Out with the old

There are several reasons why Canada's federal election last October drew worldwide attention. The US' neighbour saw a strong political shift, with Canada's Liberal party toppling nine years of conservative rule led by outgoing Prime Minister Stephen Harper.

Aside from Justin Trudeau's famous last name – his father Pierre was Prime Minister from 1968 until 1984 with only a brief interruption – the fact that he is the second youngest to ever hold the post, and the parallels drawn between himself and US President Barack Obama, Trudeau has made a splash on the political stage by promising a more open and transparent form of government, greater co-operation both domestically and internationally, and a strengthening of the middle class.

INFRASTRUCTURE STIMULUS

A significant break with the previous government is Trudeau's plan to increase spending to stimulate economic growth. This represents a 180-degree turn from Harper's austerity, which enabled the country to weather the global financial crisis much better than many of its peers.

At the heart of Trudeau's economic agenda lies infrastructure investment.

“The Government of Canada will place renewed focus on the economy, especially as it relates to investing in transit, environmental infrastructure and social infrastructure – the basic infrastructure that economies need to grow,” the government states in its investment strategy published in November.
Four months later, the new government is staying true to its word, delivering a budget for fiscal year 2016-17 that includes new investments in infrastructure of more than C$120 billion ($92.6 billion; €81.9 billion) over the next decade. 

While this increased spending will raise the country's deficit to an estimated C$29.4 billion or 1.5 percent of GDP, the government plans to cut the deficit in half by 2020-21. On the other hand, Trudeau's government expects the increased spending to boost GDP by 0.5 percent in 2016-17 and 1 percent the following year.

But it is not just the “historic” amount that is noteworthy. There are a number of other significant changes the government is implementing with respect to infrastructure investment.

“The drivers under the new government are broader than under the former government,” Michael Ledgett, a partner at Dentons' Toronto office tells Infrastructure Investor. “Under the old government it was more about addressing the infrastructure deficit. I think for the new government, it has two additional drivers: the first is fiscal policy and the second is green policy.”

Green investment features prominently in Trudeau's agenda. “A strong economy also requires a healthy environment and it is vital that Canada invest in a sustainable future,” according to the government's investment strategy. “As a result, Canada needs to make significant new investments in green infrastructure such as: local water & wastewater facilities, clean energy, and climate resilient infrastructure.”

The budget will be implemented in two phases. During phase I, the government intends to invest C$5 billion over the next five years in “infrastructure that protects communities and supports Canada's ongoing transition to a clean growth economy,” according to the budget plan.

The government links economic growth with protecting the environment, stating that the two go hand in hand, which is why it intends to establish a C$2 billion Low Carbon Economy Fund.  

EXPANDING SCOPE AND SCALE

In addition to fiscal policy and green policy, the current government has also expanded the scope for infrastructure investment in several other ways.

“Under the former government, the eligible recipients were by and large provincial and territorial governments and to a very small degree band councils,” Dentons' Ledgett states, referring to the councils representing First Nations. “Under the new programmes, eligible recipients now include the full range of public bodies, as well as private sector bodies, for-profit and not-for-profit organisations as long as they partner with the public sector.”

What is more, the list of eligible recipients has not only been expanded in terms of domestic agencies, but also by adding binational bridge and tunnel authorities that exclusively serve the US and Canada.

“Interestingly enough, these are US federal and state transportation authorities, which means US governments can apply to the Canadian authorities for funding, but this would be exclusively for binational bridge and tunnel projects,” Ledgett explains.

This latest provision makes sense considering that the US and Canada have historically been each other's largest trading partners with approximately $2 billion worth of goods and services and almost 400,000 people crossing the border every day.

An example of binational collaboration on a cross-border project is the Gordie Howe International Bridge, also known as the New International Trade Crossing, which the Windsor-Detroit Bridge Authority is in the process of procuring as a P3. Described by Canada's transport ministry as “the largest and most ambitious infrastructure project along the Canada-US border,” the project will replace an existing bridge that links the US city of Detroit with Windsor, Ontario and handles nearly one-third of Canada-US trade.

While phase I of the budget will focus on sectors the previous government also targeted – public transit, water/wastewater, social infrastructure – the scope has expanded to include connectivity (broadband), climate resiliency, local and regional airports, as well as infrastructure of all kinds in the north. Another innovation the new administration is considering is asset recycling, a practice Australia has implemented with great success by privatising state assets and using the proceeds to invest in infrastructure.

The budget does not contain details, but opens the door to such a possibility stating that the government will “engage public pension plans and other innovative sources of funding -such as […] asset recycling”-to increase the long-term affordability of infrastructure in Canada.

THE P3 SECTOR

Despite these changes, however, “the scale, the scope and the process for P3 projects will be much the same,” Ledgett says. 
The reason for this, aside from the size of the projects, is that municipal and provincial agencies understand traditional procurement and it is the way they do things, according to Ledgett.

“And probably traditional procurement is more appropriate and more efficient for smaller, less complex, shorter-term projects,” he notes. “So they're not going to shove the P3 procurement model down the throats of other levels of government.”

Asked whether Trudeau is in favour of using P3s for delivering infrastructure projects, Ledgett replies: “I think he's for infrastructure development driven by federal, provincial and municipal governments letting those governments decide what they want to do and how they want to do it. He's not driven by the procurement model.”

Infrastructure Canada, as the Ministry of Infrastructure is known, confirmed that view.  “The Government of Canada is supportive of the use of innovative financing arrangements as deemed appropriate by proponents,” spokeswoman Jen Powroz said.

Trudeau's promise for openness, transparency and increased collaboration comes through in his infrastructure investment strategy in another way. In addition to making public the mandate letters addressed to all 30 of his Cabinet members – an unprecedented move – Trudeau has directed each minister to look at infrastructure as it relates to his or her ministry.

“So, for example, Indigenous & Northern Affairs, Public Works, Defense – all have infrastructure within their purview,” Ledgett explains. “They are given the mandate to be the point person for those projects which they then funnel into Infrastructure Canada to deal with the funding aspects.”
But for all its innovation, there is a bigger question surrounding the budget. Large Canadian institutional investors have often expressed regret that the country does not provide the opportunities that would enable them to deploy large amounts of capital, being forced to invest elsewhere as a result.

That has been a concern with both managers and investors in the past and as you can read in the following pages, while a group of Canada-based infrastructure investors agree this latest budget is a step in the right direction, they are not certain where the opportunities will emerge from.
Ledgett, however, is reassuring: “There are a reasonable number of very, very large public infrastructure projects ongoing and upcoming in this country, so I'm sure we'll see our Canadian pension plans looking at them seriously.”