Apologies for the delay in getting this latest Star column out, but it was for the best of reasons!
As a Conservative, few columns should be easier to write than one about privatizing public assets in an effort to improve service and reduce costs for consumers. We are all for it, as a rule.
When it comes to public infrastructure, unlike a railway or airline, the topic is more complicated. Basic economics get in the way, and hospitals and airports are but two examples of quasi-monopolistic “operating businesses” that also happen to be publicly-owned and operated infrastructure vehicles where life and death are the daily fare. One gets us safely onto an airplane, while the other gets us healthy — why is it that one should never be privatized while the other shouldn’t be publicly-owned?
For years, allies of the federal Liberals have been making the case that Ottawa should sell them our airports and “recycle” that capital into more risky projects; the pitch didn’t progress very far until Mark Carney — himself a former institutional investor — got the big chair.
It’ll be fascinating to watch this topic play out, the further we get into the details. As someone who utilized a public-private partnership model to get the pedestrian tunnel built at Billy Bishop Toronto City Airport (sans taxpayer dollars), I’m all for the concept of governments and investors working together to get new stuff done. As a consumer, one has to be on guard for any deal that looks to be “heads they win, tails we lose.” At the moment, it’s too early to know what to make of it all.
Like any other deal, that’s see what we find in the data room.
At first blush, privatizing taxpayer-owned airports in places like Calgary, Edmonton and Vancouver in exchange for a “free” high-speed rail line between Quebec City and Toronto sounds like a no-brainer, despite the distasteful political optics. The Liberal government will deny the link, but the math really is that simple: realizing an estimated $90 billion from the sale of (primarily) English Canada’s key airports might just cover the aspirational cost of building a Quebec-led high-speed rail (before the guaranteed cost overruns, that is).
By opening the door to the sale of the nation’s larger airports, Prime Minister Mark Carney is responding to a compelling pitch by some of our most sophisticated institutional investors: that Canada should “recycle” our existing low-risk assets (such as airports and ports) and reinvest those proceeds in new, higher risk infrastructure. These same institutions already own key airports around the world, and advocates pose a fair question: why are we being so protective here at home?
Canada’s history with privatization lends credence to this FOMO mantra.
Air Canada, Canadair, CN Rail and Petro-Canada are just some of the 24 public assets that were privatized during the first term of the Mulroney government. Canadair was sold to Bombardier, while Petro-Canada was taken public on the Toronto Stock Exchange. Once the fat was cut at CN Rail, the Jean Chrétien government took it public in 1995, with Michael Sabia — now Clerk of the Privy Council — serving as its chief financial officer. The initial public offering has generated a 3,400-per-cent return to date.
Carney’s recent economic update teased that reforming the airport system would lower air passenger costs, and much of the discussion will hinge on just how an institutionally owned Toronto Pearson International Airport (currently managed by the federally appointed Greater Toronto Airports Authority (GTAA)) would be more efficient and better capitalized than the current not-for-profit model.
This is where the privatization pitch needs to be fleshed out. Unlike a traditional quasi-monopoly business, such as a government-owned railroad, it’s not clear how much profit can be wrung from what are already well-run airports.
At present, the GTAA (among others) already issues billions of dollars of bonds for airport improvements at a rate not much higher than Canada’s largest provincial governments. Under private ownership, those debt costs would likely rise, and there’s no evidence that airports can’t raise more than enough capital under their current structure to meet every growth scenario.
On the expense front, I’m unsure — as a former airport chairman — what fat there is to cut, given the costs of things such as security screening, runway maintenance, air traffic control, snowplowing and de-icing are all essential. The new owners would be able to dispense with the $236 million rent payment Pearson made to Ottawa in 2025, for example, but the $41 million in payments in lieu of taxes (PILTS) paid to Mississauga and Toronto helps cover water and sewage services — an expense that privatization can’t avoid.
If they’re going to spend $90 to $100 billion, these institutional investors (many of which are pension fund managers) will justifiably want to earn eight to nine per cent each year on their/your capital, which means they’ll need to grow revenue faster than expenses. There’s the rub.
Whichever airport is analyzed, the income statement is the same: revenue comes from fees paid by airlines, cargo firms, passengers, and tenants, such as restaurants and shops. If traveller demand is there, new runways and additional gates would certainly help grow revenue faster, but that requires additional capital investment. There are no freebies in this business.
That leaves few other options, beyond increasing existing landing fees and gate charges (which either increases the cost of your ticket or reduces the earnings of the airline in question). Upping the rent paid by Tim Hortons and Starbucks leads to higher prices for your cup of coffee.
There’s also the airport improvement fee, which in Pearson’s case is $40 per departing passenger (plus tax). Travellers paid $715 million in such fees last year, more than double the $314 million that was spent on construction and new equipment. That may represent an opportunity to cut costs, but should those excess funds be returned to travellers or the new owner?
If you ask WestJet CEO Alexis von Hoensbroech, he’ll tell you that between gate and landing fees, Canada is already “far, far, far more expensive than any other country.” As every Torontonian who has jetted-off to New York for a weekend on a points ticket knows, you pay $123 in fees to leave Canada, and $44 to come home — despite the fact that LaGuardia has elevated security risks and a state-of-the-art new terminal.
Airport investors will need to be clear how they will trim costs, improve service, maintain safety and grow revenue without doing so on the backs of the travelling public.
For NDP Leader Avi Lewis, this issue could be a generational gift.
(Read the rest of the column at The Toronto Star.)