By Theo van de Kletersteeg
It is important to note that some of the world’s highly successful economies, such as Switzerland and Japan, have achieved their well-known success despite suffering from present-day low labour productivity growth. An explanation of this apparent contradiction lies in the fact that both countries were and are significant drivers of global innovation.
In the case of Japan, in particular, much of the innovation is “exported” for use in Japanese subsidiaries and affiliates worldwide, while numerous traditional industries have never had the benefit of much industrial progress, and Japan’s population is among the oldest in the world. Japan and Switzerland have become global innovation leaders and have attained strong economies because of strong exports of high value-added products, and because of their investments in foreign subsidiaries and strategic alliances which produce significant profits that can be repatriated to the home countries.
On another subject, during the past election campaign one of the highlights of the Liberal platform was the promise to go into deficit spending to make funds available to “kick-start” a stagnating economy reeling from the impacts of low global commodity prices. The nature of these projects, the cost of these projects or the duration of these projects has not yet been announced, but from various informed opinions we might guess these projects will last for the mandate of this government or longer, and might cost $50 billion or more, including $10 billion allocated, but not spent, by the previous government.
Undoubtedly many of the projects will result in the construction of infrastructure that will provide long-term benefits to corporations and taxpayers at large. On the other hand, judging from projects that were implemented during the most recent economic crisis some seven years ago, many will be modern-day versions of Depression-era style make-work projects that will have positive impacts of short duration only. However, while the positive impact of such projects might be very short in duration, repaying the ensuing debt can burden taxpayers for decades – just ask the people of Ontario after several years of an NDP government under the leadership of Bob Rae. It is perhaps instructive to remember that during the most recent crisis, money seemed to be “burning” in the pockets of bureaucrats and politicians, who were anxiously looking for projects to use the funds that had been allocated, with many funded projects being of dubious value.
Since the most recent financial crisis, Public-Private-Partnerships (PPPs) have been used extensively and successfully to build new infrastructures. These partnerships have private enterprises pay for and operate public infrastructure under detailed contractual agreements, with the private operator being repaid through a combination of user fees and performance-based payments which earn a financial return over a long period of time, and with the operator returning the asset to the public sponsor upon expiration of the contract, much like an automobile leasing contract. Given the success of these partnerships, it seems clear that any worthwhile project that can generate sufficient revenues over a long period of time can be funded by private enterprise, obviating the need for government to fund, own or operate such projects. For example, why should taxpayers pay for public transit projects? Such projects have solid streams of revenues attached to them, making them perfectly suitable for funding and operation by PPPs. I am not aware of any public transit systems that have been financed through PPPs, but they seem a perfect example. With private enterprise more than willing to enter into PPPs, the infrastructure projects the government likely has in mind for taxpayers to fund will be those that do not have a stream of user fees attached to them. Taxpayers should be very, very cautious supporting such projects!
Spending $50 billion, particularly when it needs to be repaid, needs to be undertaken with a high degree of care. Do we really need make-work projects that will help re-elect incumbent politicians? In some cases I am sure we do, to help the local economies in natural resource-dependent areas. But we should think very carefully about the objective of such spending. What are we trying to accomplish? Are these projects primarily make-work projects, or can we enhance the effectiveness of the spending by helping make Canadian businesses more competitive? The accompanying article paints a bleak picture of Canadian international competitiveness, resulting from low labour productivity. As if that’s not bad enough, we know that there are no Canadian companies that have undisputed global brand leadership, or that are large enough to be labelled “global”. Canadian companies are also not known for their eager adoption of new technologies, or ability to export new technologies on a global scale. Our flagship global telecom provider, Nortel, went bankrupt, and Bombardier, our largest business enterprise, is struggling to book orders for a new family of aircraft that, by any measure, are setting new standards in range, fuel efficiency, convenience and noise. Blackberry was saved by its large cash hoard, and continues to struggle to re-make itself.
A point that was missed in the 2015 election campaign, and that perhaps we can begin to address now, is the answer to the question: “In future years, what exactly is Canada going to live off”? Our PM is not too enthusiastic about Canada’s reliance on its natural resources, even though those industries have paid the bills ever since Europeans first came to Canada. Our PM champions “Canadian resourcefulness” without defining what that means, how we will get there, or how much money and how many decades it will take for us to get there. Ever since I arrived in this country in 1967 I have heard the same rhetoric, but nothing has really changed. The only difference is that in 1967, there was no unemployment (less than three per cent), no inflation, and strong economic growth that allowed for real (after inflation) wage increases of more than five per cent. If we truly wish to re-make the economy, there must be a well thought-out plan, backed up by long-term action, not mere talk. So, Mr. Trudeau, where is the plan? It’s good to be young, flamboyant and dream about a better future, but we’re not going to get there without a viable plan, lots of money and lots of time.
I advocate that in its deliberations about how to spend the $50 billion of borrowed money, our new government should carefully consider whether implementation of the various projects will simply be costly “one-shot” deals or whether they will have a lasting positive impact on our ability to create value and to monetize that value through increased international competitiveness. Governments have the unfortunate tendency to back losers, at the expense of not supporting the winners. In our own industry, a good example of that practice is the decades of tens of millions of dollars’ worth of support for Davie Shipyard of Levis, Quebec, before it was taken over a few years ago by competent managers who did not need government handouts.
Is this not a time to back some of our well-run corporations, so they can become more productive and gain size to help them compete globally? There are many ways of doing this, just ask the Conference Board or any of our large management consulting firms. I advocate the formation of a second version of Canada Development Corporation, with initial funding of some $5-$10 billion by the federal government, to be owned by Canadian investors (with some RRSP-like incentives for private investors to invest in), to be managed by professional managers, and with the federal government’s role limited to minority representation on the Board of Directors. This fund should be mandated to invest in majority Canadian-owned enterprises that undertake to initiate significant projects that will increase their international competitiveness. The latter should be interpreted in the widest possible sense. How about an example? Here is one, in our industry: Canadian Pacific has made a bid to acquire Norfolk Southern, a large southern U.S. rail carrier. The acquisition would make CP an even more efficient carrier, and would significantly expand its North American reach. It might be able to make the acquisition using its own resources. However, it is equally possible that CP management is concerned that a successful bid might stretch the company’s resources, causing it to want to seek investment support from the new fund. And here is another: Bombardier. Having developed two passenger aircraft that set new global performance standards, the company has more than a reasonable chance of becoming, ultimately, a viable competitor to Boeing and Airbus in certain segments of global civil aviation markets. A sizeable investment in Bombardier is exactly what the country needs to restore some of its past industrial glory.
We have choices: we can spend lots of borrowed money on a large number of make-work projects that will have little or no longer-term impact on value creation. Alternatively, we can spend the money supporting Canadian companies in their quest to achieve scale, efficiency, or brand power, or to acquire access to complementary technology, all of which would help these corporations become more profitable, pay more taxes and hire more people. If we choose to channel such investments through a firm that is professionally-run, and not answerable to any government agency other than through its Board of Directors, there should be every expectation that the investments made by this firm will increase in value, and will benefit the corporations that have received its investments, and its shareholders (the federal government and private Canadian investors). Either way, the borrowed funds will have to be repaid. However, it appears to me that taxpayers and corporate Canada (and, ultimately, all Canadians) will be far better served when the repayments are derived from gains on investments, as opposed to additional taxes to be raised to meet repayment obligations.
Now is the time to bolster the Canadian economy, not just by income-support projects, but especially by implementing projects or investments that will help Canadian companies become bigger, better, more efficient, or all of the above, to help create the future that our PM sees. Investing in Canada’s future is a far more “resourceful” idea than spending borrowed funds on projects of dubious value to taxpayers, despite the obvious attraction of such spending to politicians who will stand for re-election four years from now.