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Jack Mintz: How to pay for urban infrastructure

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Jack M. Mintz | 13/07/15

The push is on for more infrastructure spending. Even Rob Ford, Toronto’s tax-fighting mayor, is now willing to consider property levies to fund a subway through the suburb of Scarborough. Ontario’s Premier, Kathleen Wynne, is proposing new “revenue tools” to dig deeper into taxpayers’ pockets for transit infrastructure across the Greater Toronto Area.

In post-flood Alberta, meanwhile, Calgary city council now has a carte-blanche to usurp property tax room provided by the provincial government to pay for infrastructure costs. Some Albertans are even musing about an Alberta sales tax to pay for Premier Alison Redford’s expensive subsidy to cover housing losses and new infrastructure to mitigate flood damage.

No question, new and replacement infrastructure costs money. Someone has to pay for it, whether users or taxpayers. Yet one of the questions rarely asked is why governments are in the business of paying and operating infrastructure as opposed to the private sector.

When governments do it, often the tax load is borne by the taxpaying middle and upper income classes and non-voting businesses with little relationship between payments and the value of service received. If the private sector operates the infrastructure, it is the users who pay for its costs and have the right to demand good service from operators.

Many might presume that only governments should provide infrastructure. However, this is clearly not the case. Much of today’s infrastructure is privately provided including telecommunications, railways, shipping and pipelines. Power transmission can be easily privatized (it is a regulated industry in most countries). Airlines and airports can also be privatized. Canadian airports remarkably improved when the federal government turned over control to non-profit local entities.

When it comes to roads, bridges, transit, water and wastewater and electrical power systems, the government usually operates and funds the system. Why is this the case?
Yet, when it comes to roads, bridges, transit, water systems, wastewater systems and strangely electrical power transmission in most provinces, it is the government that operates and funds the system. Why is this the case?

The typical public finance argument for government provision is that infrastructure is a “public good.” It is difficult to exclude people from using the service so therefore no private producer can charge for it. In the absence of any congestion, many people can enjoy using the public good without diminishing the benefits others derive from it. Further, some goods are produced at the least cost per person when almost the whole population can use it.

When it comes to residential roads, neighbourhood parks and lighting, the private sector cannot price the public good due to the difficulties of excluding some — free riders — from using the network. Even if people could be excluded (through, say, a membership pass), it makes no sense to exclude non-payers who must travel down a residential street. All must contribute to the cost of providing the public good.

However, government provision does not imply that users should not pay for the cost of providing the service. In the case of transit, bridges, major highways and national parks, a charge is assessed on users since the technology is available to do so — this is a fair way for people benefiting from the service to pay for the cost. Some adjustment might be associated for social costs like pollution but the principle is the same.

Governments might be reluctant to charge user fees since low-income users have less capacity to pay for costs. However, it should not be assumed that solely equity objectives drive governments to turn private into public services — after all, we don’t have governments taking over Bell and Rogers simply because we want Internet services provided free to the public. Instead, the fast moving innovative telecommunication industry is best operated in the private sector with governments satisfying equity objectives with a progressive tax system and transfers paid to low-income Canadians.

And even if governments do not want to charge for public services, the private sector could construct and maintain infrastructure with a payment received from the government as in the case of public-private partnerships. As long as the private producer bears risks commensurate with returns, the public-private partnerships work reasonably well. Problems with excessive costs arise when governments cover the risks while leaving returns with the private producer.

Even though government provision of infrastructure is necessary at times, Canadians rely currently on too much public provision of infrastructure. In part, this is a relic of Canada’s economic history when few private sector businesses were available to start up railways, airports, airlines, telecommunication and other forms of infrastructure almost a century ago. We did see eventual privatizations of public services such CN Rail, Air Canada and telecommunication companies inefficient state entities were no longer affordable.

Yet, why do we see some types of infrastructure still in government hands when technology no longer requires pubic provision of the services? Most power transmission companies in Canada are public-owned so it is up to government to make sure such infrastructure is financed. Yet, many state-owned power transmission companies operate at a small scale and are subject to heavy political intervention. Private regulated companies operate well since the public interest is protected from monopoly pricing while the producer has more freedom to innovate.

And where Canadian governments do provide infrastructure, they often fund too little of it even with advantageous financing costs. Governments are elected by current not by future voters — spending money on infrastructure with long-run benefits is less attractive to the voting pubic than health and social spending. Further, with balanced-budget constraints, the public debt is more than the monetary cost once accounting for the crowding out of other public spending.

In the case of core public infrastructure — urban transportation, water and sewage — we typically see underpricing of public services. Users do not pay for the cost of public infrastructure, demand excess amounts of it and complain about inadequate funding. Canada is particularly poor at road and water pricing. Even urban transit is often too underpriced – subsidies for urban rail transit vary from 29 to 89% of operating costs in North America, leading to urban sprawl itself.

Urban infrastructure is currently messy policy in part due to overbearing government intervention, excessive subsidies and inadequate pricing. Perhaps, before throwing more money at the problem, we should try to run a better system.

_____

Taken from Financial Post: http://opinion.financialpost.com/2013/07/15/jack-mintz-how-to-pay-for-urban-infrastructure/

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