With the Christmas shopping season in full swing, many of us have already seen, heard, or read the inevitable news stories about how much consumers are planning to spend this year, the results of the latest consumer confidence survey, and the overall state of the retail sector.  Behind this type of commentary lies an unspoken assumption—that high levels of consumer spending equate to a “good” economy or a “growing” one, while lower levels mean a “bad” economy or one that is “tanking.”

That assumption has just one small liability.  It’s not entirely correct.

When all of us earn income, we can do only one of two things with it.  We can spend it or we can save it.  Spending on goods and services—whether by individuals, corporations, or governments—represents only one side of the economic equation.  On the other side lies saving.

When income is saved, it does not sit idle in your bank or RRSP account.  Rather, it becomes a pool of investment capital that business employs to invent new products, new technologies, and new goods and services, or to innovate by developing and improving upon existing products, adapting and adopting new technologies and processes, and finding more efficient ways of producing existing goods and services.

This is enhanced productivity—producing better, producing more, and producing at lower cost.  This frees up productive resources—both labour and capital—that can be used elsewhere in the economy.  And, it also frees up personal income that all of us can use to buy additional goods and services.  The end result?  Higher living standards and rising real incomes.  In other words, economic growth.

Thus, it is investment, invention, and innovation that stimulates long-term and long-lasting economic growth.  The concepts of investment, invention, and innovation are closely linked, and this larger package also ties strongly to infrastructure.

Investment:  When governments renew existing capital assets or construct new ones, they are not spending as much as they are investing.  The “expenditure” results in a physical asset that has economic value.  The asset supports private investment.  What good is a factory in the middle of the prairie with no water, no electricity, and no natural gas to run the place?  What good is a factory in the middle of the prairie with no roads, bridges, interchanges, or railways to get the factory’s products to market?  Well, that factory is useless.  So, infrastructure is first of all very much investment as opposed to spending.

Invention:  In Canada, the municipal infrastructure funding challenge has been estimated at some $270 billion, with $123 billion required to fix existing systems and $115 billion required for new infrastructure.  Western Canada’s seven largest cities face a combined infrastructure funding gap of some $42 billion over the next 10 years.  Like the broader economic point above, the infrastructure funding dilemma can also be viewed as an equation with two sides.  The first side is revenue.  How can we pump more money into infrastructure investment?   On the other side lies cost.  How can we invent new technologies and new processes to put the infrastructure down at lower cost?  The sheer size of the infrastructure challenge is crying out for the new idea and the new inventionto lower costs.

Innovation:  To be sure, the line separating invention from innovation is not always clear.  But if we conceive of invention as the new idea, the new technology, or the newproduct, then we can think of innovation as the next step, whether that be adopting the new invention, adapting it to local circumstances, and developing and improving the idea.  In short, “pushing the envelope.”

A look at history shows us that innovation has likely had more impact than the inventionor the “discovery.” While Benjamin Franklin discovered electricity, it was Thomas Edison who put it to use by creating the light bulb.  While Alexander Graham Bell discovered the telephone, it was Motorola that came up with the first hand-held mobile cellular telephone.   The gasoline engine was already a reality well before Henry Ford began building Model-Ts. And while Orville and Wilbur Wright risked life and limb with the first airplane, it was a century of development by the likes of Lockheed-Martin, McDonnell-Douglas, Airbus, Boeing, and Bombardier that gave us the luxury and convenience of the modern jetliner.

The idea, the discovery, and the invention is just a first step.  The larger innovation process takes that idea and continues to work it by developing the idea, improving it, strengthening it, and finding new applications for it.

When it comes to governments and innovation, however, we do run into a problem.  The very concepts of investment, invention, and innovation entail risk.  What if the idea doesn’t come off?  What if the invention doesn’t work?  What if the new innovation blows up?  What if we fail and lose our investment?

In the private sector, the prospect of a reward compensates for the risk.  If one takes the risk, and if one is successful, then one reaps a reward in the form of profit.  This dynamic does not always work in the public sector.  In government, where is the reward for innovation?  It is more elusive.

To make matters worse, the risks are larger.  Not only does government face the prospect of economic risk—the innovation does not work and money is lost—but they also face political risk—failure coupled with discontent, dissatisfaction, and public protest.  For governments, the risks of innovation are a “double-whammy.”   This results in an affinity for the traditional approach, if not outright inertia.

When it comes to innovation in public infrastructure, more thought needs to be given to how the risk-reward function can be made to work better in the government sector.

One solution to get the “I-4” rolling is the “P-3” or the “public-private-partnership.”  Advocates of the P-3 model often argue that it saves money and results in more projects getting completed in less time.  But one of the real strengths is how the P-3 can incorporate innovations in project design, finance, construction, and even operations.  The P-3 facilitates this by “risk transfer.”  The risks inherent in innovation are shared and split between the private and public partner depending on who can better manage that risk and lower the prospect of any failure.  For some, this is the single greatest strength of the P-3 approach.

Another solution is to encompass innovation attempts by using a business model.  Initially, this was the rationale for creating separate departments or utilities distinct from general municipal operations.  Over time, the concept has expanded to include the “public interest corporation.”  These are things like EPCOR and ENMAX, corporate entities that are wholly-owned by the cities of Edmonton and Calgary to provide water, wastewater, and electrical services.  Separation helps innovative efforts by creating a measure of political insulation.

Another idea, and one with which many Canadians are familiar, is the federal or provincial research and development agency or council.  Federally, such bodies include the National Research Council (NRC), which was created in 1916, and the Social Sciences and Humanities Research Council (SSHRC).   Most provinces have similar bodies, designed to fund and promote research and development, and help guide and fund the adoption of new technologies:

• Alberta Research Council (1921)
• Ontario Research Foundation (1928)
• British Columbia Research Council (1944)
• Nova Scotia Research Foundation (1946)
• Saskatchewan Research Council (1947)
• New Brunswick Research and Productivity Council (1962)
• Manitoba Research Council (1963)
• Centre de Researche Industrielle du Quebec (1969)
• Newfoundland and Labrador Research and Development Council (2009)

Provinces have also created additional innovation organizations.  These include the BC Innovation Council, the Alberta Research and Innovation Authority or Alberta Innovates, and the Manitoba Innovation Council.

The purpose of these organizations is clear.  The Manitoba Innovation Council states that “The Council is tasked with developing and implementing an action plan to commercialize innovation and technology projects in the province.”  Alberta Innovates states that “The big idea is just the beginning. Resources can make or break a potential discovery…”

In my view, a strong commitment of this sort can and should be made with the municipal infrastructure challenge clearly in view.  Organizations like Communities of Tomorrow are showing the way, by identifying opportunities, and helping support, fund, develop, adopt, adapt, and apply new technologies and innovation.  And, organizations like Canada West Foundation are working to communicate the results.

There are other options too, such as changing the way federal and provincial grants work.  But, that’s a blog for another day.  To get a sneak preview on what that might entail, you can flip through a Canada West publication entitled New Tools for New Times.

– By Casey VanderPloeg, Senior Policy Analyst