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.

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.

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.

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.

The SFPR project is part of the Province’s Gateway project and is planned as a 40 km, four-lane divided highway on the south side of the Fraser River. 

In July 2008 the Ministry of Transportation and Partnerships BC, the government’s privatization agency, issued a Request for Qualifications.  The RFQ makes clear that the project was one of Partnerships BC’s preferred P3 models – Design/Build/Finance/Operate.  The RFQ said:

The Concessionaire will be responsible for arranging and delivering the financing required to complete the Project.

A press release issued at the same time said

Construction under this contract will begin in 2009 with completion in 2012.

In April 2009 a Request for Proposals was issued to a short list of three consortia.  Again, the accompanying release promised completion in 2012, but this time the financial details for the project were withheld from the RFP on Partnerships BC’s website.

Friday’s announcement raises three issues.  First, the timeline for the project has been delayed a year.  Construction will now begin in 2010 with completion predicted for 2013.  So much for P3s being on time and on budget.  Also, The ACS Group, one of the consortium partners says on its web site that construction will take 45 months making even this published timeline questionable. 

Second, there has also been a change in the makeup of the winning consortium.  Ledcor was not listed as a member of the consortium in 2009.  It is now listed and appears to have replaced Zachry American Infrastructure as an equity partner.  Although the RFP does allow for the possibility of changing members of a bidding consortium in mid bid it is not a usual practice and it required the consent of the government.

Third, although it was not announced, it seems likely the financial model for the project has also changed.  The RFP issued in 2009 came just months after the collapse of the Port Mann Bridge P3.  During the recent economic troubles borrowing by private companies became so much more expensive than borrowing by governments that having private companies finance a public project became obviously ridiculous.

Documents obtained from Partnerships BC under Freedom of Information show that in July 2009, three months after the RFP was issued to the bidders, Partnerships BC was still discussing what financial model to use for the project.  The subject of the memo was “SFPR: Amount of Private Finance.”  The memo compared the original base case with funding provided by the private company with a “wide equity model” which basically lets the private sector off the hook for most of the funding.  This is the model being used for the Fort St. John Hospital P3.  All of the models for the SFPR assume the private company will still get a long term contract to manage the project no matter how much money they put in.

The press release on Friday has no comment on why the project has been delayed, why the partners in the consortium changed and whether or not the funding model has been changed from that originally proposed in the RFQ and RFP.

All of these things suggest there may be serious problems with the project that don’t get mentioned in a press release snuck out on a Friday afternoon.

Aside from the financial and contractual issues, Gateway and the SFPR are also controversial for environmental and planning reason.  The Livable Region blog has examined these issues.  The Sunbury Neighborhood Association has also questioned the project.

Today Tom Sandborn writing for the Tyee posted a story quoting Premier Campbell’s response to health and safety issues. The story also dealt with the NDP and labour issues, but the NDP section focused on such issues as Green Bonds.

Here are some of the Premier’s comments.

On a CCPA report that called for better enforcement of worker safety regulations:

He said he had not read a recent study from the Canadian Centre for Policy Alternatives and the B.C. Building Trades Council that called for reforms to construction industry safety practices, and he expressed skepticism about the usefulness of on-site safety enforcement. “I don’t think it’s something where you say we’ve got, to be candid, a whole bunch of people coming around and throwing fines at people. I think it gets them to avoid the issue.”

Campbell did say he would read the report if it were sent to him, and expressed willingness to meet with union representatives to discuss safety issues and training.

and more:

Campbell was asked about the changes his government brought in during its first term that effectively eliminated lifetime pensions for injured workers and reduced the amount available for shorter-term WorkSafe payments by 13 per cent. Would a re-elected Liberal government at least restore the level of support for injured workers to 2001 levels?

“I won’t commit to that today,” the premier said. “I think we have a relatively fair system. Workers are now getting taken care of far more rapidly than they were before.”

A welfare rate increase, he said, was “not in the books.”

And finally, on public private partnerships:

the premier noted that the P3 (public private partnership) approach, strongly championed by his government, can slow timelines for projects. “Up front, they are slower, for sure.”

I’d love to be able to tell you that the government has come to recognize the multitude of problems of this model of providing public infrastructure (which have been described at length in other posts), but I don’t think that’s it. And while it was the financial crisis which made it considerably more difficult and more expensive for the private sector to secure financing for these type of projects, I think it’s stimulus spending that is killing the P3.

You see, two decades of spending cuts in Canada (and many other Western countries such as the UK and Australia) resulted in chronic underinvestment in public infrastructure. At a time when raising taxes or running deficits amounted to political suicide, it’s hardly surprising that governments would be tempted by the idea that they could provide much needed public infrastructure without having to put the money up-front (by using a P3). This, in my view, was the big attraction of the P3 model for governments.

I doubt that high-level bureaucrats were not aware that P3s cost more over the long-run and that they expose taxpayers to higher risk over the lifetime of complex 30 to 40 year-long contracts, but as long as they weren’t prepared to raise taxes or run deficits, what other options did the government have?

Now that it is once again politically acceptable and even desirable to run budget deficits and to spend public funds on infrastructure projects, the model looks like it has outlived its usefulness (at least temporarily). It’s no longer worth the government’s effort or political capital to have to come up with ways to rationalize the cost overruns and project downsizing that have aroused considerable dissatisfaction with the outcomes of many P3s.

But until the public realizes that there is no such thing as free public infrastructure and that we all have to pay for the roads and hospitals we rely on, governments will be tempted to engage in short-sighted deals like P3s, putting short-term considerations ahead of long-term gains.

She was sympathetic to the merchants but, “It was a TransLink project,” she said. “There’s no question the province didn’t have any control over the project.” She admitted that at times she questioned the “P3 model” that gave the province no control.

Taylor was only elected in 2005 so perhaps she can be forgiven for not knowing the history of how the Canada Line came to be a public private partnership with a ditch instead of a tunnel. The choice to use a P3 was imposed by the province on what was then a locally run transit authority.

On June 19, 2002 Deputy Transportation Minister Dan Doyle wrote to TransLink CEO Pat Jacobsen making the province’s position clear. He said, “Any project constructed using provincial funding will be a public private partnership.”

That stipulation – No P3, no provincial transit cash – was repeated several times over the next two years but the real pressure from the province came in 2004 after the TransLink Board had turned down the transit P3 twice. At that point Transportation Minister Keven Falcon said the province was pulling any money for rapid transit (including for what is now called the Evergreen Line) until after the Olympics. He also killed a proposed parking stall tax saying without the Canada Line, TransLink didn’t need the money.

A business coalition was created to support the line and its P3, the federal government found some more money and then the province promised some funding for the Evergreen Line. As a result, two TransLink Directors changed their votes and the Canada Line was underway.

Subsequently, the project went over budget. TransLink had to put in more money but it also came up with ways to cut costs. By January 2005 the plan to tunnel under Cambie Street had been dumped in favour of a proposal by the P3 company for a ditch. Ravco chief executive Jane Bird said disruptions would be minimal.

Even though the province finally got its way on the Canada Line P3 Transportation Minister Kevin Falcon was still furious at TransLink’s temporary display of independence. In December 2004 he promised a sweeping review and restructuring of TransLink. Three years later the province finally passed legislation firing the locally elected TransLink Board replacing it with government friendly appointees.

Carole Taylor expressed real sympathy with her former constituents along Cambie Street. But to say the P3 model gave the province no control is a pretty serious rewriting of history.

I’m all for tolling. Unless you are a fan of the queues inevitably created by what can only be described as our current Bolshevik approach to tranportation planning, you should know that tolls and other vehicle-related charges are essential if we are ever to have an efficient road system. Offer something valuable for free and chances are there won’t be enough to go around.

But it isn’t tolling for the sole purpose of paying for some (though interestingly not all) new bridges and roads that will bring some logic and discipline to the use of our road system. We desperately need a more systematic and fundamentally fairer approach.

The more systematic part is putting smaller, but more widely applied tolls throughout any corridor where major improvements are needed and made. It makes no sense to charge a $3 toll to cross the Port Mann and nothing to cross the neighbouring Patullo bridge. It is a sure way to ensure that the Patullo will always be overcrowded and the Port Mann relatively underused. Better to charge both bridges (and the Alex Fraser and new Golden Ears bridge) the same $1.50 or $2.00 toll during peak periods and little or nothing off-peak. The objective should be to encourage people to reduce peak period trips — not just shift trips from one bridge to another.

The fairer part is treating all corridors in the region the same. When we invest $2 billion to build the Canada Line, with the express purpose of reducing vehicular traffic and congestion in the Richmond/Vancouver corridor, we should put in tolls on the Oak, Knight and Arthur Laing bridges to pay for it (and encourage more people to take advantage of the new Line). And of course the same principle (and tolls) should be applied to Sea-to-Sky, a soon-to-be major suburban corridor thanks in large part to the excessive highway improvements that are being made there.

Marc would rightfully argue that first we should think more carefully about what new transportation infrastructure we build. The track record of this government certainly supports that. But once the decisions have been made to go ahead, there are sensible ways to finance the investments and sensible ways to pay for them. On those albeit secondary but still very important matters ,we are only half-way there.

Jeff Nagel already has a very interesting article in the Surrey Leader on the cancellation of the public private partnership. He includes the following quote from the Partnerships BC boss Larry Blain.

Critics have long said P3s bring higher finance costs because corporations must pay more interest than governments to borrow in order to offset the higher risk.

Partnerships BC CEO Larry Blain said that was a factor in the decision not to proceed.

He estimated $200 million in financing costs will be saved by switching from private to public borrowing.

So if they admit to saving taxpayers $200 million on this one, how much more could they save by cancelling the other planned P3 projects including six or seven hospitals?

The province has been unable to reach a finance-arranging deal with the consortium that was to build the new Port Mann Bridge, transportation Minister Kevin Falcon announced Friday.

The provincial government will now finance the entire $3.3 billion project, and is hoping to recoup the money through tolls.

It is a black eye for the Liberal government, which had touted P3s (public-private partnerships) as the way to build infrastructure without the government assuming any financial risks.

And so it is, as it should be – the government will build the bridge – well, except for the tolls. Why should this one bridge be subject to tolls, especially since it is the Trans-Canada Highway, and not others?

But that is beside the point: I think building this new super-bridge will be a colossal waste of money that will entrench unsustainble forms of development further up the valley, choking off more farmland just at the time when we need more local sources of food.

But, hey, there is an election on, and there are a lot of votes on the other side of that bridge.

Government officials have argued in the past that the magic bullet for P3s was the combination of risk transfer and private investment. The government transferred risk to the private sector and private companies risked losing their investment and the loans they had guaranteed if those risks (such as late completion) happened.

Partnerships BC is the governments P3 agency. Its President, Larry Blain, puts it this way:

If you lend money to a project it (the discount rate) is not the cost of raising debt, it is also the risk involved in the investment you are making.

So risk and investment go together, right?

Except that with the current economic crisis it turns out governments are taking on the investment risk. The Financial Times reports that in the UK the government is looking at putting in hundreds of millions of pounds to backstop cash strapped P3 projects. Some are even suggesting that the loans be at lower than prevailing rates to address the “affordability gap.” This affordability gap is the aforementioned “risk involved in making the investment.”

The same thing is happening here. As the cost of the Port Mann bridge project doubled, private investors were having trouble raising capital for the project. In stepped the provincial government putting in one third of the capital. But now it appears the province has gone further. The Macquarie Group is the private financing partner for the bridge project. In an article in the Australian publication Business Spectator David Roseman, Macquarie’s head of infrastructure for Australia says the following:

So we said if you [the government] want to do the deal, the equity is there but you are going to have to do something. So the government actually stepped in and they have underwritten the whole debt.

Now all this risk being assumed by government might seem to undermine Larry Blain’s argument about the private sector taking on risk, but wait a minute.

Now it appears Larry Blain says P3 players have to monitor the market constantly and be prepared to adjust their approach. Partnerships BC is considering whether to adjust terms of financing and the length of fixed term financing during negotiations.

Daniel Roth from Ernst and Young writing on the web site for the Canadian Council for Public Private Partnerships (CCPPP) says:

Using government debt does not mean that the private sector risk-management and project delivery skills (and consequent cost advanatages) are insufficiently harnessed.

And Jane Peatch who heads up the CCPPP says everybody agrees there’s a credit crunch but:

When the dust settles here, investment has to occur. Investment in something as clear aqnd fiscal as infrastructure with payments coming from an availability basis from government is going to be as good as it gets for investors.

The best part is that in the UK, where the Labour Party runs P3s, the Conservative Party is enraged by the whole process. Philip Hammond, Treasury Spokesman for the opposition Conservatives says:

“If you take the private finance out of PFI ( in the UK P3s are called Private Finance Initiative) you haven’t got much left.” He says, “PFI is meant to transfer completion and operational risk to the private sector,” and if you transfer the financial risk back to the public sector, then that has to be reflected in the structure of the contracts.

“The public sector cannot simply step in an lend the money to itself, taking more risk so that the PFI structure can be maintained while leaving the private sector with the high returns these projects can bring. That seems to us fairly ridiculous.”

The nature of the partnership with the private sector is unclear. I suspect it means the mines and other firms who stand to benefit from the transmission line will put up some of the capital costs, with the government subsidizing the rest. No doubt Partnerships BC will develop innovative financing schemes to obfuscate the long term costs to taxpayers or BC Hydro ratepayers (or both), but it is almost certainly the case those costs will be significant.

If it was just the one-time subsidy of the line, it wouldn’t be so bad. The real problem is the electricity sales the new line will encourage. Mines are electric-intensive — some metal mines consume as much electricity in one year as BC Hydro hopes to achieve each year in conservation with its multi-million dollar Power Smart programs. And under the government’s energy policy, BC Hydro sells electricity to these new mines at less than half the cost of new supply. The revenue loss to BC Hydro from each new mine (subsidized by you, me and everyone else who pays a Hydro bill) is in the tens of millions of dollars per year.

Now it’s one thing (though still problematic) to subsidize existing major industrial consumers of electricity with the government’s buy high – sell low electricity policy. But why would you subsidize new transmission lines so you can attract even more electric-intensive firms to subsidize. I’m not going to talk yet again about my tequila habits, but one can easily see how this can drive one to drink.

The government, of course, justifies all this by the economic development that the subsidized line, and even more heavily subsidized electricity, will generate. But the issue here is whether subsidizing energy use is an environmentally attractive, economically efficient or sustainable strategy. The short answer is that it isn’t. Better use of energy, not subsidizing more use of it, is a far better way to go.

He was saying that the bridge will be paid for by tolls but he seems to have forgotten that people who cross the bridge actually do pay taxes. For them, the toll on the bridge is just one more tax.

How much tax? Well if the Minister is correct and the toll comes in at $3.00 per crossing, it will cost $1,500 per year for someone to drive back and forth to work. That’s if the toll doesn’t come in above $3.00 and I’m not holding my breath on that one.

There is an interesting tie in here to an earlier change the government made in labour legislation. When employers called you into work they used to have to guarantee four hours. That was changed to a two hour minimum call in (one of the many reductions in BC’s employment standards made between 2002 and 2004).

So let’s say you make $10 an hour and get the minimum call in. You make $20 that day and you pay $6.00 to get back and forth to work. That’s a tax of 30%.

If you are one of BC’s 115,000 minimum wage earners, you are even worse off. After all, the toll on the bridge goes up by as much as 2.5% annually. Minimum wage workers don’t get a pay increase. The minimum wage has been frozen for eight years.