OIB may hurt more than it helps

Wouldn’t it be great if more government infrastructure were built faster and cheaper? The Ontario government certainly thinks so and is creating the Ontario Infrastructure Bank (OIB) to get that done.

Unfortunately, inadequate funding is not the problem plaguing infrastructure investment. The province never comes close to spending the money it allocates to infrastructure. In 202223 alone, it underspent its infrastructure budget by a whopping $3.4 billion (15 per cent). Under-spending has happened every year in recent memory.

What’s more, increasing funding over time has not increased actual infrastructure output. According to Statistics Canada, the combined capital expenditures of all levels of government in Ontario have risen 33 per cent over the past 10 years, but in real terms production is essentially unchanged. Costs have risen (close to a point a year faster than the consumer price index); output has stayed the same. On a per-capita basis, output is actually down 10 per cent.

Ontario’s infrastructure problem is not a shortage of funding, it’s the cost and availability of construction labour and materials. Robust demand is being constrained by shortages on the supply side. The better financing deals and greater funding that a good infrastructure bank might generate could even make things worse by further stoking demand for already scarce construction resources, thus driving up prices and sector profits while slowing completion by spreading activity out even further among competing projects.

There’s also the problem that involving the private sector, as an infrastructure bank will, does not guarantee efficient project delivery. Private-public partnerships suffer well-known drawbacks. According to a recent report published by the think-tank Ontario360, some of Canada’s worst-performing infrastructure projects have been PPPS, including Ottawa and Toronto’s new light rail lines, which have been plagued by technical challenges, construction delays and cost overruns. Even when projects are delivered on time and within budget, they can be more costly to the taxpayer. In 2014, Ontario’s auditor general reported that such projects had resulted in significantly higher costs ($8 billion) to the province.

What is the likely outcome of the investment bank? The Ontario Ministry of Finance has a strong reputation and can be expected to set up the OIB quickly and capably. The bank’s new leadership will be under political pressure to demonstrate results. A few “quick win” investment announcements will be portrayed as proof of success. But the actual benefits, costs and efficiency of these projects will not be known for many years. If they get built on time, it will only be by drawing resources away from other projects. Even if they get built within budget, they will be expensive.

Despite the weak business case for it and the many possible unintended (negative) consequences, the OIB is almost certainly going ahead. So here are a few ways to maximize its value and minimize its risk.

First, give it a very focused mandate to start with. Longterm care homes and affordable housing answer clear public policy needs, have easily identifiable roles for the private sector and relatively low risks — at least when compared with energy and transportation infrastructure projects.

Second, ensure taxpayers are protected by a robust investment framework reviewed and approved by the auditor general. Clear and binding financial accountability is in everyone’s best interest, especially given public skepticism regarding recent Ontario government dealings with the private sector (in the Greenbelt and at Ontario Place, for instance).

Finally, devote some policy attention to the real problems inhibiting infrastructure project delivery — the shortages of skilled labour, project delivery capacity and contract management expertise. Without action on the supply side, adding the OIB to the demand side won’t help and may even make things worse.

ROBUST DEMAND IS BEING CONSTRAINED BY SHORTAGES ON THE SUPPLY SIDE.