AUCC BRIEF TO FINANCE MINISTER JIM FLAHERTY DECEMBER 2008

AUCC BRIEF TO
FINANCE MINISTER JIM FLAHERTY

              DECEMBER 2008

  Established in 1911, the Association of Universities and
  Colleges of Canada represents 94 Canadian public and
  private not-for-profit universities and university-degree
  level colleges. Our mandate is to foster and promote the
  interests of higher education, both within Canada and
  abroad.

Budget 2009 will be delivered in the midst of a major global economic downtown.

Recognizing this reality, AUCC has prepared this submission which focuses primarily on
the urgent need for economic stimulus that is major in scale and scope, but is time-limited
to ensure that Canada can weather the current economic crisis.

While the OECD predicts Canada will have the third strongest economy of the G-7
nations in 2009, and the strongest in 2010, that strength is relative and profoundly
affected by the strength of other major economies and key trading partners – particularly
the United States. Canada is certainly not immune from the effects of this downturn and
Canadians are understandably worried. In his recent reply to the Speech from the Throne
on November 20, Prime Minister Stephen Harper stated that it is the government’s duty
“to ensure that when a downturn occurs, Canada is last in, least affected and first out.”

A return to sustained economic growth will require both economic stimulus to create jobs
in the short-term and continued focus on the federal government’s commitment to
position Canada to compete with the world’s best. Canada’s universities are ready and
willing to play an important role in stimulating short-term economic activity in their
communities through infrastructure projects. They also look forward to helping to ensure
that Canada will benefit from the longer-term people, knowledge and entrepreneurial
advantages set out in the government’s economic blueprint, Advantage Canada, and its
science and technology strategy, Mobilizing Science & Technology to Canada’s
Advantage.

In a letter to the Prime Minister on October 27, AUCC stressed that the association and
its 94 member universities are committed to working with the federal government, as
well as governments at other levels and our partners in the private and not-for-profit
sectors, to ensure that the conditions are in place for as rapid a return as possible to
sustained growth in the Canadian economy and financial security for individuals, families
and communities. This submission proposes budgetary measures in two areas to help
universities meet this commitment.

Stimulating the economy through investing in university infrastructure

Universities are the generators of approximately one third of Canada’s overall research
effort and the primary training ground for the highly-qualified people who will be key to
Canada’s success in the knowledge economy. The quality of university infrastructure
and its ability to meet modern research, teaching and learning needs provide very
important incentives to retain top Canadian students and researchers and to attract highly-
qualified people from other countries. Keeping highly-qualified people in Canada and
attracting others is crucial to Canada’s competitiveness, capacity to innovate, and overall
quality of life.

At the recent G-20 meeting, the Government of Canada, along with the other
governments of the largest and most advanced economies, committed to “use fiscal
measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining

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a policy framework conducive to fiscal sustainability.” One common element of
discussion in G-20 countries is the role that infrastructure investment can play in
stimulating the economy. In the United States, President-elect Barack Obama has
announced his intention to introduce an economic stimulus package that would see the
single largest new investment in U.S. infrastructure since the creation of that country’s
federal highway system in the 1950s. The President-elect’s infrastructure plan will
include a massive effort to make public buildings more energy-efficient and will launch
the most sweeping initiative to modernize and upgrade school buildings that the U.S. has
ever seen.

In some respects, Canada has a head-start on some other G-20 countries with the creation
of the Building Canada plan in the Budget 2007 and with the government’s commitment
in the recent Economic and Fiscal Statement to expedite the plan to ensure that projects
are delivered as quickly as possible. The statement said that infrastructure investment is
“an example of worthwhile spending” that “creates jobs for today and for the future. It
creates essential links between communities and regions.”

An effective economic stimulus package, and an effective infrastructure initiative as part
of that package, should be timely, targeted to both short- and long-term goals, and
temporary. Investments in university infrastructure can meet all of these criteria.
Moreover, university infrastructure projects enlist skilled workers and professionals in a
wide range of trades and fields including, for example, construction workers, roofers,
plumbers, electricians, engineers, architects to name but a few.

A major portion of the existing campus infrastructure at Canadian universities was
constructed in the 1960s and 1970s or earlier. Not only are these facilities at or near the
end of their projected lifecycles, they often do not adequately meet the needs of today's
research and teaching activities. Like other publicly-funded bodies, universities were
forced during the period of fiscal retrenchment in the 1990s, to devote scarce financial
resources to their core functions. For universities, that meant ensuring access to the
growing number of people seeking a higher education and supporting vital research
activities that contribute to Canada’s current and future economic prospects. Other work,
such as the maintenance and rehabilitation of physical infrastructure, often had to be
deferred. The result was a large and growing university infrastructure deficit.

Since that time, federal and provincial governments have provided funding for facilities
expansion to accommodate increasing enrolments and, in some cases, to begin to address
the facilities maintenance and renewal challenge. Nevertheless, given the scale of the
problem carried over from the 1990s, a major challenge remains and, in the current
economic crisis, is likely to become much worse without an injection of funds. The
Canadian Association of University Business Officers estimates the value of the
infrastructure backlog across Canada as being at least $5 billion, of which close to a half
is estimated to be of an urgent nature.

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To create economic stimulus and help address this university infrastructure deficit,
AUCC recommends a targeted university infrastructure initiative that would
complement but be separate from the Building Canada fund. Projects would be
subject to an assessment process on the basis of agreed criteria. Provincial
governments should be consulted on the design of this university infrastructure
initiative to ensure complementarity between federal and provincial efforts. In
order to provide the maximum short-term economic stimulus, the university
infrastructure initiative should be established in as simple and streamlined a
manner as possible.

Among the criteria that would be considered in the choice of projects would be:
  • Their contribution to short-term job creation;
  • Their contribution to long-term innovation and competitiveness, including, for
     example, providing opportunities and incentives for commercialization, building
     on existing R&D capacities and attracting, producing or retaining talent in
     Canada;
  • How quickly they can be undertaken;
  • Their potential for reducing the university’s energy utilization and costs and its
     environmental footprint thereby contributing to Canada’s energy and
     environmental goals, including research in the areas of environmental science and
     technologies and natural resources and energy; and
  • Their potential for partnerships (whether in terms of funding or as beneficiaries of
     the project) between universities and, for example, provincial or municipal
     governments, the private sector or community organizations.

Federal investments in university infrastructure would create jobs across Canada and
have a positive impact in small and medium-sized centres as well as large urban areas.
AUCC’s member institutions have a physical presence in more than 80 communities
across Canada. There is also little risk that this investment will displace other economic
activity as many university infrastructure needs have gone unfunded for many years and
universities unfortunately do not have the financial flexibility to deal with them
otherwise. Though the benefits of these projects would be long-term and virtually all of
the activity surrounding a university infrastructure program would create new economic
stimulus, the funding for these projects would be temporary in nature, eliminating the risk
of a return to structural deficits over the long term.

The nature of the university infrastructure deficit means that universities can meet the
timeliness criterion for an effective economic stimulus initiative. The need for
investment has been known for some time, and university facilities managers have a
range of projects identified that could be quickly implemented. Many projects that do not
require new construction or significant engineering planning could be commenced
virtually immediately. Other projects requiring more planning could be phased in over
the next six to twelve months. In both cases, the work can lead to sustained employment
and economic activity over the crucial period that we are entering.

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Maintaining Canada’s people and knowledge advantages

The Speech from the Throne recognized that “advances in science and technology are
essential to strengthen the competitiveness of Canada’s economy.” During this current
economic downturn, it is vital that the federal government sustain Canada’s strength in
public sector research and the development of a highly educated workforce. Over the past
decade, Canada has established the foundation required for a strong, domestic research
capacity in universities across the country. In 2007, Canadian universities conducted
more than $10 billion worth of research. That is approximately one third of Canada’s
annual research effort.

The federal government has made major investments in research, including university
research - a key area of strength for Canada relative to other countries. In 2007 alone,
federal investments in university research totaled $2.7 billion. These investments support
the federal research granting councils, the Indirect Costs Program, the Canada
Foundation for Innovation, the Canada Research Chairs Program, and Canada Graduate
Scholarships plus many other programs. The challenge is to make the best use of the
capacity that Canada has created and to maintain and build on that capacity into the
future.

The Indirect Costs Program plays a critical role, as it covers the institutional costs
associated with supporting research excellence: operating and maintaining facilities and
resources; managing the research process; bringing technologies to the marketplace; and
complying with regulations in the areas of health, safety, and ethics. These are costs that
must be covered if research is to proceed and to be fully productive and cost-effective.

At present, the Indirect Costs Program reimburses institutional costs associated with
research funded by the federal granting agencies at an overall rate of 25 percent of the
total eligible direct costs, well short of the minimum institutional rate of 40 percent that
AUCC has consistently argued will be necessary to ensure the excellence and
international competitiveness of this country’s university research effort. The 25 percent
rate of reimbursement falls well short of key competitor jurisdictions, including the US,
the UK and the European Union, where institutional costs are reimbursed at rates ranging
from 50 to 60 cents on each dollar invested in research by government.

Ultimately, internationally competitive levels of reimbursement will be essential if
universities are to avoid having to cover these costs from their existing operating budgets.
When universities have to turn to their operating budgets to subsidize institutional costs
of research not covered by external funders – as is presently the case in Canada’s largest
research-performing universities – their ability to provide students with a high quality
educational experience is compromised. This drain on operating budgets has also
contributed to the deferred maintenance problem discussed in the previous section of this
brief.

Currently, 28 institutions are reimbursed at a rate of less than 40 percent and 23 of these
institutions, which together account for almost 90 percent of granting agency-funded

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research, have reimbursement rates below 30 percent, which will represent a gap of $123
million in 2009-10.

Recognizing the current tight fiscal situation facing the federal government in this
difficult economic period, AUCC urges that the government maintain the overall
reimbursement rate of 25 percent.

This would represent a $21 million increment for 2009-10 and would send an important
signal that Canada remains committed to excellence in university research for the long
term even as it tackles the immediate economic challenges of the present. Such a signal
would help universities retain the talent that Canada has worked so hard to attract and
develop over the last decade.

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