Martin Faces an Infrastructure Deficit
FUNNY HOW SOMETIMES YOU DON'T NOTICE the decisions you're making until after you've been making them for a while. Early in 2000, Norman Betts stood in the New Brunswick legislature as finance minister in the brand-new government of Bernard Lord's Conservatives. Betts announced he was putting the province's money where the people wanted it: health care, education, tax cuts.
What he mentioned only in passing was how he was going to pay for all the sexy stuff: by spending a lot less on less-sexy stuff. The province's infrastructure budget took a $100-million cut that year. An aide to Lord said last week that the infrastructure budget - which pays for ROADS, parks, sewers, and the rest of the province's essential capital stock - has inched upward in every subsequent budget. But it still isn't up to its 1999 level. The province's health-care budget, meanwhile, has continued to rocket from big increase to big increase.
Multiply the New Brunswick experience across every government jurisdiction in Canada and across a couple of decades of policy-making decisions. The result is the mess a growing number of experts say Canada is in: a massive infrastructure debt - that's the gap between what has been spent on infrastructure and what should have been spent - which translates into clogged roads, deteriorating cities and decaying sewers. Estimates of the total infrastructure debt run as high as $130 billion.
And just as the federal budget debt grew deeper for decades before 1998, the infrastructure debt is getting bigger every year. A recent study by the Canada West Foundation looked at the 2003 infrastructure deficit for the six big western Canadian cities (Vancouver, Edmonton, Calgary, Saskatoon, Regina and Winnipeg) alone. For those six cities, the gap for a single year was $564 million.
"It's a crisis we can no longer afford to ignore," Saeed Mirza, a professor of civil engineering at McGill University, says. Road quality directly affects trade. Traffic jams foul the air. "Pipes," Mirza said, "are so perforated that we are losing 30 per cent or more of the purified water."
And if something nasty like bacteria or parasites got into those pipes? The tainted-water scandals in Walkerton, Ont., and North Battleford, Sask., would look like only a dress rehearsal for the full-blown epidemic that could ensue, Mirza said.
So welcome to your new job, Paul MARTIN. Canada's public infrastructure is only one of the challenges facing a new head of government intent on making his party seem shiny and new after a decade in power. And while it may seem an odd angle on the job Liberals handed him last Friday in Toronto, it's a pretty good microcosm of the tough decisions Martin will have to make every day.
Now, fixing potholes and sewers is hardly the most glamorous of the myriad priorities tugging at a new prime minister's attention. Last week the Hill Times, a newspaper for Ottawa's parliamentary precincts, asked more than two dozen experts - mayors, profs, members of Parliament and so on - what Martin's top three priorities should be. Dozens of topics were named, from parliamentary reform to debt reduction to fixing Canada's relationship with the United States.
Only two of the experts mentioned spending on infrastructure.
But it's precisely because it's unglamorous that Canada's public infrastructure is in such a mess. Government after government has allowed the nation's plumbing to be pushed down the list of priorities.
Casey Vander Ploeg is a senior policy analyst for the Canada West Foundation. He wrote that study about the infrastructure deficit in Canada's Big Six western cities. He was struck by what he discovered when he examined four decades' worth of financial reports from those cities.
In the 1960s and early '70s, he writes, the first item in every city's annual report was a detailed account of the capital budget - how much was spent on municipal roads and parks and so on. But by the 1980s, capital-spending schedules were tucked deep inside the reports - or vanished altogether.
"In the 1960s and 1970s, civic leaders wanted to draw attention to the fact that they were actively building their cities," Vander Ploeg writes. But by the 1980s their attention and their pride focused on program spending and operating budgets: social-assistance programs, daycare, macramé classes at the parks and recreation department.
The cities, in short, were spending more on people and less on stuff. Just as Bernard Lord's government did after the 1999 election. Just as all Canadian governments have done for decades.
Vander Ploeg writes: "Has public capital investment been squeezed out by continual demands for more government program spending" - such as social services, health care or business subsidies?
"Are Canadians simply too focused on consuming the national wealth today rather than investing it to protect and even increase potential consumption in the future?"
Several experts interviewed by Maclean's suggest that's precisely what's been happening. Canada has been acting like a homeowner who spends an ever-increasing amount of his budget on groceries and health-club memberships, ignoring his knocking furnace and leaking roof.
In 1960, Canada's federal, provincial and municipal governments between them were devoting about 20 per cent of their budgets to bricks and mortar. By 2002 the figure had fallen to less than 10 per cent. International comparisons suggest Canada has turned more decisively away from infrastructure spending than many competing countries. Figures from the Organisation for Economic Co-operation and Development show that in 2000, the public and private sectors in Canada spent less on public investment than many of Canada's European and American neighbours - but substantially more on government consumption.
The Federation of Canadian Municipalities found that in 1996 the average municipal infrastructure spending for Canada was $1,180 per capita. For the United States, the comparable figure was $2,480. And for an average of 43 European countries it was $3,150.
You can buy a lot of stuff with that extra money. Last month the outgoing Chrétien and incoming Martin camps engaged in a late-inning feud over the wisdom of Transport Minister David Collenette's plan to spend $700 million to prepare Via Rail's Windsor-Quebec City train corridor for a possible switch to high-speed rail service. There is room to debate that decision. Some experts argue that even if that $700 million is spent on transport infrastructure, it should be spent elsewhere - improving public transit in Montreal or Vancouver, for instance.
But the European Union has budgeted 220 billion euros - about $337 billion, or 470 times what Collenette proposed - on new transport development from now to 2020.
Nice trains come in handy in a global economy, because they permit consultants or widgets to travel with a minimum of fuss between, say, Warsaw and Stuttgart. They help a nation meet its Kyoto accord commitments to limit greenhouse-gas emissions, because when traffic flows smoothly it creates less carbon dioxide.
Here in Canada, meanwhile, Canada-U.S. trade has tripled since the Free Trade Agreement of 1988, but the country's transport infrastructure hasn't begun to keep pace. Roads into major cities most mornings are parking lots for hours on end. Rural roads in Saskatchewan that used to be paved have been converted back to gravel - and the locals are delighted, because at least gravel is better than an endless gauntlet of potholes.
But inadequate infrastructure spending isn't just about lost opportunity. It can be about ballooning cost, too.
Remember we compared Canada to a homeowner who devotes his entire monthly budget to operating costs instead of upkeep? Soon enough both the homeowner and the nation run into a rule of thumb engineers call De Sitter's Law of Fives: major repair can be expected to cost roughly five times what routine maintenance would have cost if you'd done any. And all-out replacement will cost five times what repair would have cost. The longer you defer your capital spending, the bigger the bill when it finally does come due.
So what were Canada's governments thinking while they let the nation's physical plant decay? Were they nuts?
Not at all. They were responding rationally, or at least understandably, to life in a world where dollars are scarce but the wrath of the voter can be infinite.
Recall Vander Ploeg's observation that infrastructure spending collapsed as a public priority in the 1980s. That's when Canada's governments and electorates began to be concerned with ballooning budget deficits. Spending had to be reined in, then cut drastically. How do you decide what to cut?
As much as possible, you protect spending on programs people will notice, such as health care and unemployment insurance. "People protest," Vander Ploeg said. "Roads don't."
Of course, social programs took a nasty hit in several provinces even before Martin's 1995 budget announced deep cuts to the payments Ottawa sends the provinces for such spending. The hard times only accelerated after that budget. So it probably didn't feel as though programs on people were being shielded from cuts. Sure enough, people protested: in the 1997 election, anger over social-program cuts cost the Liberals more than half their seats in Atlantic Canada.
But as governments' fiscal health improved, they fell all over themselves to reinvest in social programs, with health care, the jealous alpha male of money-sucking budget priorities, overwhelming everything else. The federal Liberals' 2000 election-eve "mini-budget" devoted $23.4 billion over five years to new health spending. The premiers never stopped arguing that wasn't enough. So the 2003 budget devoted a further $34.8 billion over five years. Jean Chrétien had barely announced that figure before the premiers were saying that still wasn't enough. They will be back at Martin's door.
Not that the premiers' concern was insincere. Provinces' health-care spending has increased even faster than federal contributions. In some provinces the health-care budget has grown from about 25 per cent of total program spending to more than 40 per cent.
Compare that with the Canada Infrastructure Works program the Chrétien Liberals implemented every few years since 1994: typically about $1 billion a year to leverage another billion from the provinces and another billion from municipalities. It would be unfair to call $3 billion a year chump change. But if you putter along at that rate for very long, one day you realize your competitors are beating you silly.
In the U.S., Washington and some state governments have lately run into a nasty fiscal crunch that has slowed an extended infrastructure buying spree. The Transportation Equity Act for the 21st Century, or TEA-21, provided $US218 billion in federal money for highway and transit projects between 1998 and 2003.
The Europeans' budget balances are deteriorating too, but in the meantime they are spending like, well, Europeans: as well as the 220-billion-euro transit blitz, part of the 213 billion euros earmarked for the 2000-2006 instalment of the EU's Structural Funds will go to an infrastructure program targeted at the continent's poorer regions.
As Vander Ploeg notes, a 1999 report by the International Institute for Management Development in Switzerland ranked Canada 45th for the quality of its roads, 43rd for its railways, 35th in energy. Canada does much better in high-tech infrastructure. The Canada Foundation For Innovation has poured billions into the nation's campuses. Research labs are sprouting like mushrooms. There is much to admire in that choice. But as McGill's Mirza says, "sooner or later you have to put your high-tech product in a truck and deliver it on a road."
The good news is that Paul Martin understands this state of affairs. The bad news is that the pressure on him to look elsewhere will be intense.
Anyone wondering why Martin has become an ardent advocate of a "New Deal For Cities" should be starting to figure it out by now. Four Canadians in five live in cities. The bulk of the infrastructure gap, although by no means all of it, has accumulated in Canada's cities. Revenue from property taxes, which provide a disproportionate share of municipal revenues, fails to grow when the economy - and voters' expectations - do. Two-year infrastructure programs are useless to a mayor deciding whether to begin a 15-year upgrade to his sewer system.
After years of goading from the Federation of Canadian Municipalities and several prominent mayors, Martin has come to embrace the idea of guaranteeing municipalities a fixed share of federal gas-tax revenue. That would take care of cities' qualms about the predictability of transfers and about the way property-tax revenue flatlines during an economic boom.
What it won't address is the sheer scale of the infrastructure gap. "The short answer is, it's not sufficient," Vander Ploeg said. "It's a step in the right direction." How big a step? That depends on Martin's ability to shield infrastructure spending from all the other demands on the public purse. "No matter how long it takes," Martin told the Union of B.C. Municipalities, "we are going to provide Canadian municipalities with a portion of the federal gas tax."
Great. How long? What portion? Martin will get back to us on that: "Just how much tax room is vacated by the federal government, and at what pace, will have to be negotiated depending on the state of the government's finances," he told the FCM in Winnipeg. The state of finances, in turn, depends on the state of other priorities Martin has also embraced: new tax cuts, debt reduction, research, aid to Africa, military helicopters. Oh, and still more money for health care.
He has luck on his side, in the form of an opposition consensus that he's not serious about cities. James Moore, the Canadian Alliance's transportation critic, dismisses Martin's urban-renewal plans. So does Jack Layton, the NDP leader and an even more formidable opponent on this file because he was president of the FCM when it made infrastructure a national issue. The threat of trouble from across the aisle has historically been the surest spur to Liberal action.
But the supply of dollars will never come close to matching the supply of demands. The hard choices about how to allocate dollars are now Martin's. Don't cry for him: he volunteered for the job. There will be days when he will wonder why.
See also PUBLIC EXPENDITURE.
Maclean's November 24, 2003