The Greatness of Public Infrastructure
Today, Statistics Canada released an excellent paper concluding that the rate of return on investment in Canadian public capital is around 17%. This paper builds on another Statistics Canada paper from a few years ago that Marc cited a few days ago on this blog.
If anything, the paperâ€™s text somewhat understates its mathematical findings. The authorâ€™s hypothesis was that “the long-term government bond rate could reasonably be employed as the rate of return on public capital.” In his words, “the paper concludes that the long-run government bond rate could be used as a conservative estimate for the rate of return for public infrastructure.” The opening line on Statistics Canadaâ€™s website is that public infrastructure “provided a rate of return to public capital at least as high as the government long-term bond yield over the period from 1961 to 2005.”
Put another way, the 17% figure suggests a rate of return appreciably higher than long-term government bond yields. Since the long-term economic benefits of infrastructure significantly exceed the financing costs, Canadian governments should be undertaking more public investment. The short-term economic stimulus of such investment would be an added bonus.
UPDATE (April 15): Eric Beauchesne has written a story on todayâ€™s Statistics Canada paper and FCM release (which Toby mentioned below):
Infrastructure pays off, StatsCan says
Canwest News Service
Tuesday, April 15, 2008
OTTAWA – The rate of return to businesses and individuals of government investment in infrastructure, such as roads, bridges and sewers, is at least as great as the governmentâ€™s cost of raising the funds for that investment, a new Statistics Canada study suggests.
“Public infrastructure, the roads and water and sewer systems that comprise the foundation of Canadaâ€™s economy, provided a rate of return to public capital at least as high as the government long-term bond yield over the period from 1961 to 2005,” according to a summary of the study, which estimated that return “centres” on an annual average of 17 per cent.
The findings support the case for more such investment, a labour economist argued.
“Since the long-term economic benefits of infrastructure significantly exceed the financing costs, Canadian governments should be undertaking more public investment,” said Erin Weir, an economist with the United Steelworkers.
But there would be an “added bonus” to such investment at a time when economic growth is slowing, as is occurring now, Weir added.
“Although we also need interest rate cuts, there is legitimate doubt about how quickly lower rates from the Bank of Canada will translate into lower borrowing rates for consumers and businesses,” Weir said. “In this context of financial uncertainty, direct public investment becomes even more important as a potential source of economic stimulus.
“Infrastructure investment would be a particularly effective type of stimulus because it would necessarily create employment in Canada,” he added, noting the construction work would have to be done here and that many of the materials used in construction, such as concrete, would be produced here as well because it is impractical to import them.
Further, such investment would help reduce what the Federation of Canadian Municipalities has said is a $123-billion infrastructure deficit that has left Canadaâ€™s water-treatment facilities, roads and public infrastructure is on the verge of collapse.
The federation released poll results Tuesday that it said “shows Canadians overwhelmingly want the federal government to provide greater financial support to municipal governments.”
“More than 90 per cent say the federal government should help municipal governments deal with infrastructure issues, a view shared across the country, including in Quebec and Alberta,” the federation said.
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