Building BC for the 21 st Century Presented to: Construction - - PowerPoint PPT Presentation

Building BC for the 21st Century

Presented to:

Construction Council Vancouver Island:

Capital Project Forum 2015

May 13, 2015

Ken Peacock Chief Economist and Vice President

Business Council

260 large and medium-sized companies and institutions from every sector of BC’s Economy Represents over 25 % of BC’s Employment Thoughtful public policy and economic leader Non Partisan Collaborator

» First Nations » Educational institutions » Governments » Industry » NGOs

BCBC’s Work

Areas of policy focus

» Competitive economic climate

• infrastructure
• regulatory
• trade
• environmental sustainability
• certainty and access to the land base

» Energy » Innovation and Productivity » Human Capital » First Nations

Importance of Infrastructure

Strong positive returns on infrastructure investment

» 1980s David Aschauer estimated rate of return of 50%+ » subsequent work shows lower but still positive returns » shown to lift GDP per capita

Boosts economic output

» directly through planning and construction phase » infrastructure services are inputs into production process of other sectors » lifts productivity

Improves quality of life

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Larry Summers, former Chair of the US Council of Economic Advisors…

“The US needs long-term budgeting for infrastructure that recognizes benefits as well as costs.” “Projects should be approved with reasonable speed.” “The budgetary arithmetic associated with infrastructure investment is attractive at a time of record low real interest rates and when there are enough unused economic resources that greater infrastructure investment need not come at the expense of other spending.”

Larry Summers “Why Public Investment Really is a Free Lunch,” Financial Times, October 6, 2014

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Governments Are Generally Not Well-placed to Meet Growing Infrastructure Needs

Constrained public budgets Aging population and growing demand for healthcare funding Slower economic growth Environmental concerns Projects increasingly complex

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1 2 3 4 5 6 7 8 9

Health Education Social Services Protection Trans- portation Natural resources

• ther

General government Interest

Spending as a Share of Nominal GDP, %

2002/03 2013/14

Health Care Takes More Resources

Source: BC Financial and Economic Review 7

Total Provincial Gov’t Capital Spending Stable

Source: BC Economic and Financial Review and 2015 BC Provincial Budget

200 1,200 2,200 3,200 4,200 5,200 6,200 7,200 8,200

02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18

Provincial Capital Spending, millions $

Total Tax-payer supported

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But on a Per Capital Basis Edging Lower

Source: BC Economic and Financial Review and 2015 BC Provincial Budget

200 400 600 800 1,000 1,200 1,400 1,600

02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18

Real per Capita Provincial Capital Spending, $

Total Tax-payer supported

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Sub Par Economic Growth

Source: Statistics Canada, Provincial Economic Accounts * chained 2007$ average excludes 2009 recession

• 3.0
• 2.0
• 1.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

BC Real* GDP Growth, %

Total

• avg. 1995 to 2014

10

BC Middling Performer on GDP per Capita

• 0.5

0.5

• 0.6
• 0.4
• 0.2

0.0 0.2 0.4 0.6 0.8 1.0

N&L NB Ont Que PEI BC Alta NS Man Sask

Avg Annual Growth in Real GDP per Capita, 2008-2013, %

Source: Statistics Canada, Provincial Economic Accounts. 11

Factors Shaping Infrastructure Needs

Trade and greater integration with Asia – Gateway role Population growth Demographics – aging Urbanization Globalization and competitiveness Communications and information revolution Environmental considerations Aging of existing infrastructure assets

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Diversified Trade: A Long-Term BC Advantage

(average annual share of international goods exports by province, 2014, per cent)

Source: BC Stats.

US, 50.6% Japan, 10.3% China, 17.7% Other Asia, 9.5% Other, 11.9% US, 90.2% Asia, 4.7% Other, 5.1% US, 79.3% Asia, 4.7% Other, 16.0%

BC Alberta Ontario

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Rise of Asia Continues – Top 10 Economies

Country GDP 2014

(US$ bn PPP)

Country

Projected

GDP 2030

(US $ bn PPP)

Country

Projected

GDP 2050

(US $ bn PPP)

China 17,632 China 36,112 China 61,079 US 17,416 US 25,451 India 42,205 India 7,277 India 17,138 US 41,384 Japan 4,788 Japan 6,006 Indonesia 12,210 Germany 3,621 Indonesia 5,486 Brazil 9,164 Russia 3,559 Brazil 4,996 Mexico 8,014 Brazil 3,073 Russia 4,854 Japan 7,914 France 2,587 Germany 4,590 Russia 7,575 Indonesia 2,554 Mexico 3,985 Nigeria 7,345 UK 2,435 UK 3,586 Germany 6,338

Source: PWC, The World in 2050 14

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

BC Population Growth, %

Population Growth Slows

Source: BC Stats. 15

20,000 40,000 60,000 80,000 100,000 120,000

91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

Increase in BC Population, persons

Past 10 years population increased by 475,000 Coming 10 years population projected to increase by 600,000

But Actual Increase in Coming Years Higher than Recent Past

Source: BC Stats. 16

Stronger Population Growth Expected on Southern Island

• 0.4
• 0.2

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4

Average Population Growth, %

2010-14 2015-19 2020-24

Source: BC Stats. 17

Ratio of 65+ to Working Age Population Climbs

18.8 25.7 40.3

5 10 15 20 25 30 35 40 45

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

BC Number of Persons 65+ for every 100 Working Age (25-64)

Source: BC Stats. 18

Island Expected to Age More Rapidly than BC Average

10 20 30 40 50 60 70

Number of Persons 65+ for every 100 Working Age (25-64)

1995 2015 2035

Source: BC Stats. 19

Record Low Borrowing Costs

Source: Statistics Canada.

2 4 6 8 10 12 14 16 18 36 42 48 54 60 66 72 78 84 90 96 02 08 14 Gov’t of Canada Bonds (over 10 years) Average Yield, quarterly, %

Latest : Q3 2014 20

Remarkably Low Interest Rates

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Ten Year Government Bond Yields, April 14, 2015, %

Source: Bloomberg. 21

Infrastructure Deficit

Historic shortfall has left an infrastructure deficit

» Canada used to invest equivalent 5% of GDP » fell to 2% and has climbed back to 4%

Aging infrastructure also a concern Municipalities are now responsible for the largest share of the nation’s stock of infrastructure Given the age of infrastructure assets, financing will have to flow into maintenance

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Financing Infrastructure

Government financing rests mostly on tax revenues and funds garnered from borrowing

» federal government routinely supports infrastructure investment

Private resources

» growing role for private sector including user fees » banks important financiers » bond market also has a long history of providing debt financing

• P3s, IPPs, YVR, BC Ferries, Port Authority

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Broadening Finance Options

Pension funds

» predictable and stable cash flows » higher returns than other fixed income investments » offers the opportunity to deploy large amounts of capital » better marching of assets and liabilities

Barriers

» shortfall of a pipeline of projects » governments like to retain control of natural monopolies » costly to build up in-house expertise » infrastructure may not be a good hedge against inflation

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Recommendations from BCBC Paper

Develop a long-term strategic infrastructure plan

» help coordinate regional development strategies » prioritize projects » create pipeline of projects

Leverage financing opportunities

» take advantage of historic low borrowing costs » tap private sector capital and expertise » amend province’s accounting policy – current treatment of self- supported debt at BC universities » consider a provincial infrastructure fund administered by a stand alone agency » review capital requirement & taxation capacity of municipalities » green bonds

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Recommendations from BCBC Paper

Seek support from federal government

» make infrastructure a top priority in all discussion with the federal government » continue to advocate for the importance of the Asia Pacific Gateway

Make greater use of demand management tools Improve the regulatory environment

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Recap

BC has done well in making strategic infrastructure investments But we need to invest more in infrastructure in BC, especially economic infrastructure Need to build new and upgrade existing assets Implement a long-term infrastructure strategy / plan Focus on developing new and innovative ways to finance infrastructure

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From the October 2014 IMF World Economic Outlook

Advocates a stepped-up pace of infrastructure investment across the OECD, led by the public sector Notes that public sector capital spending has trended lower as a share of output across the advanced industrial economies in recent decades Argues that record low borrowing costs for high quality credits, coupled with continued economic slack, make today an unusually opportune time to expand public sector infrastructure

• utlays

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From the October 2014 IMF World Economic Outlook… continued

Emphasizes that well-designed infrastructure investments in projects that generate high social returns can reduce rather than increase government debt burdens The IMF estimates that smart infrastructure spending that catalyzes private sector investment and improves productivity and competitiveness may boost a jurisdiction’s GDP by a ratio

• f 3 to 1 per dollar spent

Source: IMF, World Economic Outlook, October 2014.

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