Plodding to “yes” on an economic no-brainer

Skeptics have an easy time dismissing claims about failsafe investments in the economy.  My favorite example, the $40 million Downsview Aerospace Campus, probably suffers from this.  The return on investment sounds too good to be true, and skepticism tends to trump opportunism when public sector spending decisions are made.

When governments demur from an expensive commitment like this, they employ a few familiar forms of argument.  First there is a suspicion of overstated claims, combined with false modesty about government’s ability to pick winners and losers in the economy.

Then there is general skepticism about the proponents of a project, either because they lack real business bona fides (in this case, Centennial College), or because their commercial interest (in this case, Bombardier’s) taints their perspective.  Credibility is difficult to establish when proponents are criticized both for being too businesslike or not businesslike enough.

When challenges to the proponents’ estimates and objectivity aren’t enough, the last resort is an austerity argument.  There simply isn’t enough money.  This is impossible to contradict.  There has never been enough money for anything a government does not desire or is not compelled to do.

Unfortunately, economic development is neither compulsory nor politically appealing.  It entails the consideration of strategic options, commitments to plans, and implementation of initiatives over periods of time that are longer than the average term of a government.  If the payoff of an economic development strategy won’t occur for five or 10 years, and the next election is three or four years away, members of the government have only costs to show for their time in office, not benefits.  Worse, if they lose the election, their opponents may get credit for the economic return on investments made in the previous term.  This adds insult to injury.

Of course, the reluctance to make long term economic investments is expressed to the proponents and the public in ways that make it seem reasonable.  Government agencies like to point out how much they’ve already spent on a related category of activity rather than address the special merits of a particular proposal.   They’re also quick to point the finger at other potential sources of public or private sector funding when circumstances seem to demand a timely decision about the resources under their own control.  Then there is rejection by attrition, characterized by hearty praise of the proposal that degrades over time into endless study and negotiation, ending with a decision that delivers too little or too late to achieve optimal results.

It’s difficult to understand why sufficient funding hasn’t been committed in the Downsview Aerospace example, given that the forecast benefits are unassailable.  Centennial College has a training contract with Bombardier that assures employment for graduates.  Bombardier badly needs the next generation of aircraft assembly and maintenance technicians trained in the new technologies designed into its C-series jets.  Aerospace jobs, which pay twice the national average, are going to be there if the training occurs soon enough to prevent Ontario’s share of the global industry from migrating to jurisdictions with more skilled workers.

There is very little left to doubt in this arrangement other than government’s ability to approve and fund the project before the opportunity is lost.  In April of 2012, the College went public with its plans to renovate the historic de Havilland plant in time to open for classes in September of this year.  This would necessitate breaking ground on the project in March or April.  Support has been solicited, and some offered, yet the total commitment has been insufficient for the College to proceed.

Although it’s impossible to know what gets said privately between the proponents of projects like this and the agencies they approach for funding, the answer obviously hasn’t been a resounding “yes.”  Delay will soon have the effect of saying, “no.”  In the void between yes and no is the familiar refrain, “Not this, not now, not us.”

Given that there are reasons for saying “no” built into the system, and well-practiced ways of declining participation in schemes like the Downsview Aerospace Campus, we have to find better ways of evaluating opportunities and rationalizing strategic investments in the economy.  Otherwise we’re susceptible to wasteful diversions, like, say, casino-driven economic development campaigns.

I’ve been thinking about this since citing the Downsview project as an example of initiatives that promise a better ROI than a Toronto casino would.  Accepting all the obvious reasons for government to say “no,” to projects like this, how do you get to “yes”?

Starting from the assumption that a project promises tangible results, aligns well with strategic objectives, and has credible proponents, the only remaining question is where the money comes from.  There are limits to what government can fund, so bringing private sector money into the equation would obviously help.

It’s tough to send a community college into a charitable fund-raising campaign for something like this.  Many prospective donors think that government or industry ought to fund training facilities.  Governments raise taxes for this purpose and corporations profit from it.  Most people feel they already pay enough tax and that labour costs, including training, are already hidden in the price of consumer goods and services.

Industry already contributes to training costs through community college partnerships.  Individual companies expend money and expertise for this purpose as part of a sophisticated corporate community relations practice that demands engagement on a wide range of social issues.  It’s irrational on some level to ask a company like Bombardier to pony up millions for training when the company is in cutthroat competition with rivals in low cost labour jurisdictions around the world.  At some point, the company has to establish a line between responsibility for educating their workers and responsibility for employing their workers, given all of the risk and cost that entails (massive capital investment and management obligations in engineering and design, manufacturing facilities, and global marketing).

When all sectors have a role, but no one takes clear leadership on the funding of initiatives like this, it’s time to change the rules of the game.  “Not this, not now, not us,” isn’t good enough when economic development strategies require rapid implementation.

Changing the terms of engagement between the cross-sectoral partners could help.  If all parties agree on the tangibility of benefits, and can quantify these benefits to everyone’s satisfaction, opportunities arise for use of the private sector capital in some variant of social impact bond financing.

This isn’t a new idea.  Nor is it some woolly-headed socialist mimicry of a capitalist financing mechanism.  It’s a profit-driven practice that has worked elsewhere but has yet to be applied in any significant or systematic way to the problem I’ve described here in Ontario.

New York is experimenting with this technique, using $9.6 million provided by Goldman Sachs to finance a reduction of juvenile recidivism in the prison on Rikers Island.  The financier, the municipal government, and non-profit program delivery groups have reached an agreement on how much recidivism rates can be reduced and on the dollar value of this reduction.  Based on this agreement, it has been possible to structure the financing of government’s objectives in a way that rewards the investor from the future cost reductions realized by keeping young offenders from returning to prison.

There are two features to recommend this model as an antidote to the reluctance of government agencies, industry groups, and philanthropists to lead on the financing of opportunities like the Downsview project.  Of course, it has the potential to activate dormant private sector capital in high yield social enterprise – with huge economic benefits.  But equally important is the introduction of private sector expertise and discipline in the identification of potential, the assessment of risk, and the metrics of success.

In this model, government is no longer exposed to criticism for trying to pick winners and losers.  The old “not this, not now, not us,” arguments no longer pertain.  Three perspectives are expressed in the structure of these deals; the government’s policy intention, the private sector’s financial motive, and the non-profit sector’s program delivery experience.

This translates more comfortably into the social democratic culture of Canadian society than in the freer-market, lower tax environment of the United States.  We’re accustomed to a different balance of interests between corporations and government, between management and labour, between the voluntary sector service providers and funders in the public and private sectors.  This is a model that makes sense for us.

As an illustration, consider what it would look like in the Downsview example.  If government and industry can agree on the security and value of employment arising from aerospace training under the Centennial contract with Bombardier, and on a reasonable rate of return for capital invested in the historic de Havilland plant renovation, then it quickly becomes possible for private lenders to rationalize financing the project.

It’s a faster way to reach “yes,” on high-yield, time-limited, initiatives.  The Downsview project promises to create and retain billions of dollars in wages and hundreds of millions in tax revenue over 10 years.  All of this is at risk if an investment of $40 million isn’t committed very, very soon so that the facility, equipment, and faculty will be ready to train and graduate students in time to meet aerospace industry labour demand here in the GTA.  A social impact bond, on terms that assure a reasonable likelihood of recovering and profiting from a $40 million loan turns this from a strenuous demand on public and private sector budgets into a rational use of capital, repaid by government from the windfall of tax revenue it creates.  Under these terms, a company like Bombardier might very well underwrite project costs that it couldn’t have rationalized otherwise.

There are many possible applications of this financing model in our field.  Just as the City of New York can calculate the savings resulting from reduced prison recidivism rates, we can find similar savings, by reliable means, in many areas of harm reduction.  For example, Parachute  is a national, non-profit organization dedicated to the reduction of avoidable injury.  Through advocacy and education programs, they believe they can significantly reduce the billions of dollars in health care costs incurred because of thoughtless or uninformed behavior, or by ill-considered public policy.  If they’re right, their work may warrant a greater investment than they can secure by charitable means. A carefully rationalized expansion of programming, with tangible results and sound metrics, could merit consideration of private sector financing, in partnership with government, under a social impact bond arrangement like the deal in place between the City of New York and Goldman Sachs.

Social impact bond financings originate in the U.K. and are still at an experimental stage in the United States.  It’s not a radically new idea in Canada, falling somewhere between conventional government bond issues, which raise mostly institutional capital, and community bond issues, which raise mostly individual contributions.

There aren’t a lot of examples of government bond issues at the provincial or municipal levels, although the Ontario Municipal Economic Infrastructure Financing Authority, which issues tax-exempt Ontario Opportunity Bonds to support local infrastructure, might be one.  As infrastructure costs mount for Canadian cities, interest in this form of financing is on the rise.

A good example of community bond issues would be the financing of facility development by the Centre for Social Innovation, which is now operating three sites in Toronto and has just opened another in New York City. They strongly promote the practice for others.

The specific benefits of the model I’m advocating, applied to the “no-brainers” of economic development like the Downsview project, include:

  • accelerating the pace of decision-making by bringing private sector urgency to the deliberations of public sector agencies
  • relieving government agencies of responsibility for picking winners in the economy by bringing private sector diligence to the evaluation of opportunities
  • deploying idle private sector capital in public sector initiatives that exceed the capacity of tax-funded agencies
  • enabling government to direct economic development initiatives without being required to put up public money as the price of leadership

There’s one caveat to this hopeful prospect.  Hybrid public-private organizations, including arm’s length government agencies and crown corporations, need outside expertise to navigate through the analysis and negotiation required to broker private financings of public initiatives.  They aren’t equipped with the corporate skills to match their private sector counterparts, nor should they be.  Their performance isn’t improved by imitating business, even though they’re increasingly expected to compete in the marketplace.  Yet they must be able to call on specialized expertise periodically when opportunity knocks.

This concern has been documented in previous posts about the sub-optimal results of 3P’s (public private partnerships), and more recently in discussion of the corporate challenges facing colleges in the crowded GTA post-secondary market.

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