Sell-Off

Yesterday, our unelected Minister of Pork-barreling (otherwise known as Minister of Public Works Michel Fortier), announced that Canada’s “new” government had sold off a package of public properties to private developer Larco Investments for $1.6 Billion. The government was only too willing to unload these properties fearing to have to foot the bill for much needed repairs after years of neglect. As part of the deal Larco will provide $77 million dollars of repairs. So far, so good.

However, several factors point to the long-term insanity of these asset sell-offs:

• The federal government will still have to pay annual maintenance and operating costs on top of base rent.
• The base rent of $79 million dollars/year is more than the amount Larco will spend on the extensive repairs needed.
• As a condition of the sale, the feds signed a guaranteed 25 year lease.

Now that is pretty sweet. Can you imagine getting a 25 year guarantee by your tenant, employer etc. This is what I call revenue security. PSAC has called the Minister to task, noting that on top of giving up control of these properties “the federal government has, in effect, written a $630 million dollar check signed by Canadian taxpayers.” It is even more perverse considering a counter-appraisal by Infometrica evaluated the properties at $2.3 Billion. No risk of large repairs, or increasing utility costs, no risk of default, AND guaranteed rent. Sounds like a license to print money. However, this type of profligacy in favor of private property developers is nothing new, and we should head warning to lessons of the past to learn about the repercussions of these silent deals.

In early 1974, when restrictions were imposed on public works expenditures, the federal Department of Public Works (PW) cleverly adapted to these new conditions. With the assistance of private sector real-estate moguls, senior mandarins at PW initiated an early form of public-private-partnership (P3’s) to ensure the post-war building boom would continue. Under direction of Andy Perry, who before his appointment as ADM of PW had built Robert Campeau’s Place de Ville Complex, the feds abandoned the “crown-construct” model preferred by past and current functionaries at the NCC and launched the “lease-purchase agreement programme” (Deachman and Woolfrey, 1982).

However, as Deachman and Woolfrey (1982) astutely demonstrated in their case study of Terrasse de la Chaudière, the cost-effectiveness of such agreements was often questionable since over the long-term costs for office-retail-hotel developments such as Terrasse de la Chaudière were considerably higher under the “lease-purchase” agreements than the “crown-construct model.” Deachman and Woolfrey estimate the Terasse de la Chaudière development would over the full 35 years would cost $1B, and $900M more than it would have cost to self-build.

Yesterday’s announcement is a continuation of this trajectory.

This is a classic case of what McGill University Prof. Henry Mintzberg has referred to as the perverse adoption of private management models to the public sector, which contrary to the private sectors have completely different goals, and as a result different criteria from which we should judge efficiency. Leasing works for large private sector firms since they must meet short term financial objectives to keep investors happy. These private firms often sell-off valuable property to boost profits, dividends or stock price. Private firms may also sell fixed assets to provide cash for investments in liquid assets with higher returns. Private firms use opportunity costs as a way to make these decisions. Fixed asset sales work very well in the short-term. However, governments operate over the long-term with financial horizons beyond the life span of the average firm. Governments are not in the investment business: they cannot turn around and invest the sale value in another asset that will give better returns (It’s not like Harper is going to invest the 1.6 B in Berkshire-Hathaway and send me a nice dividend check every quarter). Assets such as buildings make sense for the public sector because over the long-term owning is cost-effective. Moreover, no matter what, the feds will need office space. They will never “get-out” of the business of needing office space. The logic just doesn’t work here.

We can excuse ministry officials, I guess, since Fortier is hiding in the shadows of his barrels. Remember this is the unelected and uncountable Minister who is unwilling to run in one of three (THREE!) by-elections in Québec. My guess is he is scared of facing public scrutiny. To scare him out of the shadows, I say that whenever Fortier announces something every reporter should ask the same question: Mr. Fortier, why are you not running in the Outremont by-election?

The murky nature of this deal, and flawed rationale of the initial 1974 P3’s continues to capture the minds our MBA-indoctrinated ADM’s and high-level federal property mandarins. Henry Mintzberg should take them to school! Oh, and did I mention this: When is Fortier going to run anyway?