Capital spending by governments at all levels, by quasigovernmental entities and by private enterprise has been on the rise in Canada over the past few years. There has been extraordinary activity in certain areas, notably the development of the oil sands in northern Alberta, and the broad expansion of activity across all sectors generally have meant upward pressure on costs as prices for labour and materials have increased. In some cases, the increases have been quite dramatic.
In fact, the acceleration of private capital spending has compounded the existing public infrastructure crisis, with private projects crowding out public works. This trend is most pronounced in Alberta, where the sheer number of major capital projects in the works by private enterprise will both crowd public infrastructure projects out of the market and, paradoxically, require additional spending on public infrastructure as existing stock is stretched to its limits.
Set out below is a brief description of the major capital project activity in each of five broad sectors (industrial and manufacturing; mining, oil and gas; power (generation and transmission); commercial and retail; public infrastructure) and a discussion of the interplay between public and private projects.
INDUSTRIAL AND MANUFACTURING
In 2005, non-residential investment (i.e., commercial, industrial and institutional projects) in Canada hit a record high of $31.5 billion, up 8.7 per cent from 2004. It was the fifth straight year of growth. Industrial projects recorded the largest gain (+20.3 per cent), reaching a record $5.6 billion, with western Canada spearheading the growth in industrial investment. Alberta and British Columbia alone accounted for one-fifth of all investment in the nation’s manufacturing plants in 2005.
The increase in industrial spending has targeted a wide array of projects. The proposed $3 billion polygeneration plant to be constructed by the provincial and federal governments in Belle Plaine, Saskatchewan; the $750 million iron and steelwork plant to be constructed by Pacific Iron & Steel Products Ltd. in Prince Rupert, British Columbia; and the $400 million lumber mills to be constructed by Ainsworth Lumber Co. in northern British Columbia are but three examples of the diverse types of projects being undertaken by government and private enterprise in this general area.
In the refining sector, many new projects, including expansions of existing facilities, have been announced or are under way. The Edmonton area is a major beneficiary, expecting more than $25 billion of industrial development over the next five to seven years. Currently, Shell Canada Ltd. is building a major addition to one of its existing refinery complexes near Edmonton. Newfoundland is also experiencing growth in this sector, with a $600 million refinery upgrade by North Atlantic Refining Ltd.
Several new bitumen-upgrading projects have also been announced. Calgary-based North West Upgrading Inc. has released plans for a $2.4 billion upgrading project, with construction scheduled to begin next year. This announcement came on the heels of announcements by Petro-Canada and Synenco Energy Inc. of new multibillion-dollar facilities. A $1.2 billion Husky Oil Ltd. upgrader expansion is already underway in Lloydminster, Saskatchewan.
In addition to these investments in resource-processing capabilities, capital spending is also robust in the traditional pipeline business and the newly emerging liquid natural gas (LNG) sector. Construction has commenced on a $400-million pipeline project by Access Pipeline Inc. in north-eastern Alberta, and two LNG projects are slated to begin in Nova Scotia. Bear Head LNG will build a $750-million LNG terminal in Point Tupper, while Keltic Petrochemicals and Petroplus International intends to build a $5-billion LNG plant in Goldboro.
In eastern Canada, there has been considerable activity in the automotive sector with General Motors spending an estimated $2.5 billion to strengthen automotive engineering, R&D and manufacturing capabilities in Canada, and Toyota building a new $1.1-billion assembly plant, slated to open in 2008, in Woodstock, Ontario. To entice Toyota to build this new assembly plant in Ontario, the provincial and federal governments agreed to contribute $125 million to help cover research, training and infrastructure costs. Canada boasts a highly educated workforce, leading to lower training cost. Additionally, Canadian workers are also $4 to $5 per hour cheaper to employ than Americans, thanks, in part, to the taxpayer-funded health-care system in Canada.
MINING, OIL AND GAS
The mining sector continues to attract a large volume of capital spending, with major investments planned across the country. British Columbia is the site of the proposed $900-million development of a large gold/copper deposit near Williams Lake and NovaGold is developing a gold/silver/copper mine in northern British Columbia at a cost of $1.4 billion. De Beers is planning to spend $825 million to develop the Gahcho Kue diamond mine in the Northwest Territories. There are also many mining projects currently under way, including a $456- million expansion of the potash mine in Allan/Lanigan, Saskatchewan and a $660-million uranium mine development in Cigar Lake, Saskatchewan. In Nova Scotia, the capital cost of the Donkin mine development and power plant is expected to be $2.2 billion, while the capital cost of the Voisey’s Bay mineral development project in Newfoundland is expected to total $2.9 billion.
Oil and Gas
The major focus of capital spending in the mining, oil and gas sectors continues to be the Alberta oil sands. Capital spending in the oil sands grew from $1.9 billion in 1997 to $6.2 billion in 2004 and continues to grow, with over $100 billion in projects scheduled over the next 20 years. The increasing cost of oil sands development has not deterred resource companies from making plans to expand existing projects. For example, Shell Canada Ltd., Chevron Canada Ltd. and Western Oil Sands L.P., owners of the Athabasca Oil Sands Project, recently announced a major plan for expansion. The first stage alone is projected at $10.4 billion.
In the offshore oil and gas sector, two projects off the coast of Newfoundland, the Terra Nova and Hibernia projects, are expected to attract approximately $400 to $500 million in new capital spending over the next few years.
A Closer Look: Shell and North West
The Alberta oil sands has already attracted vast sums of capital, and, over the past year and a half, an estimated $140 billion in future spending has been announced. Reported capital spending in 2004 topped $6 billion. A look at two particular projects, the Athabasca Oil Sands Project and the North West Upgrader Project, highlights two different strategies for success in this sector.
The Athabasca Oil Sands Project is an example of an "integrated approach" to oil sands development. This project, previously dubbed "one of the largest construction projects on the planet," is a joint venture by Shell Canada Ltd. (60 per cent), Chevron Canada Ltd. (20 per cent) and Western Oil Sands L.P. (20 per cent). Using an "integrated approach," capital spending is focused on building an integrated oil operation, which includes mining, upgrading, and refining components. The scope of the joint venture includes both the $1.8-billion Muskeg River mine in Fort McMurray, Alberta, and the $1.7 Scotford Upgrader near Fort Saskatchewan, Alberta. Upgraded bitumen is sold to Shell and Chevron refineries, with any excess sold to other refiners. An important feature of the joint venturers’ strategy involves entering into long-term agreements for the pipeline transport of raw materials between the two facilities and to market. The Athabasca Oil Sands Project currently produces 155,000 barrels of bitumen per day, with plans to increase to upwards of 550,000 barrels of bitumen per day.
In contrast to the "integrated approach" exemplified by the Athabasca Oil Sands Project, the North West Upgrader Project is an example of a more "focused approach" in oil sands investment. This project concentrates on one link in the production-supply chain, the upgrading of raw bitumen. The North West Upgrader Project will serve third-party producers by upgrading raw bitumen to light sweet crude oil before sending it to refineries for conversion to end products. The upgrader will be located in Sturgeon County, just north of Edmonton, Alberta. The capital cost of the first phase of the project is estimated at $2.4 billion and will allow the processing of 50,000 barrels of bitumen per day. Two more phases are planned by 2015, with an expected future capacity for the entire project of 150,000 barrels of bitumen per day.
These two projects represent two ends of the supply chain aggregation/disaggregation spectrum. The first allows Shell Canada and its partners with wide-ranging expertise in most aspects of the hydrocarbons industry to control and benefit from the full value chain. North West, on the other hand, brings its specific upgrading expertise to meet a market requirement in the upgrading niche of the value chain and hopes to draw capacity from independent bitumen producers without upgrading capabilities. In fact, North West recently announced a long-term contract with Canadian Natural Resources for feedstock.
POWER (GENERATION AND TRANSMISSION)
The burgeoning demand for electricity has sparked increased capital spending and the development of new generation and transmission projects all across Canada.
In British Columbia, a 300- to 400-MW expansion of the Waneta power plant in Trail, with an estimated capital cost of $600 million, is expected to begin in 2007. In addition, BC Hydro is proposing to spend $3.5 billion on a dam project on the Peace River near Fort St. John. Alberta has three significant projects at the proposal stage, a $495-million transmission line (500 kV) from Edmonton to Calgary, the $2.4-billion Bow City Power Project (1,000 MW) and the $600-million Keephills 3 Power Project (450 MW). In Ontario, the biggest project by far is the $4.25-billion refurbishment of the Bruce nuclear power complex. The Ontario Power Authority is also in the process of procuring an additional 3,000 MW of supply from new generation, demand response and combined heat and power (cogeneration) projects for the Greater Toronto Area. Hydro- Québec is building a new 480-MW hydroelectric complex, with an estimated capital cost of $2.3 billion, in Baie-James. A new 315-kV transmission line will link the powerhouse to an existing substation. Finally, capital spending on the Lower Churchill Falls Project in Newfoundland is projected at $3.3 billion.
There is also a tremendous amount of interest in renewables, particularly wind power. In British Columbia, construction of the 700-MW Nai Kun Wind Power Project, with an estimated capital cost of $1.6 billion, is expected to begin on the Queen Charlotte Islands in 2007. In Quebec, six wind farms are planned for the Gaspé region at a total cost of $1.1 billion. In Ontario, the 99-MW Erie Shores Wind Farm near Port Bur-well, the 40-MW Kingsbridge I Wind Power Project near Goderich, and the 67-MW Melancthon Grey Wind Project near Shelburne are three of the 19 new renewable energy projects the province has supported to date. Combined, these projects should help Ontario reach its goal of generating 5 per cent of its electricity capacity through renewable generation by 2007, and 10 per cent by 2010. Since 2003, the amount of wind energy in the province has increased 80-fold and brought an estimated $2.5 billion in new investment to Ontario.
COMMERCIAL AND RETAIL
In 2005, a $1.4-billion gain in office tower investment accounted for more than one-half of the total increase in nonresidential investment (i.e., commercial, industrial and institutional projects) in Canada, with two metropolitan areas (Vancouver and Calgary) accounting for nearly one-quarter of the jump in investment in office towers. Nationally, investment in office tower construction soared 28.2 per cent, to $6.2 billion, in 2005, halting a two-year decline.
Investment in warehouses jumped 14.6 per cent, to $2.0 billion, likely the result of a strong performance by retailers and wholesalers, supported by consumer spending and international trade. Ontario was the leader in warehouse construction.
Commercial projects, such as shopping centers, office buildings and cinema complexes, accounted for the lion’s share of nonresidential investment, about 55 per cent. Investment in this sector totalled a record high $17.5 billion, up 12.7 per cent.
All provinces and territories, except for Newfoundland and Labrador, Saskatchewan and Nunavut, posted increases in investment in non-residential buildings in 2005. The largest gains occurred in Alberta, which saw booming conditions as a result of high oil prices, and in British Columbia, which saw rising trade with Asia and preparations for the 2010 Olympics, among other factors.
East of the Prairies, several factors contributed to gains in spending on office buildings. Vacancy rates declined sharply in the major centers, and rents were up, leading to strong gains in such investment in Toronto, Halifax, Quebec and Montréal.
Notable projects currently under way in this sector include the $1- billion EnCana office tower complex, the $500-million Deerfoot Meadows retail complex and the $400-million Centennial Place office tower, all in Calgary, Alberta, and the $290-million Bay Adelaide Centre, the $400-million RBC Centre and the $250- million Telus tower, all in Toronto, Ontario.
Public Infrastructure Gap
Despite a long history of investing considerable resources in large-scale public infrastructure projects, over the past two decades or so, there has been a move in Canada toward greater fiscal restraint, with almost every government in the land focusing its attention on slashing deficits, reducing debt and cutting taxes. Public infrastructure was one casualty of that approach. In 1962, 22 out of every 100 public dollars spent in Canada were invested in public infrastructure assets. By 2002, that had fallen to $12, a dramatic drop by any standard.
This underinvestment has left Canada’s public infrastructure, including transit systems, roads, highways, bridges, water and waterworks, educational facilities and hospitals in a weakened state. Combined with the steady growth of Canada’s economy and a failure to prioritize the maintenance of public assets, this underinvestment has created a huge gap between Canada’s current stock of public infrastructure and its present and future public infrastructure needs.
For Canada as a whole, this public infrastructure gap is estimated at up to $125 billion, being over 10 times the combined total of all government public infrastructure budgets, and it shows no signs of lessening. It is difficult to determine the actual gap, as available data is limited to specific sectors or specific provinces or territories. But in Ontario alone the deficit has been estimated at $100 billion suggesting that the national infrastructure deficit may be much larger.
If the current level of infrastructure underinvestment is allowed to continue, some studies indicate that the deficit could balloon to $1 trillion by the year 2065. The problem is particularly severe in health care, education, transportation and municipal works, where governments face significant operating cost pressures as well as daunting capital investment requirements.
A Closer Look: Ontario’s Infrastructure Gap
Ontario has a large and complex system of public infrastructure, worth more than $250 billion, and a public infrastructure deficit estimated at $100 billion or higher. In recognition of its diminishing repair and failure to keep up with expanding demand, the Government of Ontario created the Ministry of Public Infrastructure Renewal ("PIR") in 2003.
In 2004, PIR released Building a Better Tomorrow: An Infrastructure Planning, Financing and Procurement Framework for Ontario’s Public Sector, a guide to investing in Ontario’s public infrastructure. The framework is part of the government’s long-term infrastructure strategy to restore Ontario’s crumbling public infrastructure, prepare for future growth and ensure economic prosperity.
The framework establishes five fundamental principles to govern the approval of public infrastructure projects and the selection of financing options: the public interest is paramount, value for money must be demonstrable, appropriate public control/ownership must be preserved, accountability must be maintained, and all processes must be fair, transparent and efficient.
The framework will be applied to all public infrastructure projects in which the government makes a significant investment, including those proposed by Ontario ministries and agencies, municipalities and public institutions like hospitals and universities in effect, all future public infrastructure projects of any substantial size.
In May 2005, PIR announced the ReNew Ontario plan pursuant to which the government and its partners will invest more than $30 billion in public infrastructure over the next five years. The plan includes
- approximately $5 billion for health-care projects, including 105 hospital projects;
- more than $10 billion to improve elementary and secondary schools and to renew postsecondary facilities; and
- about $11.4 billion to improve public transit, highways, border crossings and other transportation systems.
PIR formed the Ontario Infrastructure Projects Corp. (Infrastructure Ontario), which in November 2005 was given the mandate to initiate 38 projects in Ontario. Some of these projects will be carried out under Ontario’s Alternative Finance and Procurement program, which, as noted in the framework principles above, places a heavy emphasis on protecting the public interest.
Set out below is a list of notable public infrastructure projects currently under way or proposed in various provinces:
- Northern Alberta Institute of Technology Campus Development; Edmonton, Alberta; $750 million (proposed)
- Abbotsford Regional Hospital and Cancer Centre; Abbotsford, British Columbia; $350 million (2004-09)
- Tom Baker Cancer Centre; Calgary, Alberta; $600 million (proposed)
- Hospital for South Calgary; Calgary, Alberta; $550 million (2007-10)
- Edmonton Clinic; Edmonton, Alberta; $577 million (2006-09)
- William Osler Health Centre; Brampton, Ontario; $450 million (2004-07)
- Royal Ottawa Hospital, $145 million (2004-06)
Ports and Bridges
- Vancouver International Airport Expansion; Vancouver, British Columbia; $1.8 billion (2000-10)
- Port of Vancouver Facility Expansion; Vancouver, British Columbia; $1.6 billion (2004-10)
- Golden Ears Bridge; Maple Ridge to Pitt Meadows, British Columbia; $808 million (2006-09)
- Airport Improvements; Calgary, Alberta; $850 million (1998-2007)
Public Transit Projects
- RAV Canada Line; Vancouver, British Columbia; $1.9 billion (2005-10)
- Light Rapid Transit Extension; Edmonton, Alberta; $495 million (proposed)
- TTC Subway Line Extension; Toronto, Ontario; $2 billion (proposed)
- Light Rail Transit System; Ottawa, Ontario; $700 million (2006-10)
- Sea-to-Sky Highway Improvements; Horseshoe Bay to Whistler, British Columbia; $600 million (2005-09)
- Kicking Horse Canyon Project; Golden, British Columbia; $960 million (2003-08)
- Highway Twinning Project, various locations in Alberta, $1.4 billion (1998-2009)
- Anthony Henday Drive (southeast section); Edmonton, Alberta; $493 million (2005-07)
- Ring Road East Freeway; Calgary, Alberta; $1 billion (proposed)
Water and Wastewater Projects
- GVRD Capilano and Seymour Water Filtration Plant; North Vancouver, British Columbia; $600 million (2003-08)
INTERPLAY BETWEEN PUBLIC AND PRIVATE PROJECTS
The sheer number of major capital projects in the works by private enterprise will both crowd public infrastructure projects out of the market and, paradoxically, require additional spending on public infrastructure as existing stock is stretched. Nowhere is this more evident than in Alberta, where the boom in capital spending is highlighting the need for adequate public infrastructure to meet resulting demands.
Total spending by Alberta Infrastructure and Transportation rose from $3.4 billion in 2004-05 to $4.4 billion in 2005-06, an increase of 29 per cent year over year. Several projects are currently under way in "infrastructure-starved" Fort McMurray, such as the $680 million twinning of Highway 63 and associated power, water and public facilities. Despite this, many critics have alleged that there is an infrastructure deficit in the province that will ultimately slow the pace of private capital spending. Calgary Mayor Dave Bronconnier has stated that Calgary’s current public infrastructure debt stands at $2.7 billion, and that this will likely double over the next five years. As of 2005, some estimated the public infrastructure deficit in Alberta at $10 billion.
Compounding the need for increased public infrastructure spending is the upward spiral of construction costs in the province, largely driven by private capital investment. The fastpaced growth in Alberta has increased prices to the point where the potential delay of various public projects has been publicly aired. Outgoing Alberta Premier Ralph Klein recently stated, "Costs are escalating at 30 to 40 per cent, so my message is simply to delay." He further stated, "I know there is a screaming demand for more infrastructure but, folks, the prices are beyond belief." While it is difficult to ascertain the true extent of the public infrastructure crisis in Alberta, public infrastructure spending should continue at a high level for the next several years in Alberta. In many ways, a slowing in the Alberta economy would serve as a boon to public infrastructure spending.
Capital spending by governments at all levels, quasigovernmental entities and private enterprise has been on the rise in Canada over the past few years. Major capital projects have been announced in many different sectors all across the country. Although the oil sands continue to attract tremendous amounts of capital, spending on industrial and manufacturing, mining, power generation and transmission and public infrastructure projects has also been strong.
There is a symbiotic relationship between public and private capital spending. In order to maintain its competitive advantage and continue to attract major capital projects, Canada will need to invest in its stock of public infrastructure. The importance of public infrastructure to the country’s economy and quality of life is indisputable. A prosperous economy depends on a healthy and well-educated workforce, the delivery of accessible, top-quality services and the orderly growth of our communities.
The authors wish to acknowledge Tara Mackay and Andrew Bateman for their assistance with the development of this article.
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