Proceedings of the Standing Senate Committee on
National Finance
Issue No. 31 - Evidence - May 3, 2017
OTTAWA, Wednesday, May 3, 2017
The Standing Senate Committee on National Finance met this day at 6:47 p.m. to study the federal government's multi-billion dollar infrastructure funding program.
Senator Anne C. Cools (Deputy Chair) in the chair.
[English]
The Deputy Chair: I would like to welcome to the Standing Senate Committee on National Finance all the Canadian viewers who see fit to turn on their television sets at this time. I also want to say that I'm very honoured to stand in tonight for our dear chairman, Senator Mockler, who, as you know, is away travelling with another Senate committee. He asked me if I would do him the great favour of chairing this meeting in his stead. I said I would do it happily, and so here I am.
To all Canadians out there who are watching this and watching me, I would like to note that this committee, the Senate National Finance Committee, has a mandate to study those financial matters that we call the estimates and what we also call the public accounts. Both of these mean the finances of the government, in other words, the public finance.
I am Senator Cools from Ontario, and I am the deputy chair of this committee.
This evening, as I said before, I do not look like Senator Mockler, but I shall stand in for him quite admirably, I hope. I would ask my colleagues on this committee to be so kind and generous as to introduce themselves. Perhaps we can begin with Senator Woo.
Senator Woo: Yuen Pau Woo, British Columbia.
[Translation]
Senator Pratte: Senator André Pratte from Quebec.
Senator Moncion: Senator Lucie Moncion from Ontario.
Senator Forest: Senator Éric Forest from the Gulf of St. Lawrence region, Quebec.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
[Translation]
Senator Eaton: Senator Nicole Eaton from Toronto.
[English]
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
The Deputy Chair: Thank you. We have quite a full house.
I would like to say to the viewers as well that tonight we are continuing our study of the federal government's multi- billion-dollar infrastructure funding program. For those interested, our National Finance Committee began this special study on May 4, 2016, almost a year ago. Since then, our committee has held 15 meetings and we have heard 40 witnesses who have addressed this particular federal government infrastructure program.
Two months ago, on February 28, the committee presented to the Senate its first interim report, titled Smarter Planning, Smarter Spending: Achieving Infrastructure Success.
This evening we continue our hearings on this subject matter. For the first part of our meeting, we shall hear from none other than our most distinguished Parliamentary Budget Officer, Jean-Denis Fréchette, and his associates Peter Weltman, Senior Director, Costing and Program Analysis; and Jason Jacques, Director, Economic and Fiscal Analysis. Welcome to the committee, gentlemen. If you have an opening statement, feel free to go ahead in the order that you choose to present. I thank you very much, gentlemen.
Jean-Denis Fréchette, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer: Thank you, madam chair. It's a pleasure. You're too kind with your very nice words.
Honourable senators, it's a pleasure to be here. Thank you for the invitation to continue our discussion on the infrastructure program, which is something we began a long time ago, and we will continue supporting this committee over the upcoming months. My two colleagues here will make the presentation, with your authorization.
Thank you also for the invitation for next week. We will appear, as you know, on the reform of the mandate of the Parliamentary Budget Officer. As a reminder, today we published a discussion document to help senators better understand that complex legislation.
With your authorization, I would like to ask my colleague Peter Weltman to walk you through our presentation. Thank you.
Peter Weltman, Senior Director, Costing and Program Analysis, Office of the Parliamentary Budget Officer: Thank you. Since the last time we appeared, our objective was to collect data from the 32 departments that are charged with delivering on the government's infrastructure plan. I think you told you it was 31 last time. I found another one. As we keep digging, we find little bits and pieces.
There is a lot of information. I've been struggling with a way to present it in a manner that makes sense, which is why there is so much paper, unfortunately, in front of you. I guess it reflects my age that I still need to do some things on paper. I haven't quite gotten fully electronic yet.
There is a table. Again, what I'm going to show you is a snapshot as to what has been allocated in the budget and how much money has been identified for projects, or the value of those projects. I will give you a breakout as to how the government has divided up the program. We'll look at a couple of — I don't want to call them statistics, but basically assessments as to where we are now and what the plan is to spend the phase-one, two-year money. Just to assure you, we are getting reasonably good cooperation from departments in terms of gathering the data, and we hope to continue this study and will come back. As we get further progress data, we will be able to update this baseline data.
We will start with the legal-size sheet. That is a quick snapshot pictorially as to how all the various budget initiatives are meeting their commitments. The red bar is what was allocated to the particular budget commitment in Budget 2016. The blue bar is the value of the projects being funded under that budget commitment.
You will notice that in many cases the red and blue bars aren't too far apart from each other, and in other cases there are significant gaps. I will cover those in a moment if there are questions.
If you turn the page, again we're looking at progress and plans. This is a quick snapshot as to how many projects were scheduled to start after the introduction of Budget 2016, roughly 8,600. We're tracking about 8,900 projects at the moment.
We have a column that says "projects reported as started.'' At first glance, out of 8,500 projects, only 262 have started. I'd like to remind everybody that that is based only on what departments and project proponents are reporting. We can only tell what is happening based on the data we get. At this point, probably a better way to find out would be to actually visit and see what's going on. We are expecting some actual project data within the next month. With any luck, this number will change. If I were a government putting this together, I would hope the number is changing, so I want to back away from that luck statement. In terms of projects completed, 83 have been completed to date.
The following page is a quick snapshot of what the spending plan looks like over the next two years on a month-by- month basis. It's a bit of a rough look. It's just to give you an idea.
You will see that a lot of spending happens in the summer of 2017, so this summer. There is some logic to that. If you're on a two-year program, most of the construction season is in the summertime, and we see that's where we peak. Typically, in any project you start off a little more slowly and ramp up as things go on.
If it's of interest down the road, as projects are completed, we can start to map how this graph shifts over time. If we're actually seeing things on time or if things slip or are early, we can start to track, in a very rough sense, how the money is flowing, if you will.
Senator Andreychuk: The first column on your first short page, when you say "Office of Indigenous and Northern Affairs'' and "Office of Infrastructure,'' that's where the projects are originating from, being held, developed; is that it? I thought they all originated from two or three ministries, and then they're disseminated through. I'm not sure how I should interpret that column against what we've been told before.
Mr. Weltman: That's a very good question. This column represents that each department in this column has been allocated funding from Budget 2016 for the national infrastructure program. In turn, those departments are spending money on a variety of projects and programs, and it varies by department.
As a quick example, Agriculture and Agri-Food, the 15 projects they have are largely capital refurbishment projects within the department.
The Office of Infrastructure Canada is completely different. They don't have any assets. They are simply transferring funds out to provinces, municipalities and other entities on a variety of projects, be they public transit or green infrastructure, all types of things. There is a whole gamut of projects in this list. Does that help?
Senator Andreychuk: Yes, thank you.
Mr. Weltman: The last page is another way to look at the monthly spend, and it looks at it by budget theme. There is not much we can see there right now except that there is a fair bit of money and it's fairly steadily going out across on the "building stronger communities'' social infrastructure. It's a loss less project-dependent and a lot more program money.
It might be easier to read this package that describes each budget theme. For the first page, investing in green infrastructure is the theme of this series of measures, the measures being the smaller green boxes underneath; the dollars assigned to those boxes; and underneath that, the departments that are responsible for delivering those initiatives and how much money or funding they have identified to this point.
It's a snapshot. If you will, this is where things sit more or less at the end of March 2017, and that's our baseline.
Senator Pratte: The amounts that are there — these are projects approved; is that right?
Mr. Weltman: These are projects identified. Usually, they're also approved, and I think that's probably a simpler way to describe it. Those are projects that have been approved by those various departments.
Senator Pratte: Thank you.
[Translation]
Senator Éric Forest: Actually, the money invested in projects, such as green infrastructure or building strong communities, is from the federal government.
Mr. Weltman: That's right.
Senator Forest: That's not the value of the projects; the leverage effect is therefore not accounted for.
Mr. Weltman: No, that aspect is not included.
Senator Forest: And we are talking about $14.5 billion.
Mr. Weltman: That is right.
Senator Forest: From that amount, what do the forecasts in Budget 2017-18 come to?
Mr. Weltman: The $14 billion is for the first two years, 2016-17 and 2017-18. The projects that have been defined come to $9 billion; there is money earmarked for that phase.
Senator Forest: The first phase was about $18 billion?
Mr. Weltman: No, about $14 billion.
Senator Forest: If you do the math, you get to $14.5 billion.
Mr. Weltman: We get to $14 billion. The value of the projects identified was about $9 billion, so the difference will be carried over to next year, and possibly the following year.
[English]
At this stage, I just wanted to present where we're at. It might be interesting to understand some of the discrepancies between funds allocated and funds identified. If that's permissible, I can do that.
There are a couple of notes. There is one I want to bring to the committee's attention, and I don't know if it got captured in this graph properly. That's too bad, because I wanted to bring it to your attention.
As we went through and did the work, we realized that there's about $896 million that has been allocated under the theme of revitalizing federal public infrastructure. It's found in that envelope, but that money has not been allocated to any department to deliver on. I'm just going to bring that for your consideration. I've asked the Treasury Board Secretariat to provide us more detail as to what their plans were for that money. I'm still waiting to hear back.
The Deputy Chair: What do they mean by "revitalizing the federal infrastructure plan''?
Mr. Weltman: That is typically funds that have been allocated to departments to allow them to do capital asset refurbishment. If they have labs that need to be refurbished or refinished — Agriculture Canada, National Research Council, et cetera. That's where most of that money has been allocated. That's within the control of the departments. Fisheries and Oceans, for example, has about 600-odd projects right across the country for fixing up small-craft harbour, for example, and a whole bunch of other types of projects like that.
The Deputy Chair: It sounds very promising.
Mr. Weltman: We've been working with Indigenous and Northern Affairs Canada quite extensively, because they have a big piece of this. They are in the process of completely revamping how they report on their projects. For the moment, we have, I think, 1,681 projects from INAC. We only have a global dollar value identified — about $800 million. They haven't yet identified project-by-project values. They have told me they intend to make that public at some point.
Senator Eaton: How much?
Mr. Weltman: It's 1,681. The way they are managing their program, they receive base funding and then incremental funding. They call it project funding. They present it in a different format than what we've been asking for. We're working together to reconcile that. That's why there is no value in there yet for INAC.
Something else of note, too, is that CMHC is not showing a lot of projects, but most of their programs are claims- based. So they don't control any of the projects; they just submit a cheque once the project is completed. Many of those projects are delivered via third party, so by municipal or provincial governments. It's more of a program-based approach. For the projects they do follow, we have that data. Again, that's not something they're required under law to give us, but they do give it to us, and they provide a lot of explanation as to where the funds are.
With Infrastructure Canada, since the last time, we're seeing quite a number of new infrastructure projects, especially on the investing-in-green-infrastructure side, as they suggested would happen.
Some of the departments struggle, certainly Employment and Social Development Canada, because they're delivering mostly program money. They don't really run projects; they run programs. For us to ask them to report against projects — we're working with them to try to bring you something that is useful. At the moment, we're getting close. We're doing our best on that one.
The Deputy Chair: Mr. Jacques, would you like to add anything to this?
Jason Jacques, Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer: No, not at this time. Thank you.
The Deputy Chair: Mr. Fréchette, how about you?
Mr. Fréchette: That's okay. I am prepared for questions.
The Deputy Chair: We will go to questions.
Senator Marshall: I have a lot of questions, so you will have to cut me off when my time is up.
The Deputy Chair: I think you can have as much time as you need for now.
Senator Marshall: Thank you very much for all the material you gave us. You released a report in February on infrastructure that was very informative. Is it your intent to issue another report on infrastructure as a follow-up to the one you did in February?
Mr. Fréchette: What we do now is follow up on these infrastructure reports in our economic and fiscal outlook. On Friday last week, we published our EFO, which is presented every spring and fall. In that report, we have an additional section specifically on infrastructure. We follow the money exactly the same as Peter did: in a more concise way and also in a more — I won't say "more interesting'' — but with the impact on the economy. Jason may add something on this, but what we found is that in the first year of the infrastructure, not that much money was spent. The economic impact on the economy was not there.
Our projections in the EFO again say that now this will be picked up, and this is a discussion that some senators had with us last time. I'm looking at my left side right now. And provinces now are picking up and actually reading the projects. We expect by the end of the second year, 90 per cent of the money that was supposed to be spent will be spent.
That being said, I would like Jason to explain a little bit about the impact and productivity and what happens in that context, Madam Chair.
Senator Marshall: Mr. Jacques, can you also address the issue where initially we thought that phase 1 was going to raise the GDP by 0.2 per cent? So you're going to talk about those issues?
Mr. Jacques: There are two parts to it. As Jean-Denis mentioned, in comparison to Budget 2016 and our own initial estimates, the growth in GDP is actually quite a bit lower, we anticipate, for 2016-17, based on two factors.
The first is that we're looking at roughly half of the initial anticipated money that the government announced in Budget 2016-17 actually being spent. That cuts the economic impact in about half or so.
The second factor that I'd like to flag for the committee, especially looking at the next witness appearing at 7:45 from the Fraser Institute, is a slight change we've had to our economic multipliers as well. Our economic multipliers are effectively the impact on the broader economy of one dollar spending or, in this situation, several billions of dollars' worth of spending flowing into the economy for infrastructure projects. We've actually revised our multipliers slightly downwards in comparison to what we had previously. Previously, they were generally a little bit lower than those of the Department of Finance. Now they're a little bit lower still.
In 2016-17, at least in the first year, it's 0.8, which means that for every one single federal dollar, we anticipate it's going to generate roughly 80 cents of additional economic activity in the first year. In 2017-18, we anticipate it's a one- for-one relationship. So for every one dollar of federal spending, it's going to create an additional one dollar worth of GDP or economic activity.
Senator Marshall: So you're saying GDP didn't increase the 0.2 per cent. It was about half of that.
Mr. Jacques: Roughly half.
Senator Marshall: Is that going to be picked up in the current fiscal year because the money is starting to go out the door? The anticipation was we'd be 0.2 per cent in 2016-17 and 0.4 per cent in 2017-18. Because the money didn't get out the door, is the 2017-18 number going to be higher?
Mr. Jacques: Based on our current monitoring, we anticipate it will absolutely be higher.
Senator Marshall: Have you got a number?
Mr. Jacques: Right now, it will be roughly around 0.4 or so, probably a little bit lower, but it will round up to 0.4 per cent of GDP. Again, keeping in mind that most of that has to do with the additional flow of cash in comparison to going back to the baseline that Finance Canada and the Government of Canada had at the outset and also we had put on the table way back in April 2016. Because of the change in multipliers, the actual economic stimulus that we had anticipated and I think the government anticipated would have occurred is a little lower than we expected at the outset.
Senator Marshall: So for this year's budget, 2017, the budget that just came down last month or a month before last, there is no additional money for infrastructure, is there? It's still what was under the original programs and then what was provided in the budget last year and then what was provided in the fall economic update. There is nothing new in 2017, is there?
Mr. Jacques: There is a shifting around of some monies.
Senator Marshall: But nothing additional, was there?
Mr. Jacques: From a material perspective, there wasn't a change.
Senator Marshall: Okay. That's good. In the chart you provided, you compared the budgetary allocation to the value of the projects identified, but in some cases, the value of the projects identified exceeds the budgetary allocation. So what's the story there? That's odd. They're approving projects with money they don't have.
Mr. Weltman: That's what it looks like, but it's not entirely what happens. I don't have it by department. I know you're looking at ISA, the agreements they struck with post-secondary education. That was money already in the budget under another program that was re-allocated in addition to the infrastructure money. That's the case for pretty much all of those departments.
Senator Marshall: Those were what we referred to as the "existing.''
Mr. Weltman: That's right, the existing money that was added to that base.
Senator Marshall: All right. In the report on infrastructure that you issued in February, there were a couple issues that I'm wondering if you could give us an update on. There is one where you're saying that there is no performance measurement framework. Budget 2017 says on page 117 under "measuring success'' that the government will be implementing new approaches to measure the impact of its infrastructure investment. So that sort of just parachutes right into your recommendation. Have you seen any sign of the development of this new approach?
Mr. Weltman: There have been informally, because formally I haven't. Informally in discussions with people at Statistics Canada and Infrastructure Canada, there is work ongoing right now at Stats Canada to start to develop a survey to look at existing infrastructure stock, if you will, what is out there right now. That's a project that got started. It's a fairly complex project. It will take time.
I understand there are people working on performance measures. I'm not privy to them.
Senator Marshall: I've been looking but I haven't found them.
Mr. Fréchette: If I may, the President of the Treasury Board, Minister Brison, also mentioned that they will implement and Treasury Board is working on some kind of measurement for all departments. We have no recent development on that.
Senator Marshall: Just speaking from memory now, I also think in your report you said that it was only Infrastructure Canada that had published their projects so the Canadian public could see them. Has there been any progress on that area? Is it still Infrastructure Canada that is the only one publishing their projects?
Mr. Weltman: At the moment, that's the case. I am aware, though, that the Treasury Board is requiring all departments to catch up, so when that happens, I don't know.
Senator Marshall: Yes. I was looking for them. They gave me some websites to look at, but I still couldn't find it so I was just double-checking to see. Those are my questions for now.
Senator Eaton: Yesterday, Infrastructure Canada showed us a wonderful chart that they had developed digitally showing each ministry and the number of infrastructure projects attached to each ministry, the way you've done here. I don't have those documents with me, but I think I remember it was Parks Canada, Health and Fisheries and Oceans. I think in Parks Canada they had 800 projects on the go. Five hundred were deemed confidential — Parks Canada, confidential; Health, confidential. So we said, "Well, this is the Senate Finance Committee. We're here to follow the money.'' And they said, "Oh, well, the PBO, they know what those projects are.'' So do you know what those projects are?
Mr. Weltman: Yes. However, I see the doors are being locked on us now as it is.
Senator Eaton: I can understand if it was an intelligence thing, national security, but Fisheries and Oceans? Parks? Health?
Mr. Weltman: When we ask for data, and we have a process when data is given to us, we ask the deputy or whoever signs on their behalf as to whether the data can be shared publicly or not. The data that can be shared publicly we share publicly, and the data that cannot be shared publicly we don't share. The reasons that I'm aware of, anyway, for these confidential projects are largely twofold. The biggest reason is the projects haven't yet been publicly announced. We have to respect the agreement by which we got the data.
Senator Eaton: Of course you do. But from our point of view, it's pretty hard to follow the money if there is a box around quite a high percentage in each ministry that's confidential. So who do you suggest we take this up with?
Mr. Fréchette: That's an excellent question that we may raise next week when we discuss our reform. It's a way for departments to control the information. As Peter said, and Senator Forest mentioned something at the beginning, when third party information is involved, it's very difficult, even for departments, to release the information. In some cases, this is exactly what's happening.
So until the contracts are signed, third parties agree to release the information, nobody, except our eyes, just on an aggregate basis, can see the information. Where can you bring that? Maybe it should be part of the PBO's legislation, or even raise that with each department because it's exactly the situation we're facing, and we're really transparent and honest. We said, "Yes, we have seen that information. We cannot release it.'' It has happened more frequently than you can believe.
Senator Eaton: Thank you. That's something we will continue to discuss and you will discuss.
Do you have sufficient access to data on federally funded infrastructure projects to assess performance, or does that get back to the performance measures you're not really comfortable making? Or is this something in your long-term plan you will start to put into each big project? If ministries each had performance measures, would you then look at each ministry's performance measures? Is that another way of doing it?
Mr. Weltman: I think that's a great suggestion. One way is to look at each ministry. That's what we would do, should they be forthcoming.
The other way we would do it, and we have done in the past, is we would look to international best practices. We would try to see if we could come up with some sort of analytical framework that may be used with other jurisdictions to measure the same sorts of things and try to see if we could apply it to the data that we have.
Senator Eaton: I think we have found on this committee — and I don't normally speak for myself — it's very discouraging when big ministries come before us and they have absolutely no performance measures. So we spent that last year on housing in the North, for example. How many houses have been built? Have they been built to code? What's going on? I'm sorry, we don't know. I think it would be a wise improvement if some performance measures were put in place. Thank you.
[Translation]
Senator Forest: You have quite the job on your hands, because there are so many programs and sources. There are two major categories. There are infrastructure investments that come directly from federal departments or agencies — I'm surprised that you're talking about a return of 84 cents or a dollar for a dollar — and for a large portion, from investments with partners for which there is then a leverage effect. We cannot get a picture of that leverage, because Canada has a significant deficit in public infrastructure.
Right now, we are in the first phase of the $14 billion or $15 billion investment. For the second phase, the investment will be over $100 billion. Clearly, the challenge is whether the targets can be met. There are two main targets: the first is the government's intention, through massive investments, to help make the Canadian economy more robust.
If we draw a parallel to a situation where the leverage is a one-to-one ratio when there are a lot of programs or municipal partners, we understand that, for the $1 billion that the federal government is investing, the provincial government will invest $1 billion in turn, and the municipality will invest another one. Under normal circumstances, we should end up with a two-to-one ratio.
This is something that concerns me, because this first phase is quite modest with an investment of $14 billion. When we start the second phase, which will involve an investment of more than $100 billion, the challenge will be to figure out whether we have met our targets.
Will we be able to determine whether, as a result of the $15 billion investment, we have helped improve or reduce the deficit of major public infrastructure? For example, I am concerned about the fact that there are huge needs across Canada for fishing harbours, but in many communities, no investments are being made.
Consider the budget of Transport Canada or Fisheries and Oceans Canada; the appropriations are available, but they are not being spent. Why? This is an important question.
The other thing is to be able to measure the impact of the leverage that these programs should have. Some programs are ongoing, such as the excise tax on gasoline, while others are, for the most part, one-time. It will take some time to figure out — we're talking about $126 billion — whether we've met our targets.
When you look at the number of programs and the number of envelopes, if you count the sub-programs, it's a huge amount of work for you, but, at some point, we will have to be able to draw a positive, neutral or negative conclusion about this major investment of Canadian public funds.
Mr. Fréchette: You are quite right, but I will add one thing. You are talking about your two targets, but remember that, for the second phase of investment, which is $100 billion or more, the main objective is to increase the productivity of the Canadian economy.
For the first phase, the focus was a strong economy, but for the second phase, the goal is to increase the productivity of the economy and of Canada. First of all, you know full well that it is extremely difficult to increase productivity; this wishful thinking has been around for many years. Second, it is difficult to measure the productivity.
So I'm sort of going back to your argument and saying that, yes, it will be extremely important. For the time being, our first preliminary results do not show this surge in productivity as such in the longer term with the expenditures.
Senator Forest: When you add that important objective, which is sort of the backdrop of the second target, what sectors are given priority? Should high-speed communications, for example, take precedence? Should we focus on transport infrastructure? What must we focus on to increase Canada's productivity? First of all, it is a legitimate question to ask whether the programs are in line with the main objective of this very major second phase.
Mr. Fréchette: That is an excellent question for you to ask the future Infrastructure Bank.
Senator Forest: We will try to find it first.
[English]
Senator Woo: I'm going to ask technical questions around the multiplier, maybe mostly to Mr. Jacques. First of all, you made a reference to the witnesses coming later and that your comment was relevant to that. Could you elaborate on why you made that reference? I think I know why, but just spell it out for all of us.
Mr. Jacques: Certainly. The Fraser Institute has published research with respect to economic multipliers and the impact of government investment on the economy. As pointed out and as referenced by the government in Budget 2016, there is a range of views with respect to the actual multipliers for government investment. There is a consensus that there is more slack in the economy. For instance, in 2008 and 2009, the multipliers were quite a bit higher. So instead of the 0.8 that we're currently tracking or that we estimate for 2016-17, it would actually be well above 1, so instead of one dollar of government investment, we will have more than one dollar of economic activity.
On the other hand, in situations where the economy is operating, as we currently assume, close to its full potential, the multipliers can be quite a bit lower, hence the Fraser Institute pointed that out in terms of the flow of funding and how the same federal dollars spent at different times can have differing economic impacts.
Senator Woo: You've lowered the multiplier estimate based on your assumption of capacity utilization, essentially. Is that the major reason for lowering the multiplier estimate?
Mr. Jacques: Following Budget 2016, we had additional conversations with the Department of Finance to actually assess where the funding is flowing through the economy. Of course, there end up being different multipliers with respect to business investment as opposed to government investment. Initially, we were tracking and treating it as business investment. Once we saw it was more appropriately treated as government investment, we transferred it to that category, for which there is a lower multiplier. There is an open debate in the office whether we should be adjusting them downward or shifting them owing to where we are with respect to the current economic cycle.
Senator Woo: Right. There are questions as to capacity and debate as to how much. It is subject to a huge margin of debate.
Do the multipliers capture the long-run productivity effects that Mr. Fréchette alluded to?
Mr. Jacques: Yes, they would. For some of the multipliers and for infrastructure in the first two years, where we have the first year take for example at 0.8, over the longer term the multiplier would actually or should actually grow over time. Another good example of that, of course, are corporate income tax cuts where the multiplier starts out very low at the outset but builds over time. So year five, six and seven it's empirically well above one dollar.
Senator Woo: The multipliers might be revised upwards, then, in years to come?
Mr. Jacques: The multipliers could be revised upward, but I think the key point is that there are some types of investment where the economic stimulus and mpact starts very low, immediately, and then it builds over time.
Senator Woo: Increasing returns of scale.
Mr. Jacques: Exactly. Infrastructure is an example of that, and as other senators have noted, if you invest in the right things, you will get a return immediately, but the return should build over time.
Senator Woo: Do your multipliers capture quality of life improvements?
Mr. Jacques: Up to this point, they unfortunately do not. It's a limitation of being an economist.
Senator Woo: Can you comment on quality of life improvements? Economists have many shortfalls, and I am one as well so I will sympathize with you, but quality of life is a real and important issue for Canadians. Many people look to the PBO as the ultimate source of truth on the effects and benefits of Canadians' spending, including spending on infrastructure.
If you're telling Canadians that the benefit is only 0.8 per cent on a dollar spent, 80 cents on a dollar spent, et cetera, is it correct to say that this is not the full picture because the quality of life benefit is not being captured?
Mr. Jacques: That's entirely accurate. Going back to the report that we published in February, that was why one of the key points that we highlighted was the lack of performance indicators, again, keeping in mind that when you go back to Budget 2016, there is the economic side of the story with respect to short-term economic stimulus and longer term productivity growth. But the policy categories were about green infrastructure, social housing and capital investment on reserves. The policy outcomes were more qualitative in nature. One of the things we highlighted, and that I think the government has accepted looking back to the reference that Senator Marshall made with respect to Budget 2017, is that up to this point there is an absence of those types of performance indicators.
Senator Woo: Anticipating the later testimony as well, we're likely to hear the view that there is some kind of equivalence going on where the spending on infrastructure today is basically going to be compensated for because consumers will spend less later or will fear taxes will go up, so there is really no net benefit over the long run based on the infrastructure spending. Do you share that view in your office?
Mr. Jacques: I don't know that we have a strong theoretical view on that issue. Again, it really depends on the type of infrastructure one invests in, and up to this point we don't have enough data and information with respect to the specific projects.
Not to set up Charles Lammam too well, but I will say that one thing we have been tracking in the short-term is the potential risk of crowding out investment with respect to subnational levels of government. So we do track, in addition to the more detailed work around federal spending, the work that Peter does in great detail. We also track provincial budgets, and of course provinces and municipalities are responsible for close to 90 per cent of actual public infrastructure spending across the country.
Something we have noted is that when you look at the provincial budgets for 2016, most of which were tabled prior to the federal budget for 2016, and you look at their planned infrastructure and capital spending before and their planned capital and infrastructure spending that they estimate for 2016-17 currently in the most recent budgets, you see that there ends up being no net change over the year. For the 10 major provinces, prior to Budget 2016, they said they were going to spend around $50 billion or transfer that down to municipalities, and when you look through the most recent rounds of budgets that were tabled by the provinces, they say when you look at 2016-17, they're still planning on spending around $50 billion.
Senator Woo: What you're saying is they let the federal government take that —
Mr. Jacques: That's certainly one inference that can be made, with $50 billion in planned spending beforehand and a substantial announcement by the federal government with respect to additional funding and transfers around infrastructure, and then $50 billion at the end of the year.
The other bit of colour I would add is that we do track this on a quarterly basis, so we did see the situation where we were at roughly $50 billion. After Budget 2016, there was a substantial revision upward, and then at the end of the year they revised the numbers downward.
Senator Woo: I want to understand what interpretation or story you're telling under the sequence of numbers. Is it a crowding out story, or is it that provincial governments, because they are fiscally constrained, were not able to go into further deficit as a result of being able to draw on provincial funds for infrastructure? What is the tale you're telling here?
Mr. Jacques: There are two parts. For us, we're simply looking through the budgets and the provincial budgets. There are a variety of stories, but I've also spoken with the 10 provincial ministries of finance, and you do have a story with respect to both sides, both on the crowding out side and on the capacity side.
For instance, I had a conversation with someone in the ministry of finance in a certain Western province, which you are familiar with, and they indicated they have their infrastructure projects planned many years in advance. There is only a certain amount of capacity, say in the case of Vancouver, to take on additional infrastructure projects. They mentioned that if it was needed, they could certainly force the additional federal money out, but there would end up being substantial premiums with respect to what they would actually be paying. So from their own perspective, it didn't make sense to try to meet an artificial deadline and pay an additional 20 cents on the dollar. Instead, it made more sense to potentially delay it and not cost taxpayers that additional 20 cents on the dollar.
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Senator Pratte: Very briefly, Mr. Fréchette, in your latest report, the February report on infrastructure, and in our recent discussions, you identified a potential problem that the funds were not going out fast enough.
What is the situation? I get the impression that the problem has been "solved.''
Mr. Fréchette: Ninety per cent solved, I would say. That is what we concluded in our report, in our economic and fiscal outlook, in which this infrastructure, this spending, was included. We realized that yes, in the first year, the impact was not there. Jason talked about a 0.4 per cent impact on the GDP. By the end of the two-year period, we expect 90 per cent of the expenditures to be made. Clearly, this is the reason for the initially slower rollout, which now seems to be happening more quickly.
That is where we are at. As I said, we prepare the economic update report twice a year, and in the fall, we will probably be more set and have more information on the infrastructure as such.
Senator Pratte: On page 2 of the document, the column "projects started'' shows me —
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That data doesn't really mean anything. This is data that the departments don't have because the projects have been approved, the funds are coming out, and obviously it is information that they don't collect or they don't have or don't share.
Mr. Weltman: The bulk of these projects are within Infrastructure Canada, and they collect that progress data every six months, so they have not yet collected their first round of progress data. Most of the other departments are still trying to get their data in a position where they can even send it to us, let alone report on progress.
I put the planned column there because that was the plan. The actuals, or projects reported as started, does not mean that none of the others haven't started. The data is not complete.
The Deputy Chair: Our timing rather perfect. I would like to thank our witnesses. I should really call you the PBO shop. It is what I'm going to start to call you from now on. As always, I thank you, and I look forward to seeing you again soon.
We are continuing our study on this fantastic multibillion-dollar federal government infrastructure-funding program. Before us now, we have Charles Lammam, Director of Fiscal Studies at the Fraser Institute; and Ryan Gibson, Libro Professor of Regional Economic Development, School of Environmental Design and Rural Development at the University of Guelph. Welcome, and I hope you will give us some good, solid information that we can get our teeth into.
Do you have opening statements?
Charles Lammam, Director, Fiscal Studies, Fraser Institute: I do. I will try not to disappoint. It's late in the evening.
Thank you for that introduction, and thank you for the opportunity to contribute my thoughts on the government's infrastructure plan. I hope my find my comments helpful and informative as you deliberate this very important public policy issue.
As was mentioned, I'm the Director of Fiscal Studies at the Fraser Institute, which is a nonpartisan, independent economic policy think-tank. The mission of the institute is to measure the impact of government policies and to communicate to average Canadians how those policies affect their lives and the lives of future generations.
Most of my remarks today will draw on the findings of a recent study I coauthored entitled Myths of Infrastructure Spending in Canada. It's available on the institute's website, if you're interested. My comments reflect my own opinions and observations of the research we've conducted; I do not speak on behalf of anyone else at the Fraser Institute.
The current federal government has explicitly said that the goal of its 12-year infrastructure-spending plan is to help grow the economy and increase the prosperity of Canadians, particularly middle-class Canadians. The fundamental problem, however, is that only a small fraction of the nearly $100 billion in new infrastructure spending proposed by the current government is earmarked for projects that are actually likely to improve the economy.
In principle, sound infrastructure projects can improve our country's productive capacity by allowing Canadians to produce more and to reduce the costs of delivering goods and services to market. A needed road, railway or port that helps move people, goods and resources more efficiently and at a lower cost can indeed help build a more prosperous economy.
In practice, however, not all of the federal government's infrastructure spending fits this bill. In fact, a mere 10.6 per cent of the nearly $100 billion in new infrastructure spending is earmarked for trade and transportation. In other words, the government plans to spend almost 11 cents of each infrastructure dollar on the types of projects most likely to improve the productive capacity of our country.
So where's the rest of the money going? Most of it is going to so-called green and social infrastructure projects including parks, cultural institutions and recreational centres. Although these initiatives may be appreciated by the communities in which they are built, there is little evidence that such spending will increase the economy's long-term potential. In fact, the federal government may end up hurting the economy by focusing on such projects, especially if the productivity gains of the infrastructure projects are less than the economic costs imposed by the taxes required to fund them.
Simply calling a project infrastructure does not automatically make it a worthwhile endeavour. When ordinary citizens think about infrastructure spending, they tend to think about roads and bridges — the country's core infrastructure. According to reputable organizations such as Infrastructure Canada, Statistics Canada and the International Monetary Fund, a reasonable definition of infrastructure at the very least requires it to be a physical asset. The federal government, however, has broadened the term to include many services and activities, rendering the definition of infrastructure unclear.
For instance, the government is calling the $7 billion set aside over 10 years for subsidizing daycare infrastructure. Putting aside the merits or demerits of daycare subsidies, it's a stretch to call such spending infrastructure. Or consider the $2.1 billion in spending over 10 years to reduce homelessness by tackling addiction and mental illness. This is a laudable goal, no doubt, but by most reasonable standards, this is spending on social services, not infrastructure.
In addition, the government's infrastructure plan includes $77 million to develop regulations and establish pilot programs related to the adoption of driverless cars and unmanned air vehicles. Even data collection and research is now considered infrastructure by the federal government. The list of spending that's cloaked as infrastructure goes on and on.
To sum up, the federal government's infrastructure spending plan is unlikely to improve economic growth because only a small portion of the spending is earmarked for projects most likely to improve the productive capacity of Canada. Thank you.
The Deputy Chair: Thank you very much.
Ryan Gibson, Libro Professor of Regional Economic Development, School of Environmental Design and Rural Development, University of Guelph, as an individual: Thank you very much for the invitation to appear and to provide some feedback as the government is looking at the infrastructure funding program.
My comments come from three different organizations that have been devoted to looking at rural infrastructure and rural issues in Canada: the Canadian Rural Revitalization Foundation, the Rural Development Institute, and the Rural Policy Learning Commons. Each of these organizations is actively engaged in rural development throughout Canada and actively engaged with international scholars and policy experts. Researchers, policy-makers and practitioners from these networks have been actively seeking solutions to the infrastructure challenges confronting our rural communities across the country.
This evening I'd like to share with the committee some rural consideration for infrastructure policy and programs. I wanted to discuss some of the inter-relationships between infrastructure and rural and economic development as well as provide some suggestions or some key messages that you might consider as the Government of Canada moves forward with infrastructure spending in rural areas.
First, though, two fundamental contextual components to understand rural Canada are distance and density. Rural is characterized by low populations and low population density as well as high distance to the large densities. The concepts of distance and density are critical as government considers how any program or policy might relate to rural areas.
The important thing to recognize in Canada is that we have distinct rural needs in infrastructure. The drivers and the demands for infrastructure are different. The understanding of the gradients of rurality is important. There are no two communities that are the same; designing infrastructure that works in small places and reducing the price of distance.
Infrastructure is fundamental to the future viability, sustainability and resilience of rural Canada. I would like to discuss four key elements around the relationship between infrastructure, rural development and economic development that I think will provide some information.
First is that infrastructure facilitates the participation in the national economy. Natural resources extracted from rural Canada make up approximately 50 per cent of Canada's exports. These industries pay taxes on an annual basis, create spin-off jobs, as well as new growth in Canada's urban and rural regions. The lack of infrastructure investment compromises the future of these economic development agents to continue their operations in rural communities and to the benefit of all Canadians.
Second — and this was mentioned in the previous conversation by Senator Woo — is the impact of place as an emerging consideration for rural and economic development. The role of place-based development strategies has become quite dominant whereby we're looking at issues beyond just the economy. We're looking at issues around the natural resources as well as physical and human resources that are unique to a particular place.
In building place-based development strategies, infrastructure is fundamental to allow rural communities to attract and retain people and capital. There is an expectation that all communities would provide a robust suite of services such as clean water, roads, waste collection and broadband Internet. The current infrastructure deficit in rural hinders the ability to develop these strategies and to retain existing infrastructure and attract new infrastructure and human and financial capital.
It should be noted that economic development cannot be separated from a comprehensive or holistic development, including factors of social, the environment, and culture. It is imperative we move beyond solely an economic approach to viewing rural infrastructure.
We also need to move beyond the notion of infrastructure as subsidization and more towards investment. We know from the OECD's new rural paradigm that it encourages strategic investment to generate competitive advantages and emphasizes new forms of collaboration between government and community. Sustainable rural development requires new infrastructure approaches when considering infrastructure. The new investment approach needs to be long-term and sustainable, and it needs to be grounded in the rural realities that our communities are facing.
Infrastructure investments also need to be considered as part of a larger dialogue on rural development and not just solely on its own merit.
The fourth consideration I put before the committee is that infrastructure builds new rural economic development opportunities, particularly related to technology where they're vital to sustain and build new economic development initiatives. Broadband connectivity, which was recently declared as a telecommunication service, represents opportunity for rural communities to increase employment revenues as well as provide access to greater markets. Broadband connectivity, as many senators are well aware, is an inconsistent infrastructure across this country.
Based on research from the Canadian Rural Revitalization Foundation, the Rural Policy Learning Commons and the Rural Development Institute, my colleagues and I put together eight comments that we hope would help guide some questions around infrastructure investment in rural Canada.
The first one in terms of moving forward is looking towards long-term, stable funding mechanisms so that rural communities have an ability to plan on that front.
Combined with that is the second one around long-term planning, asset management and full-cost accounting that is required around rural infrastructure investments. These are required because we need to ensure that we're making appropriate decisions based on the rural realities that are out there. We also want to maintain infrastructure's lifespan and ensure that we are increasing the fiscal effectiveness of our investments.
We also need to ensure that there's local decision-making to be incorporated into investment for infrastructure. We need flexible programs to respond to the rural diversity that exists across the country. We don't have any two rural communities that are identical. Why should our policy be identical in how we approach them?
We also need to direct resources towards capacity building. This is maybe a bit different, but it speaks to the fact that infrastructure is not simply a question only of buildings and dollars. It also requires capacity within the local communities to be able to both build and maintain those on a long-term basis. We would be remiss not to include any funds around capacity development.
We also need to look at the scales at which we're talking about infrastructure investment. This was discussed in the earlier commentary. We need to ensure that infrastructure across the country functions as a network. We need to make the most efficient use of the limited funds that are there to avoid duplication and increase complementarity that's available for rural places.
As Senator Eaton mentioned earlier, we need mechanisms for long-term monitoring of projects and evaluation. Without these metrics, it's incredibly difficult to determine what value has emerged from our investments. This is fundamental.
The final comment I would present to the Senate committee is the ability to make use of the best available technologies that are out there. I would be remiss to say that we should always be using the most, best, brightest and fanciest technology because that's not always the most important for rural communities. Sometimes the technology we want to use needs to be contextually appropriate. It needs to meet the demands of both human capital and financial capital. Simply building the biggest, shiniest and best infrastructure that can't be maintained is not a good investment. We need to ensure that we're using the best technology that matches the local reality of those communities.
I will leave at it that, but I would like to thank you for the opportunity to share this information and look forward to any discussion.
The Deputy Chair: Thank you very much for your presentations, both of you. I think we have a full list of questioners.
Senator Eaton: I'll start with Mr. Lammam. To be more efficient and more effective, to allow cities to plan more long term and to get away from the politicization of the word "infrastructure,'' I think you bring out several good points in one of your speeches I have here, that some things should be under social services and some things should be under environment.
Would it be better if the government just gave the cities a bigger share of the gas tax? You took politics out of it. I live in Toronto and I don't know if you've been in Toronto lately, but the roads are like this; there are holes. They haven't built the subways. The subways have not been enlarged since 1980. They always say, "We don't have the money.'' The Gardiner Expressway is falling down. They kind of propped it up. Would it be more effective if the cities just had a bigger share of gas tax so they could plan long-term infrastructure, keep it up, maintain roads, build subways?
Mr. Lammam: Thank you, Senator Eaton, for that comment. I think it's a critically important comment with regard to what's happening now. Our federal government is engaged in a large-scale infrastructure plan, not just the $100 billion that was announced by the current government but in addition there is nearly that amount from the previous government.
Senator Eaton: It's a non-partisan issue.
Mr. Lammam: No, of course. The reason it's such an important comment is that we have the federal government now that is increasingly taking a larger role in what I think is mostly a local issue. You're right to point out that cities, and to some extent provinces, are better placed to make decisions about the best infrastructure projects that suit their particular regions and their particular populations, but what's happening now is that because we have conditional grants, particularly with this new plan being announced, those local governments are now taking projects that will get the funding rather than projects that have the highest priority for their region, and they're obviously responding to the incentives in front of them.
A much better course is for the federal government to allow more junior levels of government to make those decisions because they're just better placed to do that. That doesn't mean there is no role for the federal government in infrastructure. Certainly, on issues that have national implications, the federal government is key. Certainly, for issues that have cross-provincial implications, the federal government can play a role. But from what we're seeing in things like public transit, building community centres, various wastewater plants, Ottawa is just not well placed to make those decisions. We end up having situations where we don't have the best infrastructure that best suits the needs, the kind of infrastructure that provides the greatest economic bang being undertaken.
I think it's extraordinarily important. People don't realize that if you just look at the ownership of infrastructure in the country, the federal government's share is like this. We have the number in our report; 5 per cent or less. Fifty per cent is owned by the local government and the rest, the balance, by the provinces. It is those levels of government, the municipalities and the provinces, that are better suited to undertake these initiatives. They need the resources to do it, and transferring tax points is one way to do that.
Senator Eaton: My last question is to Mr. Gibson. Mr. Gibson, we live in such a gorgeous country, but you're absolutely right about density and distance as you drive across Canada. You think, when you drive across Canada, of rail, roads, water, waste and all the things you named. If you had one priority that would keep people living in their communities, help them, what would it be? If I gave you one cash priority, what would it be?
Mr. Gibson: That's a great question, and I think it changes with every community, unfortunately. But I think if you were to ask most rural communities at the moment, most would link it to broadband high-speed Internet. I think that's around the retention and attraction of young people; it's around the opportunities for business investment, particularly around succession planning for businesses but also for new incubation of businesses and communities.
Senator Eaton: And farms.
Mr. Gibson: And farms, absolutely. The other part around broadband is the opportunity to remain competitive. Our communities are no longer competing against the community down the road in the economy. They're competing against other countries around the world, and ensuring that that infrastructure is there is probably one that most rural communities would say loudly is something they need. Those that have maybe poor Internet might want faster speeds or better connectivity. For others, there are many rural communities in this country that still rely on dial-up Internet.
The Deputy Chair: I think Mr. Lammam wants to make an intervention.
Mr. Lammam: On my earlier point, the actual percentages of who owns the stock of infrastructure in the country, the federal government owns 2 per cent, municipalities 57 per cent and the provinces 41. I wanted to make sure I made this point because it's important. When you don't have the same government raising the revenue as the one doing the spending, you create an enormous accountability problem for the citizens. I think that's just another reason why we'd want to have better matching of infrastructure spending with who's raising the revenues.
The Deputy Chair: Thank you. Are you complete with that?
Senator Eaton: I'm fine. Thank you very much.
Senator Moncion: I have a few questions. One of them is to identify the projects that will bring productivity up in the long term. Here we're talking about daycare and things like that. Those are short-term infrastructure investments that are needed but on a social basis. When you're looking at long term, where should Canada invest in the long term to bring up productivity?
Mr. Lammam: Excellent question. What's key is to do an analysis of the particular projects that are under consideration. When we're talking about projects that tend to improve the productive capacity of our economy, they tend to be ones that are in the core infrastructure of the country. That's what the literature shows to be the ones that are the most likely to be beneficial to the economy.
The reason I'm focusing on the economy is because this is what the government has outlined as the primary rationale for undertaking this large-scale infrastructure plan. They have couched it under the backdrop of this is going to help grow Canada's economy, so I want to evaluate their plan on their own criteria.
I also want to be very clear here. If you build a bridge to nowhere, that is not productivity enhancing. So simply having a project that falls under the envelope of core infrastructure, whether it's roads, bridges, rails, ports, that's not a sufficient condition,but it's certainly what the literature and research suggests has the most likelihood of actually moving people and moving goods to international markets.
Let's remember that Canada is an open economy. Obviously, there are risks now on the trade front, but we need to get our resources to tidewater. We need the movement of goods and services as well as people, and that's the kind of thing that actually makes us work smarter, helps move goods at a lower cost and that ultimately grow the economy. It really is a project-by-project basis, and we don't want to be lulled into thinking that anything that falls under core infrastructure is going to work to the end of growing the economy. We have to be a bit more discerning.
Senator Moncion: I agree with you. You were talking about fixing sidewalks and roads in cities. I'm not really sure that that infrastructure spending is working towards Canada's productivity. It's making things more convenient for commuters, but for me a long-term project would be building the northern route so that we can get our products across Canada much quicker. I just want to know what your take is on this one, either one of you.
Mr. Lammam: Was it you who talked about sidewalks?
Mr. Gibson: Maybe a quick comment on that. When we look back particularly at rural communities, I can't speak to the urban sidewalk in Toronto, but in terms of northern communities, when I think of the northern route, a lot of that infrastructure was built in the 1960s to get resources out and bring them to the south, to bring them to the global markets. A lot of that infrastructure has not been well maintained or has not been maintained at all. It's been 40 or 50 years whereby we don't have any kind of long-term plan for that infrastructure, and that hinders the ability of communities on the northern route or other transportation corridors to be able to get their goods, whatever it is — timber, fish, minerals — into the marketplace.
Mr. Lammam: Just to add to that, I would say that once we do build roads, bridges, rail and ports, we can't just assume the job is done. That's just the building phase. In fact, up to 80 per cent of the lifetime costs of infrastructure come from operating and maintaining that infrastructure, which is critical. It often gets overlooked.
When we're talking about infrastructure, there are various parts of that process, so we should appropriately maintain infrastructure that is built, but let's be clear about what we're spending on and the economic potential. I would agree with you on that front, but we shouldn't neglect the infrastructure we have. Then we'd have other problems to worry about.
Senator Moncion: Thank you.
Senator Woo: Thank you for your presentations. Really interesting. Maybe I can start with Mr. Lammam and ask about the calculation of the percentage of projects that you deem to be economically productivity-enhancing. I think you said 10 per cent. What was your denominator? Was it a $10-billion target that the government set out?
Mr. Lammam: Sure. It's probably worth mentioning that the federal government continues to provide details —
Senator Woo: Precisely.
Mr. Lammam: — on this plan that is spanning over a decade. Based on what we currently know, our latest calculations suggest that $96 billion in new infrastructure spending is being undertaken by the current government. Of that $96 billion, $10.1 billion is falling into this category of trade and transportation, which again, is the most likely to foster long-term growth. There is no guarantee, but this is the category that research and evidence tell us is the most likely candidate.
Senator Woo: I agree with that. We've heard other testimony about the importance of, say, the Asia-Pacific Gateway initiative as one example of trade and transportation.
I'm curious about how you can be so definitive about the 10 per cent, because we just heard from the PBO that tells us they don't even know what these projects are. In fact, a very small percentage of the projects have been identified. For lots of them, the monies are set aside from Budget 2016 and now Budget 2017, but they don't actually know what these projects are. So it seems a little premature to be definitive about the number of projects that would fall either in the productivity-enhancing or less productivity-enhancing categories. This is just a comment. Maybe as data get better, you can refine that estimate.
They also told us — in fact, they foreshadowed your presentation — that based on some of the work you've done, they have taken into account the differential impact of different types of infrastructure investment. As a result, they adjusted their multipliers down to 0.8, something like that. Do you think that's a reasonable multiplier to land at, given that they have taken into account —
Mr. Lammam: Can you repeat what the number was? Did you say 0.8?
Senator Woo: Yes, 0.8, so $1.80 multiplier.
Mr. Lammam: There is a lot to unpack there. Let me start with your first question and get back to the multiplier.
When I say approximately 11 per cent of the plan is likely to lead to productivity-enhancing infrastructure, I say "likely'' because we don't know all the projects yet. We're learning more details, but the government has appropriated the money into different buckets: transit, social infrastructure, green infrastructure, trade and transportation, and then rural and northern communities being the last one. That's how we know the 11 per cent.
What is concerning is that, as we learn more details, we're finding increasingly dubious types of projects within the trade and transportation category. I talked a little bit in my opening remarks about what the latest budget, Budget 2017, had to say about trade and transportation. Within that category, we have things like data collection and research, $241 million over 11 years for a government agency to improve data collection and analytics related to housing. There's another $50 million of supposed infrastructure spending earmarked for a new government centre to collect and publicly provide data on transportation in Canada. Then there are the regulations on driverless cars and unmanned vehicles that are also falling into this category.
If we start to appropriately remove those projects out of the productivity-enhancing category, our latest calculations have it below 10 per cent — at 9.3 per cent — as more details are unveiled. So I actually think it's getting worse, not better, not to get too far on that question.
The second question you raise about the multiplier is important. I'm not sure everybody in the room has knowledge of what this is. In the simplest form, if the government spends a dollar on infrastructure, what is the effect on the overall economy? Everything below $1 means the government's spending is actually reducing activity. So to say that 0.8 is a good —
Senator Woo: It's important I cut in here, because what he said is it generates an additional 80 cents, so it's 1.8, if you interpret it that way.
Mr. Lammam: If we go back to the deans of fiscal stimulus, whether it's Robert Barro or Alberto Alesina from Harvard, and you look at the work they've done, it's pretty clear that in order to have a multiplier that actually improves the economy, it has to be over 1.0. We can't look at it just on a short-term basis. What's important in the research is you have to look at the long-term effects of the infrastructure spending, because they can work to reduce overall output.
Senator Woo: I hear you, and that's a debated theory. I don't want to go there, because that will bore the rest of this committee here. It's a disputed theory as to whether this will have a long-run aspect of declining revenues for government and output overall.
Let me ask a question that both of you can answer. I want to be fair to Mr. Gibson as well. It gets to the heart of how you define productivity-enhancing infrastructure investments. Essentially, you have one box — the trade and transportation box, I believe. We discussed a little bit the relevance and importance of broadband infrastructure investment. Could both of you talk a little bit about how you see the impact of a major investment in broadband, connecting particularly rural areas, as a potential productivity enhancer for the country? We heard a bit from Mr. Gibson. I will come back to you. Maybe you can start, Mr. Lammam, because it wasn't in your category of productivity-enhancing investments.
Mr. Lammam: It's not clear where it appears.
I really want to go back to our earlier exchange, because there is a lot to be said about that. Again, if the committee doesn't want to go there, I won't, but I would be happy to talk about how the economic outlook in Canada has declined since this plan was announced — the outlook as defined by the average of private-sector forecasters in the country. We can talk about that, and I think there is a really important conversation to be had that I think non- economists can wrap their heads around, but again we'll leave that to the group if they want to go there.
In terms of broadband, that's an area that is an enabler. Research is clear on the point that it can help improve productivity. But in terms of me telling you how much of the plan is falling into that category, I can't do that, because that's not appropriately allocated and segregated in the government's plan. But that over a lot of the other projects would help improve productivity. It's just not something the government provides sufficient data to disentangle.
Senator Woo: Okay.
Mr. Gibson: Perhaps moving to your question around broadband, there is no shortage of economic impacts that you can derive from this. I think back to some research we did in Churchill, Manitoba in a community where, prior to the federal government's BRAND program back in the early 2000s, created their own infrastructure — community based, community owned. They had high-speed Internet for three or four years, and it actually went down. We had the opportunity to study the economic impacts of what changed, because they had high-speed Internet for four years and all of a sudden they went back to dial-up. This is where we saw definitive things around job losses, because all of a sudden hotels couldn't do online reservations. We saw decreases in production from amenity and artisans. They weren't printing catalogues, and it increased their business costs because they then had to print catalogues as opposed to putting things online. So we saw absolute direct economic impacts from broadband. We see them in Nova Scotia. You can see them across the country.
In terms of your commentary around productivity enhancement, I would differ from my colleague around what is productivity enhancement. When I look at daycares, we would see that as a productivity enhancement. An investment in infrastructure of daycares in a rural community often means the reintroduction of predominantly women, but both genders, into the workforce, allowing them to re-engage actively into the labour force. Likewise, we see a multiplier in terms of jobs around short-term construction. There are all sorts of things that come around that. This is why it's important that we take a broader perspective than just economics, because quality of life comes into that. Do people want to live in these communities? There's a huge impact, because that means loss of nurses, doctors, retail services and consumers.
Senator Woo: Thank you.
Senator Andreychuk: Just as a follow-up, Mr. Gibson, I agree with you about daycare, especially for women who want to get into the workforce and want to be productive. That's not what we're doing here. We're trying to analyze where the money is, how it's spent and whether it meets the program needs. You call it infrastructure, and we traditionally have a definition of infrastructure; and now all of a sudden, under that rubric, you sell it that it will improve the economy, whatever it is; and then you start putting in daycare, et cetera.
There is a difficulty with that. I know the social infrastructure issue very much from my background. I want a program analysis. I want a cost analysis on daycare, because it is about the type of daycare. Does it meet the needs of rural? So it's not the issue of dealing with daycare and the social, but when you put it under the traditional old infrastructure, I think it's probably very politically astute, but it isn't very good for accountability. That's the dilemma that I'm having.
Following up with that, if you want to go into daycare and rural, what about the Aboriginal communities? You've been talking about rural, but to me rural is not just urban versus rural; it's also the Aboriginal communities, the isolated communities and the northern communities.
It isn't a question of providing those services and dealing with those issues; it's making sure that we're making the best from the dollars we have to provide all of that: infrastructure over here, physical over here, social, et cetera. It's when they're all blended and I don't know what the dollars are doing. So I challenge you on that one.
Mr. Gibson: Yes. At the end of the day, it speaks to the difficulty that this committee has, and government in general, around separating, as you discussed, what is an infrastructure and what is a social investment, and that's incredibly difficult to do. You're right; these are issues of rural, northern, remote and indigenous communities. It's a matter of where are they at the moment and what are their needs that can help them move forward.
For some communities, we know it's about drinking water and having drinking water delivered to the house that is clean and safe to drink. For other communities, it might be different. It might be the example of a daycare that can help them advance. Because they have that core infrastructure, they can advance other parts around their community.
It's incredibly context-specific. I share your frustration around trying to figure out categories and how all of this gets accounted for and the ultimate question of metrics. How do you know that a good investment has been made?
The Deputy Chair: Gentlemen, I've been asked to inquire if you could provide us a copy of the Churchill study.
Mr. Gibson: Absolutely, yes. I can send that to the clerk via email.
The Deputy Chair: Please do. That's why she's sitting here, to receive everything.
Mr. Gibson: We can send that along afterwards. Likewise, there are two other documents that we will send along.
The Deputy Chair: Thank you very much.
Senator Pratte: I want to go back to this issue of social infrastructure versus productive infrastructure. This is especially for Mr. Lammam, but also for Mr. Gibson.
When the current government is asked about whether social infrastructure is good for the economy, their reply is usually something along the lines that, for instance, money for daycare will help women enter the workforce, and that's good for the economy; and if you help the homeless, they will become productive citizens, and that's good for the economy; and if you help the indigenous people in their circumstances, they're going to be able to enter the workforce and become more productive citizens, and that's good for the economy, and so on.
Isn't that a good argument in favour of calling social investment, investment, and maybe infrastructure, and that's good for the economy? I'm playing devil's advocate here. I'm not sure I really believe in it, but anyway.
Mr. Lammam: To your point, it's a good rhetorical statement, but is it evidence-based, is the question. To really have a sense of what are the true economic impacts of these various infrastructure initiatives, we have to see the details of what they're announcing. But it's a very dangerous slope, a slippery one to go down, to assume that for everything the government does there is an economic benefit. We have to understand that in order for it to be an economic benefit, we have to account for the taxes that are required to fund it, and that's an enormous cost to the economy that must be offset with the various initiatives, and those initiatives don't have evidence to suggest that they are in fact going to achieve those economic objectives.
My point is that you can make any argument you want to show that any type of government spending will have an economic benefit, but it's not sufficient to show that it will indeed, when you look in practice. I was trying to be clear in my opening remarks that some of these initiatives provide value to people; there is no doubt. But the government has told Canadians that their plan will grow the economy, and that's where I think we have to be a bit more discerning with these kinds of arguments and be clear that there is robust evidence to suggest that when you account for all the taxes required to make the spending and the potential displacement of other government activities, as well as displacement in the private sector to engage in these projects — because we have to understand that the resources don't come from nowhere; they come from private sector organizations that will move away from other projects that they're engaged in to pursue these government projects. So it's just not enough evidence to show that these are in fact going to, on net, produce productivity-enhancing benefits.
Senator Pratte: Isn't there good evidence, though, about daycare?
Mr. Lammam: My colleagues have produced a report, which I'm happy to share, on the only major case we have in Canada, which is the Quebec experience. It's important to have a look at that analysis, which shows that a lot of the alleged benefits from the Quebec daycare experience are not, in fact, sound from an economics perspective. Of course, that's going to be open to debate by many people, but I would encourage the committee to consider that report that really looks at the evidence on the Quebec experience.
Senator Pratte: Just one last point: That would make good evidence, then, for an infrastructure bank, because that would leverage private capital for infrastructure projects.
Mr. Lammam: Again, we don't have much in terms of details on the infrastructure bank. One thing that I think was a bit concerning —
Senator Pratte: The principle of it.
Mr. Lammam: It's not clear how it's different from what Canada had been doing with public-private partnerships, a cross-party agreement on the benefits of using P3s as a way to deliver infrastructure.
The current government has, for whatever reason, moved away from that model, and that model has actually been shown to be quite successful, not just within Canada but in the U.K. and Australia. Canada became a leader in part due to the efforts of the B.C. government on P3s, and the reason why they've been shown to be beneficial is that they don't say anything about whether the particular project is productivity enhancing, but if the government is going to choose to deliver a bridge, a road, they can do so in a more efficient and innovative manner than traditional procurement. The P3 model has been shown to be beneficial in terms of producing on-time projects, generally speaking, on budget, and using innovative strategies that account for the life cycle of the infrastructure.
So there are ways to pursue a particular type of infrastructure in a more efficient way, which we've had great success with in Canada, and now we're going into this new infrastructure bank where the government's going to try and leverage private capital. It's not clear exactly how that's going to be different from P3s and how it will be beneficial. I can't really comment, because I don't know the details yet.
The Deputy Chair: I don't think any of us know, but that's okay.
Senator Marshall: I'll start with Mr. Lammam, and he'll have to correct me if my memory is failing me.
You made a couple of remarks I want you to elaborate on. One was early on when you were first making your presentation, and we were talking about the social infrastructure and the 10 per cent the federal government's plans to spend the money on transportation. You talked about the green and social infrastructure. I thought you said that those projects might even hurt the economy. Is my recollection right?
Mr. Lammam: Yes.
Senator Marshall: I want you to elaborate on that.
Mr. Lammam: This is related to the earlier point. When you do a full costing of a project, you have to account not just for the interest rates the governments undertake for the building but for the full life cycle, the operation, the maintenance costs, as well as the costs of taxation. As the committee is probably aware, when governments tax, it imposes a cost on the economy. Some taxes impose greater cost; they're more damaging than others. But there is a cost associated with raising the funds, particularly with debt-financed infrastructure.
When you're talking about a particular project, while you may see social benefits from this or that activity, if you don't see the economic benefits in terms of increases in output and GDP, what you can ultimately do is hurt on net the economy after accounting for the reduction in GDP that the taxes imposed to raise the money are accounted for.
Again, this is a project by project analysis, but this is work that has been done by Ken McKenzie, Bev Dahlby at the University of Calgary as well as Professor Leeper.They have looked at this particular issue. We have to be cognizant of it when we're evaluating whether a particular project can help or hinder the economy.
Senator Marshall: One thing I want you to speak to again is that I think you said since the infrastructure program started, there has been an actual decrease in economic activity. Did you say that?
Mr. Lammam: No. I was saying that as part of every budget and fiscal update, the government consults with a dozen or so economists in the private sector from the major banks and organizations to get a sense of what their expectations are for the economy and GDP and other variables so they can use the average. This is to depoliticize, in theory, the budget process so they can use base metrics to build the budget.
In this process, since 2015, since the update, the outlook for economic growth from 2016 to 2020, the expectations from private sector economists have declined.
There's no forecast that is accurate, but they are built on several assumptions and models and data of what their expectations are. They have, in fact, declined. It's unambiguous. We have the particular numbers in our report, and —
Senator Marshall: And we track the numbers, too.
Mr. Lammam: The expectations for growth were 2.1 in the fall update, falling to 1.9 in the budget, and then 1.7 in the update, and falling again in the latest budget.
Does this prove that the infrastructure is bad? No, but it gives you a sense of what people's expectations are. I'm sure the Parliamentary Budget Officer folks talked about how most of what the government has intended to get out the door this past fiscal year and the current fiscal year has actually not been spent. In many cases they haven't even identified the projects let alone started the projects. This speaks more to the problem with infrastructure spending as being a short-term stimulus to the economy.
We're not in a recession, but the government has decided to pursue this large-scale plan. We're not in a recession. Why does that matter? That means that the government is going to displace private activity as a result of this. In terms of idle resources in the economy, they're not what they would be in a recession. That matters.
Sorry, I'm just going off track. I'll stop and let my colleague chime in.
Senator Marshall: I do have questions for Mr. Gibson, but you mentioned the debt financing. It's not spoken of very much, but it's very relevant because the government is borrowing large sums of money, and a lot of these programs are being financed by debt, which is fine now because interest rates are low. But at some point in time, most of this money — I say all of it — will probably have to be refinanced at higher interest rates.
According to the government's own debt management strategy, what they're saying now is that the average term to maturity of domestic market debt is projected to remain at around 5.5 to 6.5 years. It looks like interest costs are going to go up. They are going to be financing at more expensive debt. I noticed you did briefly mention it in your report, but could you speak a little more about the impact that's going to have?
Mr. Lammam: Sure. First, I think it's important to understand that the federal government is in a deficit situation; it's spending more than what it brings in in revenues annually. Collectively, federally and provincially, we've added over half a trillion dollars in debt over the last 10 years. Federally, we are paying $25 billion annually in just interest on the debt. That's not repaying the debt. Many fiscal problems are plaguing the provinces, Ontario and Alberta.
We are not in a position necessarily to be taking on further debt. In fact, the government's own report from the Department of Finance showed that the federal government could be in debt, in deficit, over the next 30 years. Now you layer on top of this new debt finance spending that has questionable economic value and it raises important concerns.
I mentioned briefly about how most of the costs of infrastructure are into the future. So it's not just the building that you have to account for. The building to the extent that there's an interest rate advantage is there, but when you go into the future for operation and maintenance, upwards of 80 per cent of the costs lie into the future. You're not going to have the same advantage on lower interest rates. So the interest rate argument is incomplete. There are other factors. You want to look at the government's current fiscal position. Again, focus on the economic costs imposed by taxation to fund these debt-financed infrastructure projects.
Keep in mind that interest rates are not going to be low 10 years from now and 20 and 30 years from now when a lot of spending on the operation and maintenance will occur. It's a less compelling argument. It's much better to focus on good projects rather than what the interest rate is, as a guide on what to spend on.
Senator Marshall: Mr. Gibson, I had a couple of questions to ask you. You're talking about infrastructure in rural economies, but we didn't really talk about the cost-benefit analysis. We didn't get into the money. It's a good thing, I know, to invest in infrastructure in rural communities, but you have to pay for it, and you would like to see that there's going to be economic benefit there. Could you talk about that briefly, because it's really not discussed in the discussion paper?
Mr. Gibson: The challenge is back to distance and density. We have very few people living in rural, so the carrying costs of any infrastructure project, whether $2 or $2 million, is spread over a much smaller population.
As I was listening to the previous comments, I wrote myself a note that for some of our rural, northern and indigenous communities, before they can actually be economically productive or increase productivity, they need basic core infrastructure. It's not sometimes about advancing economic productivity; it's going back to ensuring there is running water and availability of what we classify as incredibly basic services that some communities still don't have.
That's where those rural and northern communities don't fit well into some of this discussion when we look at it only from an economic perspective. When we start to look at it by dividing by the total population of 350 people or small communities, it becomes really challenging around trying to make an economic argument for some of this.
The other challenge that impacts all of this, and I'm sure you can appreciate in the Newfoundland context, is data availability for small places. We have a great difficulty in getting data to make the arguments on some of the analysis done in the report of my colleague. There is just not robust data available to do that.
Senator Marshall: You mentioned indigenous communities, and it's also mentioned in your discussion paper. Under the government's infrastructure program, there's quite a significant amount of funding disbursed by Indigenous Affairs. I'm not sure how familiar you are with the budget for that department or whether you can comment on this, but do you think the funding is sufficient, that it will make inroads into those communities?
Mr. Gibson: I'm not familiar with the budget numbers or the amount that's been allocated under the current program, but I think we're all well aware there are significant infrastructure challenges in many indigenous communities, particularly in northern and remote areas. We also have witnessed 30, 40 and 50 years where the amount of money that's been invested has not met the current need just to maintain the infrastructure let alone to develop anything new. My suspicion would be that the amount would be fairly modest in comparison to the demand.
Senator Marshall: Because you were mentioning some communities need clean drinking water, so much of the funding has to go into providing very basic services before you get into the next level of infrastructure.
Mr. Gibson: That's right. And that's where we see some negative impacts on the economy, when people can't make an economic livelihood in their own communities and they need to physically relocate because they don't have some of the core basic infrastructures. We know the department publishes numbers on numbers of communities that don't have potable drinking water and have insufficient housing conditions. I suspect the amount is modest but that's just a preliminary lookout.
Mr. Lammam: I just wanted to elaborate on why my focus has been on economic growth and what we've called productivity-enhancing infrastructure. That's what the government has outlined for Canadians to expect. We have to evaluate the plan based on some criteria. The way I'm looking at is from what the government itself has outlined.
I want to clarify one thing about the deficit. We have nearly a $30 billion federal deficit, and there's a misconception among Canadians and just a lot of people that the lion's share of that deficit is to fund infrastructure. Infrastructure is not bad and funding it through debt is not always bad, but what is actually happening is very different from people's perceptions. As the PBO has mentioned, I'm sure, in the previous session, most of the money that's been earmarked and planned for in last fiscal year and this fiscal year hasn't actually been spent. So a very tiny fraction of that $30 billion is the government getting deeper into debt to finance infrastructure. It's mostly to finance an assortment of transfer programs, which I'm not saying don't provide any value, but there is a misconception about where that deficit is or what is driving the deficit.
Senator Marshall: Yes. That's a good point.
[Translation]
Senator Forest: Mr. Lammam, have you gone through the list of public infrastructures to measure the impacts?
When the roof of a house caves in, it must be repaired. You talk about percentages. In Quebec, 57 per cent of public infrastructure is municipal and 2 per cent is owned by the federal government. There is little investment in federal infrastructure. This is basic infrastructure that contributes to economic activity. We can think of railways, ports, the very basic transportation and communication infrastructures. When we consider that municipalities have 57 per cent of public property, that they get 8 per cent of funding in all forms, taxes and so on, we see a significant imbalance. A balance sheet would enable us to see the impact of investments.
The other point I would like to make is this. When we look at the models or matrices, in terms of assessing infrastructure costs, operating costs and funding, they show that, if we want to promote economic activity in Canada, we need basic infrastructure such as roads and water systems. No business will set up shop without basic infrastructure. This must be considered a prerequisite.
One of the things I think is very important in the current context is the whole demographic challenge. We are in a context where, increasingly, people are choosing their workplace. Communities must be attractive — I am referring to quality of life. That is impossible if you do not invest in infrastructure.
For example, if I want to move somewhere in Canada and raise my family, I want to at least have access to a library or a skating rink. It takes a minimum, beyond basic infrastructure, to have a certain quality of life. This makes rural communities, but also medium-sized communities, as well as large cities, attractive. We are in a context where the demographic challenge will have a significant impact our productivity and the sustainability of our businesses.
Finally, there is also the infrastructure that I would say belongs to the modern age. I totally agree with Mr. Gibson on this point, being myself from a very rural region. Broadband and cellular services across the country are factors influencing where people decide to settle. These are essential factors for development today, even in small communities.
I know someone who translates for clients around the world. He lives in New Richmond, Gaspé, and does the work on Cap Noir. Some of his clients send him texts to translate and he has never seen them in his life. Without that infrastructure, he would not be there.
In the evaluation matrices or models, when we look at the impact of our infrastructure investments, there is a public responsibility for the federal government to keep its infrastructure up to date. There is also the support of provincial governments, but not just for basic infrastructure. The model is much broader. Do your matrices take those factors into account?
Mr. Lammam: My French is not very good. I did not understand everything, but I know what you mean.
[English]
Forgive me if I misunderstood your comments, but I believe you're referring to the gap in revenue-raising capacity of the local governments in Canada versus what the federal government collects and what the federal government owns in terms of infrastructure.
One thing that we cover in our report, which I think is another misperception, is that local governments have been starved of revenues. It turns out that when you look at just the own-source revenues of local governments across the country, they've grown orders of magnitude faster — own-source revenue, so this is revenues minus any transfers from other governments — at the local level than the provincial governments collectively and the federal government.
We talked a little bit about the government doing the spending should be doing the revenue. That is still the ideal, but what we have now is local governments misallocating or deprioritizing a lot of the spending on the things that I think we all want them to spend on, which is things that improve their local economies and bolster their infrastructure.
So there is a bit of a gap between what the local governments spend on and how they treat and prioritize infrastructure. They can, in fact, reallocate more of their budget towards infrastructure, but I do think that we need to have a better matching between the levels of government.
[Translation]
Senator Forest: You show the investment, capital and operating costs in your accounting costs. Do you consider the capital and operating costs when you analyze the investments? There is a whole new context today. Our communities need to attract the next generation. Do you take into account the basic infrastructure that provides access to markets and allows our rural or urban communities to have libraries, swimming pools, and so on? If we do not have someone to take over our businesses, our productivity is ultimately affected. We are talking about essential infrastructure, such as the broadband network. In the context of globalization, do you consider factors other than the strictly economic ones to assess the impact of infrastructure investments?
[English]
Mr. Lammam: Again, this goes back to how we evaluate this plan. I would certainly not say that of the $100 billion in new spending, that none of it will improve our communities. That's not what I'm saying. But the lion's share of the plan as it is unveiled thus far is not going to help grow the economy. My militant focus on the economic impact of the plan is because that is how the government has pitched the plan to Canadians.
If the government had said that we want to get significantly deeper into deficit in order to improve our communities and build more libraries, hockey arenas and community centres, that would be a very different story. Then, of course, we can talk about whether the government achieves that objective. But the government has said to Canadians that we feel we need to grow the economy, and the way we're going to do that is by getting deeper into debt, and we're presenting a $100 million infrastructure plan to help change things. So far, that is not what has happened, and it doesn't seem to happen because such a small fraction of this plan is going to things that could actually help improve the economy.
I don't disagree. I just want to be clear as to why my focus is on the economy.
[Translation]
Senator Forest: I will just drop my other eight questions.
[English]
The Deputy Chair: I would like to thank colleagues and senators for an extremely enjoyable, spirited and interesting debate. I really thank you all for that.
I would also like to thank you two gentlemen, Mr. Lammam and Mr. Gibson. I'm always very impressed and touched by people like you who have done so much research and study and who are willing to come before our committee and share their work with us.
Mr. Lammam: It's our pleasure. Thank you for having us.
The Deputy Chair: On behalf of the committee, I thank you for that. It's been a wonderful experience.
(The committee adjourned.)