Study: Public infrastructure's contribution to production

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Public infrastructure, the roads and water and sewer systems that comprise the foundation of Canada's economy, provided a rate of return to public capital at least as high as the government long-term bond yield over the period from 1961 to 2005.

Infrastructure is an enabling input for the economy that facilitates the flow of goods and people. It is one of the cornerstones upon which the private sector operates.

On average, the stock of public infrastructure is half as large as gross domestic product (GDP) in the business sector, and 28% of the size of the capital stock in the private sector.

Rate of growth of real GDP and stock of public infrastructure closely related over time

Public infrastructure provides support for businesses and individuals. Over time, the expanding stock of infrastructure in Canada closely matches trend changes in real GDP, aside from the recessions of the early 1980s and 1990s.

The roads, water and sewer systems that make up the majority of public capital allows for lower transportation costs, greater concentrations of people and firms, promotes agglomeration and provides firms and consumers access to broader, deeper markets.

Estimating infrastructure's rate of return is complicated

Despite the contribution that public capital makes to the economy, the study notes that it has proven difficult to generate a robust estimate for infrastructure's rate of return. In Canada, public capital provision is primarily funded through taxation, and generally does not have commercial markets for its output. These factors make estimating infrastructure's rate of return more complicated.

Previous estimates of the impact vary considerably. Evaluations of the range of estimates provided by these studies are difficult for a number of reasons — from the variety of jurisdictions covered, to differences in data sources used and analytical approaches taken.

The study released today provides an overview of the difficulties faced when estimating the rate of return on infrastructure. The study then uses a variety of econometric techniques to estimate the relationship between real output in the business sector and public capital, and the relationship between unit costs of private sector output and public capital for Canada. The analysis investigates the strengths and weakness of each approach and then triangulates the results in order to suggest the rate of return on which the various methods converge.

The return on infrastructure is measured in this study as the benefit that a dollar invested in roads, sewers, water treatment, and so on, generates for the business sector. This benefit is either in terms of decreased private sector costs attributable to the "free" provision of infrastructure, and/or increased private sector output.

The study argues that the appropriate estimate of the rate of return centres on 17%, with a range of plus or minus 12%. This means that the range of plausible estimates generated by the study also includes values that are consistent with the return equalling the average annual long-term government bond yield and the average annual return on private capital.

The study "An examination of public capital's role in production" is now available as part of the Economic Analysis Research Paper Series (11F0027MIE2008050, free), from the Publications module of our website.

For further information on public infrastructure, consult the research paper Infrastructure capital: What is it? Where is it? How much of it is there? (15-206-XIE2008016, free), released on March 12, 2008.

Also useful is the research paper Public infrastructure in Canada: Where do we stand? (11-624-MIE2003005, free).

For more information, or to enquire about the concepts, methods or data quality of this release, contact Ryan Macdonald (613-951-5687), Micro-economic Analysis Division.