The Caisse and our infrastructure
This week’s announcement that the Caisse de dépôt et placement will construct and operate a new light rail link on the Champlain Bridge replacement, as well as a new West Island train system including a link to Trudeau Airport, raises some interesting questions.
The Caisse does and should invest in infrastructure. Where infrastructure projects yield a worthwhile return, they form a solid element in a diversified portfolio that stands behind the retirement incomes of Quebecers. The question is: Does the prospect of a solid return depend upon the government of Quebec underwriting the operation of the proposed systems through its taxation powers? If so, is this proposal simply a way of keeping debt off government books?
To answer this question, we must determine whether allocating the contract unilaterally to the Caisse has an advantage over the traditional model, where there is a competitive public tender.
New public transport projects entail three principal cost considerations: the procurement of the space upon which to build the system, the actual construction of the system, and its subsequent operation.
First, consider space. Will the Caisse purchase a lease on the new bridge, or will it obtain a lease at a nominal rate for the life of the structure? Likewise for the West Island train: Will it buy new lands, or will it operate on donated land? I am not arguing against such implicit subsidies; rail land grants were a feature of Western development in Canada’s early days. However, if land grants are to be made to the supplier, there is no inherent benefit to having the Caisse as supplier rather than a private consortium. Each type of supplier would gain equally.
Second, consider capital purchase and construction. While we might imagine that the government is listening to the Charbonneau Commission by taking the construction out of the hands of possibly corrupt developers, note that construction decisions for the Champlain Bridge replacement have essentially been already made. (Admittedly, construction decisions at each end of the bridge for a new light rail system remain.) A dedicated space on the bridge has already been factored into its cost. Therefore, the Caisse model does not seem to possess any inherent advantage in this area. As for rolling stock, will Quebec permit the Caisse to stray from Bombardier in favour of some out-of-province or international supplier? And, will the Caisse be more able than an alternative supplier to obtain a favourable deal from Bombardier?
Third, there is the issue of operation. It is difficult to imagine that these new rail projects will not be integrated into Montreal’s existing transportation network in some way. But whatever the degree of integration, their operation will likely require some public subsidy. Few public transportation systems can operate as stand-alone entities. Subsidies are part of the price cities pay for mobility and “livability.” But here’s the rub: If the Caisse is to obtain a satisfactory rate of return on these investments, it is the government, through its subsidization, that will be the ultimate under-writer.
Consequently, all of the “win-win” talk surrounding the announcements of these plans boils down to Montreal getting the capital for the projects from our retirement plans rather than having to raise it in the marketplace. It seems inevitable that the government will end up having to use its powers of taxation to ensure the break-even financial operation of these projects. Will the rating agencies therefore then decide that the investments represent a de facto addition to our public debt? I hope not.
Ian Irvine is a professor of economics at Concordia University and an associate researcher with the Montreal Economic Institute. The views reflected in this column are his own.