Investing for the future: Can Canada revitalize its aging infrastructure?

Estimates of the “gap” in infrastructure in Canada vary widely – from as low as $150 billion to as high as $1 trillion, according to the Centre for Policy Alternatives. And it has serious consequences for Canada’s development and competitiveness.

The government’s Advisory Council on Economic Growth says Canada is often hampered by its inadequate transportation infrastructure, made worse by the fact that four of the top 10 most congested cities in North America are in Canada: Vancouver, Toronto, Montreal and Halifax.

It cites a recent study on the density of global flows in goods, services, finance and people, which saw Canada’s “connectivity index ranking” fall from 8th place in 2012 to 13th in 2015, lagging peers such as the Netherlands, the U.S., Germany, the UK and France.

In contrast, the same study suggests the most connected countries experience 40 percent more GDP growth from trade than the least connected ones.

With urgent action needed, the Canadian government is proposing to launch a new infrastructure development bank that could bring much-needed investment to the country’s highways, bridges and rail networks.

The Canadian Infrastructure Development Bank (CIDB) aims to leverage institutional capital from banks, pension funds, insurance companies, sovereign wealth funds and other long-term investors and deliver over $200 billion worth of projects over 10 years.

“I would think there will be a focus on projects that return revenue, including transportation projects, roads, bridges, power distribution and water/wastewater, but it remains to be seen what the priority areas will be,” says Les Medd, Senior Vice President, Project & Development Services at JLL Canada.

“A lot of city infrastructure, particularly in Toronto, is outdated and decaying and requires significant reinvestment. Much of the infrastructure expansion in Canada occurred in the 1950s and 60s and since that time there has not been the required level of maintenance and development to sustain it adequately.”

The government has yet to release details of which areas of Canada or which types of projects it will prioritize. However, Prime Minister Justin Trudeau has previously singled out Toronto as a city requiring investment; in May 2016 he announced that the city will receive $840 million in funding over the next three years for public transit.

Other big Canadian cities are also in need of transportation infrastructure investment amid rapid urbanization and aging transportation networks, says Medd. Indeed, the Advisory Council notes that 70 percent of Canadians currently live in cities and its urban population is growing 2.5 times faster than the rural population.

Infrastructure improvements are essential to retain skilled workers to keep Canada’s cities competitive as well as attract new ones to help support the government’s ambitious plans for Canada to become the world’s preferred North American trade hub.

With public revenues alone unable to bridge the infrastructure gap, the CIDB is mandated to attract four dollars of institutional capital for every government dollar invested upfront.

Brett Miller, President of JLL Canada, believes the bank could be attractive to pension funds and insurance companies who are looking for secure income streams.

“Infrastructure is a great way for them to match their liabilities with returns. It has great appeal,” he says.

Ontario has previously hinted at an asset recycling model – where the government sells or borrows against its physical assets to raise money for investment in new assets. Investment opportunities could include toll rolls, which provide long-term investment returns.

The Advisory Council says Canada can create a “flywheel of reinvestment” in its infrastructure by catalyzing the participation of institutional capital in existing assets, and using this to multiply investment into new infrastructure.

Miller says it is an exciting time for the commercial real estate market. If the CIDB drives the development of transport hubs, such as new subway stations, it could boost the value of real estate and occupancy levels nearby.

“The neighbourhoods that the subway stops support could go up in value.

And if new highways are built to facilitate traffic then there is obviously a real estate impact on the communities being serviced,” Miller says.

In parallel with the CIDB, the government is looking at increasing foreign investment in infrastructure. Ed Bush, Senior Vice President at JLL Canada, says there has been limited interest in the past, but this could change if ownership rules are relaxed.

“If the government’s infrastructure bank succeeds in boosting Canada’s economy it could prove to be a lucrative investment for foreign investors. Income-starved investors around the globe are seeking out new infrastructure projects and the stable yields they bring,” he says.

The CIDB is very much in its early stages and the details are far from finalized as politicians debate its potential and pitfalls. Miller says the biggest challenge facing the government is the speed with which it can bring the plan to market: “We need action now – not in five years’ time. Is it realistic to think a government-sponsored entity can be nimble, dynamic and effective enough?”

The government will also need to hire specialists to ensure the bank succeeds. Miller adds: “Rebuilding trams, roads and water treatment plants all need different skills. Can a centralized entity understand these dynamics?”

The Canadian government will have to find a way to if it’s to turn its paper plan into a concrete reality.