Trump’s Lesson From Trudeau: Infrastructure Is No Quick Fix

EghtesadOnline: What could Justin Trudeau – a former drama teacher – possibly teach the real estate mogul running the world’s largest economy about building things?

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11 March 2017

Quite a lot, as it turns out. Trudeau’s quest to stimulate the Canadian economy and boost long-term growth with an infrastructure spending program has been slow out of the gates. Some 17 months after his election win, Trudeau’s government has completed only eight of the 1,274 roads, bridges, and other projects it has approved, Bloomberg reported.

So even in the early stages of the Canada plan, there’s much that President Donald Trump – pushing Congress to pass a $1 trillion infrastructure bill – can learn from his northern neighbor. There are measures to emulate and pitfalls to avoid. Here’s a summary:

Be Patient

“The hardest lesson to learn from Canada’s experience with infrastructure spending so far is just how long it takes for ‘shovel-ready’ projects to actually break ground,” said Frances Donald, senior economist at Manulife Asset Management in Toronto.

Trudeau’s first budget pledged to provide “immediate” help to the economy via infrastructure expenditures. He’s found it challenging to spend the C$13.6 billion ($10 billion) allocated for his first two fiscal years. As of March 8, less than 3 percent of the projects approved since June have officially broken ground, though updates on start times are subject to a sizable lag, according to Infrastructure Canada. Completed projects include an extension of the TransCanada Highway in Prince Edward Island.

In a recent report, the Parliamentary Budget Office estimated that C$829 million allocated to Infrastructure Canada in the 2016 budget will be deferred and spent in future fiscal years.

“This doesn’t happen overnight: just because you approve something doesn’t mean you start seeing economic impacts the next day,” cautioned Randall Bartlett, chief economist at the Institute of Fiscal Studies and Democracy in Ottawa.

Putting the Private ‘I’ in Infrastructure

Trump wants to leverage private capital to rebuild America’s infrastructure, and in light of Canada’s recent experience, there’s some policy to add to those platitudes.

The Trudeau government laid out plans for a national infrastructure bank last year, which aims to identify infrastructure initiatives suitable for private-sector participation. It also ensures government financing of these endeavors remains modest. The bank, which isn’t yet operational, has been allotted C$15 billion for direct funding of projects, and an additional C$20 billion that will be dedicated to debt or equity stakes.

“The key thing is that the feds will be creating some forum for equity involvement,” said Benjamin Dachis, associate director of research at the C.D. Howe Institute, a think tank in Toronto.

The bank will allow domestic or international entities like pension or insurance funds to generate revenue from what have historically been public projects.

“Every dollar the government has to put into infrastructure comes from somebody’s tax dollar,” Dachis said. “All these taxes have an economic cost that cascade throughout the economy.”

Marketing Matters

It’s one thing to establish institutions to attract private capital, and quite another to get those funds out the door. Educating Canadian policymakers on what investors need and identifying the projects that fit those parameters will be key to any credible plan to bring the private sector into the mix, said Bartlett. And it’s something Americans would do well to keep in mind.

“You have to be transparent about the business opportunities, you can’t expect investors to join in because of a nationalistic pitch,” added Craig Alexander, chief economist at the Conference Board of Canada, a research group. “Ultimately it has to have a good rate of return.”

The interests of corporations and governments, however, aren’t necessarily aligned. Negotiations over risk-sharing and maintenance responsibilities add significant complexity to these pursuits, and the public-private partnerships that go awry always seem to draw more attention than the ones that go off without a hitch.

“From initial conversations in Canada, it’s become clear that governments are looking for productivity and growth-enhancing projects, and private parties are looking for profitable projects,” said Manulife’s Donald. “They are not always one and the same.”

Don’t Limit Your Labor

The U.S. labor market has considerably less slack than its Canadian counterpart, and is close to levels most economists believe is consistent with full employment. This raises the risk that any massive public works projects pursued by the new administration could be inflationary as employers are forced to bid up wages to entice workers.

“If you have labor shortages, the way we fill them is accessing global talent, through immigration policies and ensuring we remain an attractive destination for foreign workers,” said Alexander.

Fly First Class

Ronald Reagan famously fired more than 11,000 striking air traffic controllers early in his first term as president. There’s an opportunity for Trump to emulate the “Gipper” by “Canadianizing” the government-run Federal Aviation Administration to cut costs.

NAV Canada, the nation’s user-financed equivalent – is a “perfect model, a beautiful model, which allows what would otherwise be a monopoly system to operate in the interest of users,” Dachis added.

Expand Your Horizons

In his victory speech, Trump pledged to rebuild “highways, bridges, tunnels, airports, schools, hospitals” to make U.S. infrastructure “second to none.” But there’s a lot more that the government can be involved in beyond these traditional high-profile infrastructure line items.

“The government of Canada’s approach is quite broad: there’s a whole variety or range of definitions that can include things like ‘green’ or ‘social’ infrastructure,” said Alexander. Beware the pendulum swinging too far in the other direction, he said.

“You need to be careful you don’t call everything infrastructure,” he said.