Avoiding collapse; Privatization Is The Only Way To Come Up With The Billions Needed To Save Our Deteriorating Infrastructure
Financial Post - August 22, 2007
Hugh D. Segal
A Minneapolis bridge collapses and a fresh debate on infrastructure inevitably ensues, and rightly so. But the core question beyond 'how old are the roads and bridges,' and 'how much more can we afford in order to correct or replace this infrastructure,' may be a diversion from the more substantial public policy question. With North America facing pressures to spend more on healthcare, security, education and welfare; with public resistance to tax increases both real and focused; is it practical to expect pure tax dollars to be the single source of infrastructure refurbishment and investment?
Or, in more precise terms, are we sure that government is the best and most trustworthy source of infrastructure cash in the future? Determining the causes and conclusions regarding Minneapolis will take time. But the questions regarding infrastructure across North America have just begun.
It may come as a surprise to many but when one travels on the new roads and bridges in France, or large parts of Greece and Spain -- all countries with a universal health care system and relatively supple social safety nets -- financing and operational management of many of these roads and bridges is private and small, ubiquitous tolls are everywhere.
Tax systems generally encourage capital spending by private enterprise, and allow for constructive depreciation allowances that can help free cash flow, along with capital-cost write-offs. This establishes a positive dynamic between the operational finances and balance sheet of the private concern, thereby encouraging more investment. The many large public pension plans investing in infrastructure projects indicates how positive this dynamic can be. Private concerns in Europe consider roads and bridges as solid and dependable yield investments.
On the other hand, a direct government investment in infrastructure is a 100% expenditure of dollars that could be used elsewhere -- in schools, hospitals or policing. Those dollars, the ones allotted to infrastructure, have to be rationed by definition if taxes are not to rise to the point of crushing investment, growth and quality of life. The same is true for investment in new technologies that can enhance future infrastructure construction and design. And, it goes without saying, as we have seen in Quebec and perhaps in the recent U.S. bridge collapse, that governments are by no means the best able to manage all infrastructure projects in the ultimate public interest. Any monopoly constrains achieving value and quality through the competitive process. A government monopoly is simply no different -- neither worse nor better than monopolies elsewhere.
That European and Asian countries should be ahead of us on this is no surprise. Their respective post-war rebuild challenges were far more daunting than ours -- and innovation and flexibility made immense sense to them at the point of rebuild. In exactly the same way, doing things the way we always did seemed logical to leaders in the post-war years in North America . Rents and taxes from resources and expanding economies in North America were rising extensively, and the social safety nets were being expanded. So it is not surprising that tax dollars had and continue to be the staple of infrastructure funding.
But Minneapolis may well be a tragic example, though the cause is yet unknown, of tax-dollar rationing. The consequences of a 40-year-old bridge, considered "structurally deficient" by engineers, yet not due for replacement until 2020, has resulted in great momentum to inspect and ensure the safety of bridges in Canada , as well as in our southern neighbours. If billions in repairs or replacements are needed, from which other pot do we pinch in order to finance this undertaking -- defence, health, balancing the budget, paying down the debt?
As one travels through Europe paying modest tolls on highways and bridges and on entering larger cities, and drives by the privately owned water towers and private generating companies that serve community needs, it becomes apparent that even European social democracies have thought through the capital-use and allocation balance that produces sane public finance, market opportunities for private players, and reasonable pay-as-you-go tolls for the traveling European and commercial public. I find it hard to believe that we cannot consider some similar policy options here in Canada . Or that all big cities must own and manage all the core infrastructure they depend upon and must refurbish going forward.
When the federal government under Prime Minister Jean Chrétien decided not to privatize airports -- but put their operation in the hands of hybrid cooperative community-owned not-for-profits -- what is clear, in some circumstances, is that construction costs shot through the roof and costs soared. Toronto 's Pearson International is now the most expensive in terms of landing fees in the world. A small sandwich costs $9. The walks are endless, the construction budget seriously exceeded initial estimates, and if the consumer of the service was figured in its design, well, it is hard to tell where.
Mixed ownership or amorphous not-for-profit structures may be as unhelpful as purely publicly owned structures in the infrastructure business. What is clear is that government must move beyond the rhetoric of the public-private partnership and the all-public monopoly. Private-sector disciplines should be allowed to help. Government can set the rules, regulate, even ultimately own, but constructing, financing, managing and operating may simply be the worse use of government skill sets and financial assets.
Suggesting we move toward privately financed and operated infrastructure will strike some as an ideological tilt; reality and the competition for public funds may well argue that it is the only rational policy choice.
Hugh D. Segal is a senior fellow at the Queens School of Policy Studies and an Ontario Senator.