Public-Private Partnerships: Ideology Trumping Common Sense

Blair Redlin

CUPE National Research

Greater Victoria Water Watch Coalition

Public Forum on P3s

Victoria, BC

March 12, 2009

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What are P3s? Many definitions.

Key feature is multi-decade private operation of public services (operational contracts of 10-40 years in duration. Generally 25 or 30 years).

In Canada, most P3s are “design/build/operate” (d.b.o.) and many include some private finance (d.b.f.o.). Yet most risk is in construction and design phase which can be reduced through design/build.

Design/build is not a P3 method.

Public and private sectors have always partnered to build infrastructure in Canada.

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Top Arguments for P3s

Cost control Risk transfer Value for Money Debt management Efficiency

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Cost control

ProjectDecision Point

BudgetCurrent

Estimate

Abbotsford Hospital and Cancer Center $211,000,000 $355,000,000

Canada Line $1,550,000,000 $2,100,000,000

Golden Ears Bridge $600,000,000 $808,000,000

Sea-to-Sky Highway Project $600,000,000 $789,000,000

Port Mann Bridge $1,500,000,000 $3,300,000,000

William Bennett Bridge $100,000,000 $170,000,000

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Procurement negotiations: What about the public interest?

P3 process lengthy, bureaucratic, complex.

Confidential negotiations with single preferred proponent for final contract.

After years of prep., public owner and managers mostly concerned that the P3 “succeed”.

Result: public owners out-negotiated.

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Public Sector Cost Control Kamloops Centre for Drinking Water Quality

As public project, 20% cheaper than projection for P3 ($48.5 million, not $60 million).

During P3 process, Whistler project costs jumped from $22 million to $36 million in just one year. The now public project is on budget and ahead of schedule.

After ending a P3, Hamilton water and wastewater saved 5.2% ($4.49 million) over three years . “…the City has achieved significant cost savings by operating the treatment facilities in-house” (City of Hamilton news release, Mar. 31, 2008).

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Cost Control and Risk

“The case studies indicate that the potential benefits of P3s are often outweighed by high contracting costs and opportunism. These costs are often particularly high when construction or operating complexity is high, revenue uncertainty (use risk) is high, both of these risks have been transferred to the private sector partner and contract management effectiveness is poor. In infrastructure projects it rarely makes sense to try to transfer large amounts of use risk to the private sector”.

Source: Public Private Partnerships in Canada Theory and Evidence by Aiden R. Vining and Anthony E. Boardman, UBC P3 Project, Working Paper 2006-04, December 5, 2006, Sauder School of Business, University of British Columbia.

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Risk Transfer

“Our analysis of the Canadian P3 evidence indicates that the willingness of private sector firms to bear user risk declines with the level of user risk. Private sector firms will not participate in a P3 if it bears cost risk and large revenue risk.”

Source: Public Private Partnerships in Canada Theory and Evidence by Aiden R. Vining and Anthony E. Boardman, UBC P3 Project, Working Paper 2006-04, December 5, 2006, Sauder School of Business, University of British Columbia.

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Risk Transfer

Canada Line – TransLink has ridership risk. Must pay for 100,000 riders per day (up from 40,000 on transit corridor today).

City of Hamilton water and wastewater debacle – companies refused liability for sewage spills and floods. 200% risk premium in contract renewal proposal.

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Risk Transfer – Metronet 2007

Metronet Tube Maintenance P3. Regulator denied additional public money for cost

overruns. Consortium collapsed. Risk reverts to public, since Tube must be

maintained. Transport for London has already provided a loan

of 897 million pounds to administrator. Ultimate cost of collapse for Transport for London

= $2 billion pounds (i.e. $4 billion Canadian)!

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“Value for Money”

Value for Money reports lack credibility. Too often they are justification reports…especially since they’re produced AFTER the final contract is signed.

They are often “….pseudo-scientific mumbo jumbo where the financial modeling takes over from thinking…it becomes so complicated that no-one, not even the experts, really understands what’s going on”.

Jeremy Colman, Deputy Controller and Auditor General National Accounting Office – UK Financial Times June 5, 2002.

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“Value for Money”

Sea-to-Sky highway P3 – Partnership BC’s V.F.M. report incorrectly assumed the cost of government borrowing is the same as the cost of capital for the P3.

“…the Sea-to-Sky P3 will cost taxpayers over $220 million more than a traditionally procured and financed project”.

Source: The Real Cost of the Sea-to-Sky P3 by Dr. Marvin Shaffer, Canadian Centre for Policy Alternatives, September 2006.

Public sector borrowing always cheaper than private finance. Current Municipal Finance Authority of BC rate for a ten year term is 5%.

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Debt Management

There was once hope P3 debt could be “off-book”. No longer.

“…how the accounting profession looks at P3s and how debt is treated has actually been evolving since 2003…the capital costs of our P3 projects will be treated as assets and liabilities on (the government’s)

books.” Kevin Falcon, BC Minister of Transportation, BC Legislative Assembly Hansard. October 25, 2005.

From 2008/09 U.K. public financial statements have had to abide by International Financial Reporting Standards. This brought PFI projects on to the public balance sheet and increased UK public sector debt by 6 billion pounds. Source: Public Finance Magazine March 3, 2007.

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Debt or Liability?

2006 Public Accounts of BC showed provincial contractual obligations up a staggering $21 billion in just one year…up from $34 billion to $55 billion!

“What (the Public Accounts) show is the effect of the Liberal government’s determination to turn to the private sector to provide services and facilities that were in the past provided by government” “P3s just put the bill in another pocket” by Craig McInnes Vancouver Sun July 19, 2007.

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Efficiency “A P.F.I. Transaction is one of the most complex

commercial and financial arrangements which a procurer is likely to face. It involves negotiations with a range of commercial practitioners and

financial institutions, all of whom are likely to have their own legal and financial advisors.

Consequently, procurement timetables and transaction costs can be significantly in excess of those normally incurred with other procurement options.”

Source: HM Treasury, Value for Money Assessment Guide, August 2004 p. 30.

Kicking Horse Pass – Park/10 Mile Bridge.

Fed/Prov. funding confirmed March ’03. Took

three years to put a single shovel in the ground.

Whistler Wastewater Treatment

Capital costs rose from $22.5 million in Jan.

2005 to $36.5 million in June 2006 as complex

P3 procurement delayed start of project.

Efficiency

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Efficiency

Millennium Line Skytrain (design/build) – took only three years to complete.

Canada Line (d.b.f.o. P3) – scheduled to take five years from signing of contract, but has been in P3 process since 2001, so really 8 years in total.

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Secretive and Unaccountable Councillor in Hamilton told he had to pay $5000 for F.O.I.

request on P3 water contract with City.

P.W.C. financial feasibility study on Canada Line withheld from TransLink Directors.

Quiet deal between Epcor and Regional District of Nanaimo managers.

Critical Dayton and Knight report not shared with Whistler councillors.

Maple Ridge process ruled illegal by BC Supreme Court.

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COPE-*491

F.C. M. Conclusion August 2007

“There is no evidence to suggest that P3s consistently cost less or provide better services than traditional public projects.

P3s give the responsibility for financing infrastructure to the private sector, even though traditional municipal financing is simple, relatively easy, and less costly than private sector financing.

Long-term P3 arrangements, which often keep proprietary information out of the public domain and put the day-to-day management of public services in private hands for periods of 20 to 30 years, can reduce flexibility, transparency, and accountability for local governments.”

Source: Public-Private Partnerships and Municipalities: Beyond Principles, a Brief Overview of Practices by Dr. Pierre J. Hamel for Federation of Canadian Municipalities, August 31, 2007.

Ontario Auditor General slams Brampton Hospital P3

Total life cost: $1.2 billion. December 2008 - Ontario Auditor General Jim

McCarter said Province would have saved $200 million if it had borrowed money directly.

Construction would have been $50 million less if built directly.

Government would have saved $58 million if it hadn’t privatized non-clinical support services.

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Parks Report: Top BC Forensic Auditor on P3s

Ron Parks is top forensic auditor in BC. January 2009 – Parks and co-author Roseanne

Terhart commissioned by CUPE BC to study 4 BC P3s.

Concluded all cost more than public projects…130% more in case of Diamond Health Centre.

Said process for assessing P3s is biased against public sector.

Criticized “general lack of transparency and public accountability”.

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Financial crisis means P3s make even less sense

Private financing now is even more costly & risky. The spread between public & private financing costs is

increasing. Financial crisis caused by same policies as P3s…like

deregulation, privatization and inadequate public investment.

Bailouts prove private sector not better than the public at managing risk (e.g. Vancouver Athlete’s Village)

P3s are complex and lengthy…so if P3, stimulus won’t get spent quickly .

Governments are always ultimately accountable anyway.

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Some Key Resources Value for Money? Cautionary Lessons about P3s from British Columbia by

Stuart Murray, Canadian Centre for Policy Alternatives, June 2006. Evaluating the Operation of PFI in Roads and Hospitals Research Report 84,

The Association of Chartered Certified Accountants, London, 2004. Public Water for All: The Role of Public-Public Partnerships Transnational

Institute, Amsterdam, March 2006. Public-Private Partnerships in Canada Theory and Evidence by Aidan R. Vining

and Anthony E. Boardman, Sauder School of Business, UBC P3 Project, Working paper 4, December 2006.

Public-Private Partnerships and Municipalities: Beyond Principles, a Brief Overview of Practices by Dr. Pierre J. Hamel, Federation of Canadian Municipalities, August 2007.

Evaluation of Public Private Partnerships: Costing and Evaluation Methodology Blair Mackay Mynett Valuations Inc. January 5, 2009.

2008 Annual Report of the Office of the Auditor-General of Ontario “Chapter 3: Brampton Civic Hospital Public-Private Partnership Project”.