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Phasing Out Federal Spending Inefficiencies: 2 Approaches

Phasing Out Federal Spending Inefficiencies: 2 Approaches

The link between federal budget grant to provincial and territorial and municipal governments, to private firm to end user, viz., citizen, is undoubtedly a complex and intricate connection. On top of this, we must add the project details and objectives, timelines, health and safety, environmental concerns, and of course, the unpredictability of politics and the weather. As detailed, public infrastructure spending remains just short of a problem that is so convoluted that it appears unsolvable—what scholars commonly refer to as “wicked” problems.

In light of this, it’s helpful to bring up a model for managing cross-sectoral collaboration to better understand the time lag that exists in federal infrastructure spending. Van der wal1 outlines the exigency of optimal government-business-civil society collaboration for achieving success in large-scale and/or high-stake projects. The model does not attempt to create a need for collaboration but instead, dictates the necessity of collaboration. Provided the turn of New Public Management wherein the government began to think and act more like a business enterprise, collaboration now features a more externally-based outlook. Naturally, then, governments look outside of their internal structure for policy execution strategies. Detailing the varying degrees of connection and interdependence of the members within the governance network, Van der wal stresses the significance of the three C’s: co-design, co-creation, and co-production, that must align for value creation in multi-sectoral collaboration efforts. Granted this interaction, collaboration is in each sector’s interest. I’ll now turn to two components to be disrupting collaboration and flesh out some of the pitfalls inherent within the current system.

Lien Laws and Holdback Requirements

Ironically, financial terms are often both where procurement relationships begin and end—disagreement, conflict, and corruption often can and often does ensue in between. As this leads contractors, subcontractors, and suppliers (CSS) to encounter difficulties collecting payments, project completion is delayed. Indeed, one component lies in the ability for CSS to file a lien against the property worked on. Legally, the labour put into one’s work is the property of theirs in terms of the increased ‘value’ the property now reflects and liens exist to ensure that you are at least compensated for this effort as now part-owner in the property. To put this another way, your physical and/or financial expenditures are rooted in the value of the property and hence are entitled to the increased worth. Traditionally, when ownership of the property changes hands, your entitlement in the property, in terms of a dollar amount, would be received on the conditions of the sale. A lien works by directing the rightful and legal stake in the property by a creditor against a debtor, therein serving as collateral for the debtor until satisfied.

In this way, lien laws exist to ensure payment between the owner of the project and CSS. Notably, Canada’s delegation of lien laws to civil, as opposed to criminal law, have given way to a rather ad hoc regulation: holdback requirements. S. 22 (1-2); c. 24, s. 17 (1- 2), 66 of the construction lien act outlines mandatory holdback requirements where:

“each payer upon contract or subcontract under which a lien may arise shall retain a holdback equal to 10 percent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided under this Act.”2

Statutory holdback requirements are the responsibility of the owner yet serve a dual- purpose: ensuring that CCS receive payment in the event of insolvency or payments defaulted by the owner as well as to defeat the financial liability associated with the double- payments that would occur due to the insolvency and/or defaulted payments by the general contractor on part of the owner, viz., initial payment to the general contractor (who defaulted) and the ensuing payment against the CCS claim. In this way, even after the project is ‘complete’ a 10% holdback period ‘prevents’ the project’s completion.

Holdback periods can indirectly affect project completion timelines

Provided, the legal system ensures that both prospective and retroactive measures for overpayment are in place for both parties, yet the de facto administration of these disputes often causes infrastructure spending to be subject to a costly waiting game with payment being hoarded for extended periods of time—if ever released at all. Lien laws and holdback requirements represent not a barrier to collaboration but rather reflect the void in collaboration from the outset. Taken together, the fiscal implications outlined here for lien laws and holdback requirements are problematic as fund release is subject to an inefficient project-completion matrix.

The Canada Infrastructure Bank

In essence, policy instruments act much like a policymaker’s toolbox. One tried and tested medium has been expenditure-based instruments. As the monetary conditions of the policy process are inescapable, money is, in essence, a universal resource that ignites governmental objectives. Here, “spending” can be effectively understood as “investment.” Naturally, then, fiscal expenditures have a direct bearing on the productive functioning of an economy and all parties within it. Restraints, fluctuations, transfers, cuts, must be identified as a dynamic between the different domains of government, business, and civil society. Collaboration is in the collective interest.

In the fall of 2016 Finance Minister Bill Morneau announced the Liberals plan to create the Canadian Infrastructure Bank (CIB) which would aid in funding major construction projects across the country. As a Crown corporation, the main objective of the bank is to act as a store of funds thereby allowing the different levels of government to borrow project funding money at a cheaper (federal) rate as well as to attract private, institutional, and foreign investment. Outlined by a modest number of purposive functions, The Canada Infrastructure Bank Act designates the arm’s length corporation as a means for “innovative financial tools.”

The CIB has not been without its critics, however, asserting that the biggest accomplishment that the CIB has achieved has been the transfer of risk from investors to taxpayers. Conservative MP Pierre Poilievre reports that in order to avoid the traditional high-risk/high-reward dynamic, large power corporations proposed that the bank should include “de-risking mechanisms such as loan guarantees.” In this context, Poilievre likened the “de-risking” of government loans to moving a grenade from the investor’s lap to the taxpayers.

In response to these concerns, Minister of Infrastructure Amarjeet Sohi attests that the CIB is indeed an innovative tool and provides an element of creativity in how infrastructure projects are funded where otherwise none would exist. In his open letter to Poilievre, he goes on to note that the CIB allows projects that lie outside of the private interest yet remain in the public interest to receive funding. These projects are most often large-scale greenfield transformative projects which have high returns to the public interest but are not attractive to private or institutional investors due to the nature of their uncertainty and unpredictability. Interprovincial or international transmission lines, for example, pose greater returns to the public interest than to private or institutional investors due to cross-border or inter-/intra- governmental strife–hence financial risk.

As it stands, the CIB represents the ultimate collaboration utility, connecting the three points of Van der wal’s tri-sector model—yet as the debate rolls on, questions arise as to whether the problem of infrastructure spending is, or has become a systemic issue. Further, this doubts as to whether challenging the inefficiencies within the pay system should be a larger priority than trying to ‘gather’ more money. It remains seen that the budget and spending is there, the problem is that money cannot be paid out fast enough. From this, it is clear that projects are not being invoiced fast enough and a more targeted approach would look into the root causes of infrastructure delays rather than providing cures to the effects of it. As the CIB is a relatively new arms-length government body, it is still an open question whether it will have a surmountable difference on the infrastructure spending lags.

Notes

1. Wal, Z. V. 2017. The 21st Century Public Manager: Challenges, People and Strategies. London, ENG: Palgrave Macmillan.
2. Government of Ontario. 2017. Construction Lien Act, R.S.O. 1990, c. C.30.

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