While US President-elect Donald Trump campaigned on many promises, one of the cornerstones of his “Make America Great Again” pledge was a proposed $1 trillion infrastructure spending plan that would create middle-income jobs and foster rapid economic growth. Canada has already embarked on an infrastructure improvement plan that could serve as a model to its southern neighbor — though the exact details of how it will be financed are still developing.
To Privatize or Not?
Trump’s plan to finance the infrastructure modernization project using public-private partnerships is already drawing fire. Critics cite the common shortfalls associated with public-private partnerships versus traditional government-funded efforts to fix the nation’s airports, highways, bridges, and pipelines. A key concern is determining exactly who will bear the brunt of the costs.
One critique focusing exclusively on road construction argues that the general public would bear much of the brunt of the cost. Private businesses demand returns on their investments; as such, they will likely want to recoup costs through toll collection. Going this route, the public will be taxed twice, once through traditional taxes and then again through toll fees.
Meanwhile, project oversight and decision making in public-private partnerships have historically been granted to private investors as a form of compensation. This method ultimately removes the public and the government from control over the project.
Another concern is the great need for projects in rural parts of the country. Projects in these areas may be undesirable to private investors who consider them to offer poor potential revenue streams.
The Canadian Infrastructure Bank
The Canadian government under Prime Minister Justin Trudeau is using a new and innovative approach that addresses these concerns. The Canadian plan outlines a way for the proposed public-private partnership to be successful through the creation of an infrastructure bank. While more specific details will be outlined in next year’s budget, specific mandates already unveiled may provide a guide for Trump to ensure an efficient deployment of funds and the creation of effective public-private partnerships.
Canada’s infrastructure bank, outlined in the fall economic statement, will use a combination of private and public capital to fund proposed infrastructure projects. The projects vary from transportation projects to social and environmental projects. The method is similar to Trump’s proposal to fund infrastructure spending by tapping private sources.
As part of the plan, the Canadian government has established mandates that allow for total control of the allocation of funds, complete ownership of each project, and investment payouts tied to the completion of project milestones. It is doing so all while creating a partnership that brings together experts from the public and private sector.
Due to the ongoing nature of infrastructure projects, the mandates ensure that payments will only be made to private-sector investors based on specific prenegotiated quotas. For instance, payments may only occur when certain ridership targets are achieved. Through the new mandates, Canada is essentially retaining full control of the process while allowing for new sources of capital and limiting the overall risk exposure.
Admittedly, Canada’s plan may turn off some private companies, as investors don’t retain as much control as they would in a traditional public-private partnership. However, this model still gives private investors the opportunity to tap into very profitable, sometimes monopolistic ventures. Such ventures could provide excess yield at a time when excess yield is hard to come by.
Meanwhile, the Canadian government is providing the public with a master class in negotiating. It is stating that the government, not the private sector, dictates the rules. This is a principle that Trump could surely back.
Some sticking points remain. A major challenge is how to generate investment returns from constructing new roads in rural areas. One possibility is adopting a mix of traditional and public-private partnerships on an as-needed basis. Regardless, Canada will be the first to enact an innovative infrastructure plan that the US could learn from.
Adam Morehouse is a Macro Analytic Consultant on D&B’s Global Data, Insight & Analytics team. He covers parts of the Asia Pacific region as a contributor to D&B Macro Market/Country Insight Products. He also contributes to D&B’s monthly economic tracker, adding both commentary and analysis. Adam holds a BBA in finance from James Madison University in Harrisonburg, Virginia, and an MBA in financial management from Pace University in New York City.
Photo courtesy of the B.C. Ministry of Transportation and Infrastructure, used here under a Creative Commons license.