Taking Stock: Canada’s infrastructure – and how we pay for it

Key Concepts

• Low Churn Labor Market: A labor market characterized by slow hiring and slow layoffs, leading to gradual weakening but overall stability.
• Dual Track Labor Market: A labor market where those currently employed in stable jobs fare well, while job seekers struggle to find new roles.
• Enabling Infrastructure: Infrastructure necessary to support housing development, such as waste and wastewater systems, and public transit.
• Anchor Companies: Large, established companies that are crucial for the self-sustainability of an industry, particularly in the biotech sector.
• Development Charges: Fees levied by municipalities on new developments to help finance the infrastructure required to service them.
• Health Data Opportunity: The significant economic and health advancement potential unlocked by leveraging global health data.

Business Briefs

The labor market showed expansion in November, continuing a trend from the previous two months, despite mixed economic signals. While energy exports demonstrated strength, business and consumer spending remained weak. The economy has generally navigated trade challenges better than anticipated, though the job market and exposed sectors have been soft.

• Aloma Steel: Announced layoffs of 1,000 workers by March due to US tariffs. The company is transitioning to electric arc furnace production and has received $500 million in government loans to support this shift and explore new markets.
• Laurentian Bank of Canada: Is being sold in two parts: its retail and small banking business to National Bank of Canada, and its commercial lending and public shares to Fairstone Bank, for a total valuation of $1.9 billion. This marks the third of four smaller Canadian banks acquired in the past three years.
• Equitable Bank: Acquired PC Financial for $800 million, enhancing its market presence and providing customers access to PC's credit card platform. Loblaws will retain a minority stake in PC Financial.
• Michael and Susan Dell: Announced a $6.25 billion donation to fund "Trump accounts" for 25 million children, intended as investment vehicles. This is one of the largest philanthropic gifts in history.
• Air Transit Pilots: Voted to approve a strike, potentially commencing next week, as negotiations with the 700 pilots continue. The airline is also facing pressure from its second-largest investor, Pierc Pelo, who is demanding a board shakeup and strategic review.

The Job Market and Economic Resilience

Brendan Bernard, Senior Economist at indeed.com, discussed the current state of the Canadian job market. He characterized it as a "low churn labor market," which has been a consistent dynamic over the past few years.

• Slow Hiring: The number of new jobs started each month is noticeably below pre-pandemic norms, impacting job seekers.
• Gradual Unemployment Increase: Unlike previous downturns, the unemployment rate has risen gradually, as layoff rates have remained low. This has offset the impact of slow hiring, leading to a relatively stable but weakening labor market.
• Dual Track Labor Market:
  • Employed Individuals: Those in stable career track jobs have generally fared well, with wage growth outpacing inflation and solid job security.
  • Job Seekers: Individuals looking for new roles are struggling due to the cyclical shift from a job seeker's market post-pandemic to a market with weaker demand in many areas.
• Challenges for Youth: The unemployment rate for Canadian youth has been above 14% recently.
• Low Job Hopping: The rate of job hopping has been low, indicating a reluctance to change positions among those who are employed.

Canada's Infrastructure Gap and Housing

The Canadian Infrastructure Council's first national infrastructure assessment revealed significant challenges. Peter Welman, Vice Chair of the Council, highlighted the critical link between infrastructure and housing development.

• State of Infrastructure:
  • In 2022, 11% of enabling infrastructure for housing was in poor or very poor condition, with a replacement cost of $126 billion.
  • Waste and Wastewater Systems: 11% of these assets were in poor or very poor condition, costing $107 billion to replace.
  • Water Leakage: 17% of Canada's water is wasted annually through leakage, amounting to 800 million liters, equivalent to a year's drinking water for British Columbia.
  • Waste Management: While waste diversion has increased to 27% in 2022, landfill shortages are anticipated.
  • Public Transit: 13% of public transit infrastructure was in poor condition in 2022, with smaller cities being more affected.
• Impact on Housing Targets: The infrastructure deficit raises concerns about meeting housing targets, as adequate infrastructure is a prerequisite for new housing. Welman emphasized the need for infrastructure to precede housing development ("cart before the horse").
• Cost of Upgrades: While the overall expected costs for upgrades were lower than anticipated, there is a lack of detailed data to pinpoint specific investment needs and benefits.
• Recommendations:
  • Prioritize Existing Infrastructure: The most cost-effective investment with the highest return is to make the most of existing infrastructure.
  • Data Collection: The National Infrastructure Assessment aims to provide data for effective investment decisions.
  • Municipal Awareness: Builders, municipalities, and communities need awareness of the current state of infrastructure and future requirements.
• Housing Density and Servicing: Higher density housing areas are generally less expensive to service as existing infrastructure can be leveraged. Low-density suburban developments further from city centers require significant new infrastructure investment, which is often fiscally challenging for municipalities.

Innovative Infrastructure Financing

Ben Dawkins, Vice President of Outreach and Research at Clean Prosperity, discussed innovative approaches to financing infrastructure.

• The Problem: Municipalities often lack the capital to address infrastructure needs, leading to high upfront costs being borne by home buyers and taxpayers through development charges and higher mortgage costs.
• Proposed Solution:
  • Shift Debt Responsibility: Rethink who takes on the debt for infrastructure. Instead of burdening households, municipalities or dedicated municipal corporations should be better positioned to manage this debt.
  • Municipal Corporations: Creating corporations focused solely on specific infrastructure (e.g., water, electricity) with dedicated boards and governance can lead to more efficient investment and growth. This model is already used for electricity distribution.
  • Municipal Bonds: These specialized bonds could be issued for specific infrastructure assets.
  • Balanced Financing: A mix of upfront financing and debt, similar to how households manage mortgage payments, is needed. Municipalities currently focus too heavily on large upfront costs.

Building Canada's Biotech Sector

Gordon Macaulay, President and CEO of Admare, discussed strategies for developing a thriving Canadian biotech industry.

• Translating Research: Canada has struggled to translate basic research into a sustainable life sciences industry.
• Acquisition Risk: Emerging companies are often acquired by global players as they progress through the development lifecycle.
• Importance of Anchor Companies: Macaulay stressed that without anchor companies, a self-sustaining life sciences industry cannot be built. He cited Genzyme in Boston as an example and historical Canadian examples like QLT in Vancouver and Biochem Pharma in Montreal.
• Attracting Talent:
  • Scientists: Canada is making efforts to attract scientists, with institutions like the University of Toronto successfully recruiting high-profile individuals.
  • Entrepreneurial Talent: A significant challenge is finding entrepreneurial talent to drive companies. Macaulay advocates for a government-backed program to repatriate successful Canadian entrepreneurs from the US.
• Leveraging Health Data:
  • Opportunity: 30% of the world's data is health data, presenting a significant opportunity for value creation, estimated at $110-$115 billion.
  • Data Protection: While data protection is crucial, there's a real opportunity to use health data to advance human health and knowledge.
  • Infrastructure Needs: Canada needs to aggressively support data centers to capitalize on this opportunity.

Takeaway: Alberta-Federal Memorandum of Understanding

The recent memorandum of understanding between Alberta and the federal government, aimed at improving relations, has been met with cautious optimism.

• Symbolism vs. Substance: The MOU involves concessions from Alberta on carbon pricing in exchange for federal support for large energy projects, including a new pipeline.
• Historical Context: The Northern Gateway pipeline debate from 15 years ago serves as a cautionary tale, highlighting the challenges of public and First Nations opposition.
• Shifting Sentiment: The current spirit in Canada appears more inclined to capitalize on resources.
• Private Capital Risk: The federal government's insistence on private capital for pipeline projects faces risks due to historical opposition and environmental concerns, particularly regarding the pristine environment of BC's North Coast.
• Alternative Routes: Expanding existing southern BC routes might be a more practical, albeit less ambitious, approach.
• Conclusion: The warmed tone between Alberta and the feds carries significant symbolism, but its long-term impact remains to be seen.