Rural Infrastructure: A Creaky Skeleton (Canadian Version)

The basic infrastructure in farm communities is aging, sometimes even crumbling. Is private funding the answer?

By Boyce Upholt | Illustrations by Brad Yeo and Leo Nieter

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Farming is already tough. But over the past decade, Keith Currie, an eighth-generation farmer in Ontario, has watched an emerging challenge: the cost of electricity creeping—and then surging—up.

An aging bridge over a rural river.

An aging bridge over a rural river.

“If natural gas was up and down my road, I’d have it in a heartbeat,” he says. “But I don’t have it.”

Currie, the president of the Ontario Federation of Agriculture, says that installing gas lines would save the average Ontario homeowner about $4,000 on heating—and more for farmers who keep barns warm all winter. “That money wouldn’t be something I’d put in a savings account,” he adds. “That’s money I’d put into capital investment.”

For the average citizen, infrastructure is unsexy stuff. The skeleton that undergirds our lives and our businesses fades into the landscape—which means that when budgets pinch, their maintenance is easier to ignore. But in rural Ontario, at least, it’s become a hot topic.

That’s not just because of high prices. Grabbing headlines throughout the province and beyond was the fact that some 15% of shares of Hydro One—Currie’s sole choice for electrical service—were recently sold to private investors. Ironically, this was done to help fund a public investment in infrastructure.

Across the world, the infrastructure balance is shifting from public to private hands. So, is this the answer to farm country’s infrastructure woes?

It’s not just rural Canada that is crumbling: A 2007 study estimated that the nation needed to spend $123 billion to bring infrastructure up to snuff—a cost projected to rise to $400 billion by 2020. Much of the nation’s backbone was built in the wake of World War II, with little subsequent reinvestment; now, the Federation of Canadian Municipalities estimates, a third of that infrastructure needs immediate repair.

Who pays for infrastructure? Click to enlarge the infographic.

Who pays for infrastructure? Click to enlarge the infographic.

Rural Canada is in a particular bind. Responsibility for upkeep lies largely with municipalities, and rural communities lack the tax base to pay for what they, and the nation, need. While farmers may be the first to notice the damaged state of back roads, the high cost of getting crops to market raises the price of everyone’s food.

The cost of infrastructure is almost always tough to bankroll, and governments across the world have begun to turn to the private sector for funding solutions. Public-private partnerships, or P3s, can take a range of forms. Sometimes, private entities simply provide a loan; in other instances, they not only finance, but design and build the project. At the most extreme end—rare in Canada—private owners maintain and operate structures for public use. P3s are a hot funding model in the United States, too, particularly since the 2008 financial crisis, and President Donald Trump’s recent call for $1 trillion in infrastructure spending hinges on private money.

But Canada has been a leader in the field and, in 2014, Canadian financial experts testified before a U.S. Congressional committee on infrastructure, offering best practices on funding projects with private money. A federal Crown corporation committed to supporting P3 investment, called the P3 Canada Fund, was launched in 2009, and advises all levels of government on how best to utilize private support. Provinces, from British Columbia and Alberta to Quebec, have created their own investment agencies that support P3 programs as well.

The Hydro One sale goes much farther. Proponents believe that as a private company, with more motivation to generate a profit, the utility may become more efficient. Further, if a private company invests in a piece of infrastructure rather than the government, that’s a burden off the budget books.

“Governments can’t fund through taxpayer dollars every single need,” says Ben Dachis, associate director of research with the C.D. Howe Institute, a national public-policy think tank. “We have to prioritize as a society.” According to Dachis, some things—particularly those that can generate user fees—can be run privately. “Then you don’t need the government to own and operate every bit of infrastructure across the country.”

Ontario Premier Kathleen Wynne, for example, has promised a $29 billion update to the province’s roads and bridges. To offset that cost, last fall the government sold the shares of Hydro One mentioned earlier in this article—the largest initial public offering in Canada in 15 years.

Before the deal, critics worried that it would lead to increased electricity costs—which many contend were already high. Afterward, Patrick Brown, the provincial leader of the Progressive Conservative party, visited local farms. His message: Liberal mismanagement of infrastructure is hurting communities. Previously, he had called the privatization of Hydro One a “fire sale.”

Those are sharp words—and likely overly simplified. Analysts say that it’s too soon to determine whether privatization will impact rates long term, though the high rates that preceded the sale were related to long-term contracts that guaranteed revenues to private companies for building and running individual power plants.

But the controversy highlights an important question: Can the shift toward the private sector serve rural infrastructure needs? Many worry that, just as a small tax base limits municipalities’ ability to fund rural infrastructure, the small size of many rural projects makes them unappealing to private financiers.

Even Dachis, the research director at C.D. Howe, noted that despite his staunch support for privatization, some needs, like rural roadways, cannot be served through privatization. And even for the simplest application of P3s in which the private sector provides funding alone, many rural projects are too small to qualify.

Despite their growing popularity, P3s remain a minor portion of the Canadian strategy for funding infrastructure. Consider that the budget for the P3 Canada Fund has been just $2.5 billion over 10 years, compared to tens of billions of dollars in direct expenditures on infrastructure.

Some of the bigger breakthroughs in Canadian rural infrastructure are the result of federal impetus. In late 2016, for example, the Canadian Radio-television and Telecommunications Commission (CRTC) declared that high-speed internet was a basic service, and that all Canadians should have access to minimum speeds. Several financial incentives are in the offing to overcome private reluctance to work in rural communities. The $500 million “Connect to Innovate” program, for example, which will run through 2021, helps pay the cost of connecting schools, rural hospitals and even individual homes to existing internet networks.

The Federation of Canadian Municipalities (FCM) has praised what it calls “unprecedented infrastructure investments” in last year’s federal budget—$81 billion total, all of which is accessible to rural communities, and $2 billion of which is specifically earmarked for pressing rural and northern needs. As the government launches a federal infrastructure bank this spring, FCM is also encouraging policies that allow small municipalities to cooperatively bundle multiple projects together.

Keith Currie sees the progress. He’s excited about the CRTC broadband announcement, for example. “But how long is it going to take until we get to where we need to be?” he asks. “Time will tell. And it’s going to depend on dollars dedicated to that.”

Many of those dollars continue to be public. Due to the high hydro costs, the Ontario government has poured public money back into Hydro One, subsidizing the rates on rural users’ behalf. In addition, a $100 million grant program announced in January will help build the gas-delivery lines Currie seeks—a piece of infrastructure that suppliers have not prioritized building themselves.

According to Currie, there’s no quick fix to repair the nation’s infrastructure. “It’s taken a generation or more to get to this point,” he notes. “It’s going to take a generation or more to get back to where we need to be.”

See the U.S. version of this story here. >>