There is an obvious contradiction when a government slaps “Open for Business” signs all over the highways while it is passing legislation that unilaterally and without compensation breaks contracts with the private sector. That is what the Ford Government did to firms that bought credits in the Wynne Government’s cap-and-trade greenhouse gas emission market and what it is doing this week to the consortium of brewers that in 2015 signed a 10-year contract with the Wynne Government regarding the operations of The Beer Store.
For non-Ontarian readers of this blog, the essential point is that The Beer Store has a major share of the retail beer market and its contract limits the number of outlets selling beer, other than Beer Store and liquor store branches, to 450. The Ford Government intends to permit virtually every supermarket and corner store to sell beer, thus substantially damaging The Beer Store’s business.
The Ford Government’s nullification of contracts raises a larger question, namely what constraints there should be on any government’s ability to undo the policies of a predecessor that it has defeated in an election. Let’s consider two polar cases and then come back to the question of multi-year contracts with business.
The traditional activities of government such as taxation and spending operate on a one-year cycle. While in-year changes can be problematic, a new government can use its first budget to introduce a host of tax changes, funding changes for existing programs, new programs, and the termination of other programs. If the government has a majority, it can be certain that the budget will be enacted. In recent years, governments have been enacting omnibus budget bills that incorporate ever-longer laundry lists of reforms.
Deputy Ministers and directors of Crown corporations serve at the pleasure of the government and can been fired the day the government takes office. Indeed, the Ford Government made some immediate terminations (the Chief Scientist and the CEO and directors of Hydro One) and pushed others to retire (Cabinet Secretary, Deputy Minister of Community Safety, and Commissioner of the OPP).
The clear conclusion is that a new government that knows what it wants can introduce sweeping changes within its first year.
In contrast, it is a de facto impossibility for a government to repudiate its debt. Public debt represents the sum of all governments’ annual deficits. It is one and indivisible. A new government can’t repudiate the debt incurred by governments whose policies it didn’t like while respecting the debt of issued by governments of which it approves. For a government to fail to service any debt would be tantamount to a default and impair its credit rating to the point where it could not borrow.
Multiyear contracts with business fit between these extremes. These contracts are the governing documents for public-private partnerships. Such partnerships have been a growing trend in recent years, often involving activities that intrinsically have a long time-frame, such as the creation and operation of capital assets like highways and public buildings or the operation of regulated businesses.
If the Ford Government is breaking the contract the Wynne Government made with the brewers’ consortium, then why wouldn’t it do likewise with other contracts?
The mother of all Ontario Government contracts is the one the Harris Government made in 1999 with 407 International to operate Highway 407 as a toll road for 99 years, until 2098. A toll road is, by definition, a facility for the elite, rather than “the people.” Anyone who drives on 407 knows that much of its traffic consists of Mercedes, BMWs, Lincolns, and Lexuses. So why not convert it to a regular 400-series highway that “the people” could use?
Once a law is passed nullifying the contract with 407 International, the Government of the People would announce that it will no longer prevent the people from renewing their licenses if they have unpaid tolls. It would also encourage the people to throw out their transponders, cancel automatic bank withdrawal for tolls, and ignore bills from 407 International. 407 International could take the Government of the People to court, but by then its business model would be fatally disrupted.
The amount of money at stake is staggering. Highway 407 is now valued at close to $30 billion. If the Ford Government were to negotiate a voluntary termination of 407 International’s franchise it would increase the province’s debt by almost 10 percent, undoubtedly leading to a downgrade of its credit rating, as well as incur annual interest costs of approximately $ 1 billion. So why not pass a law to seize the highway for free?
Permit me a historical digression. In 2003-04 I was Scholar in Residence in Cabinet Office at precisely the time the McGuinty Government was fighting 407 International in court about the power to set tolls. The court fight, however, was about the interpretation of the contract the Harris Government made with 407 International. I asked Dave Guscott, a senior public servant in Cabinet Office, if the McGuinty Government would encourage drivers to ignore 407 tolls. Guscott said absolutely not, the government didn’t like the contract but would not try to nullify it.
There are two essential differences between the Highway 407 contract and The Beer Store contract: term and transparency. The Highway 407 contract is for 99 years – 20 mandates – while The Beer Store contract is for six more years and one mandate after the Ford Government’s current mandate. The Highway 407 contract was negotiated in secret and announced the day before the 1999 election was called. A misleading summary of the contract was made available during the 1999 campaign and the full contract was not made available for a few years. (You can read about this history in If You Build It: Business, Government, and Ontario’s Electronic Toll Highway, the 2004 study I co-authored with Chandran Mylvaganam).
The Wynne Government was much more transparent about The Beer Store contract. On the basis of both the term and transparency arguments, I think the Ford Government has a better case for nullifying the 407 International contract than The Beer Store contract.
Even though it is bad public policy, I am glad the Ford Government is terminating The Beer Store contract. Why? The legal fight with the brewers will be intense and could cost the province up to $1 billion. But it will serve as a bright shiny object to distract the Ford Government from other, worse policy initiatives. Better for it to demonize and scapegoat brewing company executives than teachers or nurses. Fighting the brewers will discourage other firms from embarking on partnerships with the Ford Government.
Moving beyond our misguided government of the day, are there general lessons here for the governance of public-private partnerships? Given the economic significance of public-private partnerships, I think it is essential that the public-private partnership contracts the government has negotiated be placed in the public domain, possibly with redactions to protect proprietary information, before they are finalized and signed. This would provide an opportunity for public debate. It might prevent governments from entering into misguided partnerships in the first place.
If partnership contracts have the implicit consent that comes from public debate, then it is less likely that successor governments will be tempted to use legislation to terminate existing partnerships without compensation. The latter would send out a message that is deeply destructive to any jurisdiction’s business climate – as I expect the Ford Government to discover.
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