Guess who will pay for Ottawa's infrastructure scheme... who else?: Neil Macdonald
The government has reportedly been promising big investors a dream: lots of return, not much risk
Bill Morneau, our federal finance minister, tells us the government's dodgy-sounding scheme to let private investors build and manage public infrastructure is a "win-win-win," as though such a thing exists.
That is, presumably, a win for investors, a win for taxpayers and a win for the government.
He says all this with the bland smile of patient tolerance Liberal ministers learn to wear in their centrally controlled messaging lessons.
Anyway, he must feel a bit of a fool. He's from Bay Street, and must know that in business, somebody usually gets the better end of a deal, and generally, the great white sharks of the business world — the huge institutional investors he's hoping will relieve the government of a traditional responsibility — eat very well indeed.
Understanding the infrastructure scheme
Pretty clearly, Morneau and his masters in the PMO don't want people understanding the infrastructure scheme too well. So far, it's been rather vaguely explained, something his own staff have complained about.
The official version is that the government tosses in some money, then investors arrive and jump in with an awful lot more money, enough to build roads and bridges and electrical grids and train lines and waterways and who knows, maybe even new hospitals and airports, and things will get done that simply wouldn't happen otherwise, and Canadians will have a sparkling new public square without the tiresome, conventional pain of paying for it.
Quietly, meanwhile, the government has reportedly been promising big investors a dream: lots of return, not much risk.
- Morneau's department struggled with infrastructure bank messaging too
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According to information in documents obtained by the Canadian Press, the government is promising a healthy, guaranteed "revenue stream" for years. The exact return is not specified, but such investors tend to demand between 10 and 20 per cent – "equity-like return and bond-like risk," as the Wall Street aphorism so neatly puts it.
Best of all for the investors, according to the documents, the government is suggesting it might even chip in some extra cash to pad investors' returns. It's a path to heaven with no alternate route to hell.
And guess who will pay for all this? The cheery fog exhaled by Morneau and his fellow cabinet ministers isn't very specific about that, but there is ultimately only one bill-payer, and we all know who he, or she, is.
So. Two years after the bank was announced, here's where we are:
The federal government has so far set aside $35 billion for infrastructure, $20 billion of which is meant as seed money for massive construction projects in which private investors supply the vast majority of capital. Ottawa expects municipalities and provinces to come up with another $20 billion each. Government documents suggest that the goal is to raise about $240 billion from investors over the next 12 years, for a total of $300 billion in spending.
But how the government arrived at that figure is a mystery. There has been no methodical assessment of what we need. Other countries have done that sort of homework. We haven't.
Assessing Canada's needs
The government's own Economic Advisory Council complained about this lack of data, and finally just resorted to citing estimates between $150 billion and $1 trillion. That's quite a margin. Another authoritative study, the McKinsey Report, has said there's no need at all for additional infrastructure spending in Canada.
"Meaning we don't have a clue," says an assessment by Azfar Ali Khan and Randall Bartlett, economists at the University of Ottawa's Institute for Fiscal Studies and Democracy. "We don't even know what and where the investment needs are."
In any case, there are precisely no projects under way. At least none that we know of. So far, apparently, it's been a confidential, informal courtship of big-money investors — a dance with tightfisted, powerful people, all looking for the sweetest deal possible.
(Let's not forget, as well, that cabinet decides whether any particular project goes ahead, which means political approval, which means projects would need to satisfy the electoral needs of powerful ministers, meaning they would have to benefit their regions or ridings. Further, politicians love to unveil things and cut ribbons, meaning they tend to want new construction, the riskier "greenfield" projects, rather than improvement of existing infrastructure, known as "brownfield," which is often more cost-efficient, but, like the colour brown itself, is rather boring.)
Still, the bait has been set out: the prospect of harvesting fat profits from tolls on roads and bridges, creative user fees on electrical grids and waterways, higher passenger costs, surcharges, and all the other forms of taxation that aren't called taxes.
Bartlett calls the entire infrastructure bank scheme "a subsidy by another name."
Anyway, if the federal government has to offer such guarantees, why not just build roads and other public works the way it's always been done – appropriate money, hire contractors and build?
That question is much more easily answered. The Liberals are already committed to many more years of deficits to finance their existing overspending. That borrowing adds significantly to debt and crowds out other spending, and at some point will almost certainly require tax hikes; debt servicing is going to be one of government's biggest costs in coming years, especially with rising interest rates.
Paying for hundreds of billions of new construction projects on top of that is just not politically feasible. It's much easier and far more politically palatable to bring in the private sector and let it finance the projects, and of course collect the price from Canadians separately.
The dismal political reality, says a strategist friend who circulates in rarefied Ottawa air, is that the Trudeau government is simply not going to cut spending elsewhere or borrow even more money to pay for big infrastructure projects. Or raise income tax or the HST. They'd prefer to be re-elected.
Tolls and other fees — taxes — imposed on some future prime minister's watch are a much happier option.
Ottawa also appears to understand that Canadian municipalities and provinces have a habit of bringing big projects in late, over budget, and, depending on the province, shot through with corruption. Private, for-profit management may – may – offer better performance. That argument is perhaps the most persuasive.
Anyway, I've decided I want in. Having reached a certain age, I am terrified by financial risk. I need certainty and return in my dotage.
If I liquidate everything, I can literally come up with thousands of dollars.