Ottawa’s move to create an infrastructure bank is a step in the right direction. But it has more to do in creating the accompanying policies of regulating private owners and working with local and provincial governments to stimulate private investment.
Canada is about to embark on one of the largest infrastructure investment programs in recent history, and Ottawa is poised to set up the Canada Infrastructure Bank to attract institutional investment. An infrastructure bank is a great start, but governments at all levels have more to do to enable private investment in the program.
While Canadian governments worry about their limited ability to rack up debt to finance infrastructure investment, major Canadian institutional investors are investing in such programs abroad. They invest abroad because Canadian governments have opened few opportunities for institutional infrastructure investment here.
It’s important to remember the benefits of using private investment in place of taxpayer-supported debt. Government funding for infrastructure has two hidden costs on the economy: greater risks put on taxpayers and the economic harm of taxation.
One of the most common arguments favouring government infrastructure investment is its lower borrowing rate compared to pretty much anyone else. Sounds like the government should do the borrowing, right? Not so fast. This lower interest rate is a result of lenders viewing taxpayers as the guarantors of any cost overruns or late delivery. The lower interest rate is an insurance benefit that taxpayers implicitly provide lenders. Risk has a cost, and not charging for it is a hidden subsidy given by taxpayers to private interests.
Second, every taxpayer dollar a government uses for infrastructure has to come from someone’s taxes. Those taxes mean some businesses invest less and people work less. Given the current challenging fiscal environment, raising an incremental tax dollar means that every dollar of additional publicly funded infrastructure must yield very high societal benefits to be economical.
When users pay for infrastructure instead, there is no wider economic cost. Thus, if an institutional investor were to finance a project directly and recoup its investment with user fees, there is less risk to harm the economy. Governments can reduce these economic harms by relying on users to pay for infrastructure rather than taxpayers, with institutional investors providing the financing in place of governments.
But how can governments deal with the potential downsides of private investment? One concern with selling government-owned infrastructure to private or institutional investors is the risk that the profit-oriented operator would act like a monopolist. It could then raise prices in a way that is, from a public perspective, not the most economically efficient outcome.
Where necessary, Ottawa and the provinces should create independent regulatory bodies overseeing infrastructure assets to ensure their owners, either government-owned corporations or private institutional investors, act in the public interest and for long-term sustainability. In many areas of public infrastructure, Canadian regulators either do not exist or do not have a mandate to provide price regulation for potential investor-operators.
In Canada, provincial and municipal governments own the vast majority of existing and potential user-fee-financed infrastructure of interest to institutional investors. A federally led initiative such as the infrastructure bank will need to provide financial encouragement to provincial and municipal governments to work with the bank. Such inducements could be federal grants for new infrastructure that has a high degree of cost recovery with user charges.
The cost of government-funded infrastructure is higher than it looks based only on borrowing rates. Ottawa’s move to create an infrastructure bank is a step in the right direction. But it has more to do in creating the accompanying policies of regulating private owners and working with local and provincial governments to stimulate private investment.
Benjamin Dachis is Associate Director of Research at the C.D. Howe Institute.
Published in the Globe and Mail.