“The PPP works best only when you have an income stream”

October 2011

(Part 2 of 3) Conversation with David Miller, former Mayor of Toronto, on – ending a political system of patronage – growing jobs and balancing budgets during a recession – how the city has fared under his successor.

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Here is the transcript of the video.

1. Infrastructure funding via debt

Emmanuel Daniel (ED): I’m speaking to David Miller, two-time Mayor of Toronto, a great city of two and a half million people, and a great suburban metropolis, with incredible infrastructure. Two-time Mayor of Toronto, and right now a lawyer.

 

David Miller (DM): I am back here on Bay Street, which is the heart of Canada’s financial district, and I was privileged to be two-time mayor of the City of Toronto, one of the world’s great cities, a city that’s very welcoming. More than half the people that live in the city, including myself, are first generation Canadians. The city is very prosperous. Certainly from inside of this office here we can see the prosperity of Toronto.

ED: A city with 8,000 hectares of park, 1,500 parks, a good social infrastructure. What was your thinking when you were mayor in terms of the responsibility of the state or the city in building some of this infrastructure, and the way in which it should fund the infrastructure? I ask this especially because you did have a very colourful term as mayor in some of the decisions that you’ve made, some of the big infrastructures that you pulled out, and then the ones that you promoted.

DM: Well, from my perspective as mayor, and I think I speak on behalf of most Torontonians when I say this, we see it all linked. You have to have a good public infrastructure to have a successful business community and to be a city where everybody’s welcome, not just the richest people, everybody. And the way I thought about it was you have to create prosperity and support it in order to have opportunity, and those things only occur in a city that’s liveable. And a big part of that is having a proper infrastructure.

If you don’t have strong infrastructure, the business community can’t prosper and the city won’t be livaeble; particularly things like mass rapid transit, very significant and important for us, as well as the things you mentioned like our public parks, our libraries, our childcare centres, affordable housing, other things that support the life of everybody so the city can be inclusive. And one of the challenges we face was how do you finance major infrastructure that’s built in the case of a light rail line for 50 years, in the case of the subway line for 100 years; how do you finance that from the public purse, and it’s a significant challenge.

ED: The city’s mandated borrowing limit is like 700 million; is that right?

DM: Well, we chose, ourselves, to create a ceiling of 15% of carrying costs. So the way we pay for our borrowing, it’s like a mortgage, we pay principal and interest, not just interest, but we didn’t want it to be any more than 15% of budget. That was our self-imposed ceiling.

ED: Right. But you’re fully funded on that front? You’re fully utilized in that you’re fully borrowed on that front?

DM: The city is fully utilizing its borrowing capacity. One of the challenges in the Canadian context, we ran balanced budgets, and one of the things I did as mayor was to create a new kind of tax levy on the purchase and sale of property, and that was important because Toronto was undergoing a significant building boom. We brought in quite significant policies to support the building boom. We thought it was the right thing to do for an environmental perspective, people living in the centre of the city, it’s the right thing from a job perspective, creating good quality union jobs.

But as that building boom occurred, we wanted some revenue to come back into the city coffers, so we created a land transfer tax of 1% which helped support the city budget. But even with that, it raises about $250 million Canadian a year; that’s not going to support a new subway line, which costs billions of dollars. It’s a significant challenge for –

ED: But tax wasn’t your preferred venue in terms of raising public funds?

DM: For infrastructure we borrow, that’s the Canadian tradition. We also looked at some innovative approaches for certain projects, and I could talk a little bit more about that later. One of our legal challenges was, though, we couldn’t borrow against a subway line for example. So even if you could fund a private partner, which would need a stream of revenue, that wasn’t a legal possibility for us. We have to borrow against the full faith and credit of the city as a whole. So for any of our infrastructure we had to go to the debt market. We chose to do that because this infrastructure outlasts one generation, and so you need to finance it over a longer time period than paying for it today.

ED: Right. In fact, in many other parts of the world, especially the developing parts of the world, there’s private public partnership. The PPP models seem to be very popular and many governments are thinking to move along those lines. If you didn’t have the restrictions that you have, is that something that you would’ve considered?

DM: Well, we would’ve done certain things. There are some challenges with the PPP model. It’s more expensive for private companies to borrow than governments, at least in our context. The City of Toronto has an AA+ credit rating, so it’s not very expensive for us to borrow, but we would’ve liked to use private finance more, and I’ll give you one example. We have a programme to help private landlords and public landlords to energy retrofits on their buildings, and we’re doing it for environmental reasons, very significant greenhouse gas emissions. It’s a pay back of about seven to ten years on these retrofits. The private sector won’t finance that. They’ll only finance it if it’s three or four years.

So we proposed the works being done on it now to set up a model of a public corporation that borrowed money on the private bond market because it was a public corporation it could get security relatively easily against the buildings, which would help close the gap in the borrowing costs. The reason that they were a little bit high and the pay back was long was because there’s not good security. That would’ve allowed us to use private finance for a public purpose, and I think innovative models like that are very helpful.

In our context, we didn’t use a PPP type model very much. It’s being considered on one of the new light rail transit lines. But in addition to the private borrowing costs being higher, that model works best when you have an income stream.

And in our context, unlike for example Hong Kong, there’s a significant subsidy for public transit because the city isn’t dense enough to support it on its own. So there’s no income stream that you could use to support the private borrow.

ED: Actually, when you look at the PPP model and why it’s very popular, the unstated reason really is that it’s also a form of political patronage in that although it’s called PPP, the public and the private part of the equation is really politically linked organizations on the private sector part of the economy sort of collaborating with the public sector. Very often it goes to private sector players who are linked in some way or another. Give us a sense of the Canadian political landscape and why that is not necessary and how is political patronage devolved here that gives the system its integrity.

DM: Well, it’s an interesting point you make. Canada, like many other places, is not without scandals that happen from time to time where people are close to those in power. Often those who’ve been in power too long get public contracts, whether it’s the PPP model or anything else. However, I’d say our system’s pretty good. And one of the reasons we use a traditional procurement model, which is the government borrows the money, typically we will put out the contract for bids from private contractors.

Certain infrastructure we build ourselves, like subway tunnels because we’re the experts, but most of it is built privately and it’s transparent because the low bid wins. So that helps avoid the challenge of influence peddling. And always, even if it’s not happening, there are PPP models in Ontario and Canada, but if companies that are close to the government win, people always make comments. And the traditional models as well established legally as transparent is based on price, provides good value for the public purse, and it’s clear that it’s not influenced.

The big challenge, of course, is where do you find the money. And I think the other reason some governments like a PPP model is they can build infrastructure now that’s being paid for in the future by other revenue streams so they don’t have to put it on their books. So there’s a political push because we all want to build our cities as quickly as we possibly can.

2. Reducing corruption and surviving the financial crisis

ED: In the time that you stood for mayor and became mayor, what was your most important mandate that you gave yourself on which you won your ticket?

 DM: Well, I ran on a pledge to end corruption in the city. There was a place in Toronto where who you knew was more important than what you knew, and we worked very hard. We brought in a lobbyist registrar, and we gave our auditor more powers to ensure the people knew that if you did business with the City of Toronto it’s because you had the best products at the best price, and I think we were very successful in that. So that was the number one thing.

The second thing is that Toronto is Canada’s business capital. It’s a tremendously successful city. It’s green. It’s highly integrated. It’s very welcoming. It’s very safe. But all of those things were fraying a bit, and we needed leadership in order to become as successful as we potentially could be, and to do that, we needed to build public transit infrastructure. We had a very advanced plan. Some of it’s been slowed down since I was the mayor, but we do have two lines under construction; a subway and an LRT. Significant investment from the national and provincial governments to do that, and that’s the most infrastructure that’s been built probably in 30 years. And very, very important for us because if people can’t get around a city, they can’t succeed for their families, and of course business can’t succeed.

ED: Another interesting thing about Toronto is that it’s a large city relative to the national economy. If you go across the border to the United States, there are many cities that are small where there’s a greater degree of freedom and it’s decoupled from what’s happening at the federal level in a sense. So to what extent does Toronto mirror national politics and the national agenda on budget management, and to what extent has it been able to be independent of that?

DM: That’s a very interesting question. First of all, one simple statistic is that within an hour’s drive of Toronto, there’s about one in five jobs in Canada. That’s sort of like New York, Chicago, Los Angeles, San Francisco, Cincinnati all put together, and more in terms of impact on the US. It’s fairly rare in the world for that much to be concentrated in one main city and it makes a huge difference nationally and provincially. From time to time the interests are aligned. When I was first Mayor, they were. We had prime minister Paul Martin, the Ontario premier, Dalton McGuinty, and David Miller. They call us the three M’s.

We worked together because we all recognized that Canada can’t succeed without Toronto succeeding, but that was unfortunately a bit rare. Traditionally, it’s a bit more of a hostile relationship between the city and provincial government. That’s for pretty simple reasons. We produce most of their tax revenue, and so from a city perspective, we think we should be making the decisions, and of course those governments think that they should be. But we did have that period and there were huge investments in Toronto in public transit and a number of parks in the waterfront revitalization. Very significant ones that came about because of that time, because the governments were aligned, and we worked together on common issues to solve them together.

ED: Is there infrastructure that you share like national airport, for example, where the alignment between the city and the federal government is important?

DM: Most of the infrastructure is discrete. Pearson Airport is the national hub in Canada, its very important to the economy of Toronto, but it’s run by a board appointed by the federal government. The city gets one appointee, and even then we don’t directly appoint that person. The one piece of infrastructure that’s shared by all three governments is our rail system. So Toronto Union Station, which is just over here not too far from my office, the city owns, the federal government has jurisdiction over railways, and the province runs the local commuter trains called GO Transit, and our subway comes right into it.

So we’re working together. That’s the most important transportation up in Canada actually. More people pass through Union Station every day than pass through Pearson Airport, and we’re working together to revitalize it, to revitalize the rail infrastructure, and the station. However, most things are separate. Although the funding comes from all three governments, most things are separate and you have provincial agencies, federal agencies, and city agencies.

ED: In terms of securitizing your regular income, your income, and also your debt ceiling, you’re fully subscribed in a sense, what are some of the checks in place to prevent a Canadian city or city council from going the American way of actually securitizing it, taking it off the books, and then issuing even more debt?

DM: Well, first of all, the voters wouldn’t put up with it. In Toronto we’ve got a very proud heritage of being a financial centre and it sort of seeps into everybody’s lives. We’re the kind of people here that always balance their checque books and we expect our governments to. Secondly, city governments have to balance their budget. Thirdly, by law, your budget has to be balanced.In our case, we passed a ceiling that said 15% of our income is all we’re going to spend on our debt. So those are all checks and balances, and these kind of off book transactions worry me greatly.

And it’s one of the reasons I think people should be a little bit cautious with public private partnerships because they are often off book. But in reality, the government who’s the partner in some way or other is providing an income stream, and what would that income stream go to if it wasn’t going to this piece of infrastructure? That’s an important question to ask. And I think we’ve seen some of these like in London, England for example, come unravelled at great cost to the public.

ED: Right. But at the same time, what you pay for your debt, it’s on the high side, isn’t it? You pay 5.3% yield?

DM: That’s an average over time.

ED: But given the cost of funds that are available in the market today –

DM: If the City of Toronto issues a bond today, again, it gets almost the best rate possible. So at the time that the cost of funds went up to about 5%, that was quite good in the market, particularly compared to other Canadian, North American governments. And yes, there’s a cost to that, but if you think about the kind of infrastructure that’s paying for, and we try to use our borrowing for big infrastructure and try to pay for small infrastructure on an on-going budget. So the way we thought, and I think it’s the right way, if this infrastructure’s going to last 50 or 100 years, you borrow for it.

If it’s something that’s small and the pay back period’s five years, then you pay for it out of current revenue. In the private sector, you try to match the depreciated life of an asset against your financing; it’s the same thing for us. And yes, of course, when interest rates go down, some of the financing was in the past, so it’s a little bit more. But this year’s borrowing will reflect the new lower interest rates and the overall cost will come down.

ED: How’s the global economy affecting the City of Toronto as an economy as well as the ability to tax both of the consumption level as well as at the capital tax level?

DM: We see the impacts of the global economy a little bit indirectly. Toronto, itself, reasonably survived the great financial meltdown. Our banks are highly regulated and well capitalized, very conservative. The banks are criticized for being conservative, and the government is criticized for over-regulating them, but the result was they survived the crash very well, particularly compared to our friends in the United States who had riskier practices. And that was important to our economy because the financial services sector’s a big part of Toronto, so we did okay.

Unemployment rose, but our building sector was thriving partly because of significant measures we brought in as a city. Lowering commercial taxes, lowering what we call development charges, if you build a new building you have to pay a charge, and we charge far less than we’re legally allowed to. The result is a building boom that’s being sustaine. However, it’s not without challenges, because our financial services sector support mineral exploration. So as the world economy softens, that business softens, and we have an impact in Toronto.

One of the fortunate things about Canadian cities is that because we’re highly reliant on property tax revenue, that’s pretty stable. So the city, itself, from a budget perspective, we made some efficiency measures and we negotiated with our employees to moderate certain benefits, for example, but we did okay. We would like to get a share of sales tax revenue so we could support infrastructure that helps grow the economy. But on the other hand, when there’s a recession, it’s nice to be dependent on a stable source of revenue which is what property tax is.

ED: You know the funny this is that before I met you, just looking at the literature available on the way in which the city’s managed, I would have imagined that you would’ve been a proponent of quantitative easing, that you would be the proponent of an expansionary sort of budget. When you look at what the US had to do twice in terms of an expansionary budget, what were your thoughts at that point in time in terms of maybe what the good side of it was and what the bad side of it would’ve been?

DM: Well, cities are in a different position than a national government, so you’re not wrong in your instinct about what I would have believed in. I’m an economist, actually, I studied economics before I became a layer, and I think Keynes got it right. When there is a significant drop in the economy, it’s the instinct of every resident and every business to spend less, to retrench for obvious reasons. And the only way to replace that gap is through government action. But I think there is a problem.

In a global economy, if you use methods that might’ve worked 50 years ago to put money in the hands of consumers, let’s say in the United States, and they buy things, most of those goods are going to come from Asia, which doesn’t help the United States create work.

ED: By the way, and our property prices in Asia went up as a result, so the impact was real.

DM: Yeah, and it’s very traceable. So I think in the modern world you have to be extremely sophisticated, government has to act when there’s a recession, there’s no question about that from an economics perspective because when everybody else is actually spending less. The only people who step in are the government but you have to be very thoughtful about how you do it. And as a mayor, my belief is that what government should’ve been doing is building public infrastructure that was needed but we haven’t found the money to do so.That was the moment to do it and to expedite those projects so you really hired people on real things that would benefit us for a long time.

That’s the way I think as opposed to market manipulation to both follow Keynes and produce a lasting impact that works from an economic perspective.

3. The importance of a consumption tax and the impact of Asia’s growth

ED: Right. And given the fact that the US did pursue an expansionary budget for as many years as they did, did you feel some of that impact on this side of the border?

DM: Probably a little bit. Things might’ve gotten worse, but we’re pretty unique. If you look in the skyline of Toronto, we’ve got 100 cranes in the sky and that’s for certain economic factors and because of certain policies we’ve pursued. That’s not true in any American city that I’m aware of. When the crash hit, cranes stopped in the US. In fact, the only two projects that stopped in Toronto were both financed from the United States. All of the ones that were financed here continued. So we didn’t really see, I don’t believe, a huge benefit from what happened in the US. Obviously, some, otherwise the slow down would’ve been greater, and I think US had a couple of problems.

When I studied economics, we were taught and I’m sure it’s right, I’m convinced on it from my time running Toronto – that if you raise interest rates, you put a brake on the economy, but lowering interest rates doesn’t necessarily do the opposite for some obvious reasons. Business borrowing costs go up, they lower investment, but just because borrowing costs go down, they’re not going to restart investment unless they see a business case.

ED: That’s correct.

DM: And the analogy I was taught is it’s like pushing a string, it doesn’t work, and that’s what you see with quantitative easing. It probably blunted the recession getting worse, but it’s off that in and of itself isn’t going to push business to invest. You need real opportunities for business and part of that has to be people having jobs and money in their pocket.

ED: At the city level, a consumption tax is a very debatable proposition, and in fact there are some cities that don’t take that route and those that take that route to keep their budgets balanced. What is your sense in terms of what are some of the guiding principles in terms of the use of consumption tax for your city budget?

DM: From my perspective, whether you’re a city, a sub-national government in our case with province or a national government, whether you’re dealing with the economy in good times or in bad times, but particularly in bad times, you have to think about jobs. Some of the countries right now that are running major deficits, it’s because of not enough people are working and paying tax. It’s not because their public services are too great, it’s because people aren’t working, and you have to have a strategy that puts people back to work or keeps people working, and that’s’ what we try to do within our jurisdiction as a city.

So how do you marry that with public finance? Well, I think provided you can ensure that jurisdictions that are beside each other aren’t competing with tax rates, I think a consumption tax, or an income tax helps a city do that. What happens today, if we make an investment that helps the economy, we only get a very indirect pay back if there are new buildings built. That’s the only way a city in Canada gets new money if there’s a new building. So we make an investment that helps the economy, the money’s gone, and then there’s no revenue stream to help us make the next investment.

So you need a tax that grows with economic growth. What we proposed as cities across Canada was to get of the consumption tax here, which is called the GST, the Goods and Services Tax. So when we made investments that helped the economy and kept people working, some of that came back to allow us to do more. And I think if it’s set up like that, that can be very useful. I think the problem in some places, like in the US, is you have a city centre with one consumption tax and then the suburbs cutting in and trying to lure businesses, that doesn’t make any sense.

It’s a regional economy nowadays, and these things need to be thought of in that perspective.

ED: Final question. Linkages with Asia and the global economy, what is your take on what’s going on in Europe at the moment, and what are you concerned about in terms of how it might affect Canada? And in fact, there is this whole question of how Greece and some of the European countries are dealing with their liabilities, and then perhaps just a little bit more on extended up to Asia and how the Asian economic miracle sort of impacts Canada right now?

DM: Well, Canada’s a trading nation. Our banks here have operations, particularly in Latin America, Scotiabank for example has a very deliberate business strategy in Latin America, and Toronto is a world city. When you walk around Toronto, as I’m sure you’ve seen, you see the face of the world and our businesses are more and more although they’ve got a ways to go – thinking of themselves as businesses doing business with the world. And there’s some obvious places where we’ve got historic connections with Europe, we’ve got growing connections with Asia, and we’ve got connections with Latin America.

That’s where the future is for this city. In business areas where we’re strong, we should be trading. We will be with Asia, with Europe, with Latin America. Of course the European situation worries everybody. My personal view of it is when you look at countries that are struggling with their debt and their balance of payments, they’re also the countries that have high unemployment rates, and the first move should be to make sure that people are working. If they can’t find private sector work then build the things that are needed in those countries, just like the new deal in the 1970s. Build the things that are needed and that will help the economy revive and it will also help their struggles with the debt. I think that’s absolutely the first thing.

And the second thing from my perspective is that you can’t cut your way out of these kinds of economic situations, because when governments make cuts, that has a negative impact on the economy. So you have to find a way for governments to be efficient, to meet their debts, to keep people working, and sometimes that involves tax revenue. It’s not very popular to say that, but sometimes – so I have some sympathy with President Obama who calls for people who are doing well, millionaires, to pay a little bit more to help those who aren’t.

ED: In fact, it’s sentiments like that, that makes it very difficult to place you on the spectrum of an American type left and right.

DM: Because I’m a mayor. By the nature of their position, mayors are very practical. I’m a social democrat; that’s my nature. But particularly in Canada, and I think it’s true in the US, mayors are practical, we want to make things happen. And how does your city succeed? You’ve got to have jobs, you have to have a strong private sector, but you also need public investments in the infrastructure that keeps the city successful. That’s what we try to do.

ED: But as mayor, you actually did not do the third term that you promised yourself to do with a number of those infrastructure projects still hanging in the air.    In fact, they were reversed after you left.

DM: Well, not quite, but I would say they’re slowed down because they’ve been started. But I’d originally intended to do three terms when they were three years, so I was prepared to serve nine. If I had to serve again, it would’ve been 11, and my children would’ve been in university, and I never would’ve been home two nights in a row in their entire life, so that’s why I stepped back. It is hard when you know what needs to be done to see it be slowed down. Our transit plans for example, instead of building three lines, the current administration is bearing one line and using all the money for that.

In our context, that’s not a very wise thing to do. It’s not a good use of money because you need a network. The successful transit cities all have a network. But it’s up to the people to say as well. It’s not just my city, it’s a city of nearly three million people and we have a wonderful thriving democracy and I’ve got no doubt people are going to speak up.

 

 


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