New Brunswick Auditor General Kim MacPherson joins public auditors in Nova Scotia, Quebec, Ontario, and British Columbia who have previously issued reports critical of P3 projects.  With P3 private partners put in all or part of the money for construction and in return get multi decade contracts to manage the projects with guaranteed inflation protection.

MacPherson’s report was critical of the process undertaken by the previous Liberal government.  She declared that a Value for Money report that had claimed the province would save money on the schools was in error.

The project involved schools in the communities of Moncton and Rexton.  The government committed to pay a private partner $5.1 million annually for 30 years to construct the schools and to manage operations, maintenance and rehabilitation.

The New Brunswick auditor found that the province had decided to proceed with a P3 despite the fact there had been no analysis justifying the decision. MacPherson said:

Neither the Department of Supply and Services, which executed the design, nor the Department of Education, which manages the Agreement after the schools open, were officially involved in the decision making process.

The transfer of risk is one of the reasons traditionally given to use public private partnerships.  MacPherson said,

We did not find evidence that the Department compared the total amount of quantified risk with the actual experience from prior school construction projects to assess the reasonableness. In our view, historical cost information is an important tool to validate project costs including estimated risks.

For the bottom line the Auditor General found that instead of saving the province $12.5 million by using a P3, it had actually spent $1.7 more than it would have with traditional procurement.

In British Columbia public private partnerships remain the default model for large provincial projects.  All new hospital projects in particular have been subjected to P3s with their multi-decade contracts.

In one community voters rejected the use of a P3 water system. In another community the federal government refused a P3 after the city had spent $3 million on the proposal.  And as a colleague of mine put it, the federal government succeeded in making voters furious in what are probably two of the most Conservative areas of Canada.

In Abbotsford citizens rejected a P3 water project being pushed by the city and the federal government by a 75% margin in a referendum held during municipal elections. Abbotsford Mayor George Perry, most of his council and local Tory MP Ed Fast had been promoting the P3 which would have handed control of a new proposed water system over to a private company for decades. Ed Fast told the Abbotsford Times that the community didn’t have to use a P3 but there were no alternative sources of federal funding due to restraint.

On November 19^th Abbotsford voters proved the mantra of TINA (There Is No Alternative) wrong when they voted down the P3 and replaced the mayor with an opponent who had opposed the project.

The other community was Calgary which was an enthusiastic booster of the privatizing projects. The City was looking for federal money for four recreation centres and had their eye on the $1.25 billion PPP Canada Fund.  So Calgary Mayor Naheed Nenshi was furious during the federal election last spring when the Liberal Party said in their platform document that they were going to get rid of PPP Canada.

The Mayor told the Calgary Herald in April that the rec centres might never be built if a Liberal government scrapped the fund because cities simply don’t have other pools of long-term federal cash to tap. According to the Herald article, City council voted in January 2011 to review a public-private partnership to build the four facilities, and Nenshi said the financial lifeline from the federal agency was a “huge” factor in the decision.

In April Nenshi said the city had received some “positive noise” about accessing the P3 dollars and expected a decision within the past few weeks, although that would  likely be postponed by the federal election campaign.

Unfortunately for Nenshi and Calgary this slagging of the Liberals during the election did not pay off for them.  Just last week the City got a letter from PPP Canada refusing funding and saying that recreation centres were really not eligible under the program. This was followed by some awkward twisting and turning and editing of the PPP Canada web site which had previously said the centres were eligible.

On Thursday, November 29^th, however, the Calgary Herald reported that in fact:

Greg Melchin, the board chairman of federal funding agency PPP Canada Inc., said federal Finance Minister Jim Flaherty cut recreation centres from eligibility just last week.

Melchin maintained that up until that point, recreation centres were included in Crown corporation’s conditions and terms of references, and PPP Canada backed Calgary’s bid before it was made ineligible.

Even so, he said it’s the prerogative of the federal government to change policy and criteria if it wishes.

If Mayor Nenshi had fumed at Michael Ignatieff’s plan to axe the program in the spring he is now fit to be tied. “The real challenge here is a giant game of bait and switch,” Nenshi told several hundred people at a chamber of commerce luncheon, the Herald reported.

The Mayor’s web page now carries a featured story blasting the Conservative government and demanding the city be repaid for the $3 million it spent developing the proposal for the P3. And he is encouraging Calgarians to call their local Conservative MPs to tell them what they think.

Honestly, think what you will of the idea of P3s, can anything managed this poorly really be a good idea?

The following are just a few of the issues that hit the convention floor.

The RCMP and public private partnerships

There was a lot of coverage in the media about the breakdown in negotiations over a new RCMP contract between British Columbia and the federal government. A side bar issue that got no coverage dealt with the new RCMP Division Headquarters in Surrey.

Solicitor General Shirley Bond complained to a UBCM panel about the province’s inability to control rising RCMP costs. The example she gave was the RCMP’s new Division E headquarters that saw costs balloon from $300 million to $1 billion.

However, it turns out that the new headquarters is a federal public private partnerships and that so far the province’s privatization agency, Partnerships BC, has billed $2.5 million in consulting fees on the project. Remember when the government argued that P3s offered fixed costs and price stability?

The Municipal Auditor General

Mayors and councilors were not happy about the province’s decision to impose a Municipal Auditor General on them. Councilors argued from the convention floor that they were already forbidden by law to run a deficit and had many of their major projects subject to referendum.

However, the province backed down on most of the issues promising to pay for the new office (but not for the cost of audits) as well as swearing that new MAG would not have the power to second guess local policies, including tax policy.

The big issue that still remains is governance. The UBCM wants the same model the province enjoys in its relationship with its own AGM. That would mean an MAG would report to an accounting board made up of local government representatives. No dice Communities Minister Ida Chong told the convention. Apparently local governments will make up only a minority of the board. The business community has been promised its own chair at the table.

The business community (primarily the Canadian Federation of Independent Business) is on a full-court press to see business property taxes cut with the cost being shifted to homeowners. Of course business, unlike homeowners, can write off their property taxes against federal and provincial taxes.

Government downloading and rural areas

Every UBCM convention holds individual forums for different sized communities. My favorite is always the Electoral Area Directors’ forum made up of mainly people representing spread out rural areas. While diplomacy is the order of the day when big communities talk to the provincial government, with Area Directors you get a lot more down-to-earth candor.

Over the years Area directors have had a continuing complaint about downloading of costs. This year the complaint was over diking policy. As a Central Kootenay Director told the provincial officials at the forum, “One of the reasons you are downloading is that you lack resources. If you can’t handle it, we sure can’t.” The chair of the presentation on diking sent the provincial officials away with this message:

We don’t have the expertise, equipment or money. Flood mitigation needs more funding. Send the message back.

Extended Producer Responsibility (EPR)

Over the years residents, particularly in urban areas, have become used to a growing level of recycling. Blue boxes take away our newspapers, cans and plastics. For many of us there will soon be recycling of kitchen scraps.

It turns out there is some risk of things going the other direction. The Area Directors heard a presentation on Extended Producer Responsibility. Under this program producers and consumers or products will have responsibility for them. It sounds attractive but what will it actually mean?

A Director from the Sunshine Coast told the panel they were planning to extend their blue box program and asked for advice considering the EPR policy. An industry spokesman advised the Director that they couldn’t give practical advice but that it would be “prudent to wait.”  An industry spokesman reported that some governments were putting a pause on such projects. “Remain nimble” she advised.

It turns out we may all have to be more nimble if we have to start taking our newspapers to depots rather than having them picked up in blue boxes.

Wages for public employees

It appears Christy Clark’s government is determined to make public employees pay for the government’s ineptitude on the HST. In a panel on the economy Finance Minister Kevin Falcon told the audience:

With respect to the wage mandate for the whole public service at net zero for two years – that tough mandate is likely to continue.

Public sector wages have already fallen due to inflation and the two year wage freeze. The Finance Minister appears determined to push them down further. Meanwhile, at least for now, wages in the private sector are going up.

Ferries

At the forum on the economy an Island Trust Trustee told the panel of Ministers:

Ferry fares are killing our communities. We are losing jobs because of the ferry fares.  If government isn’t willing to put money into ferry infrastructure we are going to continue to lose jobs.

Transportation Minister Blair Lekstrum said they were cutting 400 sailings but that it would not likely affect fares. Finance Minister Falcon suggested fares really didn’t make much difference because when they cut fares temporarily during the recession, ridership didn’t go up. The Island Trustee disagreed.

Open government

I went to one of the 7:30 am “clinics” on Thursday morning on “open government.” I had hoped it might deal with the government’s poor record on access to information but instead it dealt with the governments new web sites.

It wasn’t a total loss though. The government’s data website that now contains more than 2,400 data sets looks pretty interesting. And the open information site that publishes the government’s FOI releases is certainly worth reading on a rainy Sunday afternoon. Too bad their policy of releasing the information only 72 hours after it goes to the FOI requestor will probably discourage media from using FOI.

Workshop on market housing

Thursday afternoon there was a workshop on market housing that was much more interesting than last year’s all day workshop. Last year was mainly taken up by how little the province could or would do. This year instead focused on how much was actually being done in communities like Vernon, Langford and Surrey.

 There were dozens of other policy issues addressed in the week long convention. Paul Willcocks has an interesting column on the debate about smart meters here. It is remarkable just how much information flows in a meeting like this.

We have not seen clear evidence of savings and benefits in other areas of PFI projects which are sufficient to offset this significantly higher cost of finance. Evidence we studied suggests that the out-turn costs of construction and service provision are broadly similar between PFI and traditional procured projects, although in some areas PFI seems to perform more poorly. For example we heard that design innovation was worse in PFI projects and we have seen reports which found out that building quality was of a lower standard in PFI buildings. PFI is also inherently inflexible, especially for NHS (National Health Service)projects. This is in large part due to the financing structure and its costly and complex procurement procedure.

In the UK public private partnerships are called private finance initiative (PFI).

The Guardian newspaper reports that MPs found using P3s cost 1.7 times more than using public money for projects.

“The difference in finance costs means that PFI projects are significantly more expensive to fund over the life of a project. This represents a significant cost to taxpayers,” the report finds.

The Conservative chair of the Committee said:

instead of transferring risk to the private sector and cutting costs for the taxpayer, PFI had fooled the public – and Whitehall officials – into thinking they could get shiny new public services “on the never-never”.

While in the UK P3s have been under skeptical review, here in Canada, and particularly in BC, the government still refuses to make critical information public. The information is, the government says, a Cabinet Secret.

The business community in the UK continues to defend the lucrative projects with their guaranteed profits.

Here in BC we have billions  of dollars invested in P3s for 30 years or more.  Every new hospital built in the last decade is a P3.  Roads, bridges, sewage plants and now a prison have all gone the P3 route. There is no sign the government and its privatization agency, Partnerships BC, are slowing down. There is no sign they are prepared to even have a public review of the costly projects.

Personally, I frown on offsets most of the time. Some colleagues have tried to make the best of them to use for forest conservation or to fund fuel switching and other desirable practices that move us toward a no carbon economy. I like all of these things but have concerns about how offsets work in the real world, and whether they make sense at all when we need to be at 350 parts per million when we are currently at 390. I can live with some limited and shrinking amount of offsets in the medium-term, but by 2020 or so they should be phased out completely in favour of real reductions in emissions from polluters.

In the case of carbon neutral government, there has been an additional concern cited about public dollars, at $25 a tonne of CO2, being diverted to the Pacific Carbon Trust, a Crown corp created to invest in private sector offset projects, typically by contracting out to private firms like Offsetters. The public sector in BC also pays the carbon tax, recently increased to (also) $25 a tonne as of July 1. (Aside: Happy Belated third birthday carbon tax; you’re getting so big and strong, you worry us that you will inadvertently crush the poor; we’ll have to fix that before we let you get any bigger.)

Offsets are really just another way of pricing carbon emissions, so mandatory offsets in the public sector mean government bodies are currently facing a carbon price of $50 per tonne, or double that of the private sector (school boards get a rebate for carbon tax paid but are still on the hook for PCT contributions). The rub is that PCT only funds projects in the private sector. The Sun reports:

Among the private corporations that benefited from such offset expenditures: Lafarge cement; forest companies Canfor, Interfor and TimberWest; natural gas company Encana; and Kruger Products, a manufacturer of toilet paper and related products. They earned the right to sell offsets to the public sector based on energy-saving initiatives.

Bob Simpson also writes about a particularly perverse case:

In May, the PCT purchased, for an undisclosed amount, 84,000 tonnes of carbon emissions from EnCana, a highly profitable company and one of British Columbia’s largest emitters. EnCana’s greenhouse gas reduction was reportedly obtained between 2008 and 2011 from a technological improvement in its extraction operations.

However, in the same region of the province that this reduction was supposedly achieved, the Horn River basin, EnCana is building its Cabin Gas processing plant without using carbon sequestration as originally promised. At full production, this one plant alone will add 2.2 million tonnes per year of new carbon emissions to the province’s total emissions. This is more than double the greenhouse gas emissions produced by the entire public sector on an annual basis, and represents 6.5 per cent of the emissions reductions needed to meet B.C.’s legislated targets by 2020.

This seems typical of BC’s typical flow of perverse subsidies to businesses – super-cheap green electricity for new coal mines and shale gas fracking; high prices paid to other private companies to generate that electricity; P3 projects for transportation and hospitals. Crony capitalism with a Lotusland twist.

The total bill for carbon neutrality was announced at $18.2 million. Some of the bigger chunks include $1.1 million for Vancouver Coastal Health, $664,000 for BC Housing, $406,ooo for the Vancouver School Board, $1.5 million for UBC, $444,000 for SFU, and $389,000 for UVic. Local governments are not technically part of carbon neutral government, but most have signed on to be so as of 2012 in exchange for rebates on their carbon tax (if they had been part in 2010, they would have kicked in roughly $4 billion extra to PCT).

Given the size of these institutions and a BC public sector of $40 Billion per year, none of these are huge amounts. Relatively clean electricity powers much of the public sector, and over time we need to cut out the gas. And the high carbon price has led to real projects that are reducing emissions. Perhaps the biggest concern to me is for schools, where the overall budget has basically been frozen for years, forcing real cuts in services due to inflation. It would be easy enough to cut school boards a cheque as they do for carbon taxes paid, but this has not been the case.

To be fair, there another side to the story and that is the BC government’s own investments in retrofitting buildings and its efforts to reduce emissions through videoconferencing and reduced travel. These are good things, and $75 million has been spent on such projects over the past three years through the Public Sector Energy Conservation Agreement. The problem is that the program is unfunded as of April 1, and the original one was over-subscribed. So there are projects that could be done if funds were made available, but they are not so the public sector must pay into the PCT, which does not fund projects in the public sector.

There seems to be an increasing recognition that this state of affairs does not make sense. Upon release of the carbon neutral government report, the Sun story adds:

Environment Minister Terry Lake said talks are underway with the Pacific Carbon Trust on how offset funds might be returned to public institutions such as schools. While “people don’t like the thought of public money going to help big organizations,” Lake noted that companies such as Encana also generate revenue for the province that goes back into funding health and education. Non-profits such as the Nature Conservancy of B.C. have also benefited from selling carbon offsets as a result of carbon sequestered in a Kootenay property that was not clearcut.

So we’ll wait and see. I’d much rather see a higher carbon tax applied to both public and private sectors on equal terms – and use some of the proceeds of the tax to fund mitigation projects through the PCT or otherwise. Another possibility is that the public-private carbon price gap be eliminated over a few years – the idea of government taking initiative and leadership on climate action is a good one to preserve. In the meantime, compensation should go to public bodies to ensure services are not adversely affected, and retrofit dollars should flow to create a asset base of low-carbon public buildings. And let’s see some real climate action from big industrial polluters, too, which the government’s right hand seems to be encouraging, just as its left hand is pointing out climate achievements.

[Note: This post builds on analysis on carbon pricing for the Climate Justice Project. See Fair and Effective Carbon Pricing: Lessons from BC.]

A large part of the higher cost was because of the way in which the present value cost — the long term liability — of the future P3 contract obligations was calculated. The AG calculated that liability based on the government’s borrowing cost — in other words, he calculated the actual amount the Health Authority would have to set aside now to pay its future contract obligations. In justifying the P3, however, the Health Authority, as directed by Partnerships BC, used a different rate, one that seriously understated how much they would actually have to set aside to make the future payments.

In all fairness, this does sound a bit academic. But its significance wasn’t lost on that eastern reporter. He, like Keith and other followers of the P3 debate, was surprised (well, disappointed more than surprised) that there has been no media coverage about this very important Auditor General finding.

The Health Authority project was relatively small — approximately $100 million. So the higher cost– some $17 million — wouldn’t appear to be enough to get excited about. But this is a systemic problem. The Auditor General’s finding applies to all of the government’s P3′s — the $53 billion of future contract obligations last reported in the Government’s financial statements.

Partnerships BC would have us believe that the present value cost — the long term liability —  of those future contract obligation is some $26 billion. The Auditor General’s finding implies that it would in fact be over $5 billion more than that. Even C.D. Howe would have had to agree, $5 billion matters. The liability of the P3 obligations the government has already entered into is far greater than anything Partnerships BC, in its so-called value for money assessments, has acknowledged.

Under P3s, or private finance initiative (PFI) as they are known in the UK, private corporations put up some of the money for local infrastructure or services in return for a guaranteed contract to deliver services for 30 years or more.  Now government and auditors in the UK are saying these projects are far too expensive and that they want some of the money back. 

This is important for British Columbia because much of our own model for P3s was directly borrowed from the UK which had much more early experience with the projects.  Here in BC we have had approximately 35 “partnership projects” with an estimate value of more than $12 billion.  We no longer build hospitals here without private financing and handing some services over to the private sector in multi-decade contracts.

The latest development in the UK was a report in late April tilted Lessons from PFI and other projects from the National Audit Office (equivalent to our Auditor General). 

Here are some of the findings of the National Audit Office report:

• There is no clear data to conclude whether the use of PFI has led to demonstrably better or worse value for money than other forms of procurement.
• There is insufficient data on the returns made by equity investors for the risks they are bearing.
• There is still limited data on investors’ returns.  In particular, when investors sell their shares in project companies to other investors, there is little transparency of the price at which these shareholdings are bought or sold or the impact of these transactions on investors’ returns.
• There is a need for greater challenge of both the decision to use private finance and the scope of the deal…It is therefore essential that there is a robust, impartial scrutiny of the business case, decisions on the form of procurement and project scope….The case for the use of private finance therefore needs to be challenged, given our analysis which showed that the costs of debt finance increased by 20-33 per cent since the credit crisis.

Knowledge of how much the investors are getting in return for whatever risk they take?  Challenges of decisions to go with a P3?  Impartial scrutiny?  None of that happens in British Columbia. 

In the UK both Cabinet and Treasury officials are now looking for ways to claw back some of the profits made by P3 companies.  In fact, the Treasury Branch has launched a pilot project to look at P3 savings.  A cross-party group of MPs (including government members) has even set up a PFI Rebate campaign to ask for some of the money back.

Meanwhile, both local governments and hospitals in the UK have started buying out their P3 partners.  The cost of buying them out is high, but not as high as paying for the contract another 20-30 years. 

Here in BC the government’s privatization agency, Partnerships BC, merrily rolls along looking for new projects that it can tie into 35 year contracts.  When it is not pushing P3s on government agencies and ministries it is pushing them on local governments like the Capital Regional District, Powell River, Abbotsford and Mission. 

Why is the UK so far ahead of us in questioning P3s?  They have been in the game a lot longer than we have and they are seeing the real impacts and costs. 

How much longer will we have to wait before the burden of these projects becomes obvious to everyone here?  How long until some government members begin to question the P3 orthodoxy?

Until then we can only conclude they have forgotten the First Law of Holes: When you find yourself in a hole, stop digging.

The Auditor General’s report on a Vancouver Coastal Health Authority (VCHA) project adds to earlier criticisms by his counterparts about failings in P3 hospital projects in Quebec and Ontario.  The BC report, released on May 16^th, examines the Vancouver General Hospital Academic Ambulatory Care Centre (AACC), known as the Gordon and Leslie Diamond Health Centre.

Opened in 2006, the Centre was the BC Liberal government’s first major health facility to be completed as a P3s.  In the project private corporations invested in the construction in return for guaranteed rent and other payments from the Health Authority for the next 30 years.

The Auditor’s report questions claims that P3s are “on time and on budget.”  It raises questions about risk transfer and identifies the high cost of using private investment rather than public borrowing to build public projects.

In his report the AG says:

Overall, we found that not all of the key value-for-money goals were met.  While the facility was completed on time, the final capitalized value was $123 million – 29% greater than the $95 million capital cost in the project report.

While saying the project was “on time,” the AG clarifies that phase two of the project, involving administrative offices on the top two floors, was completed six weeks later than planned.

One of the claims for P3 projects is that they can guarantee service quality because the private partner can be penalized for poor performance.  Although the AG found there were mechanisms in place for the Hospital to monitor the performance of the private company:

payments under the agreement are not subject to reduction for non-performance as asserted in the project report.

The AG questions how the cost of the project was reported.  The project agreement did not actually set a total price the Health Authority would pay.  Instead it created three payment streams that in total allowed the private consortium to cover its design, construction and financing costs over the term of the agreement.

These three payment streams were monthly rent from the health authority for space it used, annual rent for the parking area and the private corporation’s right to collect other rents from commercial operations and clinical teaching space.  If the Health Authority had built the facility itself it would have collected those rents itself.  However, the money lost from that rent was not included in the capital cost reported for the VCHA. 

Including the value of these payments would have added $38 million to the cost of the project.

The AG reports that external stakeholders (government agencies and taxpayers) did not have adequate mechanisms to assess the ongoing results of the project.  Since the original project report no other projects assessments have been completed and none are planned.

Finally, the Auditor looked at the additional cost of using private sector investment rather than government borrowing, at least for one aspect of the project. 

In February, 2007, the rent the Health Authority paid for space in the project was raised by 8.34% in return for a payment from the company to VCHA of $4 million.  The AG reports that this was in effect a loan from the private corporation to the Health Authority.  He continues:

we calculate the cost of borrowing for this transaction at 8.75% for the 30 year term.  Considering that the government’s cost of borrowing for 30 year debt was approximately 4.7% in late 2006, this loan was at a significant premium.  It would have been cost beneficial to access the additional funding through government debt.

Over 30 years additional payments because of the higher cost of borrowing for this “loan” would come to nearly $7 million.

While the Auditor General in the past has “reviewed” claims for these projects by the government’s privatization agency, Partnerships BC, this is his first independent look at P3 projects.  For BC taxpayers, the first look is not encouraging.

The Auditor General’s report has not been covered in the media.

That being said, there are some things that stand out as pretty strong likelihoods.

First of all it looks like the government’s fixation on privatizing government infrastructure and services will continue and may get even stronger.

Kevin Falcon’s appointment as Finance Minister may have been a genuflection to the party’s right wing but it also puts him in a position to drive the privatization agenda.  In his previous ministries of health and transportation we saw unprecedented development of public private partnership (P3) hospitals, roads and bridges.  Now as Finance Minister the government’s privatization agency, Partnerships BC, reports to him. Under Gordon Campbell Partnerships BC was given a free hand to push for P3s and under Falcon the organization might have even more sway.

Falcon is joined at the Finance Ministry by Deputy Minister Peter Milburn.  Milburn was moved from Transportation where he helped put together the Gateway project.  Grant Main, who recently served as a vice-president at Partnerships BC, takes up the new Deputy Minister role with the Ministry of Transportation and Infrastructure.

All told it is a powerful political and bureaucratic coalition to aggressively pursue privatization.

Any other thoughts?  I’d love to hear what other people are reading from the tea leaves.

In 2003, as part of its privatization agenda, BC’s government created Partnerships BC as a private company owned by the Ministry of Finance.  Partnerships BC’s triple mandate was to advise on the use of P3s, to manage P3 processes and then to evaluate their success.

One of the first things Partnerships BC did was to take on its sister organization, Partnerships UK, as a consultant.  Today, much of the P3 agenda in BC is built on the model developed in the United Kingdom.  Partnerships BC’s favored model of a P3 is to see private companies design, build, finance and operate (DBFO) public services and infrastructure in contracts that last longer than 30 years.  The government owns the building, but the company gets a 35 year contract with a rich revenue stream as its asset.

P3s (they are called private finance initiative or PFI in the UK) had more than a decade head start in the UK.  As a result, while the projects in BC are still in their infancy, PFI projects in England are mature and some of their flaws are becoming obvious.

Last month one British hospital terminated a P3 signed in 2003.  If the deal had continued the hospital would have had to pay more than £30m to the company. The UK Treasury Department is pushing P3 companies to give up some of their profits on the projects.  The Commercial Secretary to the Treasury said last month:

 We owe it to the taxpayer to eliminate wasteful practice and gold plating in contracts.

The level of profits from the deals is coming under scrutiny.  Although almost always profitable, P3 companies found two ways to dramatically increase their takings.  First, P3 companies borrow 85% to 90% of the money needed to build a project.  The amount they pay to borrow the money is based on the risk of the project and in most cases, almost all of the risk is at the construction phase.  After construction, companies often refinance at a lower borrowing cost and the savings go straight to their bottom line.  This led to profit levels that were considered unconscionable even for P3s so the UK government stepped in and now recovers a share of any profits obtained through refinancing.  Partnerships BC learned this lesson from the UK and their contracts contain this refinancing provision.  At least some of the Alberta P3s do not contain this clause in their contract.

Second, P3 companies used equity flipping to increase their profits.  While most of the money for projects is borrowed, P3 consortia often put in 10% to 15% of the needed money as their own investment – equity in the project.  Just as the cost of borrowing goes down when the construction phase risk disappears, the value of the equity goes up.  In some cases it goes up a great deal.  And while there are provisions to help the government capture some of the value of refinancing, there are no provisions to capture any of the profits from the sale of that equity.

Researcher Dexter Whitfield has studied equity flips in P3s.  He found equity transactions involved 1,229 P3 projects (including multiple sales) valued at £10.0 billion.  The average profit on these transactions was more than 50%.  Whitfield obtained this information from corporate reports.  The UK government does not keep adequate information on the deals.

Here in BC we have not seen this number of equity flips, but unlike the UK, it is still early days for P3s here.  The information we do have suggests we can expect the same thing.

The Abbotsford Hospital was the province’s first big P3, constructed after negotiations with a single bidder.  The hospital contract was awarded to the Access Health Abbotsford consortium. ABN Ambro was the original financing partner. However, in 2005 Macquarie Bank, which had been a financing partner in a competing group, bought 81% of both the Abbotsford P3 and the Vancouver General Hospital Diamond Centre P3 for $529 million (American). In 2007 Macquarie sold its assets on to John Laing for an undisclosed amount.  In 2010 John Laing sold the projects on to the John Laing Infrastructure Fund, an investment company located in the British Channel Islands in the tax haven of Guernsey. 

The Sea-to-Sky highway, constructed for the Olympics, was the province’s largest road P3.  The S2S Transportation Group consortium got the contract in 2005 with Macquarie North America Ltd as the financial advisor and financial participation from Macquarie Essential Assets Partnership.  In December 2010 Macquarie Essential Assets sold its stake in the project to a group of investors led by Fiera Axium Infrastructure.  At the same time Macquarie sold Edmonton’s Anthony Henday Drive Southeast Leg Ring Road.  Fiera Axium is also involved in Montreal Hospital P3s. 

The Kicking Horse Canyon project involved upgrading 26 km of the Trans Canada Highway near Golden.  The Trans-Park Highway Group, led by Bilfinger Berger BOT Inc. got the contract in 2005.  In 2010 Bilfinger sold 50% of its investment to the HSBC Infrastructure Company Ltd.  HSBC also acquired 50% of North West Anthony Henday Drive on the outskirts of Edmonton, Alberta from a subsidiary of Bilfinger.  HSBC paid approximately £65.9 million for the two investments.  Like John Laing Infrastructure Fund, HSBC is located in the tax haven of Guernsey.

In six years the Abbotsford hospital project changed hands four times, presumably with profits being made in every transaction, with ownership ending up in a tax haven.  We have no idea how much those profits were because the BC government does not require the release of that information.  We do know that in the UK, on average, profits were in the order of 50%.

In the UK Parliament’s Public Accounts Committee has started to take a far more critical look at these projects.  In its most recent report the Committee said,

We found no clear and explicit justification and evaluation for the use of PFI in terms of value for money.

Why does it matter if companies make huge profits selling on their P3 investments?  First of all if they make huge profits, it means the public paid too much in the first place for the contract.  Second, with each sale at higher prices the new owner has an increased interest in driving down the cost of operating the project.  That means reducing services and the quality of services for the public.  Finally we need to ask, do we really want to see our public services and facilities turned into poker chips in the international finance market?

What is clear is that in the UK, public bodies are locked into multi-decade contracts that provide enormous profits for P3 companies.    As more information becomes available and as more of our growing list of P3s is subject to asset flips, the same issues will make themselves clear here.  And, as in the UK, we will pay for it for decades.

A water market is essentially a private market in which individuals and companies can buy and sell access rights to water resources. They are promoted as a way to encourage conservation and efficiently allocate water between user types – primarily from agriculture to industry, and within agriculture, from low to high-valued crops. However, economists and social scientists caution that they are subject to market failures, including predatory pricing, externalities and under-valuing water’s environmental services. As a consequence, these markets tend to exacerbate social inequity and have negative economic impacts on rural communities. For example, in his 2009 study, researcher Jordi Honey-Rosés found that in California’s Central Valley – where tradable water rights have existed since the 1970s – there are 8 jobs and $170 000 net income lost for each 1000 acre feet of water traded out of agriculture (see: Honey-Rosés, J. 2009. Reviewing the arguments for market based approaches to water distribution: A critical assessment for sustainable water management in Spain. Sustainable Development. 17(6):357-364).

These consequences were not lost on BC residents and response to the Water Act proposal was swift. Almost overnight, the Province’s Living Water Smart Blog  was flooded (no pun intended) with submissions calling for the removal of any form of water privatization.

The province now claims that it is not intending to “privatize” BC’s water, only allow individuals and companies to buy and sell access rights:

“Water is owned by the Crown on behalf of all British Columbians…. This will not change and water will not be privatized under the proposed Water Sustainability Act, which is aimed at ensuring a sustainable future for BC’s water.”

And here we are again, traveling the same fine line walked in debates over public-private partnerships – the debate between ownership and operation. In that debate, we understand that, for all intents and purposes, multi-decade operation contracts are tantamount to privatization. In the case of water markets, we do not have long-term contracts; we have the sale of access rights to private entities. These private entities are then free to sell their rights without government intervention. This effectively removes governance of the use of water from the public sector and thus privatizes the resource.

 British Columbians are not being fooled by this smoke and mirrors trick and opposition to the introduction of water markets threatens to submerge the entire Water Modernization Act process.

 We will have to wait and see whether water markets will find their way into this province. In the meantime there is much to be excited about in the draft Water Sustainability Act, including proposals to protect environmental services and in-stream flows and increased monitoring of groundwater resources. Yet, if this process is truly to create robust and strong water policy for British Columbians, any discussion of privatization should be dropped.

The government’s preferred P3 model is Design Build Finance Operate (DBFM).  With a DBFM a private company or a consortium puts up the financing for all or part of the project and gets a lucrative contract to operate or maintain the project for 30 or 35 years.

The problem is that government can borrow much more cheaply than private companies.  This gap grew even wider during the financial collapse meaning that P3s were enormously more expensive than traditional procurement.

The government claims that P3s are still a better deal, an argument Abbott repeats, because they deliver things “on time and one budget.”

However, the whole justification for the projects rests on complex “value for money” reports that claim to compare the cost of public and private delivery.  Here is where Abbott gets into trouble with his remarks.

Abbott says the government has to compare a DBFM P3 with a form of traditional procurement called Design Build.  A Design Build project offers virtually everything the government promotes with a P3 but does it more cheaply using government borrowing and without locking in a 35 year contract. 

Here are Abbott’s exact words.

What we have to commit ourselves to is getting the best deal for the taxpayer possible and if that best deal involves Design Build vs. public private partnership then I’m glad to look at that. I think that we should subject ourselves as a government to that same rigor around what’s a best approach to construction and operation what’s the best approach; we should subject ourselves to the same rigor as we would subject potential partners in a P3 deal.

These are fine words from Abbott but unfortunately this is exactly what the government doesn’t do.  The Value for Money report on the Fort St. John Hospital P3 states explicitly that Partnerships BC, the government’s privatization agency, refused to consider the use of a Design Build methodology to compare with a possible P3.  Instead Partnerships BC compared a P3 only with the most traditional kind of procurement.  They assume using traditional procurement that no risk at all can be transferred to private contractors.

Ontario’s Auditor General said this selective sort of comparison was completely unacceptable when he examined Ontario’s Brampton hospital P3.  He called for a wider range of options to be compared saying:

With a contract of this size, best practices call for a business case to assess the costs and benefits of a range of alternative procurement models, to allow the option that offers the best value for money to be chosen. One approach is a value-for-money assessment that captures the total estimated cost of the traditional public-sector delivery of an infrastructure project through a design-build approach and compares that to the estimated delivery cost of the same project using a P3 model

The rigor Abbott claims, a true comparison between public and private costs, just doesn’t happen.  Instead we have a rigged process that makes sure we get costly 35 year contracts with corporate friends of the government.

That’s the take-home message from a recent talk by UC Berkley economist and public policy professor Jesse Rothstein who came to SFU to present his latest research on using standardized test scores to measure teacher effectiveness in the US. 

Prof. Rothstein was involved in a 3-year pilot project in Tennessee designed as an experiment to check whether offering teachers bonus pay would improve students’ test score performance. Teachers were randomly assigned to two groups, one was offered bonus pay if their students did well on standardized tests (experimental group) and the other one wasn’t (control group).

After 3 years, there weren’t significant differences in student achievement on standardized tests between the two groups, clearly showing that offering teachers bonus pay did not improve student achievement. Yet, the Obama administration (for which Professor Rothstein worked recently) is continuing to explore incentive pay as a way to improve the education system.

Come to think of it, the idea of incentive pay has become the holy grail in governments’ quest for improving the performance of complex social systems like health care and education. On the surface, there’s a certain intuitive appeal to the idea of paying more to those doing a better job. The “economic theory” behind it is that offering to pay people more for doing a good job will lead to increased work effort as rational individuals choose to maximize their pay.

That’s what’s driving US policy makers to test schemes of offering teachers incentive pay to improve school achievement. That’s what’s driving BC Health Minister Kevin Falcon to offer hospitals funding based on the number of surgeries they do (what he calls patient-focused funding).

But when used mechanically — by tying incentives to some quantitative measure of performance, like test scores or number of surgeries done — such schemes are likely to fail.

The devil — as usual — is in the details. And the details here are that before policy-makers can give somebody a bonus for doing a good job, they need to be able to measure what a good job looks like. This is where standardized tests come in along with other quantitative measures such as the number of medical procedures performed, or the length of hospital stay.

But it turns out — surprise! — that it’s really hard to measure quality in complex social systems and employing simplistic quantitative measures can backfire. In fact, Prof Rothstein quoted an obscure scholar of methodology by the name of Donald Campbell, who coined a rather pessimistic “Campbell’s law” in the late 1970s:

“The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor.”

In other words, the perverse incentives that pay-for-performance schemes create in complex social systems may well outweigh any positive incentives for real improvement.

Campbell looked at education in particular (see his working paper here), and argued that

“achievement tests may well be valuable indicators of general school achievement under conditions of normal teaching aimed at general competence. But when test scores become the goal of the teaching process, they both lose their value as indicators of educational status and distort the educational process in undesirable ways.

What does this tell us about BC’s new incentive-based funding model in health care?

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Kudos to the SFU Centre for Education Research and Policy for organizing the public event.

This month the new coalition government cancelled the controversial Building Schools for the Future program.  Michael Gove, the Conservative Secretary of State for Education said the P3 school program had been hit by:

“massive overspends, tragic delays, botched construction projects and needless bureaucracy.”

He said: “There are some councils which entered the process six years ago which have only just started building new schools. Another project starting this year is three years behind schedule”

Earlier reports also suggest Britain’s National Health Service is having problems with the cost and inflexibility of P3 hospitals.  The Financial Times reported:

Traditionally, when spending is tough, NHS hospitals put maintenance on hold to retain doctors, nurses and other services.

But Nigel Edwards, head of policy for the NHS Confederation, said: “A hospital with a PFI scheme does not have that option. They are contractually bound to keep the maintenance up – and if you are spending 10 or 15 per cent on your buildings it means all the other efficiency and productivity gains you need have to come out of only 85 or 90 per cent of your budget.”

Not surprisingly, despite problems with the P3s, parents in areas where projects to replace substandard schools have been cancelled are furious.  They are even more furious because the government appears to be funding plans to convert schools to “academies” that can ignore national curriculum.  These academies were just one more form of privatization promoted by the Tony Blair’s Labour government.  With academies, companies and religious institutions invest in schools and get to control them.

The problems with these P3 projects in the U.K. are only coming to light years after they were initiated.  Here in BC, and in Alberta with its commitment to P3 schools, it gives us something to look forward to.

Examining a hospital project, the Quebec AG report finds the P3 more expensive than public procurement.  He finds that Infrastructure Quebec, the agency that plays the role of Partnerships BC in British Columbia, continues to use assumptions the AG had criticized in earlier reports. 

Discussing the report Quebec’s Auditor General says:

This analysis contains two major inaccuracies. First inaccuracy: a major error in the analysis model, which in presenting a $33.8 million variance, results in showing that the PPP delivery method is preferable to the conventional method, whereas in the absence of this error, the conventional method is more economical by at least $10.4 million.

The Auditor General complains that the P3 deal does not promote accountability and that the project:

was done or will be done without having a vision of the projects as a whole in terms of their global costs and the operating budgets that will be necessary for these new institutions.

Infrastructure Quebec uses the same flawed methodology  that Partnerships BC used here to assess P3 hospital projects in Surrey, Victoria, Kelowna, Vernon, Fort St. John and Prince George.