The Phantom Tollbooth:
Highway 407 Revisited
a special report by NETWIT
(NETWork Interested In Telling-it-like-it-is)
Norton Juster's The Phantom Tollbooth, from which part of our title is taken, is a "kid's book" that features a travelling tollbooth and a dog named Tock. It is unduly neglected in comparison with Stuart Little, Wind in the Willows, C.S. Lewis' Narnia books, etc.. But this is not a kid's lit book review. Our subject is, in fact, rather sordid.
It concerns Highway 407 in Ontario, which represents the merging of two of the ugliest strands of the neoconservative insurgency that began in the 1980s.
We refer to the usurpation of the public sphere and the related usurpation of state authority by private business corporations.
407 is a "Phantom tollbooth" in that it uses electronic tolling, either through cameras that record the licence plates of vehicles on the entry and exit ramps or through "transponders", dashboard devices that electronically record vehicles' use of the highway. In 1999 the Harris government "sold" the 407 to a consortium now known as 407 International. At the time the majority partner was a Spanish outfit, Grupo Ferrovia/Cintro, with SNC Lavalin and CDP Capital also involved. The current major stakeholder is McQuarrie Infrastructure Group, after its acquisition of part of Cintro. The full terms of this sale have never been disclosed but it is known that 407 International (407) has a 99-year lease on the highway.
What we do know is that 407 has engaged in a systematic pillaging of Ontario motorists, via its unregulated toll increases, the most recent being an increase of the peak-hour rate to 15cents/km. Not that we think soaking drivers of vehicles is a bad thing; we'd just rather that if drivers are going to be soaked then the revenues should go to the people who took the risk to build the thing and who give authority to the means of collecting them…the people of Ontario.
This misadventure originated with the Rae provincial government of the early 1990s. As part of its panic reaction to the public accounts deficits created by the recession of 1990-91 – the most infamous of which were the so-called Social Contract and the creation of "Rae days," or.unpaid vacation, for Ontario public servants – the Rae government went on a desperate search to "off-book" as many expenditures as possible. This is just an accounting trick whereby a subsidiary is created that is given its own books (accounts) that are not reported, by the ruling accounting conventions, on the books of the parent entity (in this case the Ontario government). This led to the creation of the Ontario Clean Water Agency(OCWA), for example. Like most efforts undertaken by the well-meaning but inept Rae government, this failed; the Provincial Auditor would not allow OCWA's net expenses to go off-book.
Nevertheless, a project was launched to seek private financing for the new Highway 407. After much twisting and turning the Rae cabinet was forced to conclude, to their credit, that it would cost much less to have the project financed by Ontario government bond issues. This is the central truth of all P3 (Public-Private Partnerships) ventures. The cost of capital is much lower to governments than private corporations. This is so for two reasons. First, private corporations always have some equity component to their financing and equity is always more expensive than debt (for a given entity). Second, despite all the rhetoric about governments being out of control etc., long-term bondholders love government debt.
The underyling reason for both factors is risk. Equity is riskier than debt because it is not secured. Government debt is less risky because governments do not go bankrupt. Let us repeat that. Despite all you hear, governments do not go bankrupt. Or if they disappear, the equivalent of bankruptcy, we concede, then everyone has much more to worry about than collecting debt. Hence, all this "share the risk" stuff we hear about P3 is pure baloney, as 407 illustrates. The Ontario government took all the risk and then, at the hands of a later group of irresponsible ideologues, gave away the rewards.
The takeover of the public good by corporations actually has its origins in the Volcker-initiated recession of the early 1980s, which Hector has discussed elsewhere. By tripling the real rate of interest on riskless investment this raised the bar on all investments. Where could private corporations get rates of return comparable with riskless government bonds? By talking over public assets, is the short answer.
There are two great problems to be overcome in this maneuver. First, public goods have an economic character that is fundamentally incompatible with private goods and organizations that deliver them. Second, people have an unfortunate "irrational" attachment to these goods.
Private goods are goods that are excludable from others and for which there is rivalry in consumption. Either I buy the last licorice pipe from the 7-11 or the kid with the Eminem T shirt, backwards Yankees cap and various adornments to his facial features does. The fact I have to pay means that he might have bought it or someone else could have. Public goods lack either excludability or rivalry or both to some degree.
National defence represents an example that even the most devoted P3er will accept. Even here, note that mercenary armies have not been unknown. But, given a choice, who would want to live in regimes with mercenary armies? Public health, public education, sewage systems, bridges, highways, the electromagnetic spectrum, these are all other examples and all have come under challenge in the last twenty years.
Public goods are also always natural monopolies. They are not the only kind; telecommunications and water distribution involve private goods but are also natural monopolies. Natural monopolies are services for which the cost of multiple means of provision is simply too high. Two or three sets of water pipes cannot possibly be worth the supposed efficiency of competition. (Note that we have not mentioned electricity; see Hector's companion piece on why bulk electricity grids are almost pure public goods.)
Turning briefly to the alleged benefits of introducing "competition" into the provision of public goods, 407 is a classic example of how hollow all of these claims are. In general, any good may be produced more efficiently by reducing the capital cost, the labor cost or the materials cost. This may be done by using less of each, paying less for each or by technological improvements that achieve the same results.
We have seen that under P3 that the capital cost is always higher. What about materials and technology? Let's look at 407.
First, the construction. The materials are gravel, cement, sand and steel. Why would private procurement be any cheaper? It wouldn't. In fact, given the historic connection between political patronage and gravel in Ontario, for example, we would expect private procurement to be more expensive. As to technology, building roads means lots of big machines that require capital. And pretty much the same machines that have been used for 30 years. Not much room for "innovation". As for operations, as we have seen, most of the revenue collection is done courtesy of the Ontario taxpayer. Otherwise we have the capital invested in the electronic tolling and patrol vehicles and maintenance and administrative labor.
We assert that if anyone were to examine all of the other P3 targets, this same pattern shows up. Public goods infrastructure is capital-intensive, uses mature highly-optimized technology and generally requires a high-skill labor force. Thus, what the P3 efficiency claim boils down to is: can using fewer and/or non-union workers offset the capital cost penalty?
In the few cases where that answer is "yes" it comes at a price. Shoddy infrastructure. Roads that fall apart or are unsafe. Public health systems that no longer protect water supplies. Besides Walkerton, a good example was provided in the 1997 Ice Storm which saw patronage-procured transmission lines in Quebec snap like toothpkicks while , a few miles away across the Ontario border, the "overbuilt" towers built by the despised Hydro monopoly still stood.
Which leads us to the irrational attachment that people tend to have for public goods. People are not economists (see Economics for Humans. So they don't think about excludability and rivalry. They think about things like "rights" and "fairness". They think, it seems, in wealthy places like Ontario, that they have a right to water, health, education, a degree of security, recourse to the courts, use of the streets and highways. They think, we assert, that they are "citizens" as well as "consumers".
Dey is going to have to be taught a lesson…
We have seen a systematic assault on both of these obstacles over the past quarter century. The chief weapon in this has been corporate hegemony over the mass media, which has bombarded us with messages about the venality and inefficiency of government, the superiority of the "private sector" and the sanctity of private property. The secondary weapon has been corporate hegemony over the justice system, which has been led by so-called "free trade" agreements, like NAFTA, the actual purpose of which is to bind governments to the emerging international corporate order. Less noticed but more insidious has been the accumulation of court rulings that favour private contract over legislation.
More and more corporations aim to bind legislative authority. The most recent turn of events in the 407 case is a perfect example. A judge ruled that Ontario has no say in the setting of 407 rates and that the contract is inviolable.
This is an absolutely basic repudiation of democracy, or at least Westminster-type democracy. The origins of Westminster liberal democracy is with the Magna Carta, which was forced upon Richard I by the Barons (at Runnymede island in the River Thames). Magna Carta, while strictly a reflection of the Barons' self-interest, established the principle of "no taxation without representation," and the later establishment of Parliament following the English Civil War gave the exclusive right to tax to the representative body known as Parliament, which, ironically, reduced the power of the descendants of those Runnymede Barons.
Now, the same corporations and front groups – the National Citizens Coalition, the Business Council on National Issues – that mewl about "taxpayers' rights" when talking about rates of taxation blithely advocate trampling roughshod over this fundamental right about the principle of taxation when it comes to protecting corporate contracts. With the possible exception of Charter Rights and where federal law is paramount under the federal Constitution Act, in Ontario, unlike the US, the legislature is sovereign over the judiciary. If, under existing law, the judge is right and there is no avenue to reopen the contract, the solution is simple: pass a new law that makes it so.
Even more egregious in the 407 case, is the extension of state authority to act as a "collection agency" on behalf private interests. The 407 revenues are almost entirely dependent on the use of state authority for private purposes. 407 has access to Ontario's motor vehicle records, without which its cameras would be useless and it would be unable to collect much of the transponder revenues without reciprocal agreements among the Ontario and most U.S. states law enforcement organizations.
However, this is the Achilles heel should the McGuinty government lack the courage to pursue direct legislation. 407 can be dragged to its knees financially by refusing to cooperate in the use of vehicle registrations and in enforcing collections through the reciprocal agreements with US states. This would force 407 to take the Ontario government to court to force it to collect 407's revenues. In a delicious piece of jiu-jitsu this would allow the Ontario government to use a time-honored tactic of large corporations to subvert justice, i.e. legal rope-a-dope. Drag out the multiple cases as long as possible (years) during which time 407 would be bled dry from lack of revenues. In the end they would have to settle, i.e renegotiate the deal, which they adamantly refuse to do now.
This is a general strategy that citizens everywhere should be demanding of their governments. Remember that "corporate persons" are fictional creations of the state and, in a liberal democracy, that l'état c'est nous. If rope-a-dope doesn't work, pass a law requiring all corporations active in Ontario to have an Ontario registration and make such registrations clearly bound by legislative, not judicial authority.
Remember the Pearson Airport deal that then-Prime Minister Chretien cancelled after the 1993 election? After all the gnashing of teeth, he made it stick. If a corporate lackey like Chretien can do the right thing, why not Dalton? More recently, Toronto Mayor David Miller of Toronto showed the way by refusing to kow-tow to the supposed primacy of private contracts over the "fixed link" to the Island Airport.
Of course, history, law and politics all have other interpretations. One such interpretation of Magna Carta is the old vaudeville monologue (popularized by Stanley Holloway), “’Enry ’Igginbotham's ’Istory of Magna Carta”, which concludes; "It's cos of yon Magna Carta, as were made by t'Barons of old/that in England today we can do what we want, as long as we do what we're told."
The Barons of P3 have spoken. Will Dalton do what he's told?
The Phantom Tollbooth: Highway 407 Revisited © NETWIT, 2005
Posted February 16, 2005
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