Infrastructure Debt and Deficit

Topic Box from the 2006 Sixth Annual Benchmark Report

What Is It?
The infrastructure gap is a pressing issue that must be addressed in the coming years if Canada wishes to preserve its competitiveness. In addition to being an important economic driver, infrastructure is also an essential component in preserving the quality of life for the public. Properly maintained transportation systems afford the efficient delivery of goods, services and resources, while allowing people to navigate safely through cities and provinces. In general, an infrastructure deficit results when expenditures do not keep up with what is required to meet expected needs. The accumulation of such annual deficits has resulted in an 'infrastructure debt', the backlog of unmet construction and maintenance needs, which is also what is commonly referred to as the infrastructure gap.

How Big Is It?
Due to inconsistency in defining infrastructure, the actual size of the gap remains unclear. Statistics Canada only considers 'civil engineering works' – items such as highways and roads, bridges and sanitary sewers – as public infrastructure, while in other studies infrastructure also constitutes public buildings as well as items that provide social services such as daycares and libraries. The inability to produce reliable estimates is also due to differing methodologies employed in various studies. For instance, in one major study by the Federation of Canadian Municipalities (FCM) and McGill University, surveys were sent to 589 different municipalities in order to quantify infrastructure needs. In contrast, an analysis by the Canada West Foundation (CWF) employed data obtained through extensive review of capital plans and financial reports of cities as well as national expenditure patterns. Such inconsistency has resulted in a wide range of estimates for the infrastructure gap. For example, the Canadian Society for Civil Engineering (CSCE) reported the municipal infrastructure debt – representing 70 percent of total infrastructure in Canada – to be approximately $57 billion in 2002. Mirza and Haider (2003) on the other hand, estimated the total Canadian infrastructure gap at $125 billion with the potential to increase to $200 to $300 billion by 2020.

What Caused It?
A primary cause for the debt in national infrastructure is the spending paralysis that occurred in the 1980s and 1990s. Mounting fiscal defi cits forced federal and provincial governments to reduce capital spending. Fiscal pressure was perhaps most strongly felt at the municipal level as transfer payments were reduced, while at the same time many traditional federal and provincial responsibilities were offloaded to municipalities. The burden on municipalities was exacerbated by rapid population growth, accelerating the decay of municipal infrastructure built 30-40 years ago, most of which was approaching the end of its expected useful life. Furthermore, when government funding was available, it tended to be heavily concentrated on construction rather than on the maintenance and renewal of existing infrastructure assets. This was partially caused by the lack of a national inventory, preventing the systematic evaluation of infrastructure needs and the allocation of funds to projects that were required the most.

What to Do About It?
The national infrastructure debt is a complex problem. A range of policies should be considered and experimented with in the search of the best overall outcome. Some contemporary options available include the following:

• Adoption of 'user-pay' model – Charging fees based on usage is not a new concept and has been adopted selectively across Canada and used widely in the U.S., Europe and Asia. In some cases, a user-pay model is effective because it permits some or all costs to be passed directly on to consumers and allow the government to raise the required revenue to finance the particular piece of infrastructure without increasing the overall tax burden.


• Strengthen revenue-raising ability of municipalities – As the majority of Canada's infrastructure is located in urban centres, it is particularly important for municipalities to increase their revenue-raising capacity beyond property taxes. This alternative would not only induce local government to be accountable for infrastructure-related decisions, but also allow them to focus on municipal needs without having to worry about fiscal arrangements decided at the provincial and federal level. In a report by TD Economics, it is suggested that one means of achieving this is for provincial and federal governments to reduce some of their existing taxes and transfer the additional 'tax room' to municipalities.


• More efficient use of municipal debt – In addition to transfer payments from provincial and federal governments, municipalities could also make efficient use of their ability to borrow. Issuing municipal debt is more effective than relying of provincial and federal grants in a number of ways. First, it provides financing in a timely manner so that infrastructure construction or maintenance can take place immediately. Second, debt financing is more equitable because repayment occurs over the useful life of the asset so that both current and future users are responsible for the costs. In contrast, provincial and federal grants are financed through taxes imposed only on users in the current generation. The problem with debt financing is that many communities are too small to be rated while others have a poor credit rating. To overcome this, provincial governments can form a single centralized agency responsible for borrowing on behalf of their respective municipalities.


• Increase involvement of private sector – As previously discussed, one of the factors that caused the large gap in infrastructure was the lack of funding by government due to fiscal pressure. Allowing the business sector to participate in selected infrastructure projects could relieve the financial burden of governments and channel-in private investment capital. Recently, the use of public-private partnerships (P3s) has gained popularity as a means to deliver public goods. Some of the benefits embedded in the P3 approach include: freeing-up government resources, leveraging private-sector expertise and economies of scale, and improved risk allocation.

Sources: Federation of Canadian Municipalities and Department of Civil Engineering and Applied Mechanics, McGill University (1996) Report of the State of Municipal Infrastructure in Canada; Canada West Foundation (2003) A Capital Question: Infrastructure in Western Canada's Big Six; Canadian Society for Civil Engineering (2002) Critical Condition: Canada's Infrastructure at the Crossroads; Mirza and Haider, Department of Civil Engineering at McGill University (2003) The State of Infrastructure in Canada: Implications for Infrastructure Planning and Policy.