When I was a kid, governments built roads and power plants to meet the needs of our citizens and these long-term investments were paid for by the perceived beneficiaries – sometimes directly through taxes and sometimes indirectly through service charges (electricity bills). We were respectively called taxpayers and ratepayers as we paid for these investments.
As the years have passed, these large scale investments have grown in complexity and cost, and our governments do not seem to have the funds or the political will to tax us to pay for everything we would like to have. In this circumstance, to me the transparent thing to do is to have our politicians and our citizens discuss the investments we need and can afford and go from there. But that is not the road we are taking.
La Caisse de depot et placement du Quebec (La Caisse) is Quebec’s mega investment body responsible for investing the funds for various government and quasi-government pension and insurance arrangements. Its flagship investment is the funds for the Quebec Pension Plan. Michael Sabia is the President and CEO of La Caisse and I recently bumbled upon a speech he gave back in March, 2016.
Mr. Sabia’s speech started with the U.S. Election, ran though a bunch of global economics, and wound its way to the idea of ‘public public partnerships’. Mr. Sabia’s view is that one public is our governments and the other public is the public service workers’ pension funds. Mr. Sabia is promoting the idea that the funding for these infrastructure projects will come from our public pension funds rather than cash strapped governments:
“In the end, we (La Caisse) own the assets and the project never touches a government balance sheet – a significant difference from typical public private partnerships. For governments all around the world, this could substantially change how major infrastructure projects get financed by providing a solution to their fiscal constraints.” and “For us (La Caisse), the reasoning is simple. These projects pay us double digit returns – not easy to come-by today”.
Follow the money
No one has ever accused me of rivaling the likes of John Maynard Keynes or Friedrich Hayek when it comes to macro economics, but I am going to take a shot at unraveling this idea.
Here are the things we know:
1. We have promised our public service workers pensions in retirement and we want to pre-fund them so that we don’t have to rely on the good will and financial strength of future taxpayers to pay the benefits when they come due.
2. The pensions we have promised are priced in today’s dollars assuming that our pension investments will be invested in ‘risky’ assets that will generate better returns than simply investing in government bonds.
3. Because of 1 and 2 above – La Caisse, and other pension funds like it, need to generate returns above the rate taxpayers would pay if their government borrowed money by selling bonds.
4. Infrastructure investments appear to offer double digit returns without the expected level of risk that would normally come with earning that type of return solving our problem in 3 above.
5. Magic! Cheap pensions.
So, what did we miss? Why haven’t we been doing this all along? The best I can tell is that all we are doing is transferring the ability to tax our future citizens from our governments to these ‘independent’ pension funds. And because our politicians won’t be responsible for the rate (tax) increases, they won’t be the needed ‘check and balance’ to ensure that we aren’t overspending on these projects – the more we spend to build a new hydro electric dam, the more we will charge users of electricity in order to make sure that the pension fund makes the 10% return they need – easy peasy!
Ontario tried this game with ‘green energy’ and we are paying for it now. One might argue that the investments Ontario has made in renewable energy will pay off in 50 or 100 years – but unfortunately it is today’s ratepayers that are paying a heavy price for these investments so that we can make sure the owners of this new infrastructure get paid now.
Winners and Losers
So how will this play out? Well, if we assume that these investments do in fact generate double digit returns the loser is the future ratepayer since the government could have built the project themselves at historically low interest rates resulting in lower long-term costs for the ratepayers. If on the other hand, future regulators limit rate increases so that the return on the investments are more reasonable (maybe say 5% compounded annually) then the pension funds are going to have a shortfall that will either be fully or partially borne by future taxpayers.
It appears that if you are both a future ratepayer and a future taxpayer – you are guaranteed to lose. Which is the point, we have promised the public service pensions that aren’t affordable unless we allow our governments to prop up the investment returns by transferring government taxing power to the pension funds. Maybe it would be better to be more honest with everyone about the true cost of these promises.