Capital Charge Magic Remedy for Winnipeg’s Downtown

Commentary, Municipal Government, Frontier Centre

A Toronto reporter’s recent few sentences about Winnipeg’s shabby downtown were another useful wake-up call for the community. It is time to retire the naïve belief that various levels of government can wave a magic bureaucratic wand and re-invent our city centre. There is no substitute for fundamental reform.

Imagine a simple policy innovation that would be the catalyst for the following outcomes: 20,000 new downtown residents, a thriving arts community, the streets crowded with people and the commerce that follows them. Most pundits see this as an unrealizable dream. That it might be achieved by a sensible accounting adjustment that creates more transparency in city operations seems even more fanciful. But there are practical precedents. The number one proviso is thinking big and recognizing the cardinal rule of successful policy-making: incentives matter. A dramatic expansion of the city’s economy is possible if civic managers have the right incentives to seek success.

Across the Red River from downtown sits a half-vacant city storage yard, on Tache Avenue. This prime riverfront property offers a spectacular view of the downtown’s skyline. Since there is no cost for holding the property, the civic department in charge is content to sit on it, even though it has much higher-valued potential uses. It would make an ideal location for an upscale high-rise condominium for young professionals who work in the office towers a 10-minute walk across the Provencher Bridge. The building would generate tax revenues and help create the momentum for the riverfront economy of restaurants, shops and water taxis that city planners dream about. The land remains a storage yard because the value of the asset on the City books is invisible.

The same indifference to property values has brought the development of Winnipeg’s high-potential Exchange District to a standstill. Here we find dozens of buildings, frequently abandoned and unused. The area’s clapped-out state is living testament to wider policy stagnation — a miasma of obsolete planning philosophies, high taxes, restrictive zoning and building codes and the red tape of multiple bureaucracies. It offers the most interesting living spaces in North America, and a sizable group of entrepreneurs is ready to create a vibrant downtown community. But the department that sits on these properties reports no holding costs on them; even basic maintenance expenses are absorbed in the City budget. The incentives are exactly backwards. More distressed buildings create more responsibility and a case for bigger budgets. Here we see the low-performance public sector at its most perverse.

The best way to unlock the potential of these properties would be to impose a nifty tool called a capital charge on all public assets. It would require City organizations holding property to calculate its market value and then pay a holding charge equivalent to the cost of borrowing the equivalent value of money from a bank. This would create the signals, now missing, that are needed to guide land assets into their smartest use. Consider the impact on our two examples.

The storage yard on prime riverfront: say the land is valued at a million dollars, roughly what a developer would pay for it in the marketplace. If the cost of capital were, say, 8%, the city department responsible would have to pay $80,000 a year to store stuff there. To avoid this cost, it would quickly decide to keep its surplus equipment on non-prime real estate or just dispose of the machines and close it down. The land is sold for a million dollars. Condos are built. A valuable addition to the assessment base springs up, a few hundred people move to the area.

The Exchange District: if these valuable heritage buildings had to pay a capital charge, the city officials responsible for maintaining them would face strong internal incentives to release and redevelop them. The goal would be to get rid of them as fast as possible to minimize holding costs. Contrary to popular belief, civil servants are not stupid people. Faced with paying a capital charge and working on performance contracts that rewarded them for using capital efficiently, they would be eager to end the policy-induced coma of this historic district. They would embrace real reforms: grandfathering zoning codes, removing parking meters, eliminating one-way streets and rush hour parking bans, replacing old-style property taxes (which severely penalize densely developed areas) with a simplified flat tax on the land value. And yes, they would join the lobby pressuring the province to end the lethal policy of rent control, to enable the construction of new rental accommodations in the area for the pre-condo market. As values rose, the incentives to release stifled properties would become even sharper.

The City owns between 2,500 and 5,000 separate pieces of property. The imprecise number is another legacy of the Unicity governance model and its lackadaisical management of public assets. No one really knows what the city owns. The capital charge policy would shake low-use/high-value properties out of limbo and onto the market. Here is where it gets fun. A portion of the proceeds from this garage sale of land assets could be deposited in a new endowment fund for the city arts community that generated a permanent income stream equivalent to the entire revenue our Mickey Mouse amusement tax brings in. Over that, the proceeds would be used to pay down debt and reduce taxes.

Complemented and tweaked by other long stalled reforms, imposing a capital charge would spark renewal. It would produce vigorous downtown investment and reconstruction, a sustained boost for the assessment base, a straightforward mechanism for depoliticizing and expanding arts funding and a simpler life for our overworked elected officials.

The most attractive downtown community in North America would just be a bonus.