I believe that effective private-public partnerships are necessary and they're inevitable.
I'll give you three reasons why.
They're probably the only way in the short term, which is going to be critical for us, to keep the ownership of our new infrastructure and a lot of our existing infrastructure in Canadian hands.
And it may be the only way to keep the very capable people we've got employed managing and operating that infrastructure employed.
Second, I think effectively done they will deliver the best value to the taxpayer that means they'll deliver the service to the taxpayer effectively at the lowest cost
Third, they will accomplish and this is an ancillary benefit, not a raison d'etre they will accomplish what the program suggests.
If you want more SNC Lavalins and more Northern Telecom's and I can give some more examples this method has a benefit of taking an existing expertise, remoulding it to meet new markets and then putting us in a position to export, which raises our standard of living and employment levels.
We're not picking winners, we're allowing existing winners the time and the atmosphere to recreate themselves.
I think really in the short run you may have a choice: you either own your own infrastructure and export that expertise elsewhere, or you can sell off that infrastructure to foreign interests, and import their expertise.
You're going to pay a premium for the privilege of doing that
I want to give you a few points on each reason, but I want to start with a key assumption: I'm not arguing this, I'm assuming it
Governments are going to be doing larger, more complex privatization projects with respect to their infrastructure as its conventionally defined. And they're going to be doing these deals with the private sector.
They have to. As we know, they're up against a credit crunch.
I think there's a recognition there's an emerging ideology that the private sector can add innovation and efficiency to what the governments have been doing in the past
I also think there's a bit of demographic swing, as people get older, they have less confidence in government's ability to deliver.
So, the only question that I'm going to try and answer is, as we do that, as we go through that process, should the government be a partner in it, or should they just stay out, as Andrew suggests?
My number one reason is keeping the ownership in Canada and maintaining our existing expertise.
Everybody knows we have in Canada great expertise to operate water treatment plants, to operate airports, to operate jails, dumps, whatever it's going to be.
The problem that we have is that our expertise is right now in the public sector. That's just how we've set ourselves up for the last 20 or 30 years.
The Americans, the British, the French have exactly the same expertise. They've already gone through the process of putting that expertise into the private sector.
If the Region of Halton wants to completely privatize its water treatment facilities or delivery facilities they can have those people up here immediately. They'll be here in a jiffy.
They'll be better organized, they'll be efficient, they're ready to go.
But, we're not ready.
If we do that (bring in outside expertise) we're going to lose that expertise we have. We'll be importing it and when it's gone from us it will be gone for good.
We'll man the pumps and keep the night shift, but the money is going to be made back in New Jersey and the management and expertise is going to be a proprietary property held back in New Jersey.
I don't want to sound like some kind of neo-Walter Gordon, but I don't think it's good public policy to take an existing expertise, to trash it, import the same foreign expertise, when really it's quite easy to restructure what you've got here and turn it into an asset that we can export
As I said, you keep the ownership here.
The same goes for financing. Our financing people here are great at government debt financing. They don't have a great deal of experience in financing water treatment centres or in financing the 407.
If you want to have these projects privately financed right now, you're going to have to get it brought in from elsewhere. If you're not going to have any government guarantees, then you're going to pay a premium.
That leads directly to point number two.
Private-public partnerships in the short term are going to deliver you the best value at your lowest cost
They're going to be the best service for the taxpayer and the person who is purchasing, whatever it is the user fee at the airport or the water, the sewage treatment, or the toll on bridge.
The reason is if you go out now for a build-own-operate tender on a toll road and you don't have the financing guarantees you're not going to get any Canadians to respond.
You're going to get some foreign financing expertise in here and you're going to pay a whacking big premium for it.
But if you organize yourself properly and I'm really talking about a transitional period here you put the public and private sector Canadians together and have a government guarantee, you will minimize you're financing costs.
I suppose the best example I can give is, if you buy a house and your mortgage is over 20 years you pay for four times the price of the house.
If you can keep your financing costs down you're going to get a big saving.
Second, you're going to get the transfer of expertise to the private sector from the public sector. You're going to have a transitional period, but your not going to have all the dislocation and retraining of all those people that you're throwing out of work.
And third, you just have to trust me on this, the private sector expertise and innovation and all the things we say we're much better at than government should also lead to a big saving.
If you can combine all those three together effectively, you're going to get the lowest cost
Mr. Coyne, I think, is right when he talks about it in theory, but in Canada we're not just ready for it yet We have to get ourselves ready for it. The only choice is to import it at a premium.
We can do it here without paying the premium if we're careful.
Public-private partnerships done effectively create companies like SNC Lavalin.
Nobody can deny SNC Lavalin is a great Canadian success that does about 70 per cent of its work around the world and we're importing our standard of living by exporting our services. I think that's what you want to do.
I know the 407 consortium are now going all over the world, competing and selling that expertise. That's a good thing.
Let me cite a controversial example the Pearson Airport deal.
I don't want to get into the merits of that particular deal,. I will tell that if that had been done properly what we would have created there would have been a great exportable expertise and it would have been good for everybody.
It would have been the result of a private-public partnership.
In Ontario there's a Crown corporation called the Ontario Clean Water Agency. you can do the same thing with them.
Give them a method and a transition into the private sector we don't have any private water treatment operators.
You can move it over by the means of a partnership and you've done everybody in the country a lot of good and you've kept your costs down.
Those are my main points of defence.
Just to show I'm a gutsy guy I'm prepared to defend the Skydome deal as a model for private-public partnership.
We can come back to Skydome in a minute, because there's gutsy and then there's marching into the machine gun fire.
I want to deal with the broad brush of my opponent's arguments.
In particular, I want to address his nationalist argument, which of course has been a traditional argument on a lot of issues in Canada largely to our detriment
First of all, if you moved the expertise out of the public sector into the private sector it does not necessarily follow that this will always and inevitably be snapped up by foreigners.
Believe it or not there actually is a fair amount of investment capital in this country. We are a fairly wealthy, large, prosperous country with a lot of capital looking for places to invest itself.
Second of all, if you wanted to keep it in Canadian hands It doesn't follow that you have to do it through public-private partnerships.
One of the things which we've had as a policy instrument, rightly or wrongly for years and years, are simply ownership requirements.
That is foreign can't own larger than X percentage of a company, or larger than X percentage of its voting rights or what have you. So, you can enforce it if you want to.
Third, I'm not sure why exactly we want to.
We have made a fetish out of saying, isn't it terrible, why would Canadians want to fly, on an American plane in Canada?
Well, you might well ask, why would Canadians want to buy Japanese electronic goods?
If people can produce things better at lower costs it profits us to allow them do so and to focus on things that we can do better.
Every country has by definition its areas of competitive advantage. It's never the case that a country can't do anything for itself: it's a question of specialization.
We would be an immensely poorer country if we had to make everything for ourselves.
If we had to be selfsufficient in TVs, in computers and everything else, we wouldn't be able to focus on the things that we can do best and export to the world.
Mostly the reason why we have focused on that, is again, I think is the tyranny of the status quo.
Airlines have always been in Canadian hands, therefore they always must be.
If, for example, we did allow Americans and other foreigners to carry people from point to point within Canada we'd probably have much cheaper flights in this country.
The money people saved from those cheaper flights they'd be able to spend on other things.
So, I think we have to keep our eye on the ball, but what's the actual long-term objective that we're faced with?
On the national ownership question, I think we have to ask why do people sell to a domestic person or to a foreigner?
The transaction's only going to take place if the price they're offering is worth the capitalized value of the long-term stream of returns they expect from that investment
And both sides have got to be happy with that transaction.
If they're not offering enough, then people aren't going to sell. They're going to keep the assets and they're going to maximize the return for themselves.
If they do offer them sufficient return, I don't see any reason why we should prevent those people from being able to sell that asset to the highest bidder.
The money doesn't go into a mattress. They take the money and they invest it in something else.
Expertise and money doesn't just get destroyed. It's gets moved around to alternate uses.
So, I'm not sure what the added premium my opponent was arguing was going to be the great cost of allowing foreign private capital into these areas.
On the nationalist question, you more and more have to ask the question that Robert Wright ,now with the U.S. Department of Labour, asked in a very famous article: "who is us?"
Northern Telecom was mentioned. Northern Telecom has most of its sales, most of its workforce in the United States.
Is it a Canadian company? Is it an American company?
A difficult definition, no question. A lot of products are made now with components from around the world.
Is that an American car or is it a Japanese car?
Well, it's not very easily defined.
The company I work for Thomson is effectively an American company. And yet it's sort of nominally Canadian, so people don't get up in arms about the fact that an American firm owns The Globe and Mail.
But it seems to me a very arbitrary definition.
That would be my objections to the nationalist argument
I'm concerned with the narrowness of some of the views that were stated. Would you like to address participation of government on broader scale how would you see government participation to 8 greater degree?
Coyne: Government should only do what only government can do.
That we don't start from the standpoint that the state will do everything and we'll carve out from that what will allow the private sector to do.
We start, rather, from the standpoint that a free people delegates only those things to government that it can't otherwise do for themselves. Well, what are those things?
Well, the government has to provide public good, i.e. things that you can't change a price for and which therefore private providers won't offer.
Obviously there's a role for government in things like that, policing and things like that, enforcing contracts, these kind of things where the market fails.
But that's a question of supplementing the market, not replacing it
A lot of the other things you're talking about in terms of helping start up firms, I think you're making a very strong argument for capital markets.
That's what capital markets do.
The fact that company X can't get capital to start up is not an argument for market failure on its own. You have to look at whether or not the process that was involved the signalling process that prices provide has somehow broken down and most times when you look at you find it hasn't
People talk about there being a shortage of capital for small businesses in this country.
There's no shortage of capital for small businesses in this country; there's a shortage of useful, promising small business opportunities.
There's lots of small businesses out there that frankly should not get capital. They are poorly planned, they don't have a very good idea, the product is not going to sell, etc.
Yet, if you look at it from the standpoint that everybody who asks for capital should get, then you say well that was a market failure.
I appreciate your point, but more in discussing the knowledge-based economy, but we're still talking about pouring concrete.
Id say the whole economy is a knowledge-based economy and always has been.
A' that's happened is that the component of the value of a product it may be have been 80 percent material and 20 per cent knowledge before is shifting toward 80 per cent knowledge and 20 per cent material.
Those are arbitrary numbers, but my point is it's questions of degree and of scale and not of abrupt shift as it is sometimes portrayed.
Smith: Government should only do what they can do, but one of the things that they can do as long as they are a sovereign government is provide a mechanism and an atmosphere for the services that are now in one area to be transferred to the other area. It's a public policy issue, but they have a responsibility to do that That's why these things are going to happen.
One of the concerns I have relates to something that Geoff raised and that is in a world where there isn't a level playing field, where other governments interfere with markets, where sometimes it's very difficult for Canadian companies attempting to gain access to a market to satisfy various local or state content rules, should we not be trying to help our own industry and centres of expertise through the kinds of mechanisms that Geoff is talking about transitional as they may be to deal with the fact that we don't five in a world where we do have a perfect market?
Coyne: This is the age old reciprocity argument
It didn't work when it comes to tariffs and I don't think it works when it comes to subsidies either.
The idea that free trade had to be reciprocal to be of value was never actually the argument ever made by anybody whose ever made the case for free trade.
It's always ever only been made by the people who are opposed to free trade.
The people who worked out the theory as to why free trade would be beneficial to a country, is expressed solely in what that country does with its own tariffs and trade barriers. It worked out through foreign competition that you're driven to specialize in the things you can have a comparative advantage in.
The fact that other countries subsidize a particular industry shouldn't mean that we should subsidize it as well.
First of all, thats predicated on the idea that it's a necessity that we succeed in that particular industry.
Aerospace, for example, people say well is Canada not going to have an aerospace industry?
Well, maybe it won't
Maybe we'll do other things.
There's no God-given tablet of stone that says that Canada must have an aerospace industry.
And particularly it almost makes the case even stronger if there are bigger, richer countries out there that are going to pour in billions and billions of dollars because they do have a fetish for aerospace, I don't think we should join them in that bizarre obsession.
We don't have deep enough pockets to begin with, but we could more profitably use our resources in other areas where we're not going to face that kind of distortion.
Obviously, we live in a world of second best, we don't live a world of perfect markets but it doesn't actually work out that you benefit by aping them in their insanitys.
We always have to look at the opportunity costs; the money that we use to subsidize that industry, because we're bound and determined that we're going to be in the aerospace industry is the private capital or public capital for that matter that is denied to every other industry.
So, we're sacrificing them very directly even though it's not visible you don't see it up front as much as you see a DeHavilland plant closing. But in a very tangible and real we are sacrificing jobs and growth in all those other industries.
And the ultimate subsidy of all these things, of course, is the exchange rate.
Even if every industry in every country were subsidized to the max we could still compete because if we couldn't compete at 70 cents, we'd be able to compete at 65 cents.
So, the unspoken thing behind a lot of these things even you convince people we shouldn't subsidize industry A is that people will have in the back of their mind, well what if they subsidize all those industries then Canada wouldn't be able to produce anything.
The exchange rate is the knife edge that guarantees that you'll be able to compete in something and the something ought to be things that you don't actually have to pour billions of dollars in tax into to keep alive.
I should make one last point
Obviously, the beet of all solutions is if you can impose some kind of multilateral disciplines on that to prevent having to live in a world of second best; if you can get every country to agree to discipline itself not to put those subsidies on, then you've got a better crack at getting to the first best. But, failing that, I think it's a mugs game to try and keep pace with them.
We did it with the farmers, for example. We said we've got to pour billions of dollars into supporting the farm sector not because we want to do this in the long term but just to keep them in the game, while these other countries are subsidizing their farmers to the hilt
We did that as a long run goal, so that through the multilateral negotiations we could reduce the subsidies.
While we did that, we poured billions of dollars into it We went through the GAU round for six or seven years and at the end of that process we reduced subsidies by what 30 per cent
At that point it seems to me you really have to ask, was the return on the investment worth it? Was it worth putting all those billions of dollars into farm subsidies to get that rather modest reduction in the long term subsidy rate?
Secondly, with the game now being effectively over with the GATT round completed and no new one looming very soon maybe now is the time to start unilaterally dismantling farm subsidies.
Smith: I agree with much of you've just said. Where we don't have the expertise or where we don't need the expertise, obviously, that's right
Where we do have expertise and its good expertise and where the expertise takes up really a significant part of our society and our GNP and where the costs of transforming that expertise or moving it over to where it should be is very low meaning that where the cost of so-called subsidy is almost a minimum then I'm saying it's a good idea and it's probably worth it for society to pay it
You can measure this stuff. You can say what is the dislocation cost to society of having these people tossed out if we don't go through the transformation period, versus the cost of the subsidy that we're giving them to allow them to make the transformation and then make your own decision.
But don't forget there are costs on the other side of the ledger, too, while Canada gears itself up to meet the market forces that Mr. Coyne is championing.
It seems to me that the debate today is a little bit extreme. Governments, for example, always invested in infrastructure. The question you might want to focus an is what infrastructure should be invested in, in the future? There may be some interesting questions around the issues of culture, communications and public access to that?
Coyne: The fact that government has always invested in infrastructure isn't an argument that it should continue to do so in the future.
It should do so where there's a genuine market failure argument, but when you see things like roads, etc. where you can actually charge a price to the users that's sufficient to cover the cost of construction of it, then I think there's a real question as to why exactly there should be a publicly-financed role in it
There's obviously going to be a regulatory role to make sure the roads go places that are going to be co-ordinated with other infrastructure, etc. but I don't think you have a public finance role.
Smith: When it comes to public investment in financing, there are projects that can't get financing. We all know which ones. The Dome was one of them, it's one of my arguments about the Dome.
The people who are providing the financing can't see the return's worth it, or the security' worth it, but the government sometimes can, or may be able to.
In the case of Skydome, I think the governments put up about $100 million. What they'll get back in terms of future tax revenue and not over the long term, but over the short term, in terms of income tax, properly and sales tax and everything that's happening down at the Skydome, outstripped the $100 million within a very few years.
Andrew, I'd like to have you address that Is that good idea for governments to do that?
Coyne: The government would get the tax revenues if it were private capital going in it, as well. Governments make their money by taxing private investment
Smith: There was no private capital ...
Coyne: But the private capital wouldn't have gone into a mattress, it would have gone into other projects, so the government would have taxed other things and made it's revenue from other things rather than making it from Skydome.
I think when you look at the potential for alternate investment, when you look at the debt the public sector was stuck with on that, when you look at the monumental cost overrun, the unnecessary additions of the hotel, etc. I think there's a real questions of whether that was a good investment of either private or public money in that particular project
I'm sure at the time it seemed like a good idea, but from a social standpoint of allocation of resources this is the spinoff argument
Some people say, "well, you can't look at the particular financial thing you have to look at the spinoff effects. Each dollar spent on this creates four dollars elsewhere."
I always say to them, if you dumped a billion dollars at the corner of Yonge and Bloor in twenty dollar notes, I guarantee it would have enormous spinoff effects. But most people would say that was not a useful allocation of public resources.
So, everything has spinoff effects on everything else. That's not an argument.
I wonder if you can comment on the ultim8te resource of the future, the information workers, the skills of our workers, and what role, if any, is there for pubic-private partnerships in the whole life long 'earning process that will be necessary. How are we going to guarantee that all of the workers will have the skills to help us prosper throughout their careers?
Smith: There are things the government can do as far as retraining and preparing people for the future is concerned.
Everybody loves to talk about the government programs that never work, but some of them do work.
We have people come to work for us for $5,000 a year you get them for six months and the idea is you hire them. We end up hiring about 50 per cent of these people.
We train them, give them the knowledge base, information, computer training that they need.
The government does subsidize us, but then we take them and run with them for 20 years.
I do see examples of where the government has a role and can make it work effectively.
Coyne: I think there are well worked market value arguments as to why government should be involved in education, both from the standpoint of equity and efficiency.
The equity argument obviously.
We all like to see equal opportunity in society, but if we just left it to private charity, etc. it wouldn't come about
So, obviously there's an argument for public education. Again I would separate public finance from public provision.
The fact that the government will pay for peoples education doesn't seem to me the argument that the government has to run the schools.
So, I would be an advocate of a voucher program in the kindergarten to Grade 12.
I think at the university level we've seen a very creative proposal coming out of the federal government for income contingent programs, which I think is a very appropriate and finely drawn line of where government's role is.
Unfortunately I think it's going to die.
People who invest in their own human capital, as they acquire university degrees, it will pay off for them very directly.
Obviously it's paid off for society as well, but the direct benefits to them are overwhelming. The problem for them is the cash flow thing.
When they're going to university they are at a very low level in their lifetime earnings and it's very difficult to determine how much parental support is there, how much it isn't
The way we structure our student loans now is very perverse, as we try to analyze how much they can afford to pay at the front end where there are always very ambiguous questions and then we make them pay it back afterwards without regard to their ability to pay.
So, people come out of university and can't find a job and are stuck with a $30,000 debt
The thing about the income contingent loan that I like is that it's not really actually debt it's what I'd call human capital equity.
The government is investing in your human capital. They will loan you the money for your education, or invest in your education that way, on the condition that they get back a portion of your future earnings. In other words, what you pay back is conditional on what you make. That's why I really don't think it should be called a loan, because what bank will lend you money on that basis.
I think that's an appropriate cash flow way for society to invest in students.
As for training. there has traditionally been an argument that there's a public sector role here, because companies might put money into a worker to retrain them and then the worker goes to another company and they lose the investment from it and so why would they engage in training.
It's sort of persuasive, except the difficulty is that when you actually look at what happens out there it doesn't seem to be all that much of a problem that way.
The United Stales, for example, which has one of the lowest public investment in training, has one of the best-trained work forces in the world, if not the best trained. I'd still remain open to arguments there's a government role in retraining workers.
Again, through a voucher type of plan I would prefer, but I'm also open to arguments that it may not always be that necessary.
A lot of people here are from the cultural sector and they run across government regulations some of which are positive, some of which are ridiculous. But, in many instances some of role of government is positive and starts to secure something that is in the public interest. Would you comment on the role of the public sector and the public interest in the knowledge-based economy, particularly looking at regulation and standards if not in the information sector, in the sectors that they're involved in?
Coyne: In terms of the standards of the content, in terms of improving the quality of the cultural product, I'm less enamoured than has been the traditional policy in this country of the state's role in that
I think it has come at a direct cost of the audience's role in that
I am obviously philosophic opposed to cultural nationalism or cultural statism, but from a cultural grant not from an economic round.
I think it denigrates.
It loses sight of the obligation, first of the artist as the provider to reach an audience, to find an audience, to connect with that audience, which is the very essence of the aesthetic experience.
But almost as importantly, if not more importantly, it ignores the obligation of choice that ought to thrust upon the consumer, upon the audience.
People don't elevate their taste without making choices; choice is the school of taste, the 'way we learn to discern the good book from the bad book is by choosing books and reading them and finding out what books are better than others.
I think that when 'we simply' encourage the supply end, we're going to produce a lot of cultural products and sort of throw it out there and eventually people will learn to come to it
I think that's looking at it from the wrong end of the thing. I think you have to challenge people to choose to support are with their own resources, but that, hopefully, is where the choice is made.
From a nationalistic standpoint, I think we have taken a very short-sighted view that somehow we could exhort people and tax them and regulate them into discovering their Canadian culture. I don't think we can.
I think people have to discover Canadian culture for themselves. And they will, indeed, be alienated and distanced from it when they feel it's been sort of prefab and thrust upon them.
Smith: All I can add to what Andrew said is, I completely agree with him.
I'm leaning, partly as I get older and have children, that there is a larger political constituency out there for the kinds of controls, censorship those kinds of issues that don't find a lot of favour in this room.
I'm finding that in society as a whole there's a larger constituency for that kind of view than I had previously thought
So, while we all probably agree those kind of controls, that kind of government interference, that kind of government role as we move into the information society, is not a good thing.
We better also deal with the fact that there's a political group out there who thinks it is a good thing to a certain extent
Is that to say that banking insurance, the production of food, would all be better without government regulation?
Coyne: No, no, obviously there is a role for government there is a role for regulations. The only point I would make is that regulation should work with markets rather than against them. It should supplement markets, not replace them. It should be at the point where markets fail, and they often times do in things safety, etc.
They don't fail when it comes to things like prices and you should for the most part leave prices alone.
I think what the cultural industries need is investment tax credits. Let people decide if that's where to put their money. But at this point we're building an information highway on which we will very little Canadian content, because all of the subsidies are being removed from our sector and not replaced with anything that an investor might perceive as an incentive. I'd like to hear your views on that?
Coyne: The incentive might be that people want to watch Canadian programming.
There was a difficulty, there was a market failure in television in its early stages because you couldn't charge people directly for the programs they were watching.
What we had was advertising financing the private market The difficulty, of course, is that it's biased hopelessly towards the mass audience, regardless of how intensely the audience is watching a program.
So, If 10 million people kind of want to watch Dallas while they do the ironing they will outvote the two million who desperately want to watch Othello.
That's unlike most markets like we heard about today, where you can get things produced in production runs of one. In other words, most markets don't have that bias to the mass.
So, there was an argument then for public subsidies to kind of mimic the way a properly functioning market would work to provide that kind of array of programming, particularly in the age of spectrum scarcity.
As we move into the age 500 channels and, as importantly if not more importantly, as we move into the age of transaction programming, whether it's television or the new media, I think a lot of those arguments fall to the ground.
If we make the unpleasant assumption that Canadian culture is a minority taste and often times it isn't, but often times it's shown itself to be, it will nevertheless still be able to get onto these channels if people actually want to watch Canadian programming.
I say that comes back to the philosophical argument about whether we should force people to do so, or make them pay to do so.
But I think we've overcome that first order objection that there was some sort of failure in the market to do so.
I think we're entering a very good age for Canadian content I'm not as pessimistic as you about it.
Things, not just like the cable thing, but satellites transmission offers real hope for Canadian programming, not just to Canadians but exporting it into other countries.
Smith: One of the impacts of the information age the information highway is that politicians are now more in touch with their constituents than ever before; maybe more than they ever wanted to be.
You may be seeing at bit of a political force out there. I think they'll be less whimsical as a result of the technological advances.