Mario Iacobacci is Director of Research and Director of the Centre for Transportation Infrastructure at the Conference Board of Canada.
The federal government has responded to the widespread calls for infrastructure spending by announcing a historic $12 billion in new spending for 2009-10 into public infrastructure-roads, bridges, post-secondary facilities as well as infrastructure for First Nation communities. But will these initiatives provide stimulus in the short term and improve economic performance in the long-term?
There is real concern that this infrastructure spending may not hit the ground quickly. Most forecasters expect to see an economic recovery underway later this year or early in 2010. While decision-makers work hard to accelerate project approvals, they should not lose sight of those projects that can boost our lacklustre productivity performance in the longer-term. The wrong projects would not only waste a once-in-a-generation infrastructure spending opportunity, but could also act as a drag on future productivity if the assets do not attract enough users and/or require exceptional operating subsidies down the road.
The government went to great lengths to reduce the time between spending decisions and project approvals. It proposes to expedite some of the priority projects under the $33-billion Building Canada Plan and bring forward to 2009-10 up to $1 billion in base funding for provinces which had been planned for the 2011-14 period. The government also plans to streamline approval processes for provincial and municipal projects, including instituting one environmental assessment process to meet both federal and provincial requirements. This initiative is long overdue and may shorten the approval process for major projects by as much as a year, but it is likely to take some time to iron out the details with the provinces.
As for the timing of the spending plans, first out the door is likely to be the spending allocated directly to specific projects or refurbishments. These are almost shovel-ready and there is no need to organize competitions between eligible projects or to agree to which projects should be cost-shared.
However, only a small fraction of the spending falls in this category – and this is mostly for federally-owned infrastructure, such as federal bridges. A quick glance at the spending plans suggests that over $10 billion of the $12 billion slated for public infrastructure will either require prior agreement on the projects to be cost-shared with other levels of government or some kind of selection process based on project merits. While this process should lead to the selection of better projects and it may even accelerate some provincial and municipal spending, it is likely to take six to nine months to reach the point where suppliers are selected and work begins.
To some extent, infrastructure spending will have a stimulus effect even if the spending is delayed a few quarters, as construction and engineering companies firm up their expectations about the projects going through the pipeline. This would shore up business confidence and forestall some layoffs and business closures.
The second main criteria for selecting some infrastructure projects over others are the job creation and GDP impacts in the short term and the impacts on economic performance in the longer term. The federal budget understandably focused on the short-term impacts, showing that $1 of infrastructure investment could generate up to $1.60 in real output in two years, which is higher than the impact of most other fiscal stimulus measures in the budget, including housing investment.
However, the proposed infrastructure spending will leave in place assets whose economic useful life will extend far beyond the recovery. An additional dollar of infrastructure investment could lead to as much as 17 cents of cost savings per year by firms, which translates into $2 billion worth of costs savings when applied to the $12 billion spending program. But this productivity boost is easily squandered if projects are poorly conceived.
We have enough examples of such projects in Canada. The construction of Mirabel Airport, which damaged the economic potential of Montreal for two decades, comes to mind. This is why all major new projects should be subject to comprehensive benefit-cost analyses (BCAs). These BCAs should cover all the quantifiable economic, social, and environmental costs and benefits. BCA tests are not a guarantee against dud projects-but they are the only insurance we have that the selected projects will contribute to future prosperity.
BCA tests for major new projects are already a requirement for some provincial agencies, such as Metrolinx, the regional transportation authority for Greater Toronto and Hamilton area, as they are for the federal government. But these tests can take time to carry out and the results do not always occupy their rightful place in project approval decisions.
The federal budget has rightly focused on timely infrastructure spending to restore confidence in the short term. But accelerating project approvals should not come at the expense of identifying the right projects that can make a real difference for our future living standards.
For more feedback on Canada’s stimulus package, read the Conference Board of Canada’s Hot Topics in Economics blog.
February 8th, 2009 at 8:37 pm
As exciting as the recent infrastructure spending and stimulus budget is on the surface, Mario Iacobacci and the Conference Board of Canada make some very good points about the strings attached to that money.
There will be inevitable delays in getting these cheques written, for the right projects, as quickly as possible. Instead of announcing ‘new’ cash and agreement structures (ie red tape and delays), the more direct route for that funding would have been to simply increase the gas tax percentage proportionally to what was promised. The gas tax revenues flow directly to the provinces and municipalities, on a sustainable, predictable basis. Regional governments manage that money on the refurbishments, renewal and revitalization projects that best suit their communities. No middle men… instant cash to shovel ready today.
After all, the federal government is ‘not in the pothole business’ – local governments are.