Bold new era: User pay, private infrastructure

If it was not clear before, it should be now: we are entering a new era in Canadian public finance, the age of user pay. Mayor John Tory’s tentative endorsement of Toronto’s first road tolls is one sign. So, on a grander scale, is the proposed new federal infrastructure bank, with which Ottawa hopes to attract $140 billion in private investment in projects offering a “revenue stream,” while “monetizing” existing infrastructure such as waterworks and airports. Both are in line with the government of Ontario’s Infrastructure Ontario agency, set up in 2006 to harness private capital for public works projects.

It will be noticed that none of these governments are led by flaming right wingers. Yet the trend marks a sharp departure from traditional models of government With its proposed federal infrastructure bank, Ottawa hopes to attract $140 billion in private investment to monetize existing public works, such as airports. procurement. Time was, when a government wanted a road or bridge built, it simply went ahead and did it itself, and chalked the bill up to the taxpayers, either current or, if the project was to be financed by debt, future. Private-sector financial involvement was generally limited to the purchase of government bonds. Charging users, likewise, was considered quite beyond the pale, if it was considered at all.

That, indeed, was the model that seemed to be on sale in the past federal election. The Liberals promised tends of billions of new infrastructure investment. That was why, we were told, the Liberals proposed to go into deficit — not to spend, but to invest — which was sold as traditional Keynesian pump-priming, to counter the recession the Liberals insisted we were then in.

At no time was it suggested in any of this that in fact it might not be the government doing the borrowing, or that most of the “investing” would be years in the future. And certainly no one was told the government planned to privatize the nation’s airports, or to start charging users for services they had been accustomed to getting for “free,” i.e. through their taxes.

So I have a shred of sympathy for those critics who are now howling at yet another bit of Liberal deception. On the other hand, well, the whole thing was a bit of a lie, wasn’t it? The recession, the deficit numbers, the notion that most or even much of it was for infrastructure, even by the Liberals’ elastic definition of the word, or that any of this was going to “kick-start” a twotrillion-dollar economy.

And unlike the Liberals’ original plan, this one’s mostly a pretty good idea. Any funds raised by private capital are funds the government does not have to borrow; fees paid by users are revenues that don’t have to be raised from taxpayers. So it’s just a wash, then? What we gain as taxpayers we lose as users? No, because the two are not equivalent. Some things, such as defence and other “public goods,” can be paid for only with taxes — there’s no way to charge users even if one wanted to. But where a thing can be paid for with user fees, it makes sense to do so, rather than use up scarce tax dollars that might have been used to pay for things that only taxes can pay for.

But isn’t it cheaper for governments to borrow than the private sector? Yes, it is. That doesn’t mean governments should finance everything; if so, they could start by picking up my mortgage. If they can’t finance everything, that means they’re financing only some things: effectively subsidizing some investments at the cost of every other. Which is a bad idea for the same reasons as subsidies usually are: at best it’s a zero-sum game, at worst you’re subtracting from the sum of society’s productive resources, disguising costs, encouraging waste and keeping uneconomic projects afloat.

Some projects are riskier than others, as are some borrowers. There’s a cost to risk, as there is to everything, and it’s appropriate that it be reflected in the interest rate (or the equity stake: it’s not a given these will be debtfinanced). And one part of the risk associated with any project is whether users will in fact be willing to pay for it. Again, this is only appropriate: it means the projects that are built are more likely to be ones that people will actually use; that a project must earn a profit means only that its users must put a value on it that is greater than its cost.

I said it was “mostly” a good idea. It would be better, for all of the reasons above, if the bank were wholly privately financed, rather than 80 per cent. And I’m really not keen on including, amongst the “private” capital the government hopes to tap, the public pension funds, including the Canada Pension Plan. Ever since the liberalization of pension rules 20 years ago, Canadian pension funds have been free to invest anywhere they like, around the world. Governments, for their part, are free to raise funds from investors around the world, including other countries’ public pension plans.

With all of these options available to them, why is it necessary that the government of Canada should raise capital from the CPP, of all the places it might look, or that, of all the things the CPP might invest in, it should invest in the government of Canada? Why especially, given the potential for politicization of the CPP this presents? But perhaps I have answered my own question.