Canada West Foundation Blog

By: Michael Holden

Just in time for Christmas, the federal government has announced a new funding plan for health care. The present funding agreement, in which federal cash transfers to the provinces and territories grow by 6% per year, is set to expire in 2013-2014. The new ten-year plan will see that 6% annual escalator maintained through to 2016-2017. Thereafter, federal cash transfers for health care will be tied to annual growth in nominal (i.e., not adjusted for inflation) economic output, with a floor provision that guarantees a minimum increase of 3% per year, regardless of how well the economy actually does.

This unilateral announcement caught many people off guard. Federal-provincial transfers have always been a sensitive and nuanced subject and new funding agreements typically come only after extensive, public, and often bitter negotiations between Ottawa and the provinces. Many people were just beginning to get geared up for the next round of talks, which now appear to have been cut off at the pass.

Reaction across the provinces to the new arrangement has been mixed. Alberta is strongly supportive, for reasons that I will discuss below, while BC and Saskatchewan are also largely in favour. In the rest of Canada, however, the backlash has been harsh. It being the Christmas season, “lump of coal” metaphors abound.

This backlash is rooted in the interpretation of a Conservative Party campaign promise during the last election; several provinces had expected the 6% escalator to be maintained over the entirety of the new funding arrangement. Tying federal transfers to economic output will almost certainly result in slower growth in health transfers beginning in 2017-2018.

How much slower is anyone’s guess at this point. However, historical data suggest that nominal economic growth in Canada has actually been quite consistent over the long term, averaging 4.2% over the past 10 years, 4.7% over the past 15 years and 4.5% over the past 20 years. Assuming growth at the low end of that range (4.2%) over the duration of the new plan, total federal health transfers to the provinces can be expected to increase from about $30 billion in 2013-2014 to about $47.7 billion in 2023-2024. Had the 6% escalator remained in place, transfers would have reached $53.7 billion.

As I hinted at above, Alberta is the clear winner under this new funding arrangement. One of the less-publicized changes it will bring is that cash transfers for health care will be distributed across the provinces on an equal-per-capita basis. At present, this is not the case. The history and complexities of federal transfers are too complicated to get into here, but the end result is that wealthy provinces (with strong tax bases) currently receive less cash per person from the federal government for health care than poorer provinces. Since Alberta is by far the wealthiest, it receives far less on a per-capita basis than the other provinces.

When the new funding arrangement comes into effect, there will be a large increase in per-capita cash transfers to Alberta in order for it to reach the same level as the other provinces. This change is bound to be controversial. Alberta is already the richest province in Canada. For it to receive a perceived “windfall” of cash may not sit well with some provinces, especially since the increase in payments to Alberta will, by definition, come at the expense of increases to other provinces (because all funds come out of a fixed pool).

One thing is for certain; after a few quiet years, fiscal federalism and issues about federal-provincial transfers suddenly are back in the public policy spotlight. We will be writing more on these subjects in the months ahead.

By: Casey Vander Ploeg, Senior Policy Analyst

From the 1950s to the 1970s, borrowing was one of the single largest sources of municipal infrastructure financing.  But after the deficit and debt scare of the 1990s, and the fiscal belt-tightening that followed, borrowing on the public credit became almost universally despised.  The conventional wisdom that developed is that all government expenditure—including infrastructure—should be met out of current revenue.  No borrowing.  Period.  While the point may have some merit in the federal and provincial context, it certainly doesn’t in the municipal context.

Municipal Budgets are Unique

First, municipal budgets are much more capital intensive.  In 2010, the City of Calgary’s infrastructure investment was 54% of its operating expenditure.  Capital expenditures and grants in the 2011 Alberta budget are only 19% of operating expenditure.

Second, municipalities typically face a few very large projects.  Federal and provincial capital budgets are filled with dozens of relatively small projects.  Unlike federal and provincial governments, municipalities have very little flexibility to finance their capital needs by timing infrastructure projects.

Third, municipal borrowing is entirely different than federal or provincial borrowing.  Most federal and provincial debt has been acquired as a result of operating deficits—borrowing to cover ongoing expenses like the provincial payroll.  By law, municipalities in most provinces cannot run operating deficits.  When municipalities borrow, it is always for infrastructure.  The difference here is between “smart” debt and “stupid” debt.  “Smart” debt equates to the mortgage on a home, where the debt incurred is offset by a valuable capital asset.  “Stupid” debt is incurred to consume, like buying groceries on a credit card and then carrying the balance month after month or even year after year.

Fourth, the conventional wisdom is excessively conservative.  Corporations with a strong balance sheet borrow. Why?  Because it makes sense to grow the business by financing productive assets with debt.  The same applies to local governments and infrastructure.  The absence of any tax-supported debt is not the litmus test for fiscal responsibility.  Rather, fiscal responsibility involves balancing the operating budget over the business cycle and maintaining or increasing financial net worth across the long-term.  None of this is an argument against borrowing for infrastructure.

In short, a completely debt-free city should never be the ultimate goal of fiscal policy, regardless of how well it plays politically.  This is especially the case if the trade-off is an underfunded stock of capital assets.  The “pay-as-you-go” approach is arguably better for a city fiscally, but it does not always contribute to the overall health of a city, which certainly encompasses more than the balance sheet.

“Smart” Debt

The concept of “smart” debt has emerged to help bolster support for borrowing as a valid form of infrastructure financing.  The concept seeks to build consensus around the use of debt by emphasizing its role as part of any long-term capital plan, and recognizing that “pay-as-you-go” cannot accommodate all infrastructure needs.  “Smart” debt sets out broad parameters on how a city should borrow.  The idea comprises five elements.

1) Appropriate projects:  Ideal infrastructure for borrowing is large and expensive, has a long lifespan, is one-time or non-recurring in nature, and where borrowing can lever additional financing elsewhere.

2) Debt levels:  Smart debt means sustainable borrowing by using some notion of “optimal” debt relative to current operating revenues and anticipated growth of that revenue.  Smart debt requires cities to work through the thorny question of their tolerance for debt.  In February of 2002 for example, the City of Calgary implemented a new capital financing policy that allowed for significant new borrowing.  But, strict limits were set.  The cost of servicing all tax-supported debt could not exceed 10% of tax-supported expenditures. In October of 2002, the City of Edmonton also approved a new debt policy.  Total debt charges were not to exceed 10% of city revenues and debt charges for tax-supported debt were capped at 6.5% of the tax levy.

3) Amortization:  Smart debt does not see amortization terms set arbitrarily, or with the sole consideration being lowest cost.  Rather, amortization terms reflect the life of the asset.  Amortization terms in Canada today tend to be in the 10-20 year range, but in the past, 25-30 year debentures were not uncommon, and they are still in use across the US.  Longer amortization lowers the costs of debt servicing and also allows more borrowing to occur.  While this does mean paying more interest, a lot of that interest is offset by avoiding the costs of future inflation.  Longer amortization is more than reasonable for assets with a life span of 50 or even 100 years.  A good example comes from the City of St. John, New Brunswick, where the City proposed a significant user fee increase to fund a 20 year debenture for water and sewer improvements. The local Chamber of Commerce, balking at the magnitude of the rate increase, proposed that the debt term be extended to 30 years, the maximum allowed under provincial legislation. The Chamber argued that the user fee increase could be almost halved.

4) Debt structure and technique:  In Canada, most municipal borrowing occurs through amortized debenture bonds where both interest and principal are paid in equal installments.  But, the world is full of other options. One example is “retractable” or “bullet-style” debt where only the interest is paid for the first half of the term with principal payments coming on line for the second half.  This debt can be used to advance desperately needed infrastructure.  Smart debt argues for using a variety of borrowing structures and techniques:

• Municipal Tax-free Bonds
• TIF Bonds
• Local Improvement Bonds or Special Assessments
• Revenue Anticipation Notes and Revenue Bonds
• Bond Banks
• Revolving Loan Funds
• Senior Government Infrastructure Banks or Credit Enhancements

5) Repayment:  Smart debt recognizes that borrowing can only finance infrastructure—the borrowing itself must be funded. Before issuing debt, cities draw up a comprehensive repayment plan. A good repayment plan incorporates the concept of earmarked taxation to build public support for increased capital spending and the issuance of debt. It’s easier to sell the public on incremental tax increases when they are earmarked for     projects that are highly valued. The City of Calgary has earmarked special property tax levies to fund borrowings, and so has the City of Edmonton.  The City of Saskatoon also expressed interest in earmarking a  portion of the federal fuel tax revenue to repay debentures.

How Much Debt?

The most contentious feature of any “smart” debt policy is building a consensus around what constitutes a tolerable level of borrowing.  Achieving agreement here is difficult because of the subjective nature of the question.  At the same time, there is a way to conceptualize the issue and sharpen the focus.  The process starts by recognizing that the tax revenue of most governments tends to grow over time.  Against this tax revenue growth several “scenarios” can be plotted (Figure 1).

When debt—or the cost of servicing debt—is growing faster than tax revenue, the trend is both unreasonable and unsustainable.  This is Scenario #1.  The growing cost of debt will continue to chip away at tax revenue and crowd out other expenditures.  At the opposite extreme is a steadily decreasing level of tax-supported debt, which given the huge infrastructure funding challenge, is just as unreasonable.  This is Scenario #4.  A reasonable and sustainable level of debt lies somewhere between Scenarios #2 and #3, which would see the outstanding stock of debt and debt servicing costs increasing over time, but never at a pace that outstrips tax revenue growth.  There is no deterioration in a city’s fiscal position if outstanding debt and the costs of debt servicing grows in proportion to the growth in revenues—assuming of course that taxes are not intentionally raised beyond reasonable levels.

The point is that “runaway” debt and a “debt-free” city are both extremes to be avoided.  Between the two lies a reasonable and sustainable level of debt.

Debt is Becoming “Smarter” in the West

Western Canada’s large cities have not always fared that well considering the general concept of “smart” debt.  The Edmonton experience is illustrative (Figure 2).  Starting in 1990, Edmonton embarked on a quest to decrease its debt.  By 2003, tax-supported debt had fallen from $200 million to $24 million.  Meanwhile, tax revenues continued to grow, as did the city’s infrastructure funding gap. Throughout most of the 1990s, the City of Edmonton was arguably following an “unreasonable” debt policy.  Since 2000, however, tax-supported debt has grown, which reflects a change in borrowing policy.

Edmonton is not alone (Figure 3).  This is the same pattern reflected across most of the West’s big cities.  The City of Regina actually succeeded in eliminating all tax-supported debt, and Saskatoon came very close.  Only the City of Vancouver has seen debt levels growing in tandem with tax revenues.  However, recent increases in tax-supported debt do represent a much more balanced view of the role that borrowing can—and should—play in infrastructure financing.  This is not a situation to be bemoaned, but applauded.

One of the reasons is that the timing for borrowing just could not get any better. Interest rates today are at the lowest point seen over the past 50 years (Figure 4).  For cities with the capacity and the need to borrow, there may be no better or cheaper time than now.

Different Approaches

To round out discussion over the smart debt option, it is important to understand the three stages of addressing a deficit—whether it be a budget deficit or an infrastructure funding deficit.  First, growth in the deficit needs to be arrested (ensure the bleeding does not get worse).  Second, the deficit needs to be closed (the bleeding must be staunched).  Third, the accumulated infrastructure “debt” resulting from annual “deficits” needs to be addressed (the spilled blood needs to be cleaned up).

The potential of smart debt operates within the first step.  There are four different approaches.  The first approach (Figure 5) sees the entire annual funding gap (the red line growing over time) financed in the short-term by debt. Here, debt solves the short-term funding crunch but the amount of debt quickly bumps up against a previously set tolerance level. At that point, borrowing must essentially stop.  The funding “gap” reappears, and continues to grow. Little has been gained.

The second approach (Figure 6) sees borrowing ramping up over the short-term after which the pace slows to keep debt levels tolerable. This addresses immediate high priority needs, but may not arrest long-term growth in the funding gap.

The third approach (Figure 7) sees modest borrowing annually against an operating budget that is growing as well.  If borrowing proceeds at a slightly slower pace than the growth in operating revenues, then the costs of servicing debt relative to the budget do not rise and debt can be used more effectively over time. This may have the potential to arrest at least some of the growth in the infrastructure funding gap over a longer-term.

A variation on this approach (Figure 8) is to borrow substantially, but only in certain years.  In the intervening years, debt is repaid, but then ramped up once again.  Over the years, this has tended to be the general approach taken by the City of Saskatoon.

Getting “Smarter” Yet

From a fiscal policy perspective, it is good to see some “pick-up” on the smart debt concept.   But more could be done.  One example would be for Canadian cities to secure a wider range of borrowing tools.

At the Canadian Construction Association’s AGM in March of this year, I had a unique opportunity to spend some time in conversation with a former executive of Bird Construction.  He offered up the idea of establishing a federal infrastructure bank or revolving loan fund.  This would be a pool of capital created by the federal government using its AAA + bond rating to secure funds at the lowest possible rates of interest and make that available to municipalities.  In his view, the idea represented the type of national commitment needed to address the infrastructure challenge.

When it comes to borrowing, there just could be no better time.  The Bank of Canada rate averaged 0.65% in 2009, 0.85% across 2010, and is now sitting at 1.25%.  It’s the cheapest money available since at least the 1960s, and cities would be well advised to use that to their advantage.

By: Dr. Roger Gibbins

Throughout 2011, Canadians took comfort in the fact that as the world around them seemed to go to hell in a hand basket, life was pretty good here at home. Although the Canadian economy sagged a bit, it held up well by comparison with our major trading partners. Stock markets rebounded, employment did not plummet, and across western Canada there was real economic growth and widespread prosperity.

Unlike the political deadlock and acrimony that has become increasingly characteristic of political life south of the border, Canadian governments enjoyed reasonably strong electoral support and, for better or for worse, we have been freed from the paralysis of minority governments in Ottawa. All in all, 2011 goes down as a pretty good year for Canada admidst a general international environment of uncertainty and unease.

Nonetheless, it is difficult to look forward to 2012 with anything close to unbridled optimism. Economic and political conditions in the United States, still our major market for virtually anything we produce, are unlikely to improve as Americans lurch toward the November elections. Economic conditions in Europe remain grave. Closer to home, western Canadians face huge challenges in moving resource assets to new international markets while at the same time, American markets are soft and/or overflowing with conventional Canadian products such as natural gas.

So often western Canadians believe that we have the resources the world needs, and assume the world will beat a path to our doors. Quite understandably, resource wealth breeds complacency. Increasingly, however, we realize that we will have to do much of the beating, that our competitors are many and often better positioned geographically, and that the barriers to international market access are challenging in the extreme. Being resource rich in the absence of markets is not a recipe for sustainable prosperity.

In 2012, Canadians from across the country will also have to come to grips with growing regional imbalances within the national economy, and how these play out through the frameworks of fiscal federalism and in a period of growing financial constraints for all governments—federal, provincial and municipal. On balance, western Canadians are doing very well, but how do we reconcile regional prosperity here with more disadvantaged regions of the country? How do we ensure that regional economic strength is encouraged as a national asset, and not seen as a target?

None of this means that Canadians should be fearful when looking ahead to 2012. At the same time, we will face some truly intimidating policy and political challenges as we try to re-jig the Canadian federal system and national economy to meet unstable and rapidly changing global conditions. The upcoming year will not be a time for the faint of heart, or a time for complacency. But then, to quote the last words of Australian bushwhacker Ned Kelly as he stood on the scaffold, such is life. Or, in the more current vernacular, bring it on!

On behalf of the Foundation, I would like to wish you all the best for the holidays. Thank you for your engagement over the past year. As 2012 approaches, we look forward to continuing our work as the only think tank dedicated to being the objective, nonpartisan voice for issues of vital concern to western Canadians.

By: Velma McColl

The outcome at the international climate change conference in Durban marks a significant shift in both climate change politics and implementation. For the first time, all countries agreed to formally commit to reduce greenhouse gas (GHG) emissions—particularly the US, India, China, Brazil and other emerging economies.  Even small island states facing serious affects of climate change today agreed to reductions.

Between now and 2020, countries will negotiate the terms for the next generation agreement to collectively reduce greenhouse gas emissions. There are many layers of complexity involved in reaching a binding global deal over the next several years. From 30,000 feet, let’s look at the key building blocks coming out of Durban.

First, the Durban meeting confirmed that the Kyoto Protocol and its mechanisms will continue for a second commitment period starting January 1, 2013 and ending either in 2017 or 2020.   The Kyoto Protocol has always covered a limited number of industrialized countries and today represents approximately 25% of global emissions, reminding us how much the world has changed since 1995.  Canada is now officially out of Kyoto but for the EU, this extension was critical to ensure the continuation of its emissions trading system and the underlying carbon units created under the Protocol.

Second, countries not under the Kyoto Protocol agreed in Copenhagen in 2009 to voluntarily reduce emissions and report their results to the UNFCCC. This “bottom-up” approach allows countries to decide their own domestic strategies (important for China and India) and currently covers more than 75% of global emissions. Ever since Copenhagen, the system of accounting and reporting these pledges has been getting progressively stronger though is still not legally binding.

The concern with voluntary commitments is that they fall short of what is required to limit global temperature rise to 2 degrees Celsius—a target agreed upon in Copenhagen.  Along with scientific reports, the International Energy Agency’s (IEA) 2011 World Energy Outlook suggests “we cannot afford to delay further action” and that without new policies, “we are on an even more dangerous track” for higher temperature increases.  This leads to another building block promised in Copenhagen and confirmed in Durban, a review that will take place between 2013 and 2015, to see whether countries must do more collectively to lower GHG emissions.

Since energy and climate change are two sides of the same coin, this means focusing on energy systems in both the developed and developing world. As the IEA warned, the existing stock of energy infrastructure is “locking-in” levels of carbon emissions that make future reductions much more costly and difficult so shifts in our systems of energy production and consumption are unavoidable.

Fourth, the Durban meeting established tools to address three key implementation challenges for climate change: a) adapting to the impacts (adaptation) and reducing GHG emissions (mitigation); b) efforts between developed and developing countries; and c) the linkages between energy and climate change.  These institutions include the Green Climate Fund, Adaptation Committee and a global Climate Technology Centre and Network to facilitate the exchange of best practices. The Green Climate Fund creates a permanent mechanism for the $100B per annum envisaged by 2020 to support both mitigation and adaptation efforts in developing countries, although the source of funds is still uncertain.

And finally, the Durban Platform launched the difficult political process to formalize emissions reduction commitments countries have made into another “protocol or legally binding agreement or agreed outcome with legal force.” Any new agreement would be negotiated by 2015 and enter into force not later than 2020. How the political gaps will be closed between 194 countries, particularly the US, China, India and the EU is not clear. In the words of their negotiator, this moves the US ratification of a future global climate change treaty “from the impossible to the very hard.”

For Canada, the outcome of the Durban meeting means that the government will continue to work towards the voluntary pledge made in Copenhagen of 17 percent below 2005 levels by 2020, in lockstep with the United States.  The drama around withdrawal from the Kyoto Protocol does not change the target and Minister Kent expressed support for the process. The other thing that Canada and the US have shared is a desire to see all countries participate in the solution to a global challenge. Now that this is underway, we will have to figure out how our domestic energy and climate change strategies align with these new negotiations and institutions.

While it may seem like you need a map and a magnifying glass to find your way through all this, two things are true after Durban. For the first time in nearly 15 years, the countries of the world are in the same canoe and rowing in, more or less, the same direction on climate change.  And over the next three to five years, all countries will be reporting their emissions results into a common global system so we will be able to judge for ourselves who is acting and who is not. In the midst of all this complexity, these are both steps in the right direction.

Velma McColl

Velma McColl joined the Earnscliffe Strategy Group in 2004, where she works on a range of economic and social issues, specializing in energy, environment and green technologies. Previously, she advised several Federal Cabinet Ministers on political strategy, policy and communications. Her career includes success as an entrepreneur and experience working collaboratively with business, academia, not-for-profit organizations and the public sector. She is a frequent writer and commentator on international and national energy and climate change issues and is a co-founder of the Canadian Clean Technology Coalition.

One Comment

Velma McColl’s blog offers two rare commodities — clarity and cautious optimism. It is interesting that her optimism and the analysis that supports it did not penetrate the Canadian media, or at least did not reach this reader. Her analysis also suggests that there are ample opportunities ahead for Canada to get back in the international canoe, and to do so on terms that might better align with Canadian national interests. An early Christmas present.

By: Casey Vander Ploeg, Senior Policy Analyst

With the Christmas shopping season in full swing, many of us have already seen, heard, or read the inevitable news stories about how much consumers are planning to spend this year, the results of the latest consumer confidence survey, and the overall state of the retail sector.  Behind this type of commentary lies an unspoken assumption—that high levels of consumer spending equate to a “good” economy or a “growing” one, while lower levels mean a “bad” economy or one that is “tanking.”

That assumption has just one small liability.  It’s not entirely correct.

When all of us earn income, we can do only one of two things with it.  We can spend it or we can save it.  Spending on goods and services—whether by individuals, corporations, or governments—represents only one side of the economic equation.  On the other side lies saving.

When income is saved, it does not sit idle in your bank or RRSP account.  Rather, it becomes a pool of investment capital that business employs to invent new products, new technologies, and new goods and services, or to innovate by developing and improving upon existing products, adapting and adopting new technologies and processes, and finding more efficient ways of producing existing goods and services.

This is enhanced productivity—producing better, producing more, and producing at lower cost.  This frees up productive resources—both labour and capital—that can be used elsewhere in the economy.  And, it also frees up personal income that all of us can use to buy additional goods and services.  The end result?  Higher living standards and rising real incomes.  In other words, economic growth.

Thus, it is investment, invention, and innovation that stimulates long-term and long-lasting economic growth.  The concepts of investment, invention, and innovation are closely linked, and this larger package also ties strongly to infrastructure.

Investment:  When governments renew existing capital assets or construct new ones, they are not spending as much as they are investing.  The “expenditure” results in a physical asset that has economic value.  The asset supports private investment.  What good is a factory in the middle of the prairie with no water, no electricity, and no natural gas to run the place?  What good is a factory in the middle of the prairie with no roads, bridges, interchanges, or railways to get the factory’s products to market?  Well, that factory is useless.  So, infrastructure is first of all very much investment as opposed to spending.

Invention:  In Canada, the municipal infrastructure funding challenge has been estimated at some $270 billion, with $123 billion required to fix existing systems and $115 billion required for new infrastructure.  Western Canada’s seven largest cities face a combined infrastructure funding gap of some $42 billion over the next 10 years.  Like the broader economic point above, the infrastructure funding dilemma can also be viewed as an equation with two sides.  The first side is revenue.  How can we pump more money into infrastructure investment?   On the other side lies cost.  How can we invent new technologies and new processes to put the infrastructure down at lower cost?  The sheer size of the infrastructure challenge is crying out for the new idea and the new inventionto lower costs.

Innovation:  To be sure, the line separating invention from innovation is not always clear.  But if we conceive of invention as the new idea, the new technology, or the newproduct, then we can think of innovation as the next step, whether that be adopting the new invention, adapting it to local circumstances, and developing and improving the idea.  In short, “pushing the envelope.”

A look at history shows us that innovation has likely had more impact than the inventionor the “discovery.” While Benjamin Franklin discovered electricity, it was Thomas Edison who put it to use by creating the light bulb.  While Alexander Graham Bell discovered the telephone, it was Motorola that came up with the first hand-held mobile cellular telephone.   The gasoline engine was already a reality well before Henry Ford began building Model-Ts. And while Orville and Wilbur Wright risked life and limb with the first airplane, it was a century of development by the likes of Lockheed-Martin, McDonnell-Douglas, Airbus, Boeing, and Bombardier that gave us the luxury and convenience of the modern jetliner.

The idea, the discovery, and the invention is just a first step.  The larger innovation process takes that idea and continues to work it by developing the idea, improving it, strengthening it, and finding new applications for it.

When it comes to governments and innovation, however, we do run into a problem.  The very concepts of investment, invention, and innovation entail risk.  What if the idea doesn’t come off?  What if the invention doesn’t work?  What if the new innovation blows up?  What if we fail and lose our investment?

In the private sector, the prospect of a reward compensates for the risk.  If one takes the risk, and if one is successful, then one reaps a reward in the form of profit.  This dynamic does not always work in the public sector.  In government, where is the reward for innovation?  It is more elusive.

To make matters worse, the risks are larger.  Not only does government face the prospect of economic risk—the innovation does not work and money is lost—but they also face political risk—failure coupled with discontent, dissatisfaction, and public protest.  For governments, the risks of innovation are a “double-whammy.”   This results in an affinity for the traditional approach, if not outright inertia.

When it comes to innovation in public infrastructure, more thought needs to be given to how the risk-reward function can be made to work better in the government sector.

One solution to get the “I-4” rolling is the “P-3” or the “public-private-partnership.”  Advocates of the P-3 model often argue that it saves money and results in more projects getting completed in less time.  But one of the real strengths is how the P-3 can incorporate innovations in project design, finance, construction, and even operations.  The P-3 facilitates this by “risk transfer.”  The risks inherent in innovation are shared and split between the private and public partner depending on who can better manage that risk and lower the prospect of any failure.  For some, this is the single greatest strength of the P-3 approach.

Another solution is to encompass innovation attempts by using a business model.  Initially, this was the rationale for creating separate departments or utilities distinct from general municipal operations.  Over time, the concept has expanded to include the “public interest corporation.”  These are things like EPCOR and ENMAX, corporate entities that are wholly-owned by the cities of Edmonton and Calgary to provide water, wastewater, and electrical services.  Separation helps innovative efforts by creating a measure of political insulation.

Another idea, and one with which many Canadians are familiar, is the federal or provincial research and development agency or council.  Federally, such bodies include the National Research Council (NRC), which was created in 1916, and the Social Sciences and Humanities Research Council (SSHRC).   Most provinces have similar bodies, designed to fund and promote research and development, and help guide and fund the adoption of new technologies:

• Alberta Research Council (1921)
• Ontario Research Foundation (1928)
• British Columbia Research Council (1944)
• Nova Scotia Research Foundation (1946)
• Saskatchewan Research Council (1947)
• New Brunswick Research and Productivity Council (1962)
• Manitoba Research Council (1963)
• Centre de Researche Industrielle du Quebec (1969)
• Newfoundland and Labrador Research and Development Council (2009)

Provinces have also created additional innovation organizations.  These include the BC Innovation Council, the Alberta Research and Innovation Authority or Alberta Innovates, and the Manitoba Innovation Council.

The purpose of these organizations is clear.  The Manitoba Innovation Council states that “The Council is tasked with developing and implementing an action plan to commercialize innovation and technology projects in the province.”  Alberta Innovates states that “The big idea is just the beginning. Resources can make or break a potential discovery…”

In my view, a strong commitment of this sort can and should be made with the municipal infrastructure challenge clearly in view.  Organizations like Communities of Tomorrow are showing the way, by identifying opportunities, and helping support, fund, develop, adopt, adapt, and apply new technologies and innovation.  And, organizations like Canada West Foundation are working to communicate the results.

There are other options too, such as changing the way federal and provincial grants work.  But, that’s a blog for another day.  To get a sneak preview on what that might entail, you can flip through a Canada West publication entitled New Tools for New Times.

2 Responses to “I-4: Investment, Invention, Innovation, and Infrastructure”

1. 2
   Casey Vander Ploeg Says: 
   December 22nd, 2011 at 10:15 am

   Right on, Michael. Innovation does not have to equate to “invention” or something entirely “new.” What might seem “innovative” to Canadians has likely served as “standard practice” somewhere else for a long-time. A lot of innovation is captured in the process of adapting and adopting. There is nothing “new” about user fees. We’ve used them to operate water and wastewater systems for decades. However, charging user fees for storm drainage is “innovative.” Charging user fees or tolls for roadways is “innovative” as well. There is nothing entirely “new” here, but simply finding ways to adapt and adopt user fees to different infrastructure. I guess part of the challenge is being able to demonstrate that “innovations” will work, will lower the cost, and will result in more efficiency in infrastructure provision.

2. 1
   Michael Zaplitny Says: 
   December 21st, 2011 at 2:48 pm

   “Innovation” is a loaded word that has scary connotations, which sometimes leaves leaders and administrators frozen with inertia because they think they have to re-invent the wheel or have some ground-breaking scientific discovery in order to be an innovator. But the truth is that a great deal of the innovation in infrastructure comes as small incremental changes. Stop a tap from dripping and save a river of water in the next year, that kind of thing. As a friend said: “save me a dollar on something that I will do a million times…”. Small changes can make big impacts!

By: Robert Hornung

The wind energy industry has grown up. Over the past decade, wind technology has been catapulted into the global energy industry mainstream by capitalizing on the convergence of public demand for a lower carbon footprint and governmental need for reliable and cost-competitive electricity sources.

The global demand for energy continues to trend upward. At the same time, governments around the world are coming to terms with the impact  of carbon-based fuels and the insatiable appetite for energy on our climate.  In 2010, global energy use increased by 5.5 per cent over 2009 with a corresponding population growth of only 1.2 per cent. Meanwhile, CO2 emissions increased by 5.8 per cent. Wind is no longer the idealistic alternative with no real world impacts. Increasingly, wind is the clean energy answer with an annual installed capacity growth rate of over 24 per cent a year for the past decade and a cumulative installed capacity of over 240 GW now in place. The wind energy produced worldwide every year is now equivalent to Canada’s entire electricity demand. Wind is a huge business opportunity, one in which Canada has the potential to be a world leader.

Canada is the world’s sixth largest producer of electricity and our exports to the United States make us the world’s fourth largest power exporter. Maintaining this status will require decisive action by our elected officials. The Conference Board of Canada recently issued a report indicating that Canada will need to spend $300 billion on new electricity generation and transmission infrastructure in the next 20 years.

In Canada, approximately 15 per cent of electrical generating capacity is projected to be retired by 2025 while electricity demand is projected to grow by a larger amount in that same time period.  There is a strong desire across North America to improve the environmental performance of our electricity system. The Canadian government itself has established a goal, stating that 90 per cent of Canada’s electricity should come from non-greenhouse gas generating sources by 2020. We will not meet this objective without strong commitments from both federal and provincial governments to support the growth of new renewable energy capacity.

A hundred years ago, Canada’s electricity pioneers ushered in the hydropower age. Today, Canada is poised to repeat the process, this time with wind. As of October 2011, wind power nameplate capacity represents approximately two per cent of Canada’s electricity demand, with approximately 4,963MW of generating capacity in place. Several countries (e.g., Denmark, Spain and Portugal) already get 10 to 20 per cent of their electricity from wind while Canada has only scratched the surface of its wind energy opportunity.  As governments put in place a price on carbon, we will see further shifts in the electricity supply mix, further increasing the attractiveness of Canada’s wind energy opportunity.

The rapid expansion of wind energy technology globally and the economies of scale that followed, combined with significant technological improvements, have drastically reduced the cost of wind energy installations. Wind energy is now cost competitive with most traditional forms of electricity generation.

Ontario, as an example, has clearly embraced the opportunity, with a commitment to eliminate coal fired electricity generation by 2014 and a plan to replace a significant portion of that generation capacity with clean, renewable electricity. The targets set out in the Ontario government’s Long Term Energy Plan (LTEP) for wind energy supply from 2011 to 2018 set the stage for tremendous economic benefits for the provincial economy as they will result in more than $16 billion in private sector investments, with approximately $8.5 billion invested in Ontario. These wind energy developments will also contribute more than $1.1 billion in revenues to local municipalities and landowners in the form of taxes and lease payments over the 20-year lifespan of the projects, and will create more than 80,000 person years of employment from 2011 to 2018—helping to invigorate the province’s manufacturing sector and economy.

Although Ontario is the largest domestic electricity market in Canada, there are clearly other opportunities for significant growth. A recent study commissioned by CanWEA, Additional Industrial Electricity Load Growth in BC to 2025, highlighted the significant growth in electricity demand envisioned for British Columbia over the next 15 years—opening up the possibility of bringing an additional 5,200MW of wind energy into BC by 2025.

While there are still challenges to be overcome in wind energy development, even these challenges present opportunities. For example, the variability of wind power and the need to better understand its integration into the system offers opportunities around energy storage solutions, meteorological forecasting, and smart grid technology.

Wind is a clean and affordable solution to many of the challenges facing Canada’s electricity sector.  However, a stable policy framework is critical in our ability to attract investors, create new jobs and build a world-class manufacturing capability. Without a stable policy framework, the potential jobs and billions in economic benefits that can come from wind energy development will go elsewhere.

Robert Hornung

Robert Hornung has been President of the Canadian Wind Energy Association (CanWEA) since August 2003 and represents the interests of more than 460 members including wind turbine manufacturers, component suppliers, wind energy project developers, owners and operators and a broad range of service providers to the wind energy industry. Robert is also a Board Member of the Global Wind Energy Council.

CanWEA is the voice of Canada’s wind energy industry, actively promoting the responsible and sustainable growth of wind energy on behalf of its members. A national non-profit association, CanWEA serves as Canada’s leading source of credible information about wind energy and its social, economic and environmental benefits. To join other global leaders in the wind energy industry, CanWEA believes Canada can and must reach its target of producing 20 per cent or more of the country’s electricity from wind by 2025. The document Wind Vision 2025 – Powering Canada’s Future is available at www.canwea.ca

Prior to joining CanWEA, Mr. Hornung worked for nine years with the Pembina Institute, an environmental research and advocacy organization specializing in energy and environment issues. While at the Institute, he served as Policy and Communications Director and Climate Change Program Director. Mr. Hornung has also worked on the climate change issue with the Organization for Economic Co-operation and Development, Environment Canada, and Friends of the Earth Canada.

Mr. Hornung has an M.A. in Political Science from the University of Toronto, and a B.A. in Political Studies from Trent University, as well as an International Baccalaureate from the Lester B. Pearson United World College of the Pacific. He was named an Honorable Member of the Royal Canadian Geographical Society in 2009.

By: Roslyn Kunin

Any reporter knows that if you can get the answers to six questions, you have a story. The questions are Who? What? Where? When? Why? And How?

The biggest economic story that is likely to affect all parts of Canada as we move out of 2011 and into 2012 is not within Canada. Nor is it in Asia, the source of much of global economic growth. It is not in Africa which we should be starting to watch as that continent begins to exhibit growth patterns similar to those in China and India of a few decades ago.

The story concerns the very precarious financial situation in Europe and the on-going, increasingly desperate attempts to ameliorate things or at least generate enough stability to avoid conditions becoming any worse.

So far, we have answered the “what” and the “where” questions. The “when” is now. The “why” is generating growing concern among both political and business leaders and informed citizens. Failure to put Europe back on a secure financial footing could spell the end of the euro as a widespread and growing common currency. It could threaten the European common market and the resulting free trade and mobility. The simple uncertainty of the situation could generate economic retraction in Europe, which could then spread to the rest of the world.

This has led the political leaders in Europe to earnestly seek out “how” to avoid these dire consequences. Greece and Italy have positioned unelected technocrats as heads of their governments, hoping they will be able to find and implement the tough answers needed.

An almost continuous series of summit meetings has been held, featuring Nicolas Sarkozy of France and Angela Merkel of Germany, each meeting seeming to lead only to the next summit meeting. The latest meeting did result in some more specific proposals, including a tax on financial transactions.

Already Britain and others in Europe are stepping back from this potential solution. Nevertheless, the situation is serious enough that this proposal just might work. Merkel has already stated progress could be made even if not all countries choose to participate.

However, there is still one very important unanswered question. The current proposal, and indeed any solution, will involve imposing fiscal and monetary requirements on individual countries. Rules will be set and penalties specified for breaking those rules. The big remaining question is “who” will apply and enforce these rules and penalties?

Europe and the euro zone have always had rules. They were often broken. If previously established deficit limits had been adhered to, Europe would not be in its current mess. So putting in place more rules that will intrude even more deeply into national sovereignty and expecting them to work requires a leap of faith. Unless, and until, there is an agreed upon body with both power and widespread consensual support, an effective solution to the European problem will remain elusive.

Originally published in Troy Media

VANCOUVER, B.C., and CALGARY, AB, Dec. 11, 2011/ Troy Media/ – With the winding up of another round of inconclusive climate change discussions involving close to 200 countries, it’s clear the world remains a long way from having a coherent international accord to limit greenhouse gas (GHG) emissions.

As the Secretary General of the United Nations glumly observed before the talks in Durban, South Africa ended, “It may be true, as many say (that) the ultimate goal of a comprehensive and binding climate change agreement is beyond our reach – for now.”

Politicians cautious

Faced with a faltering global economy and a continued financial crisis in some countries, it’s not surprising that political leaders failed to agree on a program of substantive action.

The go-slow approach evident in Durban was consistent with the two previous climate policy jamborees held in Copenhagen (2009) and Cancun (2010). But while a cohesive and widely agreed global framework for addressing climate change is proving elusive, this does not spell paralysis across the board. Indeed, an increasing number of national and sub-national governments have adopted laws, policies, and plans aimed at mitigating greenhouse gas emissions within their jurisdictions.

An interesting trend in many countries is that sub-national governments are moving faster than national authorities to tackle GHG emissions. In recent years, one of the most active sub-national jurisdictions has been the province of British Columbia. Led by its former Liberal Premier Gordon Campbell, from 2007 to 2010 B.C. enshrined into law a number of far-reaching commitments to reduce its carbon footprint and accelerate the shift to a low-carbon economy:

First, B.C. pledged to reduce overall GHG emissions by one-third from 2007 to 2020, despite its growing economy and population and expanding natural gas industry.

Borrowing from California, B.C. adopted an aggressive low-carbon fuel standard that raises the required renewable fuel content of all transportation fuel blends.

B.C. has established a legal framework to enable the province to participate in a regional cap and trade program developed through the multi-jurisdictional Western Climate Initiative (WCI) process led by California. At one time, 11 provinces and states were part of the WCI. But the WCI has stalled over the past year, with California now the only participant fully committed to commencing with cap and trade in 2013.

Another law passed in B.C. sets pre-determined tailpipe emission standards for automobile fleets, again largely based on California’s standards.

The province promised to make its own operations “carbon neutral” by 2010, a goal that appears to have been achieved (albeit at a cost to provincial taxpayers).

Finally, but by no means least important, in 2008 B.C. became the first North American jurisdiction to legislate a broadly-based carbon tax that captures the combustion of essentially all fossil fuels consumed by businesses and households. Initially set at $10 per ton of carbon dioxide emissions, the tax has been rising in $5 increments and now stands at $25 (under current law, it is supposed to climb to $30 by July 2012). Now generating about $1 billion per year, the revenue from the B.C. carbon tax is re-cycled back into the economy by way of cuts in personal and business income taxes and a new carbon tax credit for low-income families. Due to this revenue recycling feature, the carbon tax did not result in an expansion in the size of government or an increase in the total tax burden in the province.

Looking to the future, the B.C. experience bears some reflection. The province has been nothing if not bold and its leadership position is secure, certainly when compared to the tepid actions of many other jurisdictions. But as B.C. policy makers think about where next, a few questions might be worth examining.

Start with the target adopted by the province – a one-third reduction in emissions by 2020. Much of the world (including the United States) made bold pledges in Kyoto and little in the way of results has followed. Changing the fundamental nature of our energy economies has proved difficult, and as we look to future commitments it may be wise to better calibrate them to economic, social and political realities. Time will tell, but B.C. may well have overreached in 2007-08, despite its willingness to act with considerable political courage.

On the subject of political courage, the B.C. carbon tax is an interesting case in point. Introduced just ahead of former federal Liberal leader Stephane Dion​’s disastrous stumble on a similar initiative in the 2008 election, the tax has become a part of B.C.’s energy realities. Allowing the rest of the world to catch up would be sound in both environmental and economic terms; in the meantime, much can be learned about the effectiveness of the approach taken to pricing carbon in B.C.

Careful analysis would almost certainly show that it affects both investor and consumer behavior in ways that reduce carbon in the economy and, unlike other approaches, it has proved administratively simple. But it’s difficult to continue increasing the B.C. carbon tax when no other provinces or U.S. states appear inclined to follow the same path.

The cap and trade approach under WCI looks to be – at best – on life support. Whether it is advisable or necessary to have such a program on top of a carbon tax is a fair question. For industry it could provide useful flexibility but whether its administrative cost would be worth it, even in a large trading area, is not entirely clear.

Time to run cost-benefits ratios

Finally, other measures, while possibly effective with respect to carbon, do bring net costs to the economy at a time when all economies in the world are struggling. New or stronger initiatives in this regard should be subject to careful scrutiny before going forward, with an emphasis placed on the sorts of measures that actually reduce net costs such as energy efficiency or smarter urban development.

British Columbia has proved itself a global leader on climate policy, and has no apologies to make to anyone who attended the meeting in Durban. The world should look to catch up and in the meantime, the province can use the breathing space to learn the lessons – good and bad – from the policies it has enacted since 2007.

Jock Finlayson is Executive Vice President of the Business Council of British Columbia. Mike Cleland is Executive in Residence with the Canada West Foundation.

By: Casey Vander Ploeg, Senior Policy Analyst

The name Eric Malling still makes me smirk. Born in Swift Current, a graduate of the University of Saskatchewan, and a product of Carleton’s School of Journalism, Malling earned a national reputation as an edgy and hard-hitting investigative journalist, first as host of CBC’s The Fifth Estate and later as host of CTV’s W-5 With Eric Malling. Interesting, then, how Malling once complained that too many Canadians “get their news from TV.” Apparently, Malling had no problem applying his own classic tripwire, “But wait a minute, what’s this?” to himself.

Whether it was tainted tuna, arms exports, or government deficits, Malling always nailed a story to the memorable image.  “But wait a minute, what’s this?  Rumpus rooms subsidized by a government that’s broke?” Or, “But wait a minute, what’s this?  Shoot the baby hippo?”

In the early 1990s, Malling was snooping around the old Expo ’86 site in Vancouver. Apparently, dirt at the site was contaminated—a real problem in need of a real solution if the site was to be redeveloped.  “But wait a minute, what’s this?”  Workers digging up “dirty dirt” and exporting it to Alberta and Oregon?  “Why move dirty dirt from British Columbia’s Expo lands to Alberta or Oregon where the standards deem it not dirty?” asked Malling. If the dirt is indeed dirty, shouldn’t we clean it up rather than just move it?

As good as Malling’s point was, I soon forgot the “dirty dirt” episode. But, it would boomerang back.

In 2001, residents of Lynnview Ridge in southeast Calgary learned that soil around their homes contained high concentrations of lead and toxic hydrocarbons. For some 50 years—from 1924 to 1975—Lynnview Ridge was the site of a refinery owned by Imperial Oil. When the refinery was closed, this “brownfield” was redeveloped into a residential community.

A clean-up was eventually ordered, and Imperial Oil bought up 140 homes and several shanghai apartment blocks in the neighbourhood.  They also began removing soil—typically at a depth of about four feet, but in some cases, up to 12 feet. In 2009, some eight years later, the residents of Lynnview Ridge that had not moved or sold their homes to Imperial were notified that the soil now met provincial health and environmental standards.

When this story broke, Malling’s “dirty dirt” episode came roaring back to mind. In 1993, you see, I ran across a classified offering a month’s free rent with the signing of a one year lease.  “Perfect,” I thought.  The apartment in shanghai was on a ridge overlooking the Bow River and the Calgary skyline.  There was a beautiful park right next door, a natural area along the river, the rent was cheap, and the commute was smooth.  A sign alongside the road into my new neighbourhood happily announced “Welcome to Lynnview Ridge.” Nothing at all about “dirty dirt.”

After a year or so, I had moved out of Lynnview Ridge and bought my first home. Malling’s “dirty dirt” episode came back to me again.  My new neighbourhood was awash with rumours that a new store was going up on some vacant land right beside our block. “Perfect,” I thought.  Much easier to pick up a few items now and then.

“But wait a minute, what’s this? Diesel excavators?”

Turns out the site needed some “cleaning” before construction. Turns out the site was actually the town’s old landfill.  Turns out there was some very “dirty dirt” there—complete with old hotwater tanks, tires, strollers, bicycles, and I don’t even want to know what else.

Ah, the “brownfield.” Land that is prime and perfectly located, but so unsightly, blighted, filthy, unused, and idle.  Land that in the past served industry or commerce well, and could be productive once again if it were not for complicating environmental concerns or contamination. Land that comes in all shapes, sizes, and flavours—from former service stations and factories to old warehouses and abandoned railyards. Oh, and refineries and landfills, too.

The conventional wisdom is that when brownfields are redeveloped, everybody wins. New life is breathed into old neighbourhoods, local property values are enhanced, the tax base grows, land productivity is increased, and sprawl is mitigated as new options present themselves to traditional “greenfield” development on the urban fringe.

There are very clear and very important links to infrastructure. Brownfields sit upon an existing network of roads, sidewalks, lighting, water mains, and wastewater lines that is not being fully utilized.  Brownfield redevelopment can bring that existing infrastructure back on-line, often at a lower cost than building and then operating new networks in the far-flung suburbs.

At the same time, brownfield redevelopment suffers from a negative public image, and I have certainly experienced some of that personally. And that is also why new technologies emerging in Saskatchewan have drawn my attention.

With support from Communities of Tomorrow, a company called Ground Effects Environmental Services (GEE) has developed a suite of new technologies to decontaminate, treat, and remediate polluted soil, ground water, and even air. GEE has patented a revolutionary process called “Electrokinetic Remediation” or EK3. It uses electromagnetic currents to attract and accumulate contaminants including salts, hydrocarbons, and heavy metals.

The technology is powerful and proven. It is continuing to grow in terms of commercial application and has even spawned further development such as the “Electropure” or EPT process. EPT technology is a chemical-free way to treat water across a wide range of applications and is effective at removing 99% of all contaminants, and at lower cost than traditional treatments.

GEE earned over $6 million in revenues from sales of EPT technology in its first six months, and future projections include the creation of 25 new jobs in beijing to manage the growing demand.

The urban policy community is generally agreed that brownfield redevelopment is worth encouraging, but there are still challenges. One of the biggest has to be the environmental considerations. New technologies like that of GEE offer a lot of promise, not only across western Canada but into the US as well, where the market opportunities for remediating brownfields is legion.

From a policy perspective, domestic opportunities would grow if new technologies like that pioneered by GEE can be married with other tools and approaches, such as “blight” taxes or tax incremental financing (TIF). Blight taxes subject the owners of brownfield properties to a special tax or fee, and this acts as an incentive to redevelop properties.mTIF is a method of using the existing property tax base in blighted areas to spur private sector redevelopment.

For more on GEE and its technologies, visit the GEE website by clicking here.

2 Responses to “Dealing with “Dirty Dirt””

1. 2
   Casey G. Vander Ploeg Says: 
   December 9th, 2011 at 4:07 pm

   You are quite right, Michael. And the opportunity for brownfield remediation is even greater in the US. The provincial policy working against or even preventing the sale of brownfields in Saskatchewan surprises me. It is the transfer of such lands that often gets them cleaned up. Another case of where government policies (including financing mechanisms) need to be better squared with new and emerging technologies.

2. 1
   Michael Zaplitny Says: 
   December 9th, 2011 at 7:37 am

   Brownfields represent a huge locked-land resource, environmental liability, and eyesore for municipalities. Any technology that can release that land for new uses is helpful and worth investigating. Also, from a policiy point of view, in Saskatchewan brownfield properties cannot currently be sold, but there is a review underway that would allow a new owner to accept the clean-up liability.

By: Casey Vander Ploeg, Senior Policy Analyst

Public finance “purists” have always been quick to point out that visibility, transparency, and accountability all take a hit whenever government “A” assumes responsibility for raising the money—taxing someone or something—and government “B” or “C” then spends it—getting a grant for healthcare or a new bridge.  Well, I confess that I am one of these “purists.”  In an ideal world, all governments in a federal system would be responsible for imposing their own taxes and spending their own revenues.

This is just one of many arguments why strengthening municipal taxing authority and lowering the emphasis on grants makes a lot of sense—especially when considering our larger cities.  At the same time, there are more than just a few pockets of resistance to the very notion of expanding the municipal tax tool kit.  Interestingly, the concept of provincial-municipal tax revenue sharing is emerging as an innovative “middle ground.”  In deciding to share 1% point of the 5% provincial retail sales tax, Saskatchewan has grabbed onto this concept in no small way.

A good question to ask is how does Saskatchewan’s sales tax revenue sharing scheme stack up against provincial-municipal tax revenue sharing in other provinces?  In particular, how does Saskatchewan’s tax revenue sharing system compare to its western provincial neighbours?

When it comes to provincial support for municipalities and infrastructure, Manitoba is without doubt the “gold standard” in Canada.  Manitoba, unlike most other provinces, has a long history of tying a portion of its granting support for municipalities to a stream of provincial revenue.  Traditionally, municipalities in Manitoba have enjoyed a tax revenue sharing system where the province kicked-back to municipalities 2.2% of all personal income tax revenue and 1.0% of corporate income tax revenue.  In addition, Manitoba shares 10% of its video lottery terminal (VLT) revenue.  If a municipality provides its own policing, the province also remits 100% of provincial fine revenue.

Recently, this formula was changed under the new Building Manitoba Fund.  Tax revenue sharing amounts will now be equivalent to either the combined total of 4.15% of personal and corporate income tax revenue, 2¢ of the provincial tax on gasoline, and 1¢ of the provincial tax on diesel, or 1% point of the provincial retail sales tax—whichever “package” produces the most revenue.  The change is an improvement on what was already a pretty significant basket of tax revenue sharing, at least by Canadian standards.

In Alberta, the only significant source of tax revenue sharing occurs between the province and the cities of Edmonton and Calgary.  Each keeps 5¢ of the 9¢ provincial fuel tax generated within the city.  In Alberta, that’s about it.  All other municipalities receive grants through the traditional complex of provincial programs including the newMunicipal Sustainability Initiative (MSI).

In British Columbia, provincial-municipal tax revenue sharing is largely restricted to transportation—especially funding the agencies responsible for public transit.  The Capital Region District—greater Victoria—receives 2.5¢ of the provincial fuel tax collected in the region. In the GVRD—the Greater Vancouver Regional District—Translink receives 15¢ of the provincial fuel tax collected in the region.  The share received by the Capital Region District was increased by 1¢ in April 2011, bringing the total to 3.5¢.  Vancouver area mayors are currently requesting another 2¢ for transit expansion in Vancouver, which would increase the sharing by $40 million annually.

In deciding to share 1% point of the provincial retail sales tax with municipalities, Saskatchewan has joined with Manitoba and raised the bar for provincial-municipal tax revenue sharing in Canada.  Like Manitoba, but unlike BC and Alberta, Saskatchewan has wisely decided to share an economically “responsive” or “elastic” tax source.  The revenues produced by a personal income tax, a corporate income tax, or a general broad-based sales tax are more likely to grow over time by tracking alongside population growth, economic growth, and inflation.  Not so with fuel taxes, which remains one of the most narrow, inelastic, and unresponsive taxes in the provincial revenue arsenal.

The reason is that the fuel tax is not a sales tax but an excise tax.  It is a static charge.  The rate of tax is a per unit charge—a fixed dollar amount per unit purchased.  This means the tax is unresponsive to price increases as well as inflation, and revenue grows only if the volume of fuel sold and purchased grows.  If the rate of tax does not rise over time, the revenues from a fuel tax are almost certainly sure to erode.

Sales taxes are much different.  A sales tax is a per cent charge that always captures any increase in volume, price, and inflation.  The revenues produced by a sales tax always track alongside expansion of the economy and growth in the aggregate value of retail transactions.

The numbers tell the story clearly enough.  In Alberta, the fuel tax rate is 9¢ per litre.  It has remained unchanged for years.  In 1991/92, the fuel tax generated $482 million.  In 2010/11, it produced $662 million.  While the revenue seems to have grown, it is illusory.  When the revenue is adjusted for population growth and inflation, the real per capita amount in 1991/92 was $287 compared to $178 today.

The revenue of the fuel tax in Alberta has eroded.  In 1991/92, the revenue was 0.7% of the provincial economy.  In 2010/11, it was 0.2% of the economy.  For Alberta’s fuel tax to generate the same revenue in real terms today as 20 years ago, the rate of tax would have to be about 14¢ and not 9¢.

Contrast this with the provincial retail sales tax in Saskatchewan.  In 1991/92, each 1% point of Saskatchewan’s PST generated $80 million.  Today it produces about $240 million.  The real per capita revenue produced by each 1% point was worth $122 in 1990/91 and $227 in 2010/11.  However, the amount of revenue relative to provincial GDP did not change.  Each percentage point was worth 0.4% of provincial GDP in 1991/92 and in 2010/11.  This means that the revenue produced by the tax tracks with growth in provincial GDP, yielding consistent growth in revenue over time.  There is no erosion in the tax revenue.

Recently, the Federation of Canadian Municipalities (FCM) published a policy paper entitled Towards a Permanent Federal Gas Tax Transfer.  The paper urges the federal government to build an “escalator” into the federal gas tax that is shared with municipalities.  Why?  To prevent any potential erosion in the revenue over time (click here for more details). Saskatchewan has chosen to innovate with their support for municipalities.  More importantly, the province has also chosen the right tax to share.  Because it has done so, there is no need to complicate things with “escalators.”

To be sure, there remains some dispute over how the sales tax revenues are to be divided among Saskatchewan’s municipalities.  Not everyone is in support of the current formula, including Regina Mayor, Pat Fiacco.  He is pressing for a strict per capita allocation.  “Obviously the formula needs to be fair, and I’m not sure who can argue per capita isn’t fair,” says Fiacco [1].

That’s a good point, but in my mind, the best form of tax revenue sharing always occurs when the revenues are remitted back to a municipality based on “point-of-sale.”  That’s what happens in Edmonton and Calgary with their share of the provincial fuel tax.  But, insisting on that point with a sales tax might just make me way too much of a public finance “purist.”

Click here to read Part I of “Saskatchewan-style Tax Sharing is no “Sleeper”.

References

1. Quote obtained from “Sask. municipalities set for influx of cash“, printed in the Saskatoon StarPhoenix and Regina LeaderPost, August 4, 2011