It is more than a little mischievous for the provincial government and regional politicians to welcome the private sector contributing to the massive cost of the transportation infrastructure planned for the province in the coming years. The private sector does not 'contribute' -- it invests. And the amount it invests does not reduce the cost of the infrastructure to BC residents -- to the contrary it significantly increases the amount British Columbians will have to pay over time for the recovery of the projects' costs.
It is, of course, not surprising that private sector investment and ownership of bridges, roads and rapid transit projects will increase their cost to users and taxpayers. The rate of return the private sector needs to recover from these types of investment is over 10%; the interest rate government pays is more like 6%. Not unlike, but more extreme than the financing of a house, you pay a lot more over the life of the mortgage at a 10% as opposed to 6% rate.
The new Fraser Crossing is a good example. The cost of a new bridge and road network connecting Pitt Meadows and Maple Ridge with Surrey and Langley is estimated at about $600 million. If the government or GVTA were to borrow the necessary funds to pay for this project, they could recover, over a forty-year period, all of the project's costs including interest with a toll in the order of $2.50 per trip, possibly less. If the private sector were invited to 'contribute' to this project, it would add, on average, over $12 million to the costs that would have to be recovered each year -- almost $500 million over a forty-year period. Either markedly higher tolls, more taxes or a significant reallocation of GVTA funds would be required to pay for the cost of the new crossing.
The Richmond/Airport-Vancouver (RAV) rapid transit project is another example. The capital cost of this project is estimated at over $1.5 billion. Unlike the Fraser Crossing project, there is no possibility it could pay for itself. Even with relatively low cost government financing, the interest, debt repayment and operating costs of this project will exceed its revenues by over $100 million per year. Notwithstanding wishful comments by the RAV project team, the private sector cannot solve this financial problem. In fact, the more that the private sector is called upon to 'contribute' to the capital cost, the greater will be the on-going loss.
To argue that private financing can offset the capital cost of new transportation infrastructure is like arguing renting can avoid the cost of buying a house, or that second or third mortgagors can help pay for the cost of a house. Renting will eliminate the need to buy, and second and third mortgages will reduce the size of the down payment, but both come at a significant price. The total payments over time will be much greater as rent is continually incurred or the high cost second and third mortgages are repaid.
There are advocates of private financing who recognize and honestly acknowledge it will raise the costs that users and/or taxpayers will ultimately pay. Nevertheless, they argue that government cannot afford to incur more debt; also, private ownership creates better incentives to minimize construction and operating costs, offsetting some of the higher financing costs it entails; and finally, the higher financing costs are fair compensation for the risks that the private sector investors assume.
It is simply not the case, however, that the province of BC or the GVTA cannot afford to incur more debt. BC and regional governments have tremendous borrowing capacity--the issue isn't whether more debt can be raised, it can. The issue is whether and when it is a good idea to do so.
There are good reasons why the government shouldn't burden future residents with debt to finance tax cuts for wealthy British Columbians. But there is no reason to argue that BC cannot or should not incur debt for needed transportation projects--where the benefits to users and the general public clearly outweigh the costs. There certainly is no reason for government not to finance the new Fraser Crossing - a project that is so desperately needed it can pay for itself with tolls. It may be that BC should not finance projects like the currently proposed RAV line, but the problem here isn't the debt, it is the on-going subsidy the project requires in relation to the benefits it offers--a subsidy that will only increase in magnitude with private as opposed to government financing.
It is also not the case that private ownership is needed to minimize costs. The private sector will design and build the new transportation infrastructure planned for BC, all through competitive bids, with or without private sector financing. What matters most for costs is the standards and other details of what government wants built, the contractual terms it specifies and the bidding process it establishes. The demand for private ownership and financing will if anything reduce the number of bidders and potentially diminish the competitiveness of the bids. It will as well markedly increase the complexity and related cost of the contracts required.
Finally, it is only a market ideologue who believes that whatever price is paid is fair compensation for whatever is provided. There is a price to be paid for private financing and there is no doubt some transfer of risk. But there is no reason to believe there would be hundreds of millions of dollars of benefit for the risk that is in fact transferred in each project. Nor is there any evidence that users and taxpayers would want to pay for whatever risk transfer is achieved.
It is estimated that BC has a backlog of over $10 billion in transportation projects that will be built over the next twenty years. The projects are expensive and each one warrants careful scrutiny. The first question that should be asked in each case is whether the project is needed and worthwhile, and the best option of whatever alternatives are available. If it is, the next question is how its costs can be recovered. There could be tolls or other user charges and there could be subsidies from the general taxpayer. Whether the project should be financed and owned by the private sector barely warrants questioning at all. That won't affect whether the project is worthwhile and it will only add to the amount of costs that will ultimately have to be paid by the users of the facilities and BC taxpayers.
Dr. Marvin Shaffer is an economic consultant. He has taught cost-benefit analysis in the Dept. of Economics at the University of British Columbia for the last five years.