the asset once it has been built.
Herein lies the problem. The asset owner has to account for 100 per cent of the O&M funds (unless the project is a public-private partnership that at least takes into account those costs for the first 20-30 years of the asset’s life). The asset owner must bear the brunt of decades of O&M, regardless of the asset class or level of asset use. Few asset owners have the ability to meet those cost demands, especially as they struggle with current O&M demands. Proactive maintenance of newer assets becomes a near-impossible cost to bear. And in the rare case where funding does become available for such activities, the instability of the funds makes it impossible to properly budget for it on an annual basis.
As budgets for annual asset maintenance stay static, or increase marginally, the priorities for spending that money can change rapidly. A greater number of freeze-thaw cycles in a given winter can wreak havoc on roadways, increasing the expense needed for repair. Pipes will burst, powerlines will break, buildings will flood, and even the best fiscal projections on the cost of those repairs still can leave you thousands short.
But without that funding, assets can become stranded. Unable to pay the cost of repair, owners sometimes must just walk away, leaving the asset to become someone else’s problem years later. This is especially the case with assets like dams, buildings, and recreation facilities, where the inability to invest substantially in rehabilitation makes the asset no longer usable by anyone.
There is an important issue that can significantly impact the ability to proactively maintain an asset: project construction overruns. Even when an asset owner is able to do their due diligence and raise/borrow a sum of money that both addresses the project construction and provides funding for O&M, project overruns can quickly deplete that financial base.
Both new assets, and existing assets, need a greater strategy for addressing the short-, medium-, and long-term operations and maintenance needs in order to ensure an asset stays viable for all those who depend on its ability to function.
No one-size-fits-all available
While there is some commonality to the challenges faced, especially in regards to the issue of finding real funding for O&M, the individual sectors also encounter challenges that are unique to them.
As was pointed out during our discussion by Sunnybrook Health Sciences Centre CAO Michael Young, it can be a real challenge for the sector to raise internal funds for infrastructure, especially on the rehabilitation of aging assets. Understandably, donors often see patient care or research and development as priorities for campaigns to raise funds or annual endowments. As a result, even when the situation calls for significant investment in rehabilitating health care assets, the only real route for that funding is as part of the annual budget.
Anna-Raphaelle Audouin, president and CEO of WaterPower Canada, noted that one of the challenges that industry faces is the need to understand whether or not to invest in order to boost capacity. While there is much discussion on the need to increase energy output from sustainable sources for things like the electrification of the vehicle sector, there has been no concrete commitment by the federal government to do so. Right now, producers will look to just refurbish their assets without that commitment, rather than adding capacity at a time when it would be cost-effective to do so. It is not a sensible business decision to add capacity on a hunch that capacity will be needed, or needed but not with a clear timeline in place. In order to ensure ratepayers do not bear the brunt of unnecessary costs for energy production that has no end user, production that costs additional millions of dollars to put into place.
In the water sector, the challenge comes with changing standards impacting by emerging contaminants. As the health sector gains a greater appreciation for the impact of the concentration of certain chemicals in the water, changing standards for the acceptable level of those chemicals can trigger a significant investment for water utilities and municipalities, an investment not always supported with government funding. That capital expense can pull money away from asset maintenance or from capital set aside for water asset replacement.
Providing the necessary tools
In order to evaluate the needs for investment in aging assets, there first needs to be a defined system for evaluation. Asset management programming has begun to put some of these tools in place, but there is not yet a system for the universal evaluation of the structural quality of the different asset classes.
The funding solutions cannot be provided without giving asset owners the tools to evaluate the best long-term solution. It’s easy to find the political will to spend on the shiny new asset when that’s the only funding pot available, but what if it isn’t the best investment? What if refurbishment, rehabilitation, or even expansion are the better options? As Young pointed out during the conversation, you’re not going to add a third floor to a rotted foundation. But, if the foundation is strong, the most cost-effective solution may be to add that third floor rather than a whole new health facility.
Standardized tools for asset evaluation, not just provincially but nationally, are key to providing a level playing field for which new forms of funding can be developed. Because addressing the aging assets issue isn’t just about finding more money for operations and maintenance, it’s ensuring that the money made available is being spent in the most cost-effective way possible. That can’t happen if an asset owner doesn’t have the standardized tools for evaluation. These tools include standards for understanding the state of disrepair, the root causes for the damage, secondary factors that have exacerbated the issue and to what degree, and the real long-term costs of maintenance versus rehabilitation versus replacement.
As was pointed out by David Morley, who is the group head of corporate affairs, policy and communications for the Canada Infrastructure Bank, there is a need for, at worst, a set of guiding principles that can help asset owners understand whether to rehabilitate what exists or build new. But this needs to be done used an evidence-based decision-making process that is removed from the impacts of the political cycle. The desire for ribbon-cuttings or pet projects can otherwise derail the more financially-sound investment decision.
With the tools in place, the economic case for how to proceed with asset maintenance can be established. As was pointed out by Michael Klubal, KPMG’s national industry leader for infrastructure, government and healthcare, sustainability has to be considered as part of the aging asset strategy; building the business case for an investment and how that investment can meet asset sustainability targets.
A different model for government investment
With a universal system for asset evaluation in place, one that provides an economic case for short-, medium-, and long-term investment, new provincial, territorial, and federal investment regimes can be created.
Federal government regimes have focused on ‘shovel-ready’ projects, a funding system that may not be the best for ensuring that infrastructure investments are made in the most fiscally-responsible manner. Instead, using the universal asset evaluation tools available, a new funding system could be developed that could be based on the overall need for investment based on the economic case presented. This could be done sector-by-sector, by asset owner, or by offering a stable amount of annual funding to address the most pressing needs. After all, sustainable funding is one of the key issues facing asset owners, and being given a stable amount of money to address demonstrated infrastructure needs would allow for asset owner to better plan their investment.
At the provincial level, a universal system for asset evaluation could better clarify infrastructure grants targeted at a given sector. For example, the Government of Ontario currently has the Health Infrastructure Renewal Fund in place, which provides close to $200 million to be utilized by health care asset owners. However, under its current construction, no one facility can apply to receive anything more than $10 million, a relative drop-in-the-bucket when appreciating the cost of renewal of existing health care assets. With a universal system of asset evaluation in place, that fund could potentially target its investment in a way that better addresses the real needs for infrastructure renewal within the provincial health care system.
Representatives from the Ontario Clean Water Agency that participated in the conversation suggested that there may be another tool that can improve investment at the municipal level: community engagement. There is value to having councillors, mayors/regional chairs, and municipal C-suite staff visit infrastructure assets like wastewater treatment plants to understand what goes into the disposal of wastewater or the delivery of clean water, and the costs that are associated with the delivery of the services. This can apply to other asset classes as well, such as health care facilities, sports and recreation assets, and government buildings to ensure they can appreciate where the dollars are spent, and why there may be the need for greater investment to deliver services to the publics they serve.
As governments at all levels look for better ways to target infrastructure investments to ensure ‘the most bang for the buck’, especially in the economic recovery phase post-COVID-19, the rehabilitation of aging assets is a smart way to spend money that will have a positive long-term impacts on the communities they serve. Alberta has already seen the value in such an investment, announcing it would double funding for its capital maintenance and renewal program for 2020-21. And while other provinces and territories may follow suit, there is still a need to look beyond the short-term investment, ensuring that all assets have the funding needed to ensure that they continue to stay functional for those who rely on them. Doing so with take new methods of evaluation, new systems for funding, and a new appreciation for why funding these assets properly is so vital for everyone.
This article originally appeared in the May/June 2020 edition of ReNew Canada.
Andrew Macklin is the managing editor of ReNew Canada.
Featured image: The difficulty with securing infrastructure investment in the health care sector is that donors are more inclined to support equipment purchases and overall patient care, even when infrastructure funding is desperately needed.