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Top 100 corporate finance deals report: P3s a viable route to bridging growing infrastructure funding gap

There’s a fundamental fairness to having users pay the costs, rather than all taxpayers

There’s a fundamental fairness to having users pay the costs, rather than all taxpayers

The federal government’s recent announcement of the new $14 billion Building Canada Fund brings Ottawa’s total 10-year national infrastructure commitment to $70 billion, the largest in Canadian history.

But according to the Federation of Canadian Municipalities, that still leaves a gap of over $200 billion required to repair existing infrastructure and fund new projects. Where will that money come from?

Faced with deficits fuelled mainly by growing health-care costs, the provinces aren’t going to be of much help. And most cities and municipalities are already struggling to contain rising debts.

Canada’s infrastructure funding challenge is shared by countries around the world. A study released last year by consulting firm McKinsey & Company estimates that a staggering $57 trillion in global infrastructure investment is needed between now and 2030.

But another problem that’s shared with other countries is failure to achieve acceptable “productivity” (i.e. value for money) in public infrastructure projects.

The study cites three key reasons for poor productivity: project planners’ “bias,” lack of “performance accountability” and “capability constraints” in public service administrators. It concludes that a “viable improvement” in these factors could save $1 trillion a year.

But how could those improvements actually be attained? Public-sector infrastructure projects have long been infamous for cost overruns and poor quality. And yet the study found that, over the past 20 years, absolutely zero productivity improvement has been made in government-administered infrastructure projects in Japan, Germany and the United States.

There’s no reason to believe other countries are doing any better. So not only has funding the infrastructure gap become virtually impossible, most projects that do get funded fail to deliver value for taxpayer dollars. What to do?

A big part of the answer lies in public-private partnerships, or P3s. P3s mitigate the productivity problems identified in the McKinsey study because planning and forecasting is put in the hands of private-sector experts who are contractually accountable for successful project execution.

A 2010 Conference Board of Canada study of Canadian P3 projects found that they had delivered efficiency gains ranging from 1% to 61% and that “the P3s … have delivered a high degree of cost and time certainty.”

A Fraser Institute study released last year also found that P3s “provide greater value for money and opportunities for innovation.”

The Canada Line light rail transit project from Vancouver International Airport to city centre is an example of this new full-service approach to P3 projects.

InTransit BC, a company owned by project leader SNC-Lavalin together with BC Investment Management Corp. and Caisse de Dépôt et Placement du Québec, delivered the project through a 35-year design-build-construct-operate-and-partially-finance agreement. Helping cash-strapped governments fund such projects has spawned global infrastructure investment funds, which, together with pension and sovereign wealth funds, are investing hundreds of billions of dollars per year.

Transferring cost overrun risk and accessing private-sector capital would help reduce Canada’s public infrastructure gap. But that still leaves governments on the hook for the public partner’s share of the capital and all of the operating cost.

Fiscal realities are accelerating a shift toward user-pay funding, which, for bridges and roads, means toll charges. Today’s electronic technology allows charges to be paid seamlessly as drivers enter and leave toll zones. But user pay has even more encompassing benefits.

There’s a fundamental fairness to having users pay the costs, rather than all taxpayers.

Market-value municipal taxation assessment results in those living closer to the city centre paying more toward road costs than those living in the suburbs.

This means those who use the roads the least pay the most toward building and maintaining them.

The result is a never-ending demand for more roads and what is, in effect, inner-city subsidization of urban sprawl.

Around the world, P3 infrastructure projects are fast becoming the route to providing lower-cost, higher-quality public infrastructure.

And combining private financing with user-pay fees gives cash-strapped governments the ability to fund them. •

Gwyn Morgan is a retired Canadian business leader who has been a director of five global corporations.This commentary is reprinted courtesy of Troy Media (www.troymedia.com).