A key responsibility of city administration is to provide and maintain infrastructure. While the condition of our roadways is visible as we drive on them, our water and sewer systems are hidden from view. These aging systems are in dire need of upgrading, and as recent events in Calgary and Montreal have shown, they can fail catastrophically.
While politicians may point to climate change as the cause, the real issue lies in the massive public infrastructure deficit, resulting from years of neglect from all three levels of government. According to Statistics Canada, the cost of replacing public infrastructure, such as roads, bridges and water and sewer systems, deemed to be in “poor” or “very poor” condition, was estimated at $264.7 billion as of 2020 – equivalent to $16,252 per private dwelling. The survey found that another $195.7 billion is potentially required to replace public infrastructure where the condition is unknown.
This is a widespread issue affecting nearly every urban center. By 2020, a significant portion of the water infrastructure was over 50 years old, with nearly one in five kilometres of water, sewer and stormwater pipes reaching the end of their useful life.
Even communities that have managed their infrastructure well and kept it in a good state of repair will face an annual funding shortfall. This is not a sexy issue for politicians during budget deliberations. These needs are not politically attractive and remain out of sight, so they get ignored.
The challenge lies in determining how this will be funded. Some cities have large reserves built up from development charges but are reluctant to spend these funds. The typical response is to look to senior levels of government to provide funding. In 2016, the federal government created the Clean Water and Wastewater Fund to provide short-term funding of $2 billion over a three-year period, with the program cost shared between the federal, provincial and municipal governments.
More significant federal funding was provided in the past for infrastructure that is now reaching the end of its useful life. In the 1960s and 1970s, federal programs for municipal assistance in developing water and sewage infrastructure were a major influence on urban growth and land use in Canada. Between 1961 and 1980, CMHC’s three municipal infrastructure assistance programs loaned over $2 billion and granted an additional $750 million for the construction of municipal water and sewer projects. To remove roadblocks to urban development, the funding forgave a portion of the capital and accrued interest. The loans subsidized about one-third of municipal capital expenditures on water and sewer infrastructure, and grants directly covered about one-tenth of those expenditures.
While it is unlikely that the federal government would engage in the same level of funding as in the past, would they encourage the “Maple 8” (Canada’s eight largest public pension funds) to invest in this kind of infrastructure asset? This is unlikely, given the recent experience in Thames Water. Thames Water, the biggest water supplier in Britain, is owned by several funds. Recently, OMERS (Ontario Municipal Employees Retirement System) wrote down its 31.7 per cent share in Thames Water to zero. The British Columbia Investment Management Corporation holds an 8.7 per cent stake in the company, but how they are managing this investment is not clear.
The exposure isn’t just on the equity side. Thames Water’s debt totals £18 billion. Export Development Corporation (EDC) lent hundreds of millions of dollars to Thames Water between 2018 and 2022. According to the Financial Times, EDC provided this investment to “provide support for Canadian direct investment abroad,” naming OMERs as the Canadian group involved. In early August this year, EDC sold £313 million in A-rated debt and more than £300 million in B-rated loans. There likely was a significant loss on the sale, as the Financial Post noted that the B-rated notes had been quoted at a 63 per cent discount earlier in August.
The financial impact doesn’t stop there as there is exposure to our banking sector. According to the Financial Post, in early August, the Bank of Montreal sold arout £300 million of senior debt at a 30 per cent discount. This could explain the surprising increase in BMO’s loss reserve figures for Q3, which occurred prior to the sale. Given this broadscale financial hit, it is likely that the Canadian financial institutions will stay clear of this sector.
Next week, we’ll explore how addressing our infrastructure shortfall could offer a way to encourage the construction of affordable housing.
Independent Opinion
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