Did you ever wonder how Partnerships BC justifies using 35 year contracts for public private partnerships rather than borrowing the money publicly and doing things like hospitals and roads as public projects?
Well now you can find out. PBC has published its methodology on a website. They have even asked for comments on the methodology, though not in a very public way. And there is not much time left. If you want to share your thoughts you have until November 24th.
It is a pretty useful document if for no other reason than it shows the degree to which the game is fixed in favour of P3s. Let me give you an example.
Risk transfer is one of the big selling points for P3s. BC’s government says with P3s they can transfer lots of risks on projects.
This is then compared to traditional procurement where, Partnerships BC says,
Traditional procurement has typically involved construction management (CM) and design bid build (DBB), representing points along a continuum of possible procurement methods where there is very little or no transfer of project-related risk to a private partner.
In other words, PBC assumes it is impossible to transfer risk with traditional procurement even though this has been routinely accomplished in projects in the past. When it is in its interest Partnerships BC will even admit they can get risk transfer without private investment and a 35 year contract.
PBC was a consultant for and wrote the value for money report on the Charles Jago Northern Sports Centre. This centre was built as a Design/Build project without private financing or operation. Partnerships BC reported that the contractor on the project assumed:
the majority of the risks relating to construction cost overruns in this project, protecting B.C. taxpayers from these potential costs. The early partnering process proved effective in transferring risk to the private partner in this agreement.
Partnerships BC’s assumption in its published methodology that you can’t transfer risk with public procurement is just one of the ways a thumb gets placed on the scales when balancing the choice between public procurement and a P3 with private financing and long term contracts.
Writing in the British Newspaper the Guardian on Friday the 13th, Peter Dixon, the man in charge of England’s largest P3 hospital, raises some good points. One of them was,
Let’s face it, if the public sector can’t be trusted to procure a sensible building contract, it certainly can’t be relied upon to procure a successful PFI (what the British call a P3) with a 35-year term.
Somehow, that doesn’t get mentioned in the Partnerships BC methodology.
Tom Kertes // Nov 16, 2009 at 9:17 am
The political risk cannot be transferred to a private company, which is what makes P3 so favourable to private interests. Cost overruns are nothing compared to a project failing for other reasons, including economic, market and political reasons. Project failure comes with huge political costs to the public sector, which will either be absorbed or, more likely, will result in political capital being used to change the economic or political conditions, or public dollars being use to adjust market conditions (in form of subsidy or other incentive). The risks in terms of political costs to the public sector outweigh the risks of the private partner in terms of investment, there is more at stake for public sector actors than for private sector, making P3 a steal for the private sector. The remedies available to contain risks of a project failing (or falling sort) are limited to the public sector, and P3 essentially hands these remedies to the private sector for next to nothing. By partnering with the public sector, private interests are given access to public sector power and authority, at essentially no cost, including monopoly powers (and self-regulated at that). The public sector sells its authority at the cost of containing a few cost overruns. In exchange, the private sector partner is assured that project failure will most likely be mitigated by tools usually out of their reach. Essentially government is giving away its extraordinary powers, handing them over to entities that are not accountable or controlled by public oversight, and claiming that this is to reduce risk. In fact, it exposes the government to huge risks since its partner is encouraged to take risks given the very deep pockets that a government partner offers.
Tom Kertes // Nov 16, 2009 at 9:47 am
Another thing: The goals of private and public sector are different, creating a conflict of values at the outset. For the public sector the goal should be to “maximize the public benefit”. This leads the government do things like pay higher prices for goods manufactured locally, require livable wages of its contractors and own workforce and encourage unionization, charge below market rates for services, and factor on a benefits-to-public returned basis.
In contrast, the private sector aims to maximize profit, to put private benefits before public benefits. Supporting local industry, paying livable wages, sustaining communities, providing benefits to the community may be a means to such gain, but are never the ends and therefore may be canceled out in order to achieve the ends of private profit.
When the government is a customer of the private sector this difference in models does not matter, since the government is simply purchasing what it needs in order to maximize public benefits, using the goods bought from business. But as a partners the two models must somehow merge, requiring either business or government to cede fundamentals to their ways of doing things.
So which side gives? Does government no longer seek to maximize public benefits? Or does business no longer seek to maximize their profits? More to the point, why create P3 programs in the first place – since we already have a public sector that’s well designed to maximize public benefits, and we already have a private sector that knows how to maximize private profit.