Stephen Rees's blog

Thoughts about the relationships between transport and the urban area it serves

The cost of privatisation will haunt us for years to come

with 2 comments

Guardian Unlimited | Comment is free | The cost of privatisation will haunt us for years to come

PFI, and indeed much of the government’s case for privatisation, is predicated on a myth that the Tories naturally do not challenge, given that PFI and mass privatisation were originally their ideas. That myth, the false premise of PFI, is that government borrowing – its gross financial liabilities – must be held down at all costs. This is nonsense. The Treasury has persuaded our leaders that it is vital to keep government borrowing as a proportion of GDP at around 40%. It has risen above that in recent years, but it is still very low by historical and international standards.

The latest available international comparisons from the OECD show that Britain has kept government borrowing (at 44% of GDP) well below those of the successful Scandinavian economies (Denmark 53%, Sweden 63%), and even further below those of the major eurozone countries (Germany 68%, France 75%). US borrowing (64%) is also well above Britain’s, and Japan’s (156%) is off the scale. In some of these countries there have been economic difficulties, but none has experienced anything like economic disaster.

This is a splendid political polemic. Directed at the current change in leadership of New Labour in Britain, it is worth noting here too. This particular mantra – about the Public Sector Borrowing Requirement – is not heard here. We tend to be lectured in simpler terms – debt and deficit, and the cost to future generations of interest payments. But the fallacies are similar, and I suspect that we will regret most of the decisions now being forced on us by a similarly doctrinaire approach to public investments that now requires private finance for all projects over $20m – municipal and provincial.

There is an alternative method of finance that avoids borrowing altogether and is used in some European countries. The project is put to a public referendum in the area impacted. If approved the project is paid for out of a one time fixed increase in a tax. So there is no borrowing required public or private, it is simply “pay as you go” – and once the asset is built, the maintenance is simply a charge against operating cost, which is also an incentive to build it properly, with an eye to life cycle or full cost accounting. I don’t know if it is still the case here, but up until recently schools could not be built by school boards to standards which lowered their heating cost – because it was not allowed to spend more in capital to save on operating cost – because they have different funding mechanisms.

But if we are going to borrow to pay for infrastructure the first thing to bear in mind is that public debt is always much cheaper than private debt. And public enterprises do not need to make profits to satisfy the holders of equities. Simple, ain’t it.

Written by Stephen Rees

November 30, 2006 at 7:35 am

2 Responses

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  1. Seattle had a bad experience with referendums for its monorail project. It was narrowly passed twice and then finally rejected a third time following changes in scope to the project that differed from the voter authorized project. That was also a City of Seattle initiative, rather than a County wide initiative, so the voters (and the ratepayers) were just Seattleites. For the third vote, (in addition to financial and budgetary problems within the agency) an opposition group comprising deep-pocketed building owners and developers who feared the impact of the elevated monorail on their downtown properties led a vigorous public relations fight against the monorail. In addition, the financial impact of the monorail “car tab” (the Seattle-only tax to raise funds for the monorail) likely hit home by the time the third vote came around – apparently the car tab was 1.4 percent of a vehicle’s assessed value.

    A few questions that may arise regarding referendums would be:

    - would the referendum be region-wide or more localized? (i.e. would the Golden Ears Bridge project be voted on only in Maple Ridge, Pitt Meadows and Surrey or region-wide? Likewise for the Canada Line, Vancouver and Richmond only?) Presumably, if region-wide ratepayers fund a project, the referendum would have to be region-wide (i.e. voters in one city should not be able to solely authorize a project paid for by voters across a number of cities). Would that extend to province-wide referendums on such projects if provincial money is at play? If the referendum area is too small, the cost impact on each individual ratepayer would be too large, particularly lower income groups.

    - if a referendum is region-wide, would population distribution and voter turnout favour projects in certain areas over other areas? Would population dense areas benefit at the expense of infrastructure deficient growth areas (i.e. for construction of a new hospital)?

    - to minimize ratepayer impact, would projects be deferred so as not to coincide with other projects or scaled back and implemented incrementally in phases (not necessarily a bad thing) and would projects compete with each other for voter approval?

    Ron

    December 1, 2006 at 1:40 pm

  2. I am not sure why it took three votes, in the case of the Seattle monorail but if that’s what the people who had to pay for the project voted against so be it. I wonder if the Canada Line would have been built if put before the voters of Vancouver and Richmond? Or the region as a whole – against competing projects?

    Representative democracy is the least bad of the several possible alternatives (as W S Churchill remarked) but anything that increases citizen participation must be a Good Thing. Our currently elected oligarchies are neither representative nor responsible. And especially when they can tell us that they are worried about “voter fatigue” and avoid elections. People are cynical, but usually perform really well when given the opportunity. Juries for instance. Or that citizen’s forum on electoral reform.

    I was more concerned about alternatives to borrowing – and I recognize that Ron’s questions deserve answers. I just don’t have them right now.

    Stephen Rees

    December 1, 2006 at 2:05 pm


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