Some debt is ’smart’

The life of an indentured servant was unenviable.

 

Anxious to make a new life for themselves, poor labourers from England, Scotland and Ireland made contracts with wealthy ship owners in London to bring them to Canada. Many died of scurvy or starvation while crossing the perilous North Atlantic.

 

Those who survived agreed to repay their transportation, food and lodging costs by contracting their services to organizations like the Hudson’s Bay Company.

 

Hundreds were sent to work underground in various coals mines around Nanaimo, B.C. Their hours were long and hard. Living conditions were harsh.

 

It took three to seven years to settle the miners’ debts. Once paid-in-full, they were given new suits of clothing, tools or money and released from their contracts.

 

Just as the 19th-century indentured servants longed to be debt-free, so did Albertans in the mid-1990s. Debt was onerous and the province, under former premier Ralph Klein, made a giant effort to rid itself of its liabilities.

 

Albertans celebrated the day the debt was paid off and revenues were no longer needed to cover service charges.

 

The provincial purse strings opened to fund a backlog of infrastructure projects. Then the labour shortage hit and the cost of cement soared. Things changed again with the global economic meltdown and plunge in the price of oil.

 

Recently, the Alberta government announced it would spend $23.3 billion to fund its 2009 to 2012 capital project spending. It has $20 billion saved and has decided to borrow $3.3 billion to cover the shortfall.

 

Today, Albertans are again faced with a question of debt. Would we prefer financial debt or infrastructure debt?

 

For 15 years, the province chose infrastructure debt and all we got were crumbling roads, broken sewers, leaky schools, potholes and poor public transit. We were left with an infrastructure debt of $7 billion.

 

This time, the government has decided to try strategic financial debt, which economists have shrewdly called smart debt.

 

The Calgary Chamber of Commerce can support this type of debt-financing as long as it is used for critical, select capital projects that do not incur major ongoing operating expenses.

 

These include water pipelines, sewers and highways. Each asset must be built to last many decades, with the debt amortized over the useful life of the asset. The projects will be better managed, not based on arbitrary timelines or lowest cost financing mechanisms.

 

Smart debt programs require sustainable levels of borrowing or some notion of an optimal debt load versus future revenues and anticipated growth since no one wants unsustainable, out-of-control borrowing.

 

A total debt-servicing cost cap of 0.5% of total provincial revenues would give Alberta an extra $10 billion in financing (assuming an interest rate of 2%). That’s $3 billion over our current $7-billion infrastructure deficit but should not affect the province’s AAA credit rating.

 

The Chamber insists, however, that the province draft a comprehensive repayment plan before it borrows any money. We also want the government to pledge to buy down the debt as soon as it has the luxury of surplus revenues.

The downturn has freed many tradespeople from their commitments to now cancelled or delayed projects. Let’s employ them building competitiveness-supporting infrastructure while cement prices are low and the cost of money is cheap.

 

The Hudson’s Bay Company gave its previously indentured servants clothing, money or tools to celebrate their freedom.

 

Once our smart debt is paid in full, we can decide how best to position Alberta as the envy of the world.