Crawl Across the Ocean

Friday, October 14, 2005

Ignorance is Not Always Bliss

Dear Christopher Hume,

Generally, I am a fan of your column, but I found your recent column on privatization of infrastructure quite disappointing.

The primary trouble is that you are running different concepts together. For example, you say,
"the assistant deputy minister of public infrastructure, Paul Evans, made clear to the visitors from Down Under, Ontario simply doesn't have the money to keep itself in good working order.

Then came James Cowan, managing director of Macquarie Bank, to sing the praises of the private sector.

"We've got our cheque books and we're looking for projects," he told the room."

Here you are suggesting that we face a choice between whether projects will be funded by the government or by the private sector and that, since the private sector has money and the public sector doesn't, we need to turn to the private sector.

But further down, when you say, "Inevitably, we end up paying for services once covered by taxes" you acknowledge that the projects are actually funded by Ontario residents - either through taxes or through service fees (e.g. tolls).

In truth there are two separate issues here:
1) Should infrastructure be funded by taxes or through user fees (tolls)
2) Should the project be 'owned' by the public sector or the private sector. That is, who should receive the profit (and loss) from infrastructure projects.

Your initial concern about who has money to spend, the public sector or the private sector, is actually a red herring. Nobody wants to, or is planning to spend any of their own money. If the private sector is involved they will simply borrow the money (private infrastructure projects generally have a 10-20% equity stake, but even this is borrowed) and there is nothing stopping the government from doing the same thing. Over the long term, as the infrastructure provides benefits, the initial borrowing will be repaid (by taxpayers or users).

Let's sort through your confusion with an example. You say:
"When we finally decide to bury the Gardiner, for example, the private sector can do the work in return for tolls. Once tolls are introduced, we can afford whatever we want."

Do you see how you are confusing the two questions?
Question 1: Pay with tolls or taxes?
Question 2: Profit and loss stays public or is given to the private sector.

You say, the private sector can take the profit and loss, and we can pay with tolls.

Alternatively, the private sector could take the profit or loss and we could pay with taxes (see B.C., Sea-to-Sky Highway for an example of this approach, generally called 'Shadow Tolling').

Alternatively, the public sector could take the profit and loss, and could pay for it with tolls (see B.C., the Coquihalla highway, for an example of this).

Alternatively, the public sector could take the profit or loss and pay for it with taxes.

Your column doesn't really contain an argument in favour of one of these 4 approaches, just a lot of confusion of the different options.

The question of where wealth is located (private vs. public) is irrelevant. The size of Toronto's need for infrastructure is also irrelevant. The British experience with similar deals is relevant, but your statement "by all accounts, the new partnership [in Britain] works well" is inaccurate. I did a 10 second google search for "British experience with public private partnerships". Here is a quote from the number #1 result,
"The case against handing over public health services to the private sector has been strengthened with a British expert strongly warning against them.

Professor Jean Shaoul said the British experience showed that the Public Private Partnerships (PPPs) ended up costing taxpayers more and delivered vastly inferior services to the public.

"Don't touch PPPs with surgical gloves," she said during an Australian visit this week.

Professor Shaoul, who is the professor of accounting and finance at Manchester University in England said that the payments to the private sector ended up much higher than expected in many cases.

In addition the hospitals built by as PPPs were 30 percent smaller because it cost more for the private sector to raise finance than it did for the government.

As an example of the problems that can occur she said the private operators of the 800 bed South Manchester University Hospital refused to move the body of a mental health patient who had died of natural causes because they claimed they were only contracted to care for patients not bodies.

She also re-iterated the concerns raised by the British trade union Unison about poor cleaning standards in hospitals run by the private sector.

The rise of superbugs - infections that were resistant to antibiotics - is being blamed on the decline in cleaning standards."

Or consider the abstract from the paper, "Public private partnerships: lessons from the British approach" published in 'Economic Systems',
"Compared to conventionally financed procurement, the PFI [Private partnership] approach has brought both benefits and costs. The balance of advantage is often unclear, and at the strategic level the main drivers appear still to be ideology and accounting."

I didn't cherry pick these two quotes, they are the first two assessments I found, after 5 minutes of 'research', but it's enough to disprove your claim that the British experience has been a success by all accounts.

One more thing I wanted to say. You mention highway #407 a couple of times in your article, to point out that the privatization/sale of the highway was politically unpopular and to point out that 'experts' (who clearly had never driven acrosss Toronto in their lives) who predicted that people wouldn't want to pay a toll on the #407 were wrong.

However, given that your article is about why we should undertake more similar deals in the future, and that the #407 is one of the only examples of such a deal being done in Ontario, I was surprised that you failed to offer an assessment of how the #407 deal is working out for Ontario. In looking for some historical information on the #407, I came across the minutes of a session of the IPAC Toronto Regional Group, discussing the book, "If You Build It: Business, Government and Ontario's Electronic Toll Highway" by Sandford Borins and Chandran Mylvaganam.

Here are some quotes:
"The authors, in looking back on the deal struck by the Harris government, came to the conclusion that it does not serve the public interest."

From George Davies, President, Acres Management Consulting, and former Deputy Minister of Transportation:
"The privatization of Highway 407 is the worst public policy decision that any provincial government has made in the last 50 years.
Over the next 99 years, the 'right to tax' monopoly position of 407 International will only get stronger and stronger (a license to print money) and this will have a constraining effect on the Ontario economy."

From John Barber, Urban Affairs columnist, The Globe and Mail,
"To this day we are still dealing with these errors that will impede Ontario's economic growth and increase taxes for the public."

If anything, I think the panelists are understating the problems of the 407. Can you imagine if in 1906 the provincial government had given a private company the right to charge whatever the market would bear for people to travel up and down Yonge St. for the next 99 years? That deal would just be ending this year. Remember that the decision in question is who should get the profits from the infrastructure. Well, you can imagine that the profits from having a monopoly on access to one of only two routes across Toronto (for 99 years!) are pretty substantial.

Now, the authors (Borins and Mylvaganam) seem to think that the problem wasn't privatization per se, it was just that particular deal (most deals aren't for 99 years and most put some kind of ceiling on either rates or the potential monopoly profits of the private partner), and they worry that it will make people opposed to privatization in the future, but I think this is a very naive approach. It's a bit like saying, "Yeah it's a shame about that kid who got his leg chewed off swimming in those shark infested waters, but the real tragedy is that now the other kids will all be scared to swim there."

It's true that, in the global history of privatization deals, few (perhaps none) have been as bad as the #407 deal (thanks Mike Harris!) but it's also true that privatization opens up an element of long term 'bad contract risk' that wouldn't otherwise exist. The Harris government made any number of terrible decisions but only one of them will be haunting (and costing) Ontarians until the year 2098.

A final comment. You take a patronizing tone with Ontario citizens a couple of times in your article, saying at one point, "Just don't call it privatization. The mere word is enough to strike fear into the hearts of Ontarians." as if the people of Ontario were simpletons with an irrational fear of the word itself and didn't understand the concepts involved. What's clear to me is that, if anyone is lacking understanding here, it is you. Both you and your readers would be better served if you spent less time on the condescension and more time doing some actual research rather than spouting industry/government talking points.

There is a case to be made in favour of privatization deals - you haven't made it. There is a case to be made against privatization deals - you haven't made that either. All you've done is to ignore our shark bite which is going to take another 93 years to heal, insisting that we should go on back into the water because all those worries about there being an undertow are overstated.

One of the biggest drags on the prosperity of Ontario looking forward is the #407 millstone. Your column serves only to increase the likelihood of more millstones being placed around our necks. We need better reporting.

Declan Dunne.

(hat tip: Sinister Thoughts)


  • Here is the URL of an article that explains, fairly simply, how economics works and why tax cuts don't increase anyone's buying power. I recommend it.

    By Anonymous Kim, at 11:44 AM  

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