Relentlessly Progressive Political Economy

Someone should tell Labour this was tried in Canada, failed miserably, the banks abused it, and the government had to step back in. Should governments really be trying to raise money this way? Why would any government sell “assets bearing a steady stream of income.” Sound familiar?

Brown to sell off students’ £16bn debt

By Chris Giles and Nicholas Timmins

Published: March 14 2007 23:20 | Last updated: March 14 2007 23:20

Gordon Brown will raise billions of pounds to put education at the centre of next week’s Budget with a privatisation of the student loans system.

The chancellor will make the announcement of extra billions for education the centrepiece of what seems sure to be his last Budget.

The book value of student loans at the end of March last year was £16bn and the Treasury is planning to sell a large chunk of this to a private sector that has an almost insatiable appetite for assets bearing a steady stream of income.

The money raised will lower government debt, ease the chancellor’s constraints from his budgetary rules and allow him to meet his manifesto commitment on education of raising its spending faster than the growth of the economy.

Education is set to receive a budget settlement in the comprehensive spending review of about 3 per cent above inflation, more than the projected 2.75 per cent real growth of the economy.

If somebody walked up to you and said they had an investment tip that would give you a return of 8-10% a year for 25 years, you’d probably ask, “what’s the catch”.

Infrastructure is a hot topic in investment circles these days, particularly for pension funds. The major public pension funds (Teachers, OMERS, etc.) and our collectively owned CPP have been seeking out infrastructure deals of all sorts, including energy, water, and roads/bridges. A few examples:

- Borealis Infrastructure, a subsidary of OMERS, owns parts of Associated British Ports, the Confederation Bridge (in PEI), and 16 elementary schools in Nova Scotia.
- Teachers has significant stakes in two U.K. water systems, 10 U.S. power plants, and a U.K. gas distribution network.
- CPP has a stake in a the major Chilean electricity company.

It’s no secret why pension plans are all over infrastructure investments. Everybody needs the services infrastructure provides, so they generate steadily increasing revenue streams over time, perfect for funds looking to get decent, long run, low risk returns.

Good returns on the long run? Sounds great! I’ll be able to retire! The problem is that users of this infrastructure, which for all intents and purposes is every citizen, are paying for these returns.

Returns imply that profits are made, and profits imply that prices are above costs. Take a water plant. If your pension fund is making money from owning a water plant than it’s charging you more than would otherwise charge so that it can earn a profit. Seems like a shortsighted plan, doesn’t it.

Some would say that the profit is earned from efficiency enhancements rather than higher prices. I will discuss this myth in future posts. “Efficiency enhancements” usually come from fewer services at lower quality and/or lower labour costs. Labour costs are lowered through layoffs or the dismantling of unions and the ability to bargain collectively. Again, another cost to this “investment”, whether in poorer services or in, well, your job loss.

Although we never think about it this way, governments earn a similar return from investing and owning infrastructure assets. Investments in publicly owned/managed hospitals, schools, transportation networks, and water systems provide benefits (a different kind of “profit”) to society as a whole. When private profit is introduced to these services, the return to society is subsequently reduced.

So there is “a catch”. Broadly speaking, these infrastructure arrangements are about undermining the role of the public sector, something I’ve discussed in an earlier post. We must start paying more attention to the investments being made by the large pension funds that supposedly represent our interests.

Part 2 of an ongoing series on P3s.