Justin Trudeau’s Liberal government handed down a budget this spring that indicates the government is set to spend a remarkable $120 billion on new infrastructure over the next ten years. Experts welcome the money to begin filling the infrastructure funding gap—but some are raising questions about a new financing model that seems to be emerging as the trendy choice among Ottawa elites.
Former Bank of Canada governor David Dodge indicated in a recent editorial that he thinks the government has used up the existing room on the government balance sheet to fund the last round of infrastructure spending. Dodge suggests the government undertake an “asset recycling” program to finance the next round of spending on infrastructure. The term asset recycling comes from Australia and the United Kingdom where it identifies a certain financing model that taps the money in large pension funds to help finance the spending. The idea is simple. The government sells off legacy assets. Large pension funds buy up those assets. The government uses the money from the asset sale to fund the next generation of greenfield infrastructure projects.
The benefits for the government are many. New infrastructure spending can be financed without issuing debt at the government level or raising taxes. Under an asset recycling program, revenues advanced do not go into general government coffers; they remain in the infrastructure stream, creating stable and visible funding streams for infrastructure. One expert suggested the government create a centralized Infrastructure Bank to standardize contracts (and bundle smaller infrastructure projects into larger tranches that would make attractive investments for big pension funds).
There are opponents to the model. The Canadian Union of Public Employees (CUPE) considers asset recycling nothing more than a new label for privatization. The federal NDP argues asset recycling will see the money needed to catch up on maintenance raised through new user fees and toll charges. Others point out that radically low interest rates would allow governments to fund this infrastructure spending without having to give up future revenues from existing infrastructure. It is assumed that pension funds would demand a rate of return of between three-to-four per cent, whereas governments can borrow at one-and-a-half per cent. If so, it would be more expensive to finance these projects through the pension funds than by borrowing the money.
Some also worry about the potential for untoward political bargaining between the civil service and politicians. If Canadian public sector pension funds—such as the Ontario Teachers’ Pension Plan (OTPP) or Caisse de dépôt et placement du Quebec—invest in assets here, they say politicians would be tempted to begin to manage the labour relations with the civil service through opaque, politically-expedient deals cut between the funds and the politicians. To date, the big Canadian public sector pension funds have only invested in foreign countries.
Nevertheless, the idea is a popular one among the elite mandarins in Ottawa. David Dodge authored his pro-asset recycling editorial along with two other very well-respected government finance types, Kevin Lynch, the former clerk of the Privy Council and current vice-chairman with Bank of Montreal, and Tiff Mackerel, dean of the Roman School of Management and former senior deputy governor of the Bank of Canada. An Access to Information Act request filed by the Canadian Press found a deputy finance minister using the phrase in February. Finance Minister Bill Morneau uses the phrase, as has a senior executive with the OTPP who was quoted a few months ago as being “thrilled” to see the phrase in the budget.
As new dollars begin to flow into the infrastructure sector it is clear asset recycling is being seriously discussed in Ottawa. “While a lot of people at the municipal level will recognize that this is a great start and that it gets the ball rolling on closing the funding gap, it’s just a small part of what’s needed,” said Bu Lam, manager of municipal programs at the Canadian Water Network. Lam noted that water systems need to be “future ready” as the effects of global warming settle in. But doing the kind of long-term planning necessary to build resilience into the system is difficult to do when funds are handed out as large one-time grants.
Mark Bainbridge, director water and waste water planning with the City of Hamilton, voiced similar concerns. “We’re glad to see them taking the infrastructure issue seriously. And obviously no one is going to look at a grant program and say we don’t need the money. But we do need more sustainable and predictable levels of funding,” he said. “We want to create inter-generational equity so that those living now are not riding on the backs of those that happen to be born later and have to spend more at the end of the life cycle of this infrastructure to repair it. We should be collecting revenues through the whole process so that it’s not just generation at the end of the cycle that pays.” Supporters of asset recycling will no doubt argue this would be the case under such a model, even as the debate over privatization, costs, and the power of the pension funds plays out.
Jeff Sanford is a Toronto-based freelance writer with experience in pension issues, finance and infrastructure.