Public transit doesn’t make money.A month ago, I covered the announcement of the Caisse handling Quebec's infrastructure needs and stressed the primacy of good governance.
With only a few exceptions — in every major city — trains, subways, monorails and bus services are heavily subsidized by government, with citizens picking up only a fraction of the tab through fares.
That’s why it’s so baffling the country’s largest pension fund — itself no stranger to public transit investments — had the audacity to announce last month it will build two major train lines within five years at a cost of $5 billion, and turn a profit for its investors over the long run.
The commitment of the Caisse de dépôt et placement du Québec — to build a West Island commuter line from downtown with links to the airport, and light-rail transit across the Champlain Bridge — could not have come at a better time for the cash-strapped and belt-tightening Liberal government. With existing transit infrastructure in need of repairs, and several large-scale projects already committed, there’s not much cash for multi-billion dollar projects.
The Caisse believes it can turn a profit and offer an efficient and economical train service to tens of thousands of commuters who have been demanding improvements for decades. In the West Island, the Vaudreuil-Hudson line, used by more than 16,000 daily, is limited by how many trains it can run because the Agence métropolitaine de transport shares the track with freight trains. As such, there are few trains that run outside the morning and afternoon rush periods. Building a dedicated track would allow for a dependable service to run to the West Island throughout the day and night.
In the South Shore, about 22,000 people use buses that run on a reserved lane on the Champlain Bridge, but with one bus running about every 25 seconds, transit bodies need another solution to increase ridership. Instituted as a “temporary measure” in the 1970s, the reserved lane requires 500 cones to be set out, and taken away twice a day — a 40-minute process — at the beginning and end of each rush period, since the buses drive against traffic. The cones can’t be put out when it’s too windy, or they’ll fall into lanes reserved for cars, so the speed of a South Shore commuter’s journey depends on the strength of the wind.
Macky Tall, a senior vice-president in charge of the Caisse’s infrastructure portfolio, explained the Caisse has invested about $10 billion in public transit projects in the last 15 years, and has seen good returns. The Caisse is part of a consortium that has built and is running the train line that runs from the Vancouver airport to the suburb of Richmond, linking to the city’s downtown. The consortium will glean part of the revenue from the train for a period of 35 years before turning the infrastructure over to the government, according to the agreement.
The Caisse has turned a profit as a private partner in various commuter train lines in Vancouver, Boston, the Gatwick and Heathrow airport trains in London, and an airport train in Melbourne, Australia, to name a few.
But all those arrangements involve private-public partnerships, whereby the government puts up the lion’s share of the funding, and the private companies build and run the trains, taking a cut of the revenue to recoup the initial investment.
The Montreal train lines represent the first time the Caisse is planning, building and running a public transit system. Tall said the Caisse will retain a majority share of the two train lines, and will make all the major decisions for its planning.
“We will play a much more significant leadership role, which will result in a much smaller impact on the balance sheet of the government, than if it were a (public-private partnership),” Tall said. “We will use our expertise and our partnerships to bring the cost as low as possible, but also to deliver a high-quality project with fares at an appropriate level to encourage use.”
He said the Caisse will seek out partners to help fund the project, and will also try to get subsidies from the federal government. The agreement calls for any provincial government contribution to be made as an investment, in return for an equity stake in the project.
He added the Caisse, with its real estate expertise, will also take advantage of opportunities along the lines to either sell off the land around the stations, or to build office towers or shopping centres around the stations, and rent out the space.
“We want to really leverage the real estate opportunities available, and we think that can be significant to make the project commercially feasible,” Tall said.
Tall said this new model is better for the Caisse than a traditional public-private agreement because the firm doesn’t have recoup its initial investment in the first 35 years. Because the Caisse will retain ownership indefinitely, it can spread out its return over a longer period.
Matti Siemiatycki, an associate professor of geography and planning at the University of Toronto, says he is skeptical the project would turn a profit for the Caisse.
“I don’t think the money is going to work,” he said. “There really are a handful of public transit projects around the world that make money. It might be possible they may be able to bundle the infrastructure side with the land use side.”
He pointed out the cities of New York and London have tried to leverage real estate opportunities to pay for major subway extensions, and in both cases, they only paid for a fraction of the cost of those lines.
“You would think that with real estate costing an absolute fortune in New York, it would work, but even there, it hasn’t paid for the entire system,” Siemiatycki said. “It’s still getting significant government money.”
He criticized the deal, saying if it were a public-private partnership, it could possibly be done more efficiently.
“You have removed the competitive tension out of this,” he said. “There could be all sorts of investors and rail operators that could come up with all sorts of solutions. You would want others to come forward to make sure that financing is the best deal you can get, and the planning is the best deal for the users of that system.”
He said the bottom line is Quebec will still have to shell out billions if it wants to see the train lines come to fruition.
“We have done study after study, and it just doesn’t work out,” Siemiatycki said. “Transit is extremely expensive. These lines get into the billions very quickly.”
Craig Townsend, an associate professor of Geography, Planning and Environment at Concordia University, agreed and said because of the province’s cash crunch, the projects may be doomed.
“I would be skeptical that more than one project will go ahead in the next 20 years,” Townsend said. “To think the private sector is going to find a way of making money on these things is unrealistic.”
Francois Pepin, the president of the lobby group Transport 2000 Quebec, said his group will be paying special attention to the Caisse deal because it could have consequences for other future transit projects. He said the government could be looking at the private sector to fund other major transit projects like an extension of the métro’s Blue Line, as Transport Minister Robert Poëti has publicly mulled the idea of getting a private partner to build a surface train, which would connect to the métro in the East End.
“The precedent is being set,” he said. “We have noticed that when private companies are involved in this around the world, the private companies cut service to the spots that are less profitable, and we have seen this with the Orléans Express bus service, which has retained bus lines just between Montreal and Quebec.”
But now critics are coming out to question the economic viability of this decision as well as the process, stressing a private-public partnership is more efficient. I asked a friend of mine who knows infrastructure and he told me he doesn't know much about light rail transit. He also somewhat cynically quipped: "Who uses quotes from geography professors?".
I'm a little more open-minded than my friend as I trust geography professors more than economists when it comes to urban planning. Having said this, I question whether a public-private partnership, especially here in scandal-ridden Quebec, would be more "efficient" and in the best interest of Quebec's taxpayers.
As far as the Caisse's infrastructure group, they have made money in the past on transit but this is a different beast altogether. They will be playing a much more direct and central role in developing and overseeing these projects from start to finish, as well as managing fares to make them economically viable.
Macky Tall, the senior vice-president in charge of the Caisse’s infrastructure portfolio, raises excellent points on leveraging the Caisse's real estate expertise to help fund these projects. More importantly, he's absolutely right, new model is better for the Caisse than a traditional public-private agreement because it will retain ownership indefinitely, and can spread out its return over a longer period, not having to recoup its initial investment in the first 35 years.
Having said this, there are legitimate concerns about how this project will be handled and how the Caisse can fulfill its dual mandate of achieving the actuarial returns its clients need while it develops Quebec's economy. If something goes wrong in a major multibillion infrastructure project, this can have a severe impact on the Caisse's long-term results.
But there is no question that Montreal desperately needs to develop its infrastructure. Peter Hadekel of the Montreal Gazette wrote a comment a couple of weeks ago, Stagnation city: Exploring Montreal's economic decline, where he stressed among other things the need to focus on infrastructure projects to bolster Montreal's stagnating economy.
I'm highly skeptical of Montreal's economic future, especially now that Canada's crisis is just beginning. On a relative basis the city will do better than Calgary or Edmonton, which will bear the brunt of the economic weakness that comes with the plunge in oil prices. But Montreal has been stagnating for a very long time and never experienced the boom that Canada's other major cities experienced.
Moreover, the primary factor behind Montreal's stagnation remains a political climate that hinders outside investments and forces many anglophones, allophones and even francophones in Quebec to move elsewhere in search of better opportunities. My biggest concern is the institutional racism pervading many of Quebec's government and quasi-government organizations as well as large private corporations (let's not kid each other, diversity in the workplace is not Quebec's strong suit, not that the rest of Canada is any better).
But let's leave the politics aside and get back to the Caisse and building these light rail transit projects. One of the key elements of good pension governance is communication. The Caisse needs to be open, transparent and very clear on the terms and costs at every stage of these projects if they intend to have the public's support because if something goes wrong, it will be another fiasco that will make the ABCP scandal the media is covering up look like a walk in the park.
Below, Michael Sabia, the Caisse's president and CEO, discusses these projects with Amanda Lang on the CBC's Exchange. Also, watch this clip where CNN's Richard Quest explores how the city of Portland is changing the face of public transportation in the United States.