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Infrastructure spending: Let’s do it right

Kevin Page and Sahir Khan are the former Parliamentary Budget Officer and assistant PBO, respectively. They now work at the University of Ottawa.

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The late U.S. president John F. Kennedy noted that in a crisis, you will find danger and opportunity.

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The Canadian economy is struggling. Year-over-year change in our real gross domestic product has been negative, according to the latest estimate. Our national unemployment rate has risen to 7.1 per cent. Real gross business capital formation has been flat for the past three years. The latest Bank of Canada business outlook surveys are not positive. The world economic outlook is being revised down. Many commodities prices, such as oil, are hitting historic lows.

For analysts, this is a time of danger. For policy makers, this can be a moment of opportunity.

The new Liberal government wants to increase growth with a significant public infrastructure program – a doubling of federal investment for public transit, green and social infrastructure over the next 10 years.

The policy case for this is strong. Estimates from the International Monetary Fund (based on a sample of advanced economies) indicate that an increase of one percentage point of gross domestic product in investment spending raises the level of output by about 0.4 per cent in that same year and by 1.5 per cent four years after the investment.

In a climate of weak growth and low interest rates, the potential boost to growth from increasing investment in public infrastructure could offset the increase in debt so that the public debt-to-GDP ratio does not rise. In this context, Harvard University professor Larry Summers says public investment is a "free lunch."

Beyond the economic benefits, there is significant need for infrastructure investment. According to the World Economic Forum's competitive index, Canada is well behind its peers on infrastructure.

Furthermore, there are significant recapitalization needs on existing infrastructure. The 2016 Canadian Infrastructure Report Card, being released Jan. 18, warns of a weakening state of affairs, noting that "one-third of our municipal infrastructure is in fair, poor or very poor condition, increasing the risk of service disruption."

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Translating the current state of our infrastructure and the government's commitment to investment into economic growth requires a plan.

Fortunately, we have a starting point. The IMF has a three-part performance frame that includes planning, allocation and implementation for public infrastructure investment. The effective and efficient use of public money with front-end due diligence and oversight can translate into targeted public infrastructure investment with returns over the short- and long-terms.

However, even a cursory examination of the Canadian experience against this framework reveals we have important shortcomings. We have no national or sectoral plans; no fiscal rules that treat capital and current spending differently; weak governance on project selection; weak data; and limited use of independent analysis.

Simply put, we have a capacity problem. We need only be reminded of issues such as the gun registry, the F-35 fighter jet and the National Shipbuilding Program to identify the chronic misalignment of incentives with private-sector partners, inadequate due diligence on the part of government, lack of skill on project and contract management, and shockingly consistent lacks of data and transparent reporting to support ongoing monitoring and oversight.

The root causes of major project problems are intertwined and deeply embedded in the machinery of government.

Canada is not the only country that struggles with such projects. The U.K. National Audit Office recently released a major study examining 150 ongoing projects worth more than $1-trillion (Canadian). It concluded that one-third of the projects were in doubt or unachievable unless corrective action was taken.

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So how do we leverage the economic and structural benefits of infrastructure investment, while managing capacity problems?

We need a governance and oversight arrangement that not only creates political accountability for outcomes, but also eliminates secretive political involvement in project selection.

Project plans and timelines also need to be vetted and tested before approval. This doesn't imply creating burdensome bureaucratic practices. Rather, this means synchronizing the flow of funds with credible asset-management plans, transparent reporting and rigorous assessment.

Let's learn from our mistakes and the mistakes of others. We have an opportunity to develop capacity and to use investment in public infrastructure to create the growth we need in Canada.

Why not consider a two-track approach?

We have immediate recapitalization needs that don't require extensive assessment or planning. Let's opt to invest in those initial projects as bridging mechanisms as we transition to a longer-term vision.

With the involvement of all levels of government, let's build and implement a plan with a strong performance framework for new, 21st-century infrastructure.

Taking the time to reflect on the infrastructure we want and need in Canada will leave an imprint far beyond the next federal budget. Let's make sure we get it right.

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