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Share BC Pension Forum

Pension funds & P3’s:

Politics, problems and pitfalls?

Public Private Partnerships for Health Infrastructure and Services

Richard Neal BC Health CoalitionMay 24, 2007

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An attractive long-term investment?

Stable income stream

+

Low operational risks +

Limited operational competition

=

Robust returns for investors?

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Structure of a P3:Special Purpose Vehicles

‘AHA is a legal entity that has no legal assets

of its own. It is referred to as a ‘Special

Purpose Vehicle’, which is made up of the

following partners’

Finance: ABN AMRO

Construction:PCL Constructors Inc.

Hard & Soft FM Services: Johnson

Controls & SodexhoPCL Construction May 24, 2005

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Primary Goals of P3’s

Projects appear to be delivered ‘on time

and on budget’ via contract and risk

transfer

Performance Based Pay for operational

contract duration – a mechanism for

superior performance

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Questioning the goals of P3’s

What are the frequency, extent, and

magnitude of cost overruns and project

delays on conventionally procured

projects?

What factors are associated with cost

overruns and project delays?

What are the costs of P3’s?

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P3’s: On time and on budget?

The most publicized quantitative evidence to date

produced by the UK National Audit Office:

“PFI: Construction Performance”

P3’s more likely to be on time and on budget

But, NAO only examined construction times

NAO did not account for:

Budget increases during contract negotiation

Downsizing of projects during negotiation

Length of time for contract negotiation

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On time and on budget?At what cost?

Forensic analyses of operational Public Private Partnership hospitals commissioned by The Association of Chartered Certified Accountants

P3 consortia charging a premium of 30% to deliver projects ‘on-time’ ‘on-budget’

Considerably exceeds evidence of average hospital cost overruns;by a factor of 3 to 5 times

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On time and on budget?Abbotsford Hospital and Cancer Centre

‘I look forward to the day in 2007 when one of the representatives of these groups is standing beside Premier Campbell when he cuts the ribbon to open this hospital’ Colin Hansen. June 25, 2003.

‘Health Services Minister Colin Hansen and Finance Minister Gary Collins made the announcement today . . . Construction is expected to begin in 2004, with completion in 2007’

Ministry of Health//Ministry of Finance. Press Release January 23, 2003

Project Agreement: ‘substantial completion’ May 6, 2008

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On time and on budget?Abbotsford Hospital and Cancer Centre

$210 million;$286 million;

$325 million; $355 million

Annual service payment doubled:

$20 million to $40 million

August 2006: BC Office of the

Auditor General - $1.1 billion

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Lower costs:Where’s the evidence?

‘The Auditor General said we saved $39

million on [the Abbotsford P3].’Gordon Campbell. Abbotsford Times, May 10,2005

‘Abbotsford Regional Hospital and Cancer

Centre Project brings cost-savings of about

$39 million . . . those savings will go directly

to patient care’

George Abbott Nov. 29, 2005.

Ministry of Health Press Release. B.C. Wins Recognition for Public Private Partnerships

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Higher costs = Value for Money?

‘Value for Money’: numerous colloquial definitions

‘Value for money’ is misused to describe how P3 projects are guaranteed to be delivered on time, on budget, and with superior levels of service when compared to traditional public provision

But value for money is notoriously hard to identify, and has a technical definition, not colloquial, for P3 cost-benefit analyses

Comparative net economic benefit throughout the contract term

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Private sector innovations and efficiencies at P3 hospitals

Installing bedside entertainment and

communications equipment

High costs of incoming calls and

marketing to patients – a captive

audience

The real money maker: exclusive ability

to bill for variable expenses

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Is Partnership a loaded term?

Risk profile changes throughout

contract term

Refinancing – circumventing

refinancing

Public loses out

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Why P3’s? BC’s conventional procurementwell managed and well executed

• ‘No evidence that BC lacks experienced

engineers, project managers or construction

managers’

• ‘Generalizations about large cost overruns

and prolonged delays on public sector

projects are not borne out in the projects we

have examined here in BC ‘

Morris Sydor, Director, Office of the Auditor General of BC, 2006

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P3’s: the financial and political risks to trustees & fund managers

Financial

Unknown construction & development risks: Limited verifiable data available

Operational . . . ‘relatively benign risk’Standard & Poors Global Credit Rating

Political

When you look at the institutional ownership of these assets, it is the Canada Pension Plan, the Government of Alberta, BCIMC, the province of Nova Scotia, and Ontario municipal employees’

Duncan Ball, ABN Amro, E & Y P3 Issues Survey 2006

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What next?

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Risk Transfer: Is it effective? Is it worth the price?

Risk is at the heart of all . . . public private partnerships, but not perhaps in the manner claimed by their supporters.Only by adding the value of risk that is claimed to be transferred to the private sector that any PFI project can appear to demonstrate value for money. In reality, the main risks in the provision of any essential public service will remain with the government. It cannot afford to let these services fail and so, if necessary, the private sector provider will be bailed out by the tax-payer. time and again private sector failures have demonstrated that the key risks remain with the public sector

Association of Chartered Certified Accountants, 2002

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Increased investment or increased debt?

P3’s are a form of financing, not funding

More costly form of financing

Do not increase funding for publicservices or infrastructure

Compels public bodies to bypass lower-cost financing

A loan that must be repaid

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Risk Transfer: designed to

Shelter taxpayers from project cost & time

overruns

Provide lower operational, service and

maintenance costs for contract duration

Only aspect of contractual risk transfer

studied is ability of P3 consortia to deliver ‘on

time and on budget’

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Accountability: Partnerships BC says

“Public interest is paramount”

“Processes are fair and open” Partnerships BC. An Introduction to Public Private Partnerships. June 2003

“We have committed to publicly release the

final project agreement . . . after the deal is

signed”Mike Marasco, Chief Project Officer, Partnerships BC

On the Abbotsford P3

Press release February 2004

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Financial Model Extracts‘publicly released’

DELETEDPartnerships BC Abbotsford Hospital and Cancer Centre

Project Agreement Schedule 7

Financial Model Extracts

Page 1

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Cancellation Costs ‘publicly released’

DELETIONPartnerships BC Abbotsford Hospital and Cancer Centre

Project Agreement Schedule 26

Compensation on Termination Pages 24-27

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Gordon Campbell’s visit to Europe . . . Why didn’t he visit P3’s hospitals?

Could not visit any regional London P3

hospitals. Why?

High operating costs, high cost of debt,

& operating deficits

Beds cut, surgeries cancelled, staff laid

off . . .technical Bankruptcy

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P3’s in BC and PFI in the UK: Why they’re so similar

British PFI consultants drew up Abbotsford P3

contract, seconded by PBC to negotiate and lead

final Abbotsford P3 contract

Developed a “template” P3 contract for all other PBC

P3’s

Based contract on standard UK PFI contract:

“recognisably the UK PFI model”David Hunter, partner, Bevan Ashford Time To Go West Again October 2004

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Assumptions of P3’s

● Inefficient state monopoly

• Revitalize with free market competition

● Private sector expertise, efficiencies,

innovations, and competition

● Everyone benefits

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The problems with P3’s

“If you had made this up, you’d be

laughed at. If you were the one who did

make this up you should be ashamed.

If you continue to make it happen you

will destroy the NHS”Paul Miller, Chair, British Medical Association Consultants Committee.

Annual BMA Consultants Conference, June 2006

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The problems with P3’s

“ another example of governments choosing quick, politically useful results without concern for the long term consequences . . . it is difficult find anyone in the UK now prepared to support PFI except those in government and those set to profit from it”

Peter Fisher, Chair, NHS Consultants Association

open letter to the CMA, August 2005

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The problems with P3’s

Is the Private Finance Initiative dead? It may have failed in the United Kingdom but that won’t stop it from being exported . . . It has created a cadre of exports who can now offer their services to the rest of the world. The UK may, once again, be successful in exporting its failures as successes

Martin McKee & Rifut Atun, Editorial, BMJ October 8 2005

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The British Medical Journal :The evidence for P3’s

Several respondents have made the point that they would like to read an article that argues cogently the case for the Private Finance Initiative. We at the BMJ share this desire. We have never had such an article submitted to us, but we have made several attempts to commission a piece. These have all come to nothing, with some of the proponents of PFI arguing that they are "far too busy to have time to put the case for PFI." I find this bizarre, and it seems to me that when hundreds of millions of pounds are being spent on PFI schemes it should be possible for somebody somewhere to find a small amount of money to pay somebody to make the case for PFI.

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The problems with P3’s

Our analysis shows that PFI is a very expensive way of financing and delivering public services that must, where public expenditure is constrained, lead to cuts in public services and/or tax rises, that is a cut in the social wage. In contrast, the chief beneficiaries are the providers of finance and some of, though not necessarily all, the private sector service providers, leading to a redistribution not from the rich to the poor but from the mass of the the population to the financial elite. In short, PFI does not pass the accountability test. Pam Edwards et al, Evaluating PFI in Roads and Hospitals.

Association of Chartered Certified Accountants, Nov 2004.

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Public Sector Comparators

“Pseudo-scientific mumbo jumbo where

the financial modeling takes over from

thinking…it becomes so complicated

that no one, even the experts, really

understands what is going on.”Jeremy Colman, Deputy Comptroller, UK National Audit Office.

Financial Times, 5 June 2002

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Public Sector Comparators

People have to prove value for money to get

a PFI (P3) deal. But that is wrongly seen to

be demonstrated by the public sector

comparator, it becomes everything. If the

answer comes out wrong you don’t get your

project. So the answer doesn’t come out

wrong very often””Jeremy Colman, Deputy Comptroller, UK National Audit Office.

Financial Times, 5 June 2002

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Public Sector Comparators

“Public sector comparators won’t do you

much good anyways, because I can make

the public sector comparator as bad as we

want to, in order to make the private sector

look good.”Larry Blain, CEO, Partnerships BC

BC Municipal Finance Authority Meeting, March 26, 2004

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What happens to staff

Clinical staff employment retained so

far

But latest P3 models transfer entire

hospital, including clinical services, to

private sector.

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Where’s the evidence for lower costs?

No independent publicly available quantitative study published to date confirms lower costs for P3’s

Well known studies claiming lower costs for P3’s can only predict lower costs