Infrastructure Can Pay for Itself
Frank de Jong
From: Frank de Jong <fde...@earthsharing.ca>
Date: Fri, Aug 29, 2014 at 2:47 PM
Subject: Infrastructure Can Pay for Itself
To: John Tory <in...@johntory.ca>
Who benefits from the privatisation of public assets? The buyer. Such assets will only be purchased if they stand to make a return. However, the biggest winners when multiple asset sales are considered are the banks. Privatised assets are almost always bought with borrowed money. So, while individual companies or consortia might benefit from the purchase of a government asset, it’s the banks and other lenders who benefit from a culture of privatisation.
The strategy generally employed by the buyer of public assets is to privatise the profits and shift costs onto the public. It is the public who are ultimately paying the interest; either through a lower sale price of the asset, through the increased cost of the services, or through reduced services.
Understand that these companies’ first interest is not in the efficient and effective supply of service. They just want profit. If they can most easily maximise profits by being good providers of a service that’s what they’ll do but it’s easier to exploit loopholes in regulations. It’s very difficult to write regulations that are watertight when it comes to these sorts of asset sales.
There are plenty of sound ways to fund infrastructure, but land taxes are the best and also the least likely to be used. Taxes that capture uplift in land values (sometimes called betterment taxes) can be effectively used to recoup spending on a lot of public infrastructure. For well prioritised projects, this uplift in land value is well in excess of the cost of the infrastructure.
If we could have fantastic public transport in our major cities that pays for itself, why aren’t we already doing it? There are three major hurdles to implementing greater use of land taxes: the banks, the real estate industry and property investors. The first two are very powerful political lobby groups and very generous political donors, and the last is quite a large voting bloc.
That the banks are the principal beneficiaries of ever-climbing housing prices is yet another largely overlooked fact. The more banks can lend people to buy houses, the more expensive real estate gets, the more money banks get to lend and the more profit they make. It’s a beautiful self-perpetuating gravy train.
Politicians feign concern about housing affordability and how hard it is for first home buyers to get into the market but they don’t enact any of the policy measures that we know would improve affordability for fear of upsetting the financial industry, the real estate industry and all the “mum and dad” property investors who’ve been lured into real estate by distortionary government policies like negative gearing and concessional treatment of capital gains (both of which are effectively corporate welfare for the banks).
Ed. Notes: Joseph Stiglitz, who used to be the chief economist for the World Bank, put his simple fact into a formula (every worthy project can pay for itself with new land values) that he called the Henry George Theorem.