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A Path Forward: Adjusting to Canada’s New Economic Reality

By Chuck Brady and Jeff Fielding

Uncertainty! This has become the word of the day for many working in local government. Uncertainty about the workforce, uncertainty about future costs, uncertainty about availability of labour and materials. It’s this uncertainty that’s sparked questions about how to adjust to the fast pace of Canada’s new economic reality and plot a new path forward.

Inflation is a sign of a healthy economy, but what happens at the municipal level when inflation rates rise at record-breaking speeds? Canada’s inflation rate hit a new 30-year high, increasing to 4.8 percent in December 2021, the steepest increase recorded since September 1991. The impacts of the past two years are affecting Canadians on multiple levels – from the heightened inflation rate to global supply chain disruptions, pent-up supply and service demands, and the impacts of climate change weighing heavily on affected communities. Many local governments are coming to terms with Canada’s new economic reality and are doing their best to navigate a path forward, while also juggling election cycles. Throw in a shift to a remote workforce and changes to urban and rural demographics, and it’s only natural that local governments are taking a cautious approach. To further complicate things, many senior-level leaders are choosing early retirement over the stresses related to rapid change. The consequence of this leaves newer, younger leaders to face this type of situation for the first time in their careers.

With changes happening so quickly, leaders need to address the associated uncertainties to avoid clogging up the system of capital project delivery and development approvals. While infrastructure deficits continue to grow, the amount of deferred capital is hitting record levels. The average local government is now delivering about 55% of their capital program in the year the funds were originally allocated. The risks associated with these deferrals are exacerbated by inflation at its current levels. The $5M project they put off today, may be a $10M project in a few short years.

The good news is, opportunities for improvement continue to present themselves. Opportunities to re-assess processes and do things differently – just as Canadians are changing how (and where) they live and work. Many acknowledge that workers are embracing remote and hybrid work environments, which provides them with the freedom to move to more rural communities with a focus on lifestyle rather than proximity to the downtown core of our major city centres.

With a sudden increase in population, many communities are being challenged to offer housing, amenities and infrastructure that were not previously envisioned in their existing five- to 10-year plans. Some communities are also facing challenges to rebuild from flooding and wildfires that have destroyed key infrastructure. As a result, new funding streams from senior levels of government will also emerge to coincide with these infrastructure enhancements.

Local government leaders who are able to adapt, adjust and plot a new path forward will be the beneficiaries of these new opportunities. Whether it means investing in infrastructure or updating systemic procedures to support more flexible work environments, local leaders will need a plan to help navigate the uncertainties and risks so that they can sustainably rebuild. Over the past several months, we’ve engaged with CAOs across Canada to pinpoint the impacts affecting local governments and how they plan to move forward.

Four keys to a successful path forward

For years, local governments relied on historical data to support and inform their decision making. From climate change to population growth, there’s been reliable data to support forward-looking trends. But as the paradigm shifts and the pace of inflation and climate change cycles quicken, there’s now a need to look further ahead to predict the future pace.

Local governments need to stay ahead of the curve, anticipate economic cycles and remain flexible so they can better mitigate the challenges ahead. Now is an opportune time to reevaluate current operations and adopt a more fluid approach to investments. Here are four steps local governments can take to rebuild on the road to recovery:

1) Take Advantage of Private Sector Investments
The National Post recently reported that Canada is ‘bleeding capital’ and that the country’s competitiveness is adversely impacted by fiscal and environmental policies that reinforce the idea that it isn’t possible to build new infrastructure. Local governments, however, are reporting increases in building permit activity, in some cases at record-breaking levels. Private sector investments are going to be an important contributor to Canada’s economic recovery and it’s important for local governments to take advantage of those investments when they come through. Jurisdictions that are nimble and willing to adapt are likely to take in a disproportional share of private investments. Finding ways to speed up permit and funding approvals and work collaboratively with industry experts and developers will be critical. Key areas of growth we are seeing include housing, Real Estate Investment Trends (REITs) making large investments into multi-family residential homes, and industrial logistics centres, with companies like Amazon continuing to build out regional footprints across the country.

Additionally, federal and provincial governments are prioritizing climate change mitigation, meaning that there are more funds available for things like asset relocation or land acquisition. So far, these funds are being underutilized, meaning that jurisdictions that move quickly to secure funds for private sector and/or climate change initiatives will benefit significantly compared to those that get caught up in decision making or red tape. Buildings continue to make up a large proportion of our greenhouse gas emissions. Programs aimed at retrofitting existing buildings are expected to ramp up quickly. This is another area where efficient building and development permit processes will pay dividends by attracting local community investments.

2) Remote Workforce and Streamlined Approval Processes
To prepare for upcoming private-sector investments, local governments can assess and streamline their approval processes. As many Canadians adapt to a remote workforce, there’s a call to action for local leaders to introduce new technology and processes that enable greater efficiency and productivity across a remote workforce. Currently there is no common approach to creating more flexible processes for remote workers across local governments. The CAOs we have spoken to indicate that this topic is the one that leaders seem to be losing the most sleep over. Most job descriptions and hiring policies were created under conditions that no longer exist.

There is an opportunity to completely rethink nearly every aspect of the workforce at City Hall, and many local governments are exploring what this needs to look like. We are seeing job vacancy rates approaching 20% within many local governments, and the battle for talent is only going to intensify. Efforts to alleviate staffing challenges will also help mitigate the risks that come along with new, expedited approval processes and procedures, such as procurements. Without more uniform and streamlined processes, local governments risk missing out on opportunities to secure the necessary permits, funding approvals and the ability to get their capital projects delivered at the pace required to curb the impacts of inflation.

3) Develop a Robust Risk Register
Making decisions quickly does come with associated risks, which can cause local governments to suffer from ‘analysis paralysis.’ Risk assessment is a key factor to consider as part of any investment, but with process change comes the need to reevaluate and rebuild a more robust risk register. It’s important for local governments to evaluate their existing investments and identify the greatest risks to their success. In a high inflation environment, the risk of doing nothing is not adequately captured, and infrastructure deficits can get out of control quickly.

By adjusting perspectives surrounding risk, local governments can reevaluate their approach to capital investments, recast budgets and lock in fixed pricing. These actions lower their investment risks, help manage inflation and put local governments on the path to economic recovery. Low risk projects can also be re-prioritized and delivered sooner, making the most of annual budget and capital goals, and better preparing staff to take on higher risk projects later.

4) Locking Down Projects and Recasting Budgets
One way to help reduce inflation-related risks is to lock in pricing early. Between inflation and supply chain demands, it’s likely that supply costs will continue to rise. The United States pumps out infrastructure quickly, which increases the demand for supplies like steel, asphalt and cement. Since Canada shares a supply chain with the United States, our ability to obtain the supplies needed to deliver new infrastructure is also impacted.

Increased supply demands often lead to price increases. Local governments with the ability to make decisions, assess risks, and secure permits and funding approvals quickly are more likely to lock in lower project prices and supply costs. Doing so, especially over multi-year projects, helps local leaders stay ahead of the curve when it comes to inflation.

One of the greatest takeaways of an economic crisis is the opportunity to build differently. After years of stability, a crisis can stimulate a period of rapid economic growth combined with innovation. The private sector is entering that optimal period now. Provincial Gross Domestic Product (GDP), for example, has grown five to six percent in some provinces and many local governments are reporting record levels of private sector investments.

Although national inflation rates are at an all-time high, there are many positive aspects to our current phase of rapid growth. With record levels of capital investment on the way to the private sector, communities are in a powerful position to take advantage of upcoming investment opportunities. If prepared and nimble, local governments will be able to capitalize on new funding opportunities. First mover advantage will enable them to develop infrastructure that supports both current and future community needs. Recognizing this economic cycle and being able to adapt to the uncertainties and challenges it brings, enables local governments to deliver more to the communities they serve in a timely and cost-effective manner.