Victory for Infrastructure: Canada's Expansionary Growth Plans, Trudeau Style

by Alan M. Field (feat. Eric Miller)

Break bulk Magazine
April 5, 2016

The Liberal government’s victory in last October’s Canadian federal elections marks a significant triumph for that country’s deficient infrastructure. By association, it’s also a victory for suppliers of project cargo and breakbulk services, who will play a key role in developing such projects in a cost-effective way.

Canada’s infrastructure and construction sector, after contracting by 0.5 percent in 2015 because of private sector cuts to capital investment and a slowing residential sector, is expected to recover in 2016, according to a report from UK-based BMI Research. That turnaround is driven by the new Liberal government’s fiscal stimulus plan, which will double public infrastructure spending over the next 10 years.

Led by its charismatic leader, 43-year old Justin Trudeau, the Liberals have announced plans for “a stimulus package and strong pipeline of social infrastructure and transport projects [that] will help the construction industry post 2.5 percent real growth in 2016 and then average 2.9 percent from 2016 to 2019,” forecasts the BMI Research report.

The Liberal government also hopes to create a Canada Infrastructure Bank to help municipalities in that country finance infrastructure projects by providing them with debt financing and loan guarantees, and by bundling smaller projects to make them more attractive to institutional investors. Overall, BMI forecasts that Canada’s “transport infrastructure and renewable energy will outperform [the overall economy] over the next four years, as the Liberals intend to promote export competitiveness through transport infrastructure development, and have stressed their commitment to green infrastructure.”

Eric Miller, vice president of policy, innovation and competitiveness at the Canadian Council of Chief Executives in Ottawa, explains that the Trudeau government shares many views about the vital importance of strengthening infrastructure with the administration of President Barack Obama, now in its final year in office. “Prime Minister Trudeau and President Obama seem to have hit it off like a house on fire when they met on the margins of the G-20 in Turkey and other venues,” Miller said. “Both have the same basic world view about how to grow an economy and how to seek prosperity.”

In preparation for Trudeau’s state visit to Washington in mid-March ñ and the first formal state dinner between an American president and a Canadian prime minister since 1997 – Miller’s organization has urged both countries “to put on the agenda certain transformative measures with respect to the border. Early indications are that there is an interest on the part of the Obama administration on that front and a keenness on the Canadian side on that front.”

In addition, a summit meeting of the three North American leaders will incorporate “a more direct and serious discussion than there has been for a long time about North American competitiveness and what the relationship between Canada, the U.S. and Mexico will look like,” Miller said. “Leader visits are action-forcing events and the actions are now being developed.”

INFRASTRUCTURE OPPORTUNITIES

Apart from strengthening measures for cross-border cyber-security, and addressing ways to achieve mutual recognition for skills categories in each of the countries, infrastructure is one of the areas where there will be plenty of new opportunities for U.S. and other non-Canadian firms, notes Miller.

Although details remain to be determined, this much is clear: “The Trudeau government has emphasized its desire to make significant investments in infrastructure; that may mean roads but also urban transit – other types of roads, bridges and facilities – although we are not exactly certain of which projects in which locations,” Miller adds. “We expect some money will flow to the greater Toronto region because the premier of Ontario [Kathleen Wynne] is very interested herself in making that a priority of her government.”

Some federal-provincial cost sharing will be important. People will need to design that infrastructure, provide steel to it, construct it, and will require the services of project cargo and breakbulk professionals.

Much of the same kind of thinking that drove the American Recovery and Reinvestment Act in 2009 will drive the infrastructure here, Miller said, because the Canadian economy is in a downward cycle, driven by declining commodity prices. The Trudeau government hopes that infrastructure investments will be counter-cyclical. Certainly, U.S. engineering and construction firms stand to benefit from this, given the fairly open rules of cross-border procurement for NAFTA parties to bid on the infrastructure projects in other countries that are in that pact, which has brought together Canada, Mexico and the U.S. since 1994.

Glen Hodgson, senior vice president and chief economist at the Conference Board of Canada, said this is a key reason behind Canada’s renewed attention to strengthening its transportation infrastructure. Canada’s international trade has been mediocre for much of the past 15 years, he said. Exports to the U.S., Canada’s dominant trading partner, were flat 2000-2010, and manufacturing export performance has been poor since 2000.

As the trade picture changed, Canadian exporters found some success diversifying into other growth markets, especially Asia. Thanks to strong prices, exports of energy and some other resources were robust; in addition, “traded services” emerged as a new area of strength. Now, the trade game appears to be changing and the Conference Board believes that Canada is entering the next trade era.

In Hodgson’s view, four key factors define the next trade era, in which Canada will need to take a more assertive approach to expanding its infrastructure.

First, economic growth in the BRIC countries of Brazil, Russia, India and China has faded – in some cases, badly. Both Brazil and Russia are in deep recession due to the commodity price collapse combined with poor economic policies, and there is no quick turnaround in sight. India is the new growth leader among the BRICs, with the potential to grow by up to 8 percent annually. China’s downturn and its worldwide impact is profound.

Second, “Canada can no longer afford to be as dependent on exports of its industrial and agricultural commodities.”

Third, the value of the Canadian dollar has slipped back into a more familiar range in the mid-70 cents (U.S.) against the greenback. “The end of the commodity super-cycle has fed the decline in the [Canadian dollar’s] value. So has further Bank of Canada monetary accommodation, judged necessary to ward off incipient recessionary and deflationary forces,” Hodgson said.

Fourth, a full seven years after the 2008 financial crisis, the U.S. economic recovery is at last real and sustained, which means that bolstering connectivity between Canada and the U.S. is once again a priority, he said.

BUILDING CANADA

There are two major components under the New Building Canada Fund, which was originally established under the administration of former prime minister Stephen Harper a decade ago:

• The CAD$4 billion National Infrastructure Component (NIC), which provides funding for projects of national significance, with a focus on projects that have broad public benefits, and that contribute to long-term economic growth and prosperity.
• The CAD$10 billion Provincial-Territorial Infrastructure Component (PTIC) which supports infrastructure projects of national, regional and local significance that contribute to economic growth, a clean environment, and stronger communities.

The PTIC is divided into two sub-components:

• National and Regional projects (PTIC-NRP), CAD$9 billion.
• The Small Communities Fund (PTIC-SCF), with CAD$1 billion for projects located in communities of fewer than 100,000 residents.

In December, Canada’s Infrastructure Minister Amarjeet Sohi announced that the Trudeau government will focus the additional federal funding on such projects as highways, ports, and Canada-U.S. border crossings that help speed the flow of commercial goods across Canada and to its neighbor to the south. Sohi said that those projects that are shovel-ready and meet the Liberal government’s policy goals will be getting the new cash. To qualify as shovel-ready, a local municipality will have done all the relevant studies, and engaged in public consultations.

In contrast to the Harper government of the past decade, Miller noted that “the Trudeau government has a strong urban base. They elected many members from Montreal and Toronto and Vancouver, and so one could imagine that priority will be particularly given to its world view about urban planning,” which stresses the importance of reducing urban road congestion. “Light rail might be an interesting area of activity. Road construction will also get a significant portion of the spending given the fact they carry the lion’s share of the burden” of commercial transportation.

READY FOR ACTION

Are Canadian firms ready to seize the opportunities? Hodgson believed so, but funding could be an issue.

“The key limiting factor is weak Canadian business investment activity,” he said. Private investment growth numbers were feeble in 2013 and 2014 and were even worse for 2015. Driven principally by a 40 percent collapse in oil sector investment, private investment contracted by about 8 percent last year, according to the Conference Board of Canada.

Laura Dawson, director of the Canada Institute at the Woodrow Wilson Center in Washington D.C., said that the oil-price decline has had a significant impact on the Canadian economy. “That’s an unfortunate side effect that has revealed the fault lines in the Canadian economy. When you can rely on continuing robust exports of oil and gas, you don’t have to look too closely at gaps in competitiveness in manufacturing of goods and services. You are now seeing the gaps and weaknesses in other areas of the Canadian economy; but that’s not necessarily a bad thing. Being able to trade with the U.S. and export a certain amount of oil has led to a certain amount of complacency among Canadian producers [of various goods]. Nothing focuses the mind as much as a crisis,” Dawson said.

Miller argued that despite plunging oil and gas prices, the Trudeau administration has a strong interest in expanding and reshaping Canada’s energy infrastructure, noting that Natural Resources Minister Jim Carr has launched negotiations with the energy ministers of the U.S. and Mexico about a continental energy and climate accord.

“We welcome seeing a North American energy and environment accord that would include cleaner energy sources, with market access for traditional and untraditional Canadian energy prices. How the mix gets put together and what they mean [for the infrastructure and for project cargo and breakbulk service providers] is yet unclear,” said Miller.

He cautioned against accepting the conventional wisdom that views Canada as deeply divided between an environmentally sensitive East, and a politically conservative West. “Regionalism is a long feature of Canadian politics, but the Trudeau government has representatives from every province all across the country.” Although they are very aware of the importance of infrastructure for getting oil from the oil sands to the market, they are also investing massive sums of money in technological improvements that reduce greenhouse gas emissions.