The Austerity State 978-1-4875-2195-0 2017

12 Profiting off Austerity: Private Finance for Public Infrastructure

HEATHER WHITESIDE

Austerity budgets aim to reduce government debt and deficit, a task accomplishable equally by raising revenue (through assets, taxation, and growth) and/or cutting government expenditures (targeting services, operations, jobs, and programs). The resurgence of austerity today is unique to its context – the 2008 global financial crisis and its aftermath – but is also part of a longer historical trend. Mark Blyth (2013a, 2013b) has traced the “love of parsimony over prodigality” in economic thought back to Adam Smith and finds examples of fiscal austerity over the past century. Similarly, austerity policies adopted since 2010 repackage and re-employ pre-existing (pre–2008 crisis) neoclassical strategies first aimed at resolving stagflation in the 1970s through tight fiscal and monetary policy, and later renamed “expansionary fiscal consolidation” in the 1990s, which was said to stimulate growth by improving the long-run expectations of investors and consumers (Blyth 2013c). Thus the widespread use of fiscal austerity today follows decades of neoliberal spending restraint.

In light of this longer historical context, Streeck (2014) argues that for states long since starved of funds but with services, operations, and infrastructure costs to cover (even after significant episodes of privatization), the tax state has been transformed into a debt state – one that is heavily reliant upon credit accessed through financial markets for its financing. While useful for its parsimony, this description is too blunt to capture the nuance of fiscal policy transformation witnessed over the neoliberal period. Rather than a full-fledged switch to a debt state, in countries like Canada and the United States we see that debt and private financing now tend to fund capital expenditures, whereas services and operations are still mostly covered by taxation – albeit in the context of dwindling receipts through balanced budget legislation, spending control, regressive taxation, and protracted low growth/recession. In other words, austerity is not necessarily applied evenly to all budgetary elements. Expenditures on services, programs, and employees (benefits, pensions, jobs) face the axe of fiscal restraint, but those that draw on the market for financing, and are therefore of benefit to investors, often escape unscathed. In a related development, privately financed public works projects may even be cast as a source of stimulus and seen as a revenue stream to be tapped into, in order to balance the books.

By converting public infrastructure into a monetized asset, or one where anticipated revenue streams are bought and sold in financial markets by private investors, the financialization of public sector budgets adds a new dimension to austerity politics.1 No longer is the austerity story principally one of cuts and market-oriented state restructuring; it has also come to feature revenue-generating schemes that rely upon global financial markets. With public infrastructure exposed to the decision-making logics of private finance, considerations of creditworthiness, risk, and public indebtedness come to greatly constrain or otherwise influence fiscal policy. The use of private financing for public infrastructure and the austerity agenda are therefore mutually reinforcing and co-constitutive developments. Describing a separate but related process, Harvey (1989) calls this a “two way relationship of reciprocity and domination”: the dynamics of capital accumulation shape and are shaped by state governance strategies.

Privately financed public infrastructure is doubly profitable for capital. First, the projects themselves – physical infrastructure projects like bridges, highways, and water treatment facilities – generate stable and predictable revenue from user fees or state-provided payments, with most projects enjoying monopoly privileges and captive demand. Second, as a financial asset, infrastructure funds are known to bring in high returns for low risk, and, once financialized, the terms and conditions of infrastructure debt can be manipulated on secondary markets by private partners to produce even higher rates of return.

The themes of how austerity can be profitable and for whom will be examined in two sections. The first looks at the recurrent phenomenon of fiscal austerity over the past few decades. It argues that while spending restraint has been a relatively consistent feature of the neoliberal era, budgetary imbalances have been dealt with by using different fiscal strategies over the years. With previous episodes of austerity, budget cuts often reduced or eliminated infrastructure spending, but more recently public infrastructure has come to be regarded as an untapped source of revenue for the state and, through financialization, a new asset class for finance capital. The second section details the ways in which beneficiaries of austerity are profiting: policymakers bent on fiscal consolidation and capital looking for new, reliable, and profitable investment sites. Examples of why these arrangements are less than desirable for other social groups appear throughout the chapter, with a focus on Canada and the United States in particular.

Recurrent Austerity

The neoliberal period has witnessed a series of financial and economic crises but never yet one as widespread, deep, and pervasive as the 2007/8 global financial crisis, nor one centred on the core countries of the current order, hitting Wall Street and the City of London particularly hard. For a short time it even appeared as though this crisis might engender a shift away from neoliberalism; the 2009–10 period even featured a return of quasi-Keynesian discourse and policy. But “crisis” can be a slippery concept, subject to interpretation and manipulation. Within a few short years, after stimulus and bailout packages had been enacted, most OECD countries were in search of “exit strategies” and sought an “unwinding of extraordinary circumstances,” and the banking sector crisis was effectively transmuted into public sector profligacy in need of familiar neoliberal fiscal austerity. In their description of the alchemy of austerity, Clarke and Newman (2012) call this manipulation of the concept of crisis “shape changing” and suggest it has been the product of intensive ideological manoeuvring.

Clarke and Newman (2012) describe the significance of austerity today as being rooted in its enabling of greater market-oriented restructuring of the welfare state. We might also add that there has been a longer historical interrelation between neoliberal restructuring and austerity: the neoliberal era has been largely an age of austerity, and this has allowed for pre-existing rhetoric, policy prescriptions, and economic logics to be exhumed in 2010 and beyond (on “expansionary fiscal consolidation” in the 1990s, see Alesina and Perotti 1995; Alesina et al. 1998; Alesina and Ardagna 1998; Giavazzi and Pagano 1990; on “expansionary austerity” today, see Guajardo, Leigh, and Pescatori 2011). It is even commonplace now to see examples of austerity “success” stories from the 1980s and 1990s being used to justify fiscal restraint today. Detailed below, shape-changing over the years has therefore encompassed selective borrowing of results and rationale, inherited legacies of earlier forays into austerity, and variety in the forms of policies and measures used to balance the budget.

In a review of twenty-four OECD countries from 1978 to 2007, Guichard et al. (2007) find that there were eighty-five episodes of fiscal consolidation.² In Australia, for example, these episodes ran 1979–80, 1986–8, 1994–9, and 2002–3; and in the United Kingdom 1979–82, 1988, 1994–9 (ibid.). More broadly, Pierson describes the 1990s as a period of intense pressure within the global North to pursue austerity (2001, 411). In neoliberal pioneers like the United Kingdom, fiscal restraint and state cutbacks were quite rapid; in Canada, on the other hand, earlier use of austerity measures has been described as being relatively cautious and targeted throughout the 1980s and 1990s (434). Austerity policies at this time included transforming universal into selective programs, tightening eligibility requirements to qualify for some benefits such as unemployment insurance, imposing ceilings on program costs, and forcing programs to be self-financing or subject to “clawbacks” over a certain benefit level (Houle 1990). Reforms and restraint varied over time, by policy area and jurisdiction (Banting 1987), tempered by how much popular support a given program enjoyed. In contrast to austerity in the 1980s, which featured incremental erosion of the social safety net rather than outright dismantling, by the mid-1990s deficit reduction was clearly prioritized. Federal funding to the provinces dropped, provinces cut their budgets accordingly, social programs were redesigned to fit with the reality and vision of austerity, and social assistance recipients bore the full brunt of fiscal restraint (McBride and Whiteside 2011).

Spending on Canadian public infrastructure also switched from federal to municipal governments over the 1980s and 1990s (a topic returned to in the final section of the chapter), leading to a 2004 estimate that the deficiency in the addition, maintenance, and replacement of public infrastructure stock had reached $125 billion, or six to ten times the size of annual investment (TD Economics 2004), a figure matched in an earlier study that pegged the infrastructure gap at $125 billion and warned it could reach $400 billion by 2020 (Mirza and Haider 2003). Decades of neoliberal austerity and public sector spending control meant that by the mid-2000s, most of Canada’s public infrastructure was built during the Keynesian era in the 1950s–1970s (Mirza 2007, 5–6).

With public debt as a percentage of GDP lowered from 117 per cent in 1986 to 25 per cent in 2007, Ireland has recently become an often-used example of how austerity can lead to robust growth, given its 1990s/2000s “Celtic tiger” economic turnaround (Kinsella 2011, 16). However, isolating austerity as the principal factor encouraging growth and reducing debt is a less straightforward exercise than the expansionary fiscal consolidation school might admit. Instead, Kinsella (16–18) shows that the Celtic tiger economy can be related to a host of other historically contingent factors. This includes growth in the international economy, fiscal transfers from the EU, the opening up of a single market, a 14 per cent increase in the average industrial wage between 1986 and 1989 and similar public sector wage increases, an income tax amnesty in 1988, and a well-timed currency devaluation in August 1986. In a similar vein, Dellepiane and Hardiman (2012, 13) argue that Ireland’s “success” with austerity was not the result of greater investor confidence, as the expansionary fiscal consolidation literature suggests, but rather currency devaluation (which is now impossible with the euro) and growth in the global economy, which produced demand for Irish exports (absent following the economic stagnation experienced with the onset of the 2009 great recession – a phenomenon aggravated by austerity, according to Wolf 2013).

Dellepiane and Hardiman (2012) raise an additional and related concern with the economics of austerity: the need to consider “politics in time” when analysing the results of fiscal consolidation. As they describe, the treatment of austerity through formal mathematical modelling breaks down country experiences into multiple discrete episodes so that changes in a state’s fiscal condition may be examined from one period to the next. This approach is problematic, given that it ignores the highly varied ways in which countries went from large deficits in the 1980s to balanced budgets by the early 2000s. There is in fact a range of possible reasons for balanced budgets, such as economic growth, increased demand (domestic and international), tax increases, and fiscal restraint. In Canada, austerity in the 1990s was disproportionately titled in favour of cuts to public spending rather than raising revenue through higher taxes. Posner and Sommerfeld (2013, 152) calculate the composition of austerity measures to be 87 per cent spending cuts and 13 per cent revenue increases. Compare this to Britain, where fiscal consolidation under the Conservatives (1980s–1997) occurred mainly through revenue measures (taxation), not restraint (spending cuts); under Labour, austerity took the form of spending and cost control (Dellepiane and Hardiman 2012, 13).

Austerity, Risk, and Restructuring

Austerity today is a clear example of what Hacker (2008) calls the “neoliberal risk shift,” where some groups in society benefit but most are left worse off. A technical definition of austerity budgeting would have it refer narrowly to reductions made in the cyclically adjusted fiscal deficit; but seen from a wider perspective, changes in fiscal policy greatly influence both state and society. Austerity is, as Peck (2013, 4) suggests, a strategy of redistribution that pushes “the costs, risks, and burdens of economic failure onto subordinate classes, social groups and branches of government.” In the United States, for example, we see the stark impact of scalar downloading where “austerity urbanism” involves foisting the costs of a global banking and financial crisis and national deregulation onto municipalities and local authorities, who are in no position to shoulder these burdens and costs (Peck 2012). By 2012, roughly 300 municipalities were thought to be in some form of default on their debt obligations (ibid.). Municipal bankruptcies, the theft of workers’ savings (pensions), and greater social disparities are the inevitable result, given the overarching neoliberal context.

The most high-profile case of municipal fiscal distress leading to deep austerity and state restructuring today is Detroit. A brief examination of its bankruptcy saga reveals that cuts to vertical intergovernmental transfers create significant problems for the municipal budget (austerity-induced risk downloading), opportunities for neoliberal structural reform can be created through financial crises and fiscal imbalance, and bondholders’ rights are often protected at the expense of taxpayers (public service recipients) and employees (public sector workers).

In his report for FY 2003–4, Detroit’s auditor general (2003) projects a deficit from 2004 to 2008, linking it to revenue decline and expenditure increase. Detroit’s main sources of revenue are municipal income tax, property tax, utility taxes, taxes and fees associated with gambling, and state revenue sharing. By 2003–4, all sources are flat or declining, and by FY 2004–5 the city’s General Fund is in deficit by $155 million; the fiscal imbalance only gets worse over time when the city floats bonds to (temporarily) balance the budget, beginning in 2003. The reasons for this decline in revenue relate to both structural and proximate causes. The former includes aspects such as population decline, economic stagnation and secular job loss, and lower property values; and the latter to fairly recent policy choices such as competitive income tax reductions by the city and cuts to state revenue sharing. The Michigan Municipal League (Minghine 2014) calculates that between 2003 and 2014, Detroit loses over $732,000 that it should have received through state revenue sharing. This loss is significant in its own right and because it affects key expenditure items in the budget: public sector wage settlements, pension plans, and health benefit agreements. These commitments were made in part on the basis of expected revenue that did not materialize as the result of changes in state government fiscal policy (lower taxes and fewer intergovernmental transfers).

In FY 2005–6, the tipping point in Detroit’s municipal finances, $1.44 billion of new debt is issued in the form of city pension Certificates of Participation (COPs) to fund its two retirement systems and at this time a thirty-year repayment schedule is negotiated involving swaps to make COPs more attractive for investors. In the process the city switches from a fixed interest rate to a variable one: it stands to benefit if interest rates rise, it will owe more to investors if interest rates drop. In that same year the city also issues $250 million in bonds to yet again stabilize the budget. After the onset of the global financial crisis in late 2007, in November 2008 the US Federal Reserve begins quantitative easing. Short-term interest rates drop to near zero, meaning Detroit owes an additional $1.14 billion through COPs-related swaps commitments. The city issues more bonds and pledges casino tax revenue to cover future debt payments. By 2012 Detroit’s finances are such that it exchanges fiscal oversight for financial assistance from the state. By July 2013 the city had $18 billion in outstanding debt and was forced to file bankruptcy.

Along with cuts to public sector jobs, pensions, and other forms of spending, the sale/lease of public assets is likely to become a major facet of austerity-induced neoliberal restructuring. Emergency management plans released in February 2014 call for monetizing revenue streams from the District Water and Sewerage Department, public lighting, city parking garages, parking meters and lots. Monetization involves converting a city’s assets into legal tender through long-term leases or outright sales (leases sell the income from specific city operations or assets for a specified period of time), which is therefore a novel combination of privatization and financialization. However, these plans are nothing new – in 2009 Detroit’s mayor proposed “unlocking the value of the city’s assets” through the monetization of the Detroit-Windsor tunnel, city parking meters and lots, and public lighting. And well before the fiscal crisis these assets were targeted for privatization. In the city auditor general’s FY 2003–4 report, leasing meters, parking lots, lighting and water and sewage assets were each proposed, and that report furthermore refers to an earlier 1998 plan to privatize those assets.

Extreme cases like Detroit may lead to greater privatization of the already lean American night-watchman state, with the role of public infrastructure provider now being shed from the short list of activities justifiable by laissez-faire doctrine, but elsewhere many social obligations remain, even decades after the shift away from Keynesian demand management. “Structural functionalism” (Doern, Maslove, and Prince 2013), or the widespread expectation that governments of all stripes and levels will continue to address fundamentals such as employment and effective demand, must therefore coexist with fiscal austerity. Where new spending is verboten or direct expenditures are being cut, the tax system becomes a key way to address social need and economic fundamentals (see Block and Maslove 1994). By redistributing wealth in society through exemptions, deductions, credits, preferential tax rates, and the like, “tax expenditures” can take on such roles, albeit in often invisible ways and with their own distinct repercussions. As Harder (2003, 62) describes it, “In enabling market provision, tax expenditures not only represent public spending but also redistribute foregone public revenues in the service of private profit.”

Foregone tax revenue is often concomitant with an expansion of market-dependence for citizens (for their services) and the state (for its financing). Despite the heavy reliance on municipal bonds in the United States for public infrastructure financing, these bonds are tax exempt – exempt from federal tax in all instances and exempt from state tax when the bondholder lives in that state. A major part of their appeal to creditors is this tax exempt status, but it simultaneously represents foregone revenue for already cash-strapped states, making municipal bonds a significant, but hidden tax expenditure (see Cormier 2014). Further, whereas the rights of bondholders are sacrosanct (illustrated most recently with Detroit’s “emergency management” strategies), taxpayers are granted no such rights to claims on city wealth or assets in tough times. The financialization of city budgets therefore redistributes rights to the detriment of citizens and benefit of creditors (Hackworth 2007). In Streeck’s (2014) words, creditors become a “second constituency.”

Financial market dependence has been encouraged over the years by restraints on revenue and spending. Within the context of balanced budget legislation in particular, the municipal bond market becomes an “essential element of the politics of circumvention” (Sbragia 1996, 10). Savage (1988) describes four techniques that governments have used to evade constitutional limits on borrowing, each of which deepens financial market dependence: issuing state agency revenue bonds; borrowing through public corporations, commissions, and authorities; delegating state operations to local governments and agencies; and lease-purchase agreements. For all of these reasons, Sbragia (1996, 10–11) argues that, despite finance capital gaining significant structural power over the state in the neoliberal era, financialization has been encouraged by states and municipalities seeking to use private finance to advance their own economic and political interests.

New debtor categories are created along the way. Following a series of public sector debt defaults, in the late nineteenth century American municipalities began to switch from general obligations bonds, where debt is backed by the full faith and credit of government (supported principally by property taxes), to revenue bonds where earnings from the operation of that infrastructure is pledged to retire the debt. This not only avoided balanced budget legislation but also shifted debt from taxpayers to ratepayers and service users, making revenue bonds a popular option for user fee–based infrastructure such as highways, ports, and water and sewer projects. Thus where infrastructure-related services can be priced, debt has been individualized; where it is impractical or impossible to price consumption, as with sidewalks and city streets, a collective bearing of debt has been maintained, and most of these public works are financed through general taxation (Pagano and Perry 2008).

Infrastructure property assets are now being sold or revenue streams are being monetized as a way to enhance state finances, and investments in public infrastructure are being pursued in order to generate revenue, far beyond the historical use of tolls and user fees to recoup capital expenses incurred by the state (see O’Neill 2013). The city of Chicago is something of a pioneer in this respect. It has entered into three major infrastructure monetization deals since 2005 as a way to generate revenue and (temporarily) stave off fiscal crisis: the ninety-nine-year, $1.83 billion 2005 Chicago Skyway toll road; the ninety-nine-year, $563 million 2006 lease of downtown parking garages; and the seventy-five-year, $1.15 billion 2009 lease on public parking meters. Each of these deals is linked to austerity in a unique way: each has been structured by the city so that a large amount of the total revenue is received upfront from the private partner, with this money used to pay down the municipal debt/deficit (DiNapoli 2013).

Entering into long-run P3 deals for short-term budget relief has (temporarily) improved Chicago’s credit rating but is not a sustainable strategy to address structural deficit. Further, hasty deals like the parking meter P3 that took only three days to negotiate have been flagged as being of particularly poor value for money. In January 2009 Chicago’s Inspector General’s Office launched an investigation into the arrangement, later that year reporting that the parking system would have been worth $2.13 billion over seventy-five years – therefore the city underpriced its asset by 46 per cent (Hoffman 2009, 3).

Private Finance for Public Infrastructure

Historically, funds for public capital expenditures (infrastructure and equipment) have been relatively plentiful in the United States. When the post-war pipeline of federal funding for infrastructure dried up in concert with the abandonment of Keynesianism in the 1970s, state and municipal governments replaced federal support with gas taxes and other user fees, and enjoyed access to the thriving municipal bond market (worth roughly $380 billion) that could be drawn on for public infrastructure projects (Sagalyn 1990; Thornton 2007). Savings were also generated through the use of municipal bonds, with an interest rate spread of 2 to 4 per cent in favour of public rather than private financing (NCPPP 2012, 7). As a result, by the end of the 1980s, state and local governments were responsible for 90 per cent of all public works spending in the United States (Leighland 1995, 142).

The availability of public financing for public infrastructure has been eroded in many US jurisdictions since 2008 through austerity and fiscal imbalance (Davidson and Ward 2014; Peck 2013). In 2012, forty-two states had budgetary shortfalls, totalling $103 billion, and forty-six states cut services or cancelled projects as a way to address spending imbalances (NCPPP 2012, 5). Cuts such as these are occurring within the pre-existing context of a chronic and now growing infrastructure spending gap. The National Surface Transportation Policy and Revenue Study Commission calculated in 2008 that $86 billion is needed each year to pay for infrastructure maintenance and construction, and that fuel taxes – which are not indexed to inflation and are unlikely to increase in a tax-averse climate – along with other sources of traditional public funding for infrastructure are/will be inadequate to address infrastructure needs (see Page et al. 2008). This has opened up space for the use of private financing through various P3 schemes as a mechanism to access private funds to pay down public debt and to build public infrastructure without incurring upfront capital costs.

Distinguishing features of the P3 model include lengthy (multi-decade) lease-based bundled contracts and complex risk-sharing arrangements. Many P3s transfer financial risks through private financing, exposing public infrastructure and services to the vagaries of volatile capital markets, and pushing up the cost of capital through the higher interest rates paid by private debtors. One would assume that higher costs in the midst of austerity would discourage P3 use; however, privately financed P3s also offer politicians and policymakers a “build now, pay later” opportunity to achieve off-book financing and/or gain access to funds otherwise prohibited under balanced budget legislation or other forms of spending control. When episodes of austerity and budget constraint coincide with the need for infrastructure spending, conditions encourage private financing to meet public sector obligations.

Private financing for P3 projects is typically split between debt and equity. An equity stake involves fundamental ownership rights over the P3’s private partner (a firm, consortium, or special project vehicle), entitling asset holders to revenue after costs are met and debt obligations are paid (Hellowell and Vicchi 2012, 7). Debt during the construction phase of a project is often secured through private commercial banks, with bond financing used for the operational phase. Stakeholder investors (equity holders) are typically engineering, procurement, construction, operations, and maintenance firms; project investors (debt holders) are usually pension funds, sovereign wealth funds, infrastructure funds, and banks (public investment banks and private commercial banks) (Waterston 2012). Infrastructure funds raise money on capital markets through collateralization: bundled savings that seek safe yet high returns on investment (often a site of investment by pension funds) (Sclar 2009).

Following the subprime crisis–induced restructuring of global finance, major players on Wall Street (e.g., Goldman Sachs, Morgan Stanley, the Carlyle Group, and Citigroup) began moving into infrastructure assets, with an estimated $250 billion amassed in infrastructure investment funds in 2007–8 alone (Anderson 2008). More broadly, a 2007 estimate pegged the wealth contained within the world’s top thirty infrastructure funds at upwards of $500 billion – although it is almost certainly higher now (Thornton 2007). As Mark Weisdorf, head of JP Morgan’s infrastructure investments put it, “Ten to 20 years from now infrastructure investments could be larger than real estate” (quoted in ibid.). As natural monopolies (a status often augmented by non- competition clauses), P3 projects are low-risk assets with captive customers, and governments are the ultimate guarantor over the long run.

Increasingly sophisticated, private financing is not merely a substitute for public funds. It is now an avenue of profit making of (potentially) greater significance than what is typically offered as “justification” for privatization – relating to operational efficiencies, design enhancements, and project cost control (Murphy 2008; Vining and Boardman 2008). The reorganization of debt through “financial engineering” can significantly reduce private investors’ costs and improve revenue earnings for private partners. Mechanisms such as debt swaps and sweeps that switch from short-term to longer-term liability, change the nature of interest rate payments, restructure dividend payouts and debt-repayment schedules, allow for new dimensions of profit-making beyond revenue earned from the infrastructure itself (e.g., tolls, user fees) (Ashton, Doussard, and Weber 2012). Mark Florian, head of North American infrastructure banking at Goldman Sachs, summarizes the eagerness of investors: “There’s a lot of value trapped in public assets” (Thornton 2007). Accessing that value, of course, requires supportive state policies.

Legislative support for private finance in the United States includes the granting of tax-exempt status for private activity bonds to counter the attractiveness of municipal bonds. Within water and wastewater infrastructure financing, the 2013 federal Sustainable Water Act and Water Infrastructure Now Public Private Partnership Act lift taxes on private activity bonds, which is believed will “encourage billions of dollars of private investment in water supply and wastewater systems around the country” (Colombini 2013b). For transportation projects, the federal government’s 2005 Transportation Infrastructure Finance and Innovation Act (TIFIA) provides additional P3 encouragement for states seeking to strike P3 deals: direct loans with flexible terms amounting to upwards of one-third of total project costs, loan support and guarantees for institutional investors funding infrastructure projects, and lines of credit for the first ten years of a project’s operations. Some industry insiders consider the TIFIA “possibly the most advantageous mezzanine financing available anywhere for PPP in the transport sector” (P3 Bulletin 2006). The TIFIA exists alongside a $15 billion exemption for private activity bonds used towards highway and intermodal freight facilities (ibid.). Changes in legislation relating to private activity bonds and P3 support more generally are the result of lobbying and policy promotion by groups such as the Urban Land Institute, the National Council for P3s, and the Performance-Based Building Coalition. There is, however, no counterpart to private activity bonds or TIFIA for social infrastructure, inherently limiting P3 use in areas like public schools and courthouses, although this is likely to be a target of future lobbying efforts (Colombini 2013a).

From the perspective of capital, public infrastructure is both profitable and unique, given its high barriers to entry, monopoly characteristics, long concession periods (leases are often ninety-nine years in length), large scale of investment, inelastic demand, low operating costs, and stable/predictable cash flows (Newell and Peng 2008). Further, public infrastructure is also now seen as a new asset class for finance capital, and one that is a particularly attractive investment, given its low risk. As Businessweek puts it, “Infrastructure is ultra-low-risk because competition is limited by a host of forces that make it difficult to build, say, a rival toll road. With captive customers, the cash flows are virtually guaranteed. The only major variables are the initial prices paid, the amount of debt used for financing, and the pace and magnitude of toll hikes – easy things for Wall Street to model” (Thornton 2007).

The financialization of public sector budgets and infrastructure through global financial market–reliant P3 deals are therefore a way to satisfy pressures from private finance and from legislated austerity. But this drive is not innocuous, and financialization changes the nature of public infrastructure. O’Neill (2013) summarizes the three principal implications of financialization of infrastructure: services need to be commercialized in order to generate competitive returns for private investors (displacing other concerns); infrastructure design must be made to conform to the characteristics of a financial instrument (e.g., ownership, management, regulatory environment, and material performance); and risks must be controlled in a manner consistent with private property rights and commercial/investor interests.

The financialization of public infrastructure is far from an American phenomenon. As previously mentioned, Canadian municipal-level infrastructure equally faces a chronic and growing backlog, and in 2013 the Canadian Federation of Municipalities identified the need for infrastructure spending and federal cost-sharing for public works as being at the top of their agenda. Roughly 25 per cent of the municipal infrastructure gap comes from the need to renew or improve water and wastewater infrastructure, nearly 35 per cent relates to transportation and transit infrastructure, and approximately 8 per cent to waste management (Mirza 2007, 15).

The long-run worsening of the municipal infrastructure gap can be attributed to a number of factors, including responsibility downloading, tax cuts, and balanced budget legislation imposed from above, but it is due primarily to the neoliberal era withdrawal of the federal government from public capital investment and the ownership of public capital stock. As Mackenzie (2013, 7–8) shows, in 1955 the federal government owned 44 per cent of the Canadian public capital stock, the provinces owned 34 per cent, and local governments owned 22 per cent; by 2011 this federal–municipal relationship had reversed: the federal government’s share dropped to 13 per cent, municipalities owned 52 per cent, and the provincial ownership portion was almost identical at 35 per cent.

TD Economics (2004) and Deloitte (2004) recommend greater use of the P3 model to address the infrastructure gap, since it is uniquely able to leverage private financing for the delivery of public infrastructure and services. This rationale is in part ideological (i.e., the perception that public debt is a sign of mismanagement) and in part practical, given the presence of balanced budget legislation or other forms of spending control. P3s are therefore presented as a way to deliver new infrastructure at a time of fiscal austerity. This stance is contradictory, given the higher long-run costs and risks associated with private finance and the financialization of public infrastructure. Prior to 2007, government borrowers in Canada were able to secure interest rates that were, on average, 2 per cent lower than those charged to private borrowers, but between 2007 and 2009 this increased to an average of 3 or 4 per cent – making P3s nearly 70 per cent more expensive than publicly funded infrastructure (when measured in present value terms) (Mackenzie 2009, 2).

P3 schemes are not only more expensive, they are also risky. Securing profit for the private partner requires transforming public infrastructure into a tradable financial product by selling performance outcomes and transferring failure risks to the investor, which is, as O’Neill (2009) describes it, derivatization not through the sale of an asset but through the buying and selling of risk itself. P3s inscribe risk onto and into infrastructure through, for example, the creation of fee structures and insertion of financial instruments, in order to buy and sell risk.

In Canada, private financing for P3 infrastructure deals often relies upon “mini-perm” finance structures. Mini-perm financing refers to when the tenure of a project’s senior debt is much shorter than the duration of the P3 project agreement (Hellowell and Vicchi 2012). Refinancing will typically be required within the first five to seven years of a thirty-year (or greater) contract. The underlying assumption with this arrangement is that P3 projects can and will be refinanced periodically at projected rates. As Mackenzie (2009) argues, that builds in the questionable expectation that credit-fuelled bubbles will continue indefinitely. Should trouble emerge with refinancing attempts, mini-perms create problems for operational projects: public infrastructure and services in areas vital to the public interest. Refinancing guarantees are being offered by Canadian public partners. Essentially this means taxpayers will repay lenders if the private partner cannot obtain refinancing, and/or, depending on the terms of the project agreement, the state may also compensate partners if refinancing generates less favourable results (see Hellowell and Vicchi 2012).

Amid austerity-induced cuts to services, employment, and benefits in other parts of the public sector, key P3 infrastructure-spending commitments have nonetheless been made by federal and provincial governments (for more detail, see Whiteside 2014). Examples include the 2007 $33-billion Building Canada Plan federal government initiative and its $47-billion new Building Canada Plan introduced in Budget 2013. A significant role has been carved out for P3s in recent infrastructure spending schemes. The federal government created P3 Canada in 2007 to “develop the Canadian market for public-private partnerships” at the municipal level in particular (municipalities and other jurisdictions will be able to access technical and financial support only if a project uses the P3 model), and P3 Canada received funding commitments from the federal government of $2.8 billion per annum for 2011–13 (P3 Canada 2009). The P3 Canada Fund was renewed once more in Budget 2013 with a $1.25 billion commitment “to continue supporting innovative ways to build infrastructure projects faster and provide better value for Canadian taxpayers through public-private partnerships” (described in chapter 3.3, “The New Building Canada Plan”). Contrast this with federal Budget 2010 and its efforts to save $17.6 billion over five years through government department spending cuts and freezes to some operating budgets; and likewise Budget 2012, which introduced cuts totalling $5.2 billion, targeting the federal public service in particular through the elimination of roughly 19,000 jobs.

Conclusion

Peck (2013) argues that austerity has to be continually “pushed” discursively, given that it is not self-evidently desirable or necessary. However, the appeal of austerity must also be understood within the neoliberal context outlined by Blyth (2013a): there is now a generation of economists and policymakers for whom Keynesianism is but “a footnote” in textbooks and in practice. The relegation of alternative economic paradigms (even those as prominent historically as Keynesianism) to literal or figurative footnote status suggests a myopia in orthodox economics today and helps explain the “common sense” appeal to austerity. Taming government growth and trimming back the public sector is now, as it was in the past, the target and implication of fiscal consolidation. Ultimately austerity is less about achieving economic growth than it is about shifting blame for economic conditions from market actors to government departments, and displacing the burdens of adjustment from capital to labour.

However, as this chapter has shown, austerity budgeting entails not only cuts to expenditures, it can also mean generating revenue through asset monetization, sales, and financialization. After decades of neoliberal market-oriented state restructuring, public infrastructure remains a principal asset held by the state. This provides the opportunity for fiscal conservatives and austerians to benefit from its sale and monetization, with creditors (investment funds, banks, wealthy individuals) all too eager to profit from the low-risk, high-return nature of public works through infrastructure bonds and investment in P3 deals. The opportunity to profit from austerity emerged in part through current day austerity budgeting, and, from a longer historical perspective, through the infrastructure gap produced by bouts of fiscal restraint over the past three decades. Thus the forms, phases, and implications of austerity change over time.

Writing a year before the global financial crisis hit, Broadway (2006, 375) argued that “the study of redistributive intergovernmental transfers remains a lively research area.” This statement ought to be truer now than ever – austerity has meant shifts to risk and responsibility that will set the tone for state-society relations, public policy, and claims on social wealth for years to come. Themes of “framing” and “manufacturing” can be identified in the current phase of fiscal consolidation. The frame created by austerity circumscribes policy choices and opens avenues for the financialization of public sector budgets, especially capital expense portions of state spending. Similarly, the austerity imperative is manufactured by today’s circumstances and those of yesterday. Whereas the global financial crisis has since been transformed into an opportunity for greater market-oriented reforms, previous episodes of spending restraint are also a source of justification for state indebtedness to finance capital.

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Footnotes

1 Epstein (2005, 3), following Krippner (2005), defines financialization as “the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.” Here we focus on how the austerity context augments the role and influence of private finance vis-à-vis public sector budgets and infrastructure.

2 An episode is defined by Guichard et al. (2007) as starting when the cyclically adjusted primary balance improves by at least 1 per cent of GDP the following year, and ending if the balance improves by less than 0.2 per cent of GDP in one year.