Fiscal magic and voodoo

There is no creature on earth more risk-averse than a politician in government. Likewise, there is no one more likely to make expensive promises without the resources to make good on them.

There is no creature on earth more risk-averse than a politician in government. Likewise, there is no one more likely to make expensive promises without the resources to make good on them.

How do they rationalize both positions? They rely on magic and voodoo.

No doubt about it, the Alberta government is in a tight spot right now. Premier Jim Prentice promised us 90 new schools, and renovations for 70 more. He promised that hospital expansions and renovations would proceed quickly.

All this, he said, without seriously altering Alberta’s 10 per cent flat tax or adding a sales tax to raise the money.

Never mind that this is impossible, especially when the price of energy tanks.

We are told in every news story on oil prices that every $1 decline takes a $215-million bite out of government revenue, when it is sustained for a year. OK, what’s the bite on a $30 drop sustained over five months, which will be the case by the time the government needs to table its next budget?

I have no idea what that would be, but I know it’s a big number. Prentice has already said the government could fire its entire staff and shut down all its services, and still not save enough to balance the books.

But the promise is out there: 160 schools either built new or renovated. Hospital maintenance will continue.

So how’s he going to do this?

Obviously, he can’t do this. Promises will need to be broken.

On the revenue side, there’s lots of room for breakage. For both income and business taxes, Alberta has pretty well the lowest regime in the industrialized world. He could issue a significant hike on either and Alberta would still be at the bottom of the tax list.

On the spending side, he could cancel the school and hospital promises, and Alberta could clunk along with more children than school spaces, and more sick people than there are beds to hold them. He could also announce new debt initiatives, this being an emergency and all.

Or Prentice could espouse a new round of P3 projects and punt all the costs 30 years down the road. If you were a risk-averse politician, which would you do?

It’s a no-brainer.

This week, Ontario auditor-general Bonnie Lysyk reported that taxpayers in her province are stuck with $8 billion in extra debt, as a result of P3 building projects in the past decade or so.

It seems governments all over the world are discovering that P3s makes good immediate headlines but they’re bad economics.

It’s not that P3 projects cost more, though they do, big time. It’s not that businesses can’t borrow to finance these projects as cheaply as governments can.

It’s not that legal and consultant costs are far higher in the private sector than the public sector, though they are.

It’s not that the profit motive has caused some pretty shoddy design and construction quality cuts, they have. Roofs that leak, classrooms that reach 28C or more in the hot sun, gym lights that start to fall off the ceiling and can’t be repaired for more than month. These are the some of big items.

The small ones are irritations that add up to a full-scale rash: janitors aren’t allowed to touch anything attached to the building. School board staff can’t get a ball down off the roof or get a light bulb changed. You need special paperwork to hang a display from the ceiling.

You can’t fundraise for school items like a scoreboard in the gym or stage equipment — those items belong to the contractor. Some schools can’t even tap the money from the vending machines. Community gym rental rates shot up 800 per cent in some cases — and the contractor gets the money.

That’s if you can find a contractor willing to build that many schools — which you can’t.

But none of that matters: it’s all costs punted down the road.

The big thing is risk. All big projects end up costing more than advertised and always arrive late. An expert contributing to the discussion in Ontario says you can add about five per cent to the up-front cost for these add-ons.

But governments pay on average 16 per cent to avoid those risks. They employ complicated formulas in “value for money assessments” to prove that private enterprise is always cheaper than public. Which — for schools and hospitals anyway — is turning out to be not true.

Lysyk called these assessments “junk science.”

But governments love junk science when they remove the risks involved with filling promises that only magic and voodoo can create.

Relying on magical solutions is so much easier than leadership.

Greg Neiman is a retired Advocate editor. Follow his blog at readersadvocate.blogspot.ca or email greg.neiman.blog@gmail.com.

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