Several different methods are used throughout Canada in the way governments spend money on capital projects. As we all know, municipalities are large organizations that spend millions of dollars per year.
Yet, few of them enter into transactions having a present value of $10 million or more on an annual basis and even fewer spend more than $100 million on a single project.
Expenditures of this magnitude could have a devastating effect upon municipal operations if not properly executed.
Thus, there is reason to make sure the proposed solution has been properly thought through before committing to it.
Once there is a reasonable confidence that the correct solution has been chosen, the next step is to confirm that the method of affecting the proposed solution is viable as it is configured.
To that end, it is wise to develop a standardized approach to the approval of a major capital project, to ensure that the decision to proceed is based upon a sound understanding of what each project entails and to confirm further that all required steps have been taken before going to market.
The benefit of undergoing preliminary screening is clear: it assists in creating not only an orderly step-by-step process, but in the mitigation and avoidance of risk.
Phrases like “risk management” have a tendency towards cliché.
Few people would disagree with the notion that risks should be identified and properly provided for.
A rigorous process of reviewing constitutes a realistic method for anticipating and dealing with the risks that a project represents.
It is put into place at a point where the time and money invested in the project are relatively small.
Although this type of preliminary checklist does not represent a complete solution to the problems associated with major capital projects, it is an important first step in that direction.
One item that should be a key element in the planning for a major public sector capital project should be to deal with the financial basis on which a proposed facility will operate.
Some types of municipal capital facility do not seem to merit any kind of taxpayer subsidy.
Such facilities should operate on a user-pay basis.
On the other hand, there are many types of facilities that would not accomplish their underlying objective, if users were expected to pay the full cost of running them.
Some facilities are of general benefit to the entire municipal community. Others benefit a particular part of the community, in which case there may be some argument for funding them through a local development tax.
Proposals to carry out local improvement usually require notice and public hearings, and the entire process may lead to dispute. In Ontario, residential streets are funded by both the city and homeowners through local improvements taxes added to their property tax bill.
Non-residential streets are funded by both the city and through government grants. Bridges are funded by both the city and through federal or provincial grants.
In many cases, both the federal and provincial governments provide grants for the same projects, but these grants often require matching funding.
In theory, municipalities recover the cost of providing capital facilities to support new subdivisions and industrial parks that are built within their jurisdiction through a program of development charges.
It has been argued, however, that at least some municipalities have kept tax increases at below inflation levels, by drawing upon development charges to meet ongoing municipal expenses. The majority of investment in municipal infrastructure improvements comes from municipal property taxes and other municipal revenue sources.
Large one-time costs often can be very easily justified. However, the key point is that major capital projects almost always involve ongoing costs as well as initial outlay costs.
Stephen Bauld is Canada's leading expert on government procurement. He can be reached at email@example.com.