Canadian Centre for Economic Analysis

Investing in Ontario's Public Infrastructure: Improved Economic Evaluation of Benefits and Risks

With the recent Federal election, the landscape for infrastructure investment has been transformed. The majority Liberal governments in both Queen’s Park and Ottawa have an excellent opportunity to proceed with their plans to invest more than $255 billion collectively in public infrastructure over the next 10 years. Less well understood but at least as crucial is the opportunity to address evidence-driven research calls for a new era of cooperation between Ottawa, Queen’s Park and municipalities. Much better data, metrics and other analytics are essential for all three levels of government to work more closely together to achieve long-term, sustainable approaches to infrastructure investment in Ontario.

With federal-provincial political and policy barriers softening for good infrastructure investment decision making, strategic considerations and realistic evidence-based approaches to resource allocation will be crucial to attain the socioeconomic prosperity that Canadians deserve. Choosing the proper method of execution will depend critically upon accurate and effective analytics to ensure that the Canadian economy continues to grow.

Serious Challenges: Conventional Infrastructure Evaluation Methods

Despite the clear need for coordinated and effective policy, there are serious issues with the conventional models currently available. Traditional approaches such as input-output models do not properly recognize the unique characteristics and critical support role of public infrastructure. These conventional models result in a limited measurement focused mainly on the short-term economic stimulus effects.
CANCEA’s Prosperity at Risk (PaR) computer simulation platform uses agent-based modelling (ABM) and a “systems thinking” framework. PaR’s platform acknowledges the vast range of economic, financial, mobility and other interactions in order to understand a system, such as an economy, as more than the sum of its parts, but rather as the relationships among a mixture of entities that act upon one another. A critical weakness in traditional thinking is its inability to capture what is at risk tomorrow if an investment is not made today. Systems thinking valuation includes all of the jobs and other indicators of a well-functioning society that are preserved if the investment is made, and stand to be lost if it is not. It therefore serves as a fundamental differentiator of not just investment quantities, but investment types, timing and amounts.

Measuring the Ability of Infrastructure to Support, Not Just Generate

The results demonstrate that infrastructure investment has a much greater role in supporting population and enabling economic growth; it is much more than simply a short-term stimulus to the economy. That is, appropriate infrastructure investment is one support pillar in a portfolio of events that combine to generate economic prosperity. Of the 85,000 job-years that a $1 billion infrastructure investment supports on average, 83% of the result is due to supporting other activities that occur at the same time.

So while the role and value of infrastructure is significant, the bulk of its value is dependent upon economic development, appropriate and coordinated planning, population growth and whether the $130 billion is invested in infrastructure stock that supports growth. This is essentially what makes the difference between generating only 15,000 job-years for every $1 billion of infrastructure invested, and 85,000 job-years over the next 30 years.

Concluding Remarks

Given that much of the public infrastructure in Canada requires investment, proper evaluation of the investment opportunities to support effective spending is not just an academic exercise. With the federal election over, all three tiers of government have important decisions to make for strategic infrastructure investment. We all know that public infrastructure investments are important and we understand that good projects are essential. This analysis has uncovered a crucial policy challenge: our evaluation techniques need to improve. Otherwise, the funding may be misallocated relative to our urgent infrastructure priorities.