Let’s watch our pennies on ‘infrastructure’
IF IT’S POSSIBLE TO PAY FOR INFRASTRUCTURE FROM USER CHARGES, THEN IT’S EQUALLY POSSIBLE TO GET PRIVATE CAPITAL TO FINANCE IT. — COLUMNIST ANDREW COYNE
Once upon a time there were things called roads and bridges. Sometimes they were built by private capital, sometimes by government, but nobody pretended they were more than what they were: services, like any other, useful for getting from one place to another.
But then someone got the idea of calling them infrastructure, and suddenly they were endowed with all sorts of miraculous powers: as short-term economic stimulus, as a longer-term spur to productivity, and beyond. Infrastructure was a jobs policy one day, an environmental policy the next, a national unity policy the day after that.
So I suppose one should be gentle with the first report of the federal Advisory Council on Economic Growth, the group of money managers and corporate executives the Trudeau government assigned to give it an economic policy. It is a product of its time, and it is very much a product of its sponsors.
There is, indeed, much good sense in the council’s initial outing. If Canada is to grow at a faster clip than it has, it will not be from injecting larger and larger doses of deficit-funded demand — the current experiment in something-for-nothingism having failed as spectacularly as past efforts — but from expanding its productive capacity: the supply, in other words.
That will require, first, more labour: hence the council’s call for an increase in annual immigration from 300,000 to 450,000. Second, it will require more capital: hence the council’s call for an aggressive courtship of foreign investment to supplement our meagre domestic savings.
And it will require combining labour and capital in more productive ways: the theme, one hopes, of a promised subsequent report on improving Canada’s “competitive market environment.” For there is no better stimulus to raising productivity than the fear that a competitor will eat your lunch otherwise.
So far so good. It is when the council turns to the subject of infrastructure that things start to go a bit off. The language becomes even denser with management consultant buzzwords, the “studies show” hand-waving more agitated.
Especially alarming is the council’s endorsement of the absurd, economically illiterate concept of an “infrastructure gap” — the difference, supposedly, between the economy’s infrastructure “needs” and how much governments are spending on it. To appreciate how utterly meaningless this is, note that estimates of the “gap” range from $150 billion to $1 trillion.
Well of course they do. You might as well say it’s $10 trillion, since the list of “needs” a province or city might think up is essentially limitless. It’s a wish list, nothing more, with about as much economic relevance as a letter to Santa. In a world of finite resources, it is not enough to say you would like a pony. You have to weigh the return on any given use of funds against their other possible uses.
Economists do not like to speak of the “need” for something, but rather its demand, which is itself only meaningful as a function of price. Is an investment in x worthwhile? Only if its value to society exceeds its cost: that is, if enough people are willing to pay enough for it to cover its costs, including the cost of capital. Some costs, it is true, are hard to capture in price — the dreaded “externalities.” And sometimes it’s impossible even to charge a price: what are known as “public goods.”
But where it’s possible to charge a price, it’s usually good policy: as a test of demand; as an incentive for careful resource use; as a way of reserving scarce tax dollars for things that can only be paid for through taxes. So it’s good news that the council endorses pricing — what it calls “attaching revenue streams” — not only for new projects, but also, potentially, for existing public works.
Of course, if it’s possible to pay for infrastructure from user charges, then it’s equally possible to get private capital to finance it, in anticipation of those lovely “revenue streams.” Here again, the council gets it right: four of five dollars to be invested through its proposed “infrastructure bank” would come (it hopes) from private sources.
The question is: why only 80 per cent? Why not all of it? Large infrastructure projects carry large political risks, to be sure, and governments will need to do what they can to minimize those if they are to attract investors. But wherever public and private funds are commingled, the risk is of another kind — of privatized gains and public losses.
That’s not my major concern, however. For among the private capital sources the council envisages tapping are Canada’s public pension plans. I’ve written often enough of the problems at the Canada Pension Plan Investment Board, but the issue is more general. As a report in last Saturday’s Financial Post made clear, the funds are quite literally out of control, answerable neither to investors (contributions are obligatory), nor regulators (they have none), nor even their proprietors.
The result: a handful of managers in charge of gargantuan concentrations of capital, building empires, taking extravagant risks, buying up half the country. And now we want them to partner up with governments? With all the potential for mutual mischief this entails — taxpayers’ money subsidizing the pension plans, pensioners’ money underwriting governments and three levels of politicians hovering nearby, albeit “at arm’s-length”?
No thanks. If the infrastructure bank wants foreign pension plans to invest, Godspeed. But keep the Canadian funds a thousand miles away from it.