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Improving Affordability by Financing Infrastructure More Efficiently

31 January 2024

Canada’s federal government has a long history of involvement in municipal infrastructure assistance. In 1938, the government passed the Municipal Improvements Assistance Act, which facilitated loans from 1938 to 1940, primarily aimed at addressing unemployment by supporting sewage and water improvement projects.

It was in this spirit of generating employment and economic growth, as well as addressing water pollution, that the Canada Mortgage and Housing Corporation (CMHC) became involved in municipal infrastructure programs. CMHC’s Sewage Treatment Program, introduced in 1960-1961 as an amendment to the National Housing Act, was initially conceived to combat unemployment. However, as the economy improved after the program’s implementation, the focus shifted to pollution abatement. Between 1961 and 1974, CMHC granted nearly 1,900 loans to municipalities for sewage infrastructure, including sewage treatment plants and sanitary trunk lines, at favorable interest rates (Prime + 1/8%).

In 2009, the Federal Budget allocated $2 billion over two years in direct, low-cost loans to municipalities through CMHC for housing-related infrastructure projects. These funds, available at the 15-year Government of Canada rate plus approximately 50 basis points, could also be used for contributions to cost-shared federal projects. Since then, Infrastructure Canada has been providing funding, offering up to $2 billion in short-term funding through the Clean Water and Wastewater Fund.

Over the past 40 years, cities have mitigated the financial risk of infrastructure projects by relying on development charges for funding. Planners are stuck in a mindset of “growth should pay for growth.” According to Slack and Bird’s 1991 paper, “Financing Urban Growth Through Development Charges,” homebuyers typically bear this cost, especially when charges are uniform across municipalities and demand for housing is high, as seen in the Toronto or Vancouver metropolitan areas. The charges often benefit existing residents but come with consequences—public borrowing is replaced by private sector borrowing (developers or home buyers). While this benefits existing property owners with lower property taxes, it introduces inefficiencies as developers’ and homeowners’ financing costs exceed what governments pay bondholders.

If municipal governments don’t want to finance this infrastructure, perhaps it’s time to consider selling these facilities to entities interested in owning and managing them. Critics argue that Canadian pension funds have not invested sufficiently in the country, and infrastructure is both a preferred and attractive sector for them. Privatizing these projects, possibly in partnership with the Infrastructure Bank, could lead to lower financing costs and improved horizontal equity – i.e. a more equitable sharing of costs among homeowners. However, such a shift would require provinces to revise municipalities’ authority to impose large development charges to ensure new home prices come down.


Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.

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