Canada Digs Into Infrastructure to Boost Ailing Economy
Toronto-based construction economist Alex Carrick says Canada survived the Great Recession of 2009 and 2010 better than any other G7 country thanks to its public-sector building program.
With record-low oil prices hammering the country’s resource-heavy economy and signs pointing to the onset of a new downturn, Canada’s just-elected Liberal Party government now is aiming to boost infrastructure spending dramatically—doubling, to more than $90 billion U.S. dollars, the federal funding commitment over the next decade.
Many details on the program's dollars, timing, projects and process won’t be known, however, until Premier Justin Trudeau’s administration, which took power last October, releases its new budget in March. Officials are keeping largely mum.
Maxim Sytchev, industry analyst and head of research in Montreal for Dundee Capital Markets, says with interest rates “already driven into the ground,” the infrastructure stimulus “is more critical now” as an economic driver.
But the spending approach rankles some economists and other observers worried about growing deficits, despite Trudeau's promise to keep them under control. "If there is an infrastructure gap, it is unlikely to be filled with blasts of deficit spending and high-profile cash distributions to local governments," said an editorial in January in Canada's National Post newspaper. "The evidence is strong that existing government institutions are ill-equipped to handle infrastructure management efficiently and effectively."
Positives and negatives
Despite the risks involved when using building programs to create stimuli, infrastructure projects can deliver on long-term economic benefits, says Matti Siemiatycki, an associate professor of geography and planning at the University of Toronto. Industry participants generally agree. “It will be a good stimulus and good for the taxpayers because they will buy at a time when the construction industry is looking for work,” says Geoff Smith, CEO of London, Ontario-based contractor EllisDon. John Beck, chairman of Aecon, Canada’s largest public-works contractor, says the firm’s stock price “reacted positively” to word of the $42-billion infusion.
Even so, the executives and outside observers caution that the funding can’t compete with what Canada's resource sector generated. Yuri Lynk, construction-sector analyst for investment firm Canaccord Genuity, says capacity expansion for oil sands “could easily be $10.8 billion lower in 2016 from the 2014 peak of about $24 billion. That’s obviously a huge hole to fill.”
Federal and provincial officials are hopeful the pump-priming will bolster a continuing weak economy in 2016. Even with a spurt in public-sector job growth, January statistics show unemployment up 0.1%, to 7.2%, with 5,700 jobs lost. Hard-hit Alberta lost 10,000 jobs last month, and its 7.4% jobless rate surpassed the country’s for the first time in nearly three decades.
Government agency Infrastructure Canada is at the heart of the new spending blitz on public infrastructure—from transit and roads to sewers and "social infrastructure" such as hospitals—determining which projects get the money and which don’t. The agency is led by a new minister, Amarjeet Sohi, a one-time municipal bus driver and city council member, who helped negotiate a $1.8-billion light-rail project in Edmonton. His mandate already includes managing the agency’s $10-billion New Building Canada Fund, launched in 2014 under the previous Conservative government. “We are keenly aware of the need to intervene in the economy,” he said on an Ottawa light-rail project visit. “We will work with our partners to let them prioritize what their needs are.” The agency now may boost—to 50% from one-third now—the amount of matching funds it puts into projects at the local and provincial levels.
Provincial governments and cities already have rolled out aggressive infrastructure plans. The combined efforts could boost, to between $129 billion and $158 billion, spending over the next 10 years, says Michael Atkinson, president of the Canadian Construction Association.
Ontario Premier Kathleen Wynne has pledged a massive infrastructure spending spree, with as much as $86.4 billion budgeted over the next several years, including boosted transportation project investments, says Shael Gwartz, a provincial transportation investment official.
Current projects include the extension of two major Ontario highways, 401 and 407. Toronto is pushing ahead with the $4-billion Crosslink light-rail project, awarded last year as Canada’s largest-ever public-private partnership contract to a joint venture of national giants Aecon, ACS Infrastructure Canada, EllisDon and SNC-Lavalin. Each has a 25% stake in the project’s equity, development, construction and maintenance.
Montreal is in the midst of boosting its infrastructure spending to $1.7 billion a year by 2024, said Lionel Perez, a city infrastructure executive. “We have a lot of projects that are on standby.” One job that isn’t is the $3-billion Champlain bridge-replacement project, also awarded last year through a P3 contract to a team led by ACS and SNC-Lavalin. Under federal management, it is set for completion in 2019.
In Alberta, Canada's crude-oil production center that has been shaken by the price plunge, officials are boosting infrastructure spending to nearly $6 billion, but local officials want monies available sooner to offset oil-patch job losses. “Construction is a bit of a trailing indicator,” notes EllisDon’s Smith. “I think a year or two out, Alberta is going to see a contraction in the construction industry—probably a significant one,” adding that Ontario, British Columbia and Quebec also will take hits.
Calgary Mayor Naheed Nenshi said the “immediately stimulative” projects that could get moving by this summer relate to life-cycle maintenance and energy efficiency. Nenshi also is pushing for a streamlined process to get money flowing as soon as possible, such as a block-grant program “with criteria and stringent report-back requirements that let us make the decisions.”
During a provincial swing earlier this month to assess business and labor conditions, Trudeau and Sohi promised Alberta a $700-million Canadian-dollar emergency infusion that is part of an estimated $9-billion pot of existing, unspent infrastructure money under the New Build program that, eventually, will be distributed to all provinces (see chart, next page).
Aecon’s Beck sees the need for basic infrastructure to open up access to resource-rich mining regions in Alberta and northern Quebec. “Commodity prices are down now, but I can see them coming back at some point,” he says.
The federal visit to Alberta included a stop at an electrical workers’ union training center in Edmonton. “We’ve put a lot of effort into building our workforce, and now there are people concerned about finishing their apprenticeships because of the economic challenges,” Warren Fraleigh, executive director of the 75,000-member Building Trades of Alberta, told ENR. “It’s a terrible situation.” He said officials need to be creative. “We also need incentives for investors to build value-added facilities like pipelines and refineries ... that’s infrastructure, too,” he said.
The Alberta government on Feb. 1 announced a “diversification plan” to award, competitively, CA$500 million in “royalties” over the next decade to jump-start construction of new petrochemical projects in an effort to keep raw-material processing and its associated jobs in Alberta, rather than transferred to the U.S. Gulf coast. Credits would be awarded when facilities start operating.
But industry executives are worried the Trudeau government may overhaul the environmental review process for pipelines, LNG terminals and similar projects. “The government wants to make sure there is rigor in the environmental process, and that is OK as long as it is scientifically sound,” says John Gamble, president of Canada’s Association of Consulting Engineering Companies. “We don’t want a situation where the process can be wielded as a tool to sandbag projects.”
With policy details scarce until March, concerns are emerging over how the government will balance funding emphasis on “shovel-ready” projects and longer-term capital investments, as well as between social infrastructure spending on schools, hospitals, housing and other major public-works projects.
Sohi and other government officials have indicated they will be flexible. The new approach and those delivering the message appear to be gaining favor with stakeholders. In a Feb. 4 TV interview, Ottawa Mayor James Watson said that access now to federal infrastructure officials is a “complete sea change” from the past administration. After a recent meeting in Montreal Trudeau held with business CEOs, one attendee, who declined to be identified, said that while business still worries if the prime minister “will be able to pull it off … he really impressed that group.”
While some debate the use of P3 approaches on infrastructure because of up-front costs, others say they are established well enough in Canada to see the long-term cost benefits of early decision-making and terms that are tough to change later. There are roughly 220 P3 projects worth more than CA$70 billion operating or planned in Canada. “There are some like that in other countries, but none have had as much success in past 10 years as in Canada,” says Tariq Taherbhai, senior dirctor of Aon Infrastructure Solutions.
“One step Canada took early on to encourage P3 investment was to ensure that a common set of terms and conditions exists in each of the 10 provinces and three territories,” says analyst Lynk. “So, P3 consortia can put a bid together in Ontario and then know exactly what they are getting into when they bid their next job in another provinces.”
Even so, for industry participants, P3s will remain a high bar based on contract terms; further, it is unclear whether the government will stick with a 2015 policy change that drops a 2011 requirement that cities must screen CA$100-million-plus projects for P3 use before getting public funds. In a Globe & Mail newspaper article last fall, Sohi termed that requirement “onerous” and delay-inducing.
Going forward, municipalities and financiers are exploring other infrastructure investment approaches. Montreal pension fund Caisse de dépôt et placement du Québec, Canada’s second largest, with $172.6 billion in assets, including infrastructure, last year announced the formation of a new unit that will develop, finance and manage projects. Its first two are multi-billion-dollar transit jobs for the city of Montreal.
One private-sector financier worries that the fund's move "will crowd out private participants and create a new dynamic in the market." But in a Jan. 20 editorial, the Montreal Gazette said: "Government no longer has the means, and the old ways of doing things have been discredited. It’s a bold experiment that does carry some risk, but on balance, it’s a risk that seems worth taking."
Stantec Infrastructure Executive Vice President Gord Johnston remains concerned that the devalued Canadian “loonie” will make it more expensive to use U.S. staff on domestic projects, but “we are encouraged by what we hear from the federal government.” He adds, “The needs are there, and contractor pricing is good. There are a lot of opportunities to spark a struggling economy. Only time will tell.”