I have a theory.
Governments should do nothing other than:
- Provide for and protect public order
- Set up policy frameworks to guide and curb the worst of human behaviors
(of which, unfortunately, there are many), and
- Take care of the poorest part of their populations to provide for greater equality of opportunity (but not outcomes)
Everything else should be done by the private sector.
Governments are just bad at the doing of anything – especially development projects.
Do It Yourself and Save 91%
When the Sens hockey team inhabited Ottawa’s downtown rink (the Civic Centre) for three and a half years, the city generously volunteered to build some private suites in their building for us.
They figured they could install 16 skyboxes for a mere $12 million.
The Sens said, “Err, excuse me, do you mind if we do it ourselves?”
We retrofitted their building installing 42 suites for a total of about $2.9 million including full F,F&E (Furniture, fitup and equipment).
That’s $69,000 per suite versus $750,000 if the city did it.
It’s my experience that this is not uncommon –
The private sector is nearly 11 times more efficient than government development.
So it is much better for the economy to let private sector guys do-the-doing while the public sector sits on the sidelines collecting taxes or revenue shares or, in this case, happily both.
There is no better business than the government business.
- It is a monopoly provider
- It can raise its prices at will, and
- It keeps the best businesses for themselves (like casinos and lotteries)
What’s even nicer from their point of view, if you don’t like their pricing (say their property tax rate on your home or business), you can’t do anything about it.
They have the authority to sell your home or office under tax sale if you don’t pay up, and police power to evict you if you refuse to leave.
If someone owes you money, it’s off to judge Judy’s small claims court to try to collect, which no one will help you enforce even if you “win” a judgment.
The government has police power and behind that it has the army, so they always get paid.
Take Advantage Of A “Fire Sale”
Of course, you may be thinking that this is just Firestone picking on one example and one city, but I am an equal opportunity skeptic.
Let’s next look at the case of Toronto’s SkyDome (now Rogers Centre).
According to Ontario’s land registry, Rogers Centre sits on two parcels of 4.459 acres and 7.190 acres each for a total site area of 11.649 acres.
The Financial Post reported in July 2015, “the average condo lot sale price in the second quarter across the Greater Toronto Area reached $64 per buildable square foot, which accounts for the density of a project. Ten years ago that price was in the $30-range across the GTA.”
So let’s work with their data.
For a vacant site of say 15,000 square feet and an FSI (Floor Space Index) of 30, a developer would have 450,000 square feet of buildable area.
Floor Space Index is how cities like Toronto control building heights—a developer can only build a maximum of 30 times the site area.
So if a building took up, say, two thirds of a site, this means a 45-story building is permitted. It is sometimes called FAR or floor area ratio.
Thus, for this vacant site, the land would trade for $28.8 million (450,000 x $64), which works out to $1,920 per square foot of land.
Now let’s apply that number to the land under the Rogers Centre.
We then get a land value of $1,920 x 11.649 acres x 43,560 square feet/acre = $974,266,444.80.
Let’s Profit Almost $1 Billion
So here’s the deal.
The next time our government decides to sell an asset like this, let’s you and me (Spirepoint readers) scrape together the $25 million (which trust me, we could do in 2 weeks for a deal like this).
We can then buy the Sky Dome, tear that building down, and sell the land in tiny parcels to folks who want to build…
- Nice townhomes
- Cool restaurants
- Interesting art galleries
- Fabulous markets
- Tallish towers
- Learning institutes, and
- A million other things that truly animate our towns and cities 24/7.
And yes, we would make a profit of $949,266,444.80 while we are it.
($974,266,444.80 minus $25,000,000)
The Rich Get Richer
This is the reason that the top 1% will soon be (in the time of my grandchildren) the top .001%.
People like Ted Rogers have access to incredible deals like the above that you and I don’t. Any time the rich can buy an asset for $25 million that is worth about $1 billion, the rich get even richer.
Even MPAC (Municipal Property Assessment Corporation), the province’s own assessment group, had the stadium valued higher than its sale price (see below) – a lot higher at $93.5 million. Sheesh.
|Assessed Value based on January 1, 2012:||$93,546,000||Property Type:||722 Professional sports complex|
Sadly, Ted did not find a way to take it all with him when he passed in 2008.
However, recent research has shown that the rich are finding ways to “take it with them”.
Berkeley economist and Thomas Piketty protégé Gabriel Zucman (the Hidden Wealth of Nations) estimates that the rich have socked away a record $7.6 trillion in tax havens, about 8% of the planet’s financial wealth.
It’s made much worse by multinationals funneling huge swaths of their revenues and profits through tax havens.
Apple, for example, runs billions in profit through a teensy Irish subsidiary, and pays almost no taxes on it.
In July of 2015, Apple had an incredible $203 billion in cash on its balance sheet.
Private Sector Is More Profitable
Still not convinced? Well, let’s look at one of the community arenas built by the Ottawa Senators for the city of Ottawa—the Bell Sensplex.
This Sensplex produced approximately $750,000 in sponsorship revenues in its first year, stabilizing at around $650,000 annually ever since.
What do you think the average city of Ottawa-run arena generates each year in sponsorship, naming rights and signage?
Less than $10,000.
Let me repeat that.
Less than $10,000.
That extra $640,000 a year pays for a lot of Erik Karlsson bobblehead dolls.
More Efficient Too
That’s not all. The city pays their Zamboni divers about $40 per hour to work around 10 minutes out of every 60 resurfacing the ice between uses.
The rest of the time they sit around playing cards or snap chatting with their friends. If they work overtime, they get time and a half and on statutory holidays, double pay.
Sensplex drivers get around $17 or $18 per hour, and when they’re not piloting Zambonis, they’re cleaning dressing rooms and doing a million other things.
One of the other big differences between city-run arenas and ones like the Sensplex is that the latter believe in a big way in programming—creating their own…
- Leagues and
This fills up ‘shoulder hours’ that otherwise would sit empty.
Canadians are crazy about hockey and figure skating so every arena can sell its peak hours—it’s off-peak that’s a problem.
Operators have to get creative, which is not exactly a strong suit for civil servants, no matter how well motivated they might be.
In public service, you don’t get promoted for doing cool experimental stuff, you get promoted for not making mistakes, which is anathema to doing anything that is even vaguely entrepreneurial.
Top End Facilities At Lower Cost
Lastly, if you want to run a…
- Skate sharpening kiosk
- Retail store
- Hockey or figure skating school or put on a show
- Book a meeting room or band…
Where are you more likely to sign a commercial lease? (at much higher rates by the way)
A dead, poorly-lit, badly-maintained, stinky city run arena…
A sharp, modern, top end branded private or semi-private (P3 – Public-Private-Partnership) stadium?
A P3 may make sense because most cities, states, provinces and developed nations can borrow at interest rates considerably lower than most private developers.
In essence, the city’s role is limited to “loaning” their credit rating to the project and maybe guaranteeing some amount of ongoing ice time rentals.
The “doing” of everything is left to the private partner. Again, because government has police power to guarantee itself payment, credit markets rightly assign lower risk and lower rates.
It’s not necessarily fair, but then again who ever said life is fair…
So who do you really want building and operating community facilities?
I vote for the private sector.
Finally, my conclusion from years of experience and collecting evidence is that governments don’t work – you do.