Getting the most value for infrastructure spending

Establishing an infrastructure bank won’t pay off if all levels of Canadian government

The federal government’s new infrastructure bank won’t solve a huge problem: infrastructure projects cost up to 25 per cent more than necessary.

The Liberal government isn’t totally wrong in trying to leverage its ability to access cheap credit and create partnerships with investors to fund the repair of sewers, build new roads and bridges, and ensure Canadians have clean water. But that’s only half the problem.

Many will note that the bulk of our national conversation about infrastructure focuses on how to generate revenue for projects. The proposal for a bank to provide project funding is just the latest example of debt-and-deficit-laden governments looking for a way to pay for pricey infrastructure. Alongside the discussion about a bank have been proposals to tap private pension funds for capital and introduce user fees to create ongoing revenue, among others. These plans tend to only excite policy wonks.

What gets lost is the spending side of the infrastructure investment story.

Investment involves getting capital and then spending it in ways that maximize value for investors. And when it comes to a conversation on whether government investments in infrastructure provide that value, it’s tough to find evidence.

What’s our investment priority? Is it economic growth? Is it maintenance of our standard of living? What kind of processes do we need to have in place to ensure we’re not overspending?

We don’t talk about this because it’s as boring as watching concrete cure. Discussing the procurement processes and the competitive environment required to make Canada an attractive place for infrastructure investment just doesn’t have the same shine as a bank.

But how we spend matters just as much, if not more, than whether we will have the financial capital to leave a well-built Canada to our children.

Going through the itemized list of projects receiving federal funding, you see pretty quickly that Toronto – partly because of its enormous population relative to other cities – receives a huge amount of investment. The trouble is that Toronto, along with the Ontario communities of Hamilton, the Region of Waterloo and Sault Ste. Marie, can only tender projects to firms affiliated with particular unions. This means that projects worth billions of dollars receive fewer bids.

Still awake? If not, maybe the effects of this type of restricted bidding will wake you up.

A forthcoming paper from Cardus, which reviews the literature on the costs of restricting tendering, notes that scholars agree that restricting competition imposes real costs and adds huge price premiums to construction projects.

A study by Martin Skitmore on projects around the world estimates that bid prices fell by 20 to 25 per cent as the number of bidders increased from two to 15.

And a University of Texas A&M study estimates that going from two to three bids reduced the price of an infrastructure project by about eight per cent, while going to four bidders resulted in a 14 per cent reduction. When eight bidders were present, prices were discounted by a whopping 25 per cent.

To put that into perspective, Toronto is slated to spend $20.9 billion on infrastructure over the next decade. If you include the projects it needs but for which it has no funding, you’d have to add another $22.3 billion. Cost savings of 20 to 25 per cent would go a long way to finding cash for these unfunded infrastructure projects.

Getting our house in order by introducing competitive bidding on all projects receiving government funds should be a top priority for all levels of government.

It might not be as exciting as putting together a new bank, but it could give taxpayers more bang for the buck in building up Canada.

Troy Media columnist Brian Dijkema is Cardus program director for work and economics.

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