Fail on the Coquihalla

Is the sale of the Coquihalla highway an act of ideological madness, or is it another attempt to cook the books? The sale could net $600 million for the government, but that should be treated on the government's books in the same way as other government debt.

When you take out a mortgage to buy a house, the bank gives you a big chunk of cash and you make monthly payments to the bank for 10 or 20 years. Conceptually the sale of the Coquihalla is similar. According to the government's news release "Although $42.9 million in toll revenue was raised in 2001-02 to offset the original capital costs, almost half that amount - $21 million - now goes to maintenance, operations and rehabilitation." In other words, the current tolls make a "profit" (payment for past capital costs) of $21.9 million per year, but government is only going to require the successful bidder to maintain the Hope to Merritt section. That cost approximately $10 million last year which would leave a "profit" of $32.9 million. If that "profit" could be maintained for the next 55 years, how much would an investor pay for it? That is a simple question of determining the present value of an annuity (stream of future payments). At an interest rate of 5%, the present value would slightly exceed $600 million.

Whether any investor would be willing to pay $600 million for 55 years of toll revenues depends on the other parts of the contract. The current annual maintenance costs of $10 million on the Hope-Merritt section are likely to increase. Over the next 55 years the entire highway will have to be rebuilt several times. Government estimates that the costs rise dramatically if maintenance is postponed. An investor will have to determine whether the ability to increase tolls will be sufficient to cover rising maintenance costs or whether they will eat into the "profit" side of the tolls. If they do, then the contract would be worth less than $600 million. Don't feel too sorry since the successful bidder will start with a 30% increase in tolls.

What's in it for the government if they sell the highway (minus right of way and roadbed)? If the Auditor General rules that the "sale" is really a loan, then the government will have to set up the initial lump sum payment as debt which would prevent using it to artificially claim that the deficit had been reduced. In fact, since most companies don't have $600 million in spare cash, the successful bidder will probably have to raise the initial payment by borrowing at market rates that are higher than the rates paid by government. That means the cost to government will be higher than if it directly borrowed the money.

Government might claim that the advantage of the sale is to shift risks onto the contractor and assure service to the public. That's the same song sheet they use when talking about the restructuring of BC Ferries or the privatization of BC Rail, and it is equally false here. In an era of corporate scandals and failures like Enron and Worldcom, does anyone believe that a company can be counted on to deliver services for the next 55 years? What happens if the company goes bankrupt? What happens if the company allows the highway to deteriorate? Because of the freedom private companies have to fail, they are inherently incapable of removing all risk and responsibility from government.

Transportation Minister Judith Reid said that there will be no deal unless a bidder comes up with an upfront fee that is high enough for the government. What is unclear is who will be looking after the public interest. Once again the role of the Auditor General is critical. He should review any deal before it is signed.