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History Table of Contents
1995 Winter Conference
 
Winter Conference 1995
The Changing Economy and Knowledge-Based Services:
How Will Canada Succeed?

Public-Private Partnerships

ANDREW COYNE, Columnist, The Globe and Mail

When we talk of public-private partnerships, I suppose we're looking at that in two directions.

One is the degree to which the private sector is being brought into what were traditionally public sector realms. I'll deal with that first

The other involves extending the public sector into market private sector realms, which is more the industrial strategy aspect of it

To the degree that people have been trying to redefine the state's role in the last few years, it's sometimes put in very apocalyptic terms: either the government or no government

I don't think that's what’s going on.

I think it's simply a point of trying to make a more focused definition of the state's role that in the great expansion of government in the last century, it's just possible we overreached ourselves.

It's just possible that not everything that government is doing it needs to be doing and that the criteria should be: does government need to do it; not, has it recently done so.

In other words, we should escape from the tyranny of the status quo.

What we've been finding in a lot of areas is that it's not a matter of simply abandoning government's role, but of more sharply defining it; of extracting from a particular policy issue what are the public sector aspects of it and what are the private sector aspects.

With regards to infrastructure — to the networks of communications and transportation and energy and financial linkups that bind the country's economy together — we have been trying to separate the monopolistic — or public good aspect; that is, the public good in the sense of things you can't charge a price for and that, therefore, has to be tax financed.

We've been separating those monopolistic public good aspects from the aspects of it that are still competitive, or could be competitive.

For example, separating out the competitive generation of electricity from the more monopolistic aspects to deal with the transmission and distribution of electricity. Or, separating out the signals that travel across phone wires from the actual network

In bringing private participation into these areas, there are of course several ways in which that can be done.

The least ambitious level is simply a matter of contracting out, of opening things to competitive tender, where you're still publicly-financing in whole or in part the project, but you're involving private provision of it

It could mean simply charging user fees for things which were previously unpriced. It can mean using vouchers allowing people benefits in cash, rather than in kind — giving them the cash or the voucher with which to purchase from comparative providers what were previously monopolistically provided public services.

It could simply mean opening up what was previously a state monopoly to competition. For example allowing other people to carry the mail than just Canada Post. Or, it could mean full-blown privatization.

Public-private partnerships as they've been traditionally conceived so far anyway in the infrastructure areas are somewhere between contracting out and privatization.

I think they have tended to be a very clumsy and unsatisfying halfway house —neither fish, nor fowl.

That is to say, ostensibly, they tend to have the appearance of a kind of privatization and, yet there's still a kind of public underpinning to it, whether in the form of either an equity participation in it, or explicit subsidy — both of those in the example of Hybernia — or the more subtle form of debt guarantees.

I don't want to completely negate the idea of a kind of partnership between the public and the private sectors.

Indeed, you could say the government is a 50 per cent equity partner in every company in the country through the workings of the income tax system. The government shares in the losses and shares in the profits.

There's actually a fairly well worked out area of economic literature that deals with the degree to which that improves risk taking, etc. in the economy.

But what you have to ask is, given that, why should the government be selecting particular projects, particular industries to give an extra element of public participation in?

Why should it be focusing on particular projects, rather than others?

My take on the public-private partnerships, as they've traditionally been seen, is clear: I’m all in favour of them, just so long as you can keep the public part out of it, Too often, it works out to being a public risk for private profit.

We've seen that time and time again, where virtually all of the up front capital costs of the project in one way or another, the taxpayer's on the hook for it — whether we're looking at Hybernia, at Skydome, or the fixed-link project in Prince Edward Island.

What are the arguments for that?

One argument is that it will actually work out to be cheaper if there's a government debt guarantee underpinning these things, because the public sector can borrow at a cheaper rate than the private sector.

This seems to me to be a distortion of the rationale for bringing the private sector in.

It also seems to me a false economy to say we're going to borrow at a lower rate than would otherwise attract capital to a project. (That) is a kind of implicit subsidy the government is providing.

The case for markets and the case for economic efficiency is based on the idea that the prices of things cover their cost — that people are paying the full cost of the resources they use.

One of those costs is the opportunity cost. That is to say the cost — the foregone profits and returns from investing in one project versus all the other projects that it might have been invested in.

That's why economists insist that built into the cost structure should be the notion of a kind of normal return; some kind of risk-adjusted rate of return that would be attainable in other alternate uses of that capital.

When you are borrowing at a rate that is lower than the rate that investors would demand to invest in other projects, you are attracting capital into that public-private partnership that would otherwise not have gone there.

Essentially, the whole rationale of putting the public money into it is that if you weren't able to borrow at that artificially low rate investors wouldn't go near it So, it's a kind of distortion of the capital market, even if it's subtler than usual.

We should make a distinction between the idea of saving money to the taxpayer-, as valid and as important as that usually is.

There's a distinction between that and the overall social costs of a particular allocation of resources.

It's not always the case that simply by making things cheaper that you're going to make them better. If people aren't fully paying the cost of things, it is a false economy.

A second argument made for public participation is that the project wouldn't get built if we didn't get involved and, therefore, we had to have the debt guarantee, we had to have the subsidy, we had to have the equity participation. The short answer to that is some projects shouldn't be built

There's such a thing as too much risk. This came up all the time, for example, with Hybernia.

You have to look at both the risks and returns for a project. If the expected returns from the project are not worth the risk of the project you shouldn't go ahead.

That said, the notion of risk itself — the riskiness of it — is irrelevant to the case for subsidies.

The only reason people bring up the riskiness of it is to try and fudge that kind of remorseless logic of those two statements.

It's clear that if it is economic it shouldn't get the subsidy, or it doesn't need the subsidy. If It's not economic it shouldn't get it. But if it's risky, it's somewhere in the middle and people can't get a handle on exactly what the implications are.

It's also irrelevant whether or not you can point to it, after the fact, and say, well, the project succeeded with the subsidy.

First of all, of course, what does succeeded mean?

If all that it means is that with the subsidy the private investors were able to get sufficient return and make them happy, that's not my definition of success.

They haven't actually earned a genuine economic profit, they've earned a kind of accounting profit with the help of the taxpayer.

The point that makes a profit useful to society — the point that indeed almost makes it a social obligation — is where you're actually offering a product or a service whose value to society is measured by the price people are willing to pay for it exceeds the cost to society measured by the cost of the inputs that went into it

If the profit is not that kind of genuine profit, but just turned into a profit by the subsidy — then you're actually misallocating society's resources.

Second, of course, if the project succeeds in the sense of actually making a profit in the long term — well it bloody well ought to with the extra leg over its competitors.

It's not exactly a very stirring statement to say that with the help of a billion dollars in taxpayers money we were able to turn a profit over 10 years.

Third, you have to look at these things in terms of their rationale expectations of the project in advance, not 20-20 hindsight

The fact that you win the lottery does not make buying lottery tickets a very good investment You have to look at it going into the investment, not coming out of it

The other argument made in terms of these public-private partnerships, with things like Highway 407, is that this will enable us to carry forward public projects without incurring a debt on the public books.

That can be a valid criterion if the project is indeed self-sustaining; if it lives or dies according to whether or not it's able to turn a profit, whether or not you're able to attract investors to put money into it in the expectation that the users of that service are going to be willing to pay for it in sufficient quantities.

But if it still has the benefit of some kind of debt guarantee, if the taxpayer is ultimately on the hook if the project fails, or even if it's simply a political imperative that there's just simply no way in which it will be allowed to fail, then it's a shell game.

You are actually incurring debt which really ought to be on the public books and you've found a way to shuffle it off.

Highway 407 had the potential to be the kind I'm talking about, where it actually could be partly financed, private risk, toll— financed, etc. but because they provide the debt guarantee I think they forfeited and lost that opportunity.

Indeed, before they'd even gone ahead with Highway 407 they should have looked at the potential to put tolls on existing roads.

They might have found that if you made people pay for scarce road space, if you stopped giving away that resource for free, that the congestion and the delays and all the arguments that were in favour of building this new road might disappear.

In other words, if you want to get a really good fix on your use of road resources you ought to have them all priced, not just the new ones.

Let me quickly deal with the industrial strategy argument These are as old as the hills, of course. The public-private partnership idea is a simply a new twist on it

It comes down to I suppose three points:

One is it's unnecessary. If you're able to plan very well, all your simply doing is mimicking what the market should be doing anyway.

Suppose you make a good guess with your public resources has to what consumers want, all you're doing is doing exactly what private entrepreneurs do every day.

Second, it's a zero sum game.

The profits and the jobs that are won in the industry or the company that you subsidize are the profits and the jobs that are taken from every other industry and company in the economy, whether through lost market share, through diverted capital, through the higher taxes or higher interest rates that they have to pay.

Nothing comes free. The gain in that one sector comes at a loss from the other and its a zero sum gain at best

Lastly, it's generally rooted in a misunderstanding of the nature of an economy.

Usually when people advocate industrial strategies they have a fixed idea about what an economy is supposed to be producing.

There are certain sectors — which are good sectors and we should be promoting them, because they're just naturally good and high-tech has a wonderful appeal that way.

I suppose I could close by saying economists, when it comes to these questions, are relativists, as opposed to absolutists.