Funding Infrastructure
Asset Recycling

NRU
April 16, 2014
By Michael Fenn

Canada’s infrastructure is aging and significant new investments are long overdue. No one doubts there’s an urgent need in Canada for new roads, bridges and public transit.

Every Canadian who sees the deterioration of city streets or struggles to get onto a rush-hour subway car knows this. The question is how do we pay for it?

We could raise taxes, but so far, governments and the public have resisted this solution. There is another option.

Governments could make significant new investments in public infrastructure by recycling government-owned assets. Asset-recycling involves governments disposing of legacy assets and using the capital to invest in new public projects or refurbish existing infrastructure. Other countries like the U.K., Australia and the U.S. have used asset-recycling to raise billions in revenue that is being put to public use.

Private capital - including public-sector pension funds - is looking to invest in public assets and infrastructure in reliable jurisdictions, like Ontario. A new framework for asset management and reinvestment based on the principle of asset recycling would allow increased infrastructure investment, protect the public interest and make use of both the expertise and large pools of capital available in Ontario.

By leveraging an array of diverse assets - from land and infrastructure to government enterprises and information technology - governments can unlock the wealth of legacy assets. Recycled assets can pay for long-overdue investments in public infrastructure.

To start, a comprehensive inventory of current assets is needed. Surprisingly, governments oft en don’t know what they own or understand its true value. Next, a determination must be made as to whether the purpose for owning the asset in the first place is still relevant. Then governments should ask whether alternatives are available to achieve the same public policy outcome, while raising more money. Asset planning should be done centrally rather than undertaken through individual ministries. And government should be hiring or engaging people with the specialized skills and expertise in monetizing assets.

Revenues raised from assets should be put in an infrastructure trust that would ensure the revenue from asset disposition
would be used to invest in new, priority infrastructure.

Finally, federal and provincial governments should follow the lead of municipalities and clearly separate operating from capital expenses. Debt financing to invest in capital assets like infrastructure should be acceptable, while operating deficits should be discouraged. This can only occur if budgets distinguish operating from capital expenses more clearly.

Our current prosperity stands on the infrastructure foundation, built and financed by capital investment, often financed by government bonds and municipal debentures, in the decades following World War II. These post-war investments were then complemented by civic, hospital and educational infrastructure investment financed from development charges, philanthropy, debt-financed capital grants from the provinces, and periodic federal capital funding.

Our current prosperity and quality of life stand on the shoulders of these investments.

From transit facilities and water lines, to energy infrastructure and recreational facilities, the need for new investment by governments is abundantly clear to all of us.

We must either raise taxes to fund new investments or find creative ways of getting more value from our current assets.

Done properly, asset recycling has the potential to protect the public interest, increase revenues with a reduced burden on taxpayers, and permit a new wave of infrastructure renewal.

 

 

Michael Fenn is a management consultant and former deputy minister for the Government of Ontario.