When it comes to "key" infrastructure projects, should price matter?

Will VFM soon be officially off the table?

If Metrolinx’s ~$100 billion portfolio of active projects wasn’t enough, between a high speed rail line connecting Quebec City and Toronto and a new tunnel underneath Ontario’s Highway 401, Central Canada’s heavy construction and engineering industries are going to be busy for decades to come.

After seven years of happy times as a Toromont Industries (TIH:TSX) shareholder, I’m going to leave that RRSP position alone. As a taxpayer, however, I’m hoping that our elected officials keep a close eye on the ever-growing list of Good Ideas. Value For Money (VFM) was once the sacrosanct principle.

I guess it was the beatings... made me wise
But I'm not about to give thanks, or apologize
I couldn't breathe, holdin' me down
Hand on my face, pushed to the ground
Enmity gauged, united by fear
Forced to endure what I could not forgive...

Are the days of VFM in the Rearviewmirror?

“Key” infrastructure projects each have their time and place, as much as that adjective is thrown around like draft beer at the Sigma Chi House. You know what they look like: the CPR, Welland Ship Canal, Yonge subway line, Highway 407, Billy Bishop Toronto City Airport pedestrian tunnel, Gordie Howe International Bridge or the Eglinton-Crosstown LRT (ECLRT), to name a few.

There will be a debate if the time is right for these two latest proposals (401 tunnel & Quebec-Toronto high speed rail), but I get the theory that it’s always the right time to build big things.

That train of thought is a close cousin to the private sector will do it. Those two axioms grew up under the same roof as it won’t get any cheaper if we wait, we can’t afford not to and industry will learn how to deliver projects both faster and more cost-effectively next time.

Of that list of representative projects dating back to the 1820s, what do you remember? That our nation might not exist in its current form if not for the CPR, or that 17,000 Chinese men were brought in to complete construction (and often assigned the most dangerous tasks)? Do you recall that a private firm initiated the Welland Ship Canal some 201 years ago (before the government of Upper Canada took it over following the financial panic of 1837), or that the 4th version of that same canal took 19 years to build — despite the simple open-cut construction method?

When you last took Toronto’s Yonge subway line, did you marvel at the fact that those first twelve subway stops took just five years to build (nine years if you include planning that began as late as 1946), or that the construction cost hit $67 million in 1954 (<$800 million in today’s money) — more than double the $28.9 million estimate?

Neither, I bet.

Highway 407 is well-known for all the wrong, if unforeseeable, reasons and the BBTCA pedestrian tunnel actually started in 1935, before a newly-elected Liberal Prime Minister William Lyon McKenzie King cancelled it just 21 days into construction. That tunnel eventually opened in 2015, courtesy of the TPA’s own P3 initiative, despite a lot of misinformation (see representative prior post “Lies, Damn Lies, and municipal politics” Aug 24-09), interference from politicians at every level, and not a penny of financial support from the taxpayer. With a decade of successful operation, and the P3 concession ending in 2033, these details matter not.

The Gordie Howe International Bridge will come in a triple the estimated price and five years late (a distracted {Ed note: spendthrift?} WDBA Board Chairman never helps), not that anyone other than me seems focused on such details (see prior post “Who gets to set ‘the Narrative?’” Aug 12-24). The ECLRT project attracts a lot of grief, and — like the Welland Ship Canal or GHIB — it’ll open when it opens, and it’ll cost what it costs. None of which should be misunderstood as a lack of attention to whether or not taxpayers are getting value for their money, that the P3 project is being completed safely, or that the private sector is being held accountable for its material choices.

Whether Canada adds another 10 or 17 million residents by 2068, a bunch of those people will land in Ontario; whether they come by local birth or immigration, it’ll take a while before that cohort is contributing materially to the tax base. Ever thus.

Conscientious politicians are right to plan for that growth, but what today’s taxpayers should not tolerate is any scenario where our relationship as funder of said infrastructure is one of “Heads they win, Tails we lose.” “They” being the industry of designers, builders, engineers, financiers of the so-called critical infrastructure that’s currently being debated.

The temptation to manage towards that population growth with a tunnel under Highway 401, or optimize connections via a high speed rail line between Toronto and Quebec City, is well understood. Whether the motivations are pure or political, no one remembers what was driving your decision-making 50 or 100 years later.

You didn’t likely know that then-PM McKenzie King rewarded his Liberal party supporters by cancelling the original BBTCA tunnel back in 1935 (photo above), nor does anyone fuss now that the initial Yonge subway line construction cost came in at twice the original estimate. And there’s little record of post-War GTA taxpayers lamenting the fact that the 1946 version of a “rapid transit” streetcar subway along Queen Street from Trinity Bellwoods Park to Parliament Street was “shelved” due to a lack of funding.

How much larger would Ontario’s provincial debt be today had they proceeded with that project in the 1950s? Bupkis.

It wasn’t until 2019 when Ontario Premier Doug Ford announced Ontario’s plan for four priority transit projects in the GTA, including the Ontario Line, which included the long-awaited east-west subway under Queen Street. Construction began in 2022, and it’ll be completed safely, at a price and timeline that reflects — one dearly hopes — everyone’s best efforts.

As for the 401 bypass tunnel, I suspect that plenty of Associates at various LP/GP Infrastructure funds have already done the model. Assuming it’s a traditional P3 project, here’s my representative math:

If these figures are even directionally correct, it would appear that the project can be financed entirely by the private sector, provided that 407-like tolls are involved. If the construction cost is light by $25 billion, tolls will have to be raised, or the taxpayer will be required to subsidize various components of the project/operation.

If the notional interest rate on a 100 year bond is off by 50 bps, there will be less money for maintenance costs. Or tolls will have to be higher. If Queen’s Park doesn’t want to follow a user pays model, Ontario taxpayers will have to fund an annual availability payment that would exceed $5 billion.

I know that pension plans might rather buy Pearson Airport than take on this type of construction / O&M risk, but jobs don’t get created when the Crown merely “recycles” an asset. Selling an existing public asset won’t solve future traffic congestion.

To “recycle” a public asset, politicians need to put that fresh capital back into a new greenfield project. Given who some of his backers are, I expect Liberal Leadership candidate Mark Carney will soon advise that he’s open to the sale of one or more Canadian airports if that’ll “free-up” funding for new projects, such as the SNC Lavalin-backed Quebec City-Toronto high speed rail project.

The pitch will sound logical to many in the MSM, until they find out that the airport’s new owners will need to increase user fees on passengers (AIF), commercial/cargo airlines (landing fees), as well as airport limos (licences), restaurant rents and so forth. Oh, and what happens to the revenue earned by Ottawa from the current GTAA ground lease? Will that go away, costing the federal treasury a material annual revenue stream? As the current GTAA model falls under the Not-for-profit Corporations Act, the only way for the new investors to cover their expected (and deserved) return is to earn a revenue stream — which requires them to find substantial cost efficiencies at the airport or raise existing user fees.

There’s no free lunch in the infrastructure space.

The Quebec City-Toronto high speed rail project is even more “exciting” that the 401 tunnel given there are so many more unknowns, post-construction. The promoters who point to Japan as proof that high speed rail can work can’t ignore that 150 million people is a lot more than 41 million. Having taken one of those bullet trains to Onagawa, you appreciate that Japan has the luxury of a critical mass of concentrated population centres that make the economics of a high speed rail network feasible.

Even if the initial capital outlay to build Central Canada’s high speed rail line is defensible, how much of an ongoing per passenger government subsidy would be fair?

Zero, like Japan? $180/pax, like VIA Rail? Would taxpayers in the other eight provinces mind it if their tax dollars subsidize daily high speed rail tickets between Quebec City and Hogtown? As the Province of Quebec’s population is only growing at 2% per year, would it make more sense to have the line terminate at Montreal?

Not if you subscribe to the “we can’t afford not to” school of infrastructure investment, or if you assume part of the project’s appeal to i) Cadence group (which includes “CDPQ Infra, the infrastructure division of Quebec’s pension fund; Quebec-based SNC-Lavalin; and Quebec-based Air Canada”) comes from the rail connection to that Province’s Capital City, and/or ii) the federal Liberal government needs to win more than 27 seats in Quebec if it hopes to stay in power later this year.

Kitchener-Waterloo-Cambridge residents most certainly will wonder why the Liberal’s proposed line would stop at Toronto, given that region is home to as many taxpayers as Quebec City proper. As for the price tag, the Globe and Mail laid it out well:

However, Martin Imbleau, chief executive of the Crown corporation that is responsible for working with the consortium to manage the project, provided a rough cost estimate to The Globe and Mail in an interview.

“We have a working assumption,” he said. “I’m not committing to this. It’s not a budget. The working assumption is between $60-billion and $90-billion.”

Mr. Imbleau said some of those costs could be covered by outside investors. Part of the planning phase will look at how that could work.

“Sixty to ninety [billion] is the project cost. It’s not Canadians’ equity,” he said. “What will be Canadians’ equity and the private equity remains to be decided.”

Let’s say the price winds up being at least double that $60-90 billion estimate, as with the original Yonge subway line or the GHIB, should we still proceed? None of the politicians involved at the eventual ribbon-cutting ceremony will have been in office when the project was launched, decades earlier. They’ll have the luxury of blaming some earlier administration, if needed, not that the blame-game saves the taxpayers of that generation from the consequences of the choices we make today.

Eddie’s correct: “Saw things / Clearer / Once you, were in my...Rearviewmirror.”

But that’s no excuse to succumb to the “optimism bias” that we see far too often in the P-10 through P-50 phase of Canadian infrastructure projects. I’m all for “investing” in our future, but we don’t have the luxury of unintentionally spending a few hundred billion on stuff that doesn’t generate obvious economic growth in the near term.

MRM

(note: this post, like all blogs, is an Opinion Piece reflecting a personal view, and has not been reviewed or approved by any other party)

(Photo: Irving Penn, Remouleur, Paris, 1950)