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May 16, 2017

A sum of all fears: How ‘rigid incrementality’ could be the number one threat to infrastructure spending in Canada

May 16, 2017

After decades of serial neglect, the last two federal budgets have together committed $180 billion over 12 years for investments in Canada’s beleaguered public infrastructure. This is a once-in-a-generation opportunity to address a chronic infrastructure deficit that everyone agrees is a real barrier to our economic growth.

But beneath the announcement headlines lurks the very real threat that this substantial opportunity will be squandered. Left unchecked, this creeping threat could mean desperately needed upgrades to bridges, transportation corridors, transit systems or hospitals will be delayed or not happen at all. Or worse, low-priority, lower-impact projects will get funded at the expense of the most necessary ones.

The culprit is the federal government’s approach to what it calls “incrementality.”

Over 87 per cent of Canada’s public infrastructure is owned and operated by provincial and local governments. Federal infrastructure investments can only bear fruit in collaboration with provinces and municipalities who have long acknowledged the need to fund infrastructure and who continue to ante up serious funding commitments to it.

Federal officials want to ensure their new infrastructure investments result in more things getting built or repaired more quickly. They don’t want federal money to simply replace provincial and local investment that would have happened anyway or allow provinces to divert infrastructure spending to things like tax cuts or social programs. This is the principle of incrementality.

In the first phase of the current federal infrastructure investment the federal government understood incrementality to mean two things: first, that federal funding should only go towards projects that have not already been announced or funded; and second, that provinces and municipalities must share the costs of such projects with new funds over and above previous commitments in order to access the federal money. This approach struck Ottawa as necessary to ensuring a net gain in total spending.

To do the same this time around would be a mistake.

Since provinces and municipalities are focusing their resources on projects identified through long-term planning, this approach makes little sense – and also creates perverse incentives that could undermine the goals of the federal infrastructure investment. How?

  • Provincial and local governments already assess which infrastructure projects to prioritize as part of their long-term infrastructure planning, and dedicate funding to such projects accordingly. If incrementality means already-planned projects are ineligible for federal funding, then federal infrastructure money can only fund projects that didn’t make the first cut. It’s like planning to renovate the foundation or roof of your house, and discovering that the fine print of the federal grant you applied for requires you to divert funds to fancy garden fencing that you don’t really need.
  • If provincial and local governments already commit as much funding as their fiscal plans allow towards higher-priority projects, making this federal funding contingent on new provincial or local funding would force these orders of government to increase taxes, run or increase deficits, add debt, or re-prioritize their budgets. Given that this funding would go to lower-priority projects in the first place, the more sensible course for provinces is to leave this federal money on the table.
  • If the federal government’s restrictive approach to incrementality ends up tying everything up in an endless series of project-by-project negotiations about what hoops need to be jumped through, as has typically been the case, that only further delays infrastructure renewal.

A more coherent and flexible approach is possible. Provinces and local governments should be required simply to demonstrate that federal funding is leading to more infrastructure investment than would have otherwise occurred. This could mean federal funding is added on top of whatever provincial infrastructure spending was already planned. Alternatively, the federal government could fund a portion of in-plan provincial and municipal projects, freeing up room to fund new jointly-funded ones. Most Canadians could be forgiven for assuming this is precisely how it works already.

This more practical understanding of incrementality can use existing provincial reporting, audit and accountability frameworks to guard against the displacement of provincial spending with federal funds. It can also be put in place through an across-the-board agreement, doing away with the need to hammer our separate deals for each and every project.

None of this is a departure from good government practice. On the contrary, a similar approach was successfully employed with the 2007 and 2013-14 Building Canada Funds. It will ensure that the federal goals of economic growth and taxpayer accountability are met in tandem with provincial and municipal infrastructure plans and priorities.

The result will be win-win. Provinces will move further and faster to implement their infrastructure plans, the federal government will be reassured that its investment is increasing the net amount of infrastructure that gets built, and Canadians will see the highest-priority, highest-impact, and most necessary projects materialize.

If we want to avoid squandering a generational opportunity, we need first to inoculate ourselves against the tendency to privilege administrative process over real outcomes that has hampered effective federal infrastructure investments in the past.