The federal Government in Canada has budget challenges and that is, in part driving considerations to privatize its main seaports and airports. This is an extremely important issue that has deep financial, political, and underlying competitiveness consequences and a go-slow strategy is surely quite prudent. With Canada having some of the most efficient and professionally managed transport assets in the world, this isn’t generally a matter of selling-off poorly performing assets or assets that have severely poor infrastructure. Certainly there will be a perspective of the potential for private players offering access to global financial markets and some will refer to the advantages of global asset management platforms. But critically, many of Canada’s seaports and airports are well-managed and with high-quality infrastructure in-place.
These assets are currently managed by non-profit bodies that pay rent to the Government. The Government has engaged the likes of McKinsey & Co., Morgan Stanley and Credit Suisse AG to help them sort through the options and some prognostications have suggested that the Government could net between $7B and $16B with the sale of the underlying federally-owned transport assets. That’s a lot of money and the issue of the potential sale of assets has caused an expected political firestorm. Generally, the current asset owning bodies are not supportive of such a move and the political opposition in Ottawa has shown quite significant concern. The Liberal Government is continuing to assess but hasn’t pressed the issue at this point.
On one hand, we applaud Canada for thinking about balancing professional management, asset value and monetizing assets for the public good. We will not take a position on the direct issue of port and airport privatization in Canada, but we do however make the point that in our view, the fundamental value of an important trade asset such as a seaport or airport is to be a strategic cog in supporting regional and national economic development. We hope that Ottawa’s considerations are based on what’s best to support Canada’s economy and its economic development potential – and not the lure of short-term gain.
We cite a few items in recent press that help summarize the situation – a summary of the politics and an opinion piece that demonstrates understandable concern. The opinion piece in the Vancouver Sun made a case for Canada not to sell off its publically-owned seaport and airport assets. While providing a reasonable perspective and making the safe case that well-managed public assets can perform well, the piece misses some wider and important points.
From the Globe and Mail: No Plans for Privatization in Liberals Budget 3/21/17
The Globe and Mail has learned that, while the the issue of airport privatization will continue to be debated inside government, it will not be resolved in this week’s budget.
The Liberal government’s second budget is expected to be a relatively low-key, stay-the-course document that will outline new details on several federal priorities that have already been announced, including infrastructure spending, innovation and skills training.
While rumours of potential tax hikes on investment income have alarmed Bay Street, The Globe has reported that major tax changes are not expected to be enacted in the budget. The government will likely announce the elimination of some targeted tax credits, but any more complicated tax changes would be recommended for further study.
“Work is ongoing and to the extent that there’s any major conclusions [on tax changes], we need to take some time to get them right,” a senior government official told The Globe Monday.
The government has been facing questions for months about airport sales after Finance Minister Bill Morneau approved a contract last year with Credit Suisse AG to analyze several options for fully privatizing Canada’s top eight airports: Toronto, Vancouver, Montreal, Calgary, Edmonton, Ottawa, Winnipeg and Halifax.
Ottawa also hired Morgan Stanley Canada Ltd., an investment bank, to review ownership options for 18 Canadian ports.
The senior government official also confirmed to The Globe that the federal review of ports and airports is an continuing issue and no decisions will be announced in Wednesday’s budget.
Mr. Morneau has pledged that, while deficits are forecast to be larger than what the Liberals promised during the election, the government will still be able to keep the federal debt from growing as a share of the economy.
That guideline means the government is not in a position to promise much in terms of new spending without cutting elsewhere or raising taxes.
The debate over airports has become politically charged in the run-up to the budget. Both the Conservatives and NDP criticized the government in Question Period Monday for considering airport privatization.
Prime Minister Justin Trudeau declined to provide a clear response, stating that the government’s economic plans will be revealed in Wednesday’s budget.
Interim Conservative Leader Rona Ambrose is planning to use an Opposition day Tuesday to press the government on the issue, meaning it will be debated throughout the day in the House of Commons.
The C.D. Howe Institute released a report in February that estimated Ottawa could raise between $7.2-billion and $16.6-billion in revenue by selling equity in airports.
Mr. Morneau’s economic advisory council, led by McKinsey & Co. managing director Dominic Barton, urged the government last year to consider asset sales as a way of stimulating investment and raising more revenue.
The council promoted a concept known as “asset recycling,” in which governments sell hard, revenue-generating assets such as airports and then use the profits to build new infrastructure.
Major Canadian airports are currently run by non-profit airport authorities and pay rent to the federal government. A review of the Canada Transportation Act urged the government last year to consider various privatization options.
Some Canadian airport authorities, including Ottawa, Calgary and Vancouver, have spoken out strongly in public against the idea of full privatization. Other major airports, including Toronto’s Pearson, have taken a more neutral stand during the debate.
The decision not to include privatization of airports in the budget is a victory for Canada’s two largest airlines, which have voiced concerns about existing ground fees and other charges and argue that private ownership will increase costs further.
“Right now, the structure is not for profit,” Michael Rousseau, chief financial officer of Air Canada, said in an interview earlier this month. “A new structure would be run by companies that require a profit margin. That profit margin is another layer of cost that would have to be borne by the airlines or customers.”
WestJet Airlines Ltd. CFO Harry Taylor recently noted that costs to operate an airline in Canada are among the highest in the world. New owners that have paid a steep price to buy airports will be seeking a return on investment so they will likely raise fees, Mr. Taylor told an analyst conference in Toronto last week.
Transport Minister Marc Garneau said last week that the government is studying privatization, but any actions that will be taken will be aimed at improving service and lower costs where possible to increase competition.
The federal government conducted focus groups with Canadians across the country last year and found “lukewarm” support for the idea of privatizing airports, ports and roads as a way of paying for infrastructure improvements.
Participants expressed safety and security concerns and questioned whether privatization would lead to higher user fees and less service. Some also expressed concern that infrastructure assets would move to foreign ownership.
From the Vancouver Sun: Opinion: Don’t Sell Assets to Pay for Infrastructure
The Canadian government is pursuing a policy that could leave us all, as citizens and taxpayers, tenants in our own house. It’s a risky, unnecessary direction that we all will come to regret.
The government unveiled the new policy last year, moving to sell off two portfolios of critical national infrastructure — Canada’s eight largest airports and 18 major ports.
To be fair, Transportation Minister Marc Garneau has said this is not “a done deal.” The government has merely engaged two investment banks, Credit Suisse AG and Morgan Stanley, to “investigate options” for selling the airports and ports. But the direction is clear. Investment banks make money by arranging and managing actual transactions. It’s hard to imagine a scenario in which either would call Garneau to say, “We couldn’t find any options.”
So, why would government want to sell assets that are instrumental in the delivery of national trade policy, and invaluable to every Canadian who flies within or beyond our borders? Well, in their 2016 budget, the Liberals said they were looking for sources of revenue to pay for new infrastructure. They characterize the sales as “asset recycling.” But selling ports and airports wouldn’t recover value from facilities we no longer need. It would privatize assets that are still essential, and will remain so.
And that points to a motive more ideological than economic, as members of the government, and others, argue that the assets might be better managed in private hands. For example, a recent C.D. Howe Institute report suggested that privatized airports would have greater incentive to expand retail options for their passengers — a position immediately debunked by Vancouver International Airport Authority CEO Craig Richmond, who like Vancouver Fraser Port Authority Chair Robin Silvester, has questioned the divestiture.
Richmond pointed out that YVR already has the highest per-passenger retail space and the highest rates of concession sales of any airport in North America. The C.D. Howe report author, Steven Robins, countered that YVR’s retail sales are higher than, say, Toronto Pearson because of YVR’s status as a travel hub to Asia. But for anyone who flies frequently through both airports, another possible explanation is that YVR is just better managed.
The goal, for government and for us all, should be to identify the optimal way to create and maintain crucial infrastructure for long-term public good. Surely, that means protecting the things we need, because, as a planning and development consultant and retail-sector real-estate analyst, I have seen what can go wrong if you don’t.
Consider the fate of once-bullet-proof retail giants like Eaton’s or Woodward’s when they sold off their real estate. Obviously, there were other issues, but both companies woke up one day with balance sheets that showed all liabilities and no assets. And now they’re gone.
How, then, do we pay for what we want without sacrificing what we need? One consideration is covered by historically low interest rates. There has never been a better time to borrow for sound public investments that will deliver dividends for many generations — everything from new transit systems to public utility repairs or replacements.
The other consideration is one I discovered as the CEO of SFU Community Trust, which is developing UniverCity, a new community beside Simon Fraser University’s Burnaby Mountain campus. The B.C. government wisely prohibits its public institutions from selling property that was endowed by the province. So, following the example of the University of British Columbia, we created development parcels and made them available through 99-year leases — with the lease amount payable up front.
You might assume that purchasers would demand a significant discount on a 99-year lease, compared to what they might pay if land was for sale outright. But universities (like governments) are considered low-risk lease managers, so little, if any, discount is showing up on our bottom line.
As a result, a century from now, SFU will be enjoying a renewed income flow, and in the meantime, it is building community, creating endowment wealth to support its teaching and research mission and maintaining a proprietary interest that, frankly, protects the rights of everyone involved.
The federal government deserves credit for seeking innovative ways to finance new infrastructure. But, as YVR and the Port of Vancouver both demonstrate, the current managerial regime for this infrastructure can work very well. If other ports or airports aren’t hitting the mark, that deserves attention.
There are, however, better options than selling off Canada’s strategic assets. We’re going to need them, forever.
Gordon Harris is a professional planner in Canada, an international consultant, and the CEO of SFU Community Trust, the developer of UniverCity, the award-winning low-carbon community on Burnaby Mountain beside the campus of Simon Fraser University.
