Canada Joins Global Argument on Infrastructure Investment: Jennifer Wells
What to do with $100 trillion (U.S.) in AUM?
That’s the global assets-under-management figure deployed by economist Joseph Stiglitz and others earlier this year in an IMF working paper on infrastructure financing.
The number bears citing as Canadians ready for further disclosure on the federal government’s hopes to harness private sector investment in infrastructure as an economic curative. This is a global discussion. Or perhaps we should label it a global argument.
The Germans are at it. Note this recent report in Handelsblatt on a national investment agenda, “a kind of central planning hub for investments. The idea is that the federal government would create a ‘concrete, co-ordinated plan to strengthen the social, physical, and regulatory infrastructure.’ ”
The so-called Fratzscher Commission, led by Marcel Fratzscher, president of the German economic institute DIW, is pushing ahead with the idea. The commission’s proposals are expected soon, addressing the “investment gap” that Chancellor Angela Merkel has been complaining about for years. This will ring familiar to readers attuned to our own economic growth council, which has pegged an investment gap here at home at about $500 billion, with some estimates running as high as $650 billion.
Not everyone is enamored with Mr. Fratzscher. Lars Feld, a member of the German Council of Economic Experts, is in the opposition camp. “The commission is going in the completely wrong direction,” Feld was recently quoted as saying, adding that it would nullify “constitutionally-granted municipal autonomy.”
Competing agendas, national versus local, are predictable stumbling blocks.
The Americans are at it, with both Hillary Clinton and Donald Trump advocating for infrastructure investment as a way to boost the U.S. economy, though taking different avenues to get there. What neither candidate has addressed is the size of the “gap” that can reasonably be filled by private investment. A much-quoted report from Deutsche Bank put that figure at 15 to 20 per cent.
“The vast majority of infrastructure is a public good that does not offer a viable revenue model to cover costs let alone provide adequate returns,” said the report. “The relatively few revenue robust projects have little difficulty attracting capital. Indeed for these projects the problem is too much money chasing too few opportunities.”
In a recent issue of Deutsche Bank’s Konzept, John Tierney writes that “little thought is being given to the prospect that infrastructure needs could shift significantly over the next decade, let alone the next half century, rendering many of today’s likely projects white elephants.”
Tierney also addresses the governance problems. The divide between federal and state rights has resulted “in no meaningful accountability between federal and state/local governments over building and maintaining infrastructure.” He cites the plan to connect Alaska’s Gravina Island, population 50, with the mainland. “The proposal was finally scrapped last year after a decade of political infighting.”
The Australians are at it. In the early days of 2008 the then government of Kevin Rudd announced the establishment of Infrastructure Australia, which would be designed to boost the economy’s productive capacity by “unlocking infrastructure bottlenecks like clogged ports and congested roads.” Looking past short-term political interests was the promise.
A report released two weeks ago by the Grattan Institute, a public policy group, found that across a 15-year period, “Australian governments have spent $28 billion more in transport infrastructure than they told taxpayers they would.”
The institute explored how to fix the sort of underlying causes that result in cost overruns, and came up with solid recommendations. Some of those are rooted in transparency and public awareness, including a recommendation that Infrastructure Australia publish summaries of all funded transport infrastructure projects, including the business case and cost benefit analysis.
Canadian pension plans are already big players in global infrastructure. That IMF report co-authored by Stiglitz credits the percentage of capital allocated to infrastructure by OMERS in 2014 at close to 25 per cent, with the Ontario Teachers’ Pension Plan at roughly 7 per cent, the Canada Pension Plan Investment Board at slightly more than 5 per cent, followed closely by PSP Investments (the federal public service, the Mounties).
The challenge for the federal government now will be in building a database of bankable Canadian projects, structuring a maximally transparent reporting mechanism, advancing a fast-growing flow of infrastructure projects, and convincing Canadians that there’s something in it for them. Plenty of lessons have already been learned on how this could go wrong.