Trump and Trudeau are gunning to massively privatize infrastructure – and it’s going to cost you

As with most of Donald Trump’s policy ideas, details are still sparse on his plan for rebuilding America’s crumbling infrastructure. But two main pillars of the plan, outlined during the election campaign, stand out. First, he’s talking a big game – a proposed $1 trillion in infrastructure investment to be “spurred” over 10 years. Second—and here’s the rub—the Trump plan would move to privatize infrastructure on an unprecedented scale, lining the pockets of investors with huge tax breaks in the process.

South of the border, warnings are growing that Trump’s plan is a “trap”, “stealth privatization” and a “privatization scam”, as Nobel Prize-winning economist Paul Krugman puts it. Krugman explains:

“Crucially, it’s not a plan to borrow $1 trillion and spend it on much-needed projects — which would be the straightforward, obvious thing to do. It is, instead, supposed to involve having private investors do the work both of raising money and building the projects — with the aid of a huge tax credit that gives them back 82 percent of the equity they put in…

You could try to come up with some justification for the complexity of the scheme, but one simple answer would be that it’s not about investment, it’s about ripping off taxpayers.”

It’s no coincidence that Trump’s transition team and early appointments are stacked with privatization advocates and those with deep ties to firms that will profit from privatizing public assets – whether it’s private prisons, private schools, or private infrastructure. One of the main tools Trump says he’ll use in his infrastructure plan is to “leverage public-private partnerships” (P3s).

But as I described recently in the Canadian context, these “partnerships” have proven enormously costly:

“P3s are simply less efficient – on average costing dramatically more than the public sector alternative. And it’s not hard to understand why…

Traditional publicly-funded and operated projects… don’t require paying out profits to private investors and, importantly, have lower financing costs, since government can secure much better interest rates than a private corporation.

This has all been well understood since the 1990s and documented over the years in a whole range of research on P3s.”

In fact, the Ontario Auditor General recently reported that the province had lost a jaw-dropping $8 billion over a decade by building projects as P3s rather than as traditional public infrastructure projects.

To top it off, privatization tends to increase inequality by driving down wages and ramping up user fees, while eroding the capacity of our public sector. That’s why many cities across Canada and around the world have begun bringing services back in-house after failed experiments with P3s.

Now, ignoring this body of evidence, our own federal government is working from the same playbook as Donald Trump, planning a major privatization of Canadian infrastructure.

As part of the fall economic update, the Trudeau government announced the new Canada Infrastructure Bank (CIB). The CIB will be seeded with an initial public investment, but the plan is to “leverage” up to $5 of private investment for each $1 of public funding.

What does this mean in practice? Large institutional investors, hungry for returns, will get to invest in Canadian infrastructure projects as P3s, earning a steady stream of profits from government payments and/or user fees. Michael Sabia, head of the Caisse de dépôt pension fund—one of those large institutional investors—says he expects investment returns of seven to nine percent per year from these projects.

Now, compare that with the government’s interest rates of less than 2% a year on 10-year bonds. As my colleague David Macdonald explains, “whether the feds sell bonds or use P3s for infrastructure, the money comes from the same place: large institutional investors like pension plans. The difference is in how much money private investors will take home at the end of the day.”

That difference—between 2% and 7-9% interest—is a central reason the privatization route will cost Canadians billions of dollars more than simply using traditional, publicly-financed infrastructure.

So why would the government choose such a wasteful path? Academic analysis of P3s from the UBC Sauder School of Business offers an explanation:

“To an incumbent government, a key advantage of PPPs is the ability to avoid upfront costs… allowing politicians to take the credit for new infrastructure while passing future maintenance and operating costs off onto future politicians, taxpayers and/or users.”

That’s one important reason. But as with Trump, it’s also worth looking at the government’s key advisors for some clues on who is shaping the infrastructure agenda.

Recall Michael Sabia, whose firm is a major investor in privatized infrastructure. He sits on the Trudeau government’s Advisory Council on Economic Growth. The Advisory Council’s chair is Dominic Barton, Global Managing Director of McKinsey & Company, a firm which is also in the business of P3s. In turn, the Advisory Council authored the October 2016 report advising the government to create the Canada Infrastructure Bank, with a particular focus on wooing private investors.

Groups like the Canadian Council of Public-Private Partnerships are also getting face time with Minister of Infrastructure Amarjeet Sohi, who told reporters government will “listen to the private sector” as it fleshes out the design details of the Canada Infrastructure Bank.

This should all be deeply worrying to Canadians. The push for privatization illustrates how neoliberalism is alive and well – in Trump’s America and Trudeau’s Canada. Yet the evidence is clear: selling out our public infrastructure is both unnecessary and incredibly costly. And it’s taking us in precisely the wrong direction at a time when we need a renewed public sphere to meet huge collective challenges.

If Trump’s infrastructure plan is a “privatization scam”, what should we call ours?

4 comments

  1. The Caisse, OMERS and other pension plans may be private investors, but the returns they earn on their investments ensure my pension is fully funded. I have no objection to these investors putting their money into P3s and earning good returns to ensure the fund can pay me during retirement. Why are you opposed to pension funds getting a good return? Beneficiaries of public pension funds are the entire Canadian population.

    1. I have been wondering this too ever since the Infrastructure Bank was announced. While pension plans are often used as examples of private investors, the details are never specified. How would a private infrastructure funding plan guarantee that the right kind of investors participate, and on reasonable terms? Is funding pensions through infrastructure user fees reasonable policy (depends on whose pensions, which infrastructure)? Infrastructure and pensions are high on the Ontario and Federal agendas these days, and there seems to be a mostly implicit argument that both problems can be solved together. Who’s driving this argument (Minister Morneau)? The CCPA should do a study on this! Get some infrastructure experts and pension experts talking to each other!

    2. This is a pretty common question – glad you raised it.

      Suppose for the sake of argument that all of the infrastructure bank investors were pension funds and were Canadian (neither of these will be the case, of course – especially given the zeal with which the bank is being promoted to foreign investors, as has been widely reported).

      Pensions funds and other investors are free to pursue the best returns they can find. That’s very different from saying that government should take bad deals on privatized infrastructure for their benefit, paying billions of extra taxpayer dollars out of general revenue. If we’d like to use billions of dollars of federal revenue to increase retirement incomes in Canada, that’s great. We can do that directly and efficiently by increasing the OAS or GIS or both, reaching all Canadians and/or focusing on those who need it most. In contrast, overpaying for infrastructure – for the privilege of having it privatized – is a very strange (read: ineffective and inefficient) way of trying try to boost retirement incomes. The thinnest of rationalizations.

      1. Thanks for your response. I agree that there seems to be no restriction to Canadian public pension investors, and the privatization agenda is worrying. On the other hand isn’t the case to be argued in favour of pensions-funding-infrastructure that the billions used to repay the pension funds will not be coming from general revenue, but rather from infrastructure user fees? So repayments go off-budget and the government gets to avoid raising both taxes (which fund OAS and GIS) and CPP contribution rates. (User fees may be less politically painful?) The other question is whether pension funds need these high rates of return to meet their obligations, and whether there is a shortage of places to get those returns. In other words, is this construable as an attempt to either save pension funds that may be perceived to be struggling, or a way to increase CPP payouts without increasing direct contribution rates?

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