Canadian Government Executive - Volume 26 - Issue 03

10 / Canadian Government Executive // May/June 2020 Infrastructure By Michael Fenn The Limited Dividend Company for Delivery of Critical Infrastructure A s Canada looks for ways to re- cover and rebuild in the wake of the COVID-19 pandemic, infra- structure is often cited as a way to get people back to work and to build the foundation for a broad-based economic recovery. To encourage private investors to help develop and deliver new commu- nity infrastructure, this article proposes a revival of the “limited dividend” company, which the Canada Mortgage and Housing Corporation (CMHC) previously used to expand affordable housing. In a post-pan- demic recovery, the limited dividend com- pany may prove to be an effective way to provide essential infrastructure services to households and businesses and accelerate sustainable recovery, especially in hard-hit municipalities and regions across Canada. The Challenge Infrastructure investment programs are important contributors to economic and ultimately fiscal recovery. Infrastructure programs can also be designed to help to achieve environmental and social goals. Decisions regarding post-pandemic fiscal- stimulus spending will need to strike an ap- propriate balance between immediate job creation, economic growth, environmental benefits, resiliency, and affordability. The United Nations’ principle of “Build Back Better” was conceived precisely to reflect these considerations. As was the Canadian government’s standard that it’s not enough for a project to be “shovel-ready”—it needs to be “shovel-worthy” as well. Historically, federal and provincial gov- ernments have seen it as their proper role to build the infrastructure needed to support sustainable communities and im- prove the quality of life of residents. Public assistance for community infrastructure has typically come upfront, in the form of grants and generous loans to reduce the service provider’s obligation to finance and build capital-intensive enabling in- frastructure. This arrangement, in turn, allows the service provider to reduce the user fees and achieve a corresponding in- crease in public usage rates because the project is not burdened by excessive fi- nancing and depreciation costs. Most governments express a desire to see more private-sector investment in public infrastructure to mitigate risk and reduce the financial burden for taxpayers. However, in the post-pandemic environ- ment, many policymakers and political leaders are expressing concerns about fis- cal support and stimulus measures being used to fund dividend payments, share buybacks, and executive bonuses. These are legitimate concerns, but they should not negate the potential benefits of a major role for the private sector in build- ing infrastructure projects as part of the economic recovery. What Is a Limited Dividend Company? In the 1960s, CMHC created the limited dividend company program to encourage private investors to develop and operate low- to moderate-rent housing. Rents on these projects were based on the cost-of- service (COS) rate model, which included a rate of return of 5 per cent per year or less. The Income Tax Act was amended so that limited dividend owners did not pay tax on income earned by these companies. The limited dividend owners benefited from direct government loans at interest rates below prevailing conventional lend- ing rates. Projects were governed by an operating agreement between CMHC and the owner; this agreement dictated the renting of units to households below speci- fied income levels and placed restrictions on rent increases. The agreement was in force through the duration of the mortgage (30 to 50 years), but the owner could prepay the mortgage and terminate the operating agreement after an initial period. By the 1990s, most limited dividend owners had repaid or prepaid the mort- gages and the CMHC had moved to other housing initiatives. However, the limited dividend company remains on the books as a tax-exempt entity to improve the qual- ity of life in Canadian communities. What Is Cost of Service? The COS model used by a limited divi- dend company to set the rates it charges consumers is essentially the same as the one used by a broad range of rate-regulat- ed public services in Canada (e.g., energy, broadband, housing). Under the COS model, the provider re- covers the cost of delivering the public or utility service through rates charged to consumers—unlike roads, bridges, or parks, which are paid for by taxpayers. Rebuilding Sustainable Communities