Jan 25, 2018

As UK Auditor disparages P3s, BC continues to use them

Artist's rendering of the new Emily Carr University campus, prior to construction. Post-completion, this would be a view of the Chip and Shannon Wilson Arts Plaza. Photo: Province of BC / Flickr.

The public private partnership (P3) model to provide public infrastructure and services is an expensive mess, and new international evidence confirms this. The question now becomes, when is that mess going to wash up on BC’s shore?

Despite increasing evidence that P3s are a bad idea, BC’s government is going ahead with this flawed procurement model, championed by the previous Liberal government, for at least some projects.

Since 2002 the provincial government has been relying heavily on P3s to build public hospitals, roads, bridges, environmental projects and even the new Emily Carr University campus. With P3s, corporations provide some or all of the funding for public capital projects, and often provide services for the project for decades (known as ‘design-build-finance-maintain’). In return, they get a guaranteed cash flow that also goes on for decades.

BC borrowed the P3 model from the UK, which was one of the first countries to get involved with the process. But as recently as January 18th, the UK’s National Audit Office (NAO)—the equivalent of Auditors General or Provincial Auditors in Canada—took a long hard look at the results from decades of P3s (called Private Finance Initiatives or PFI in the UK) and issued a report casting doubt on whether P3s work in the public interest.

Not surprisingly, many of the issues raised by the British government auditor have also been raised here in BC. The NAO found that using private money to pay for public infrastructure was more expensive than having the government borrow the money and do it themselves.

The report said, “The 2010 National Infrastructure Plan estimated an indicative cost of capital for PFI as 2% to 3.75% above the cost of government” borrowing. This higher interest rates that P3s face add up to big increases in overall project costs. The NAO report found that “paying off a debt of £100 million over 30 years with interest of 2% costs £34 million in interest; at 4% this more than doubles to £73 million.” In other words, over a 30-year period, the higher cost of borrowing for a P3 nearly doubled the cost of paying off debt.

That 2% to 3.75% range is about the extra cost paid for by many of the BC P3 projects as well, according to published figures on discount rates for P3s and the governments cost of borrowing money on its own over the last 15 years. As long ago as 2009, two of BC’s most prominent forensic auditors came to exactly the same conclusion that the NAO came to this month: government consistently raises capital at a cheaper rate than P3 providers. BC’s Auditor General also flagged this issue in a 2014 report, where she noted the cost of P3 borrowing was twice as high as normal government borrowing.

Using private money to pay for public infrastructure has been more expensive than having the government borrow the money and do it themselves.

Moreover, the NAO report found that instead of objectively assessing whether P3 is the best model for any particular infrastructure project, decision-makers in the UK have tipped the scale in favour of P3s. The same complaint has been raised in BC including by a review of Partnerships BC conducted by the provincial Ministry of Finance.

One of the chief arguments in favour of P3s is that they transfer risk of cost overruns on the project to the private sector. But the NAO found, “there is little evidence that overall construction cost is lower under PFI.” P3 proponents have also argued that with private companies operating the projects, the government will earn tax revenue from them.

However, the NAO report found that government had overestimated the amount of taxes it would earn from P3 companies. Here in BC the government also cites taxes from P3 companies as an advantage for the program. However, there is little indication they have actually studied this issue. For example, the BC government had no information on what the implications were on tax returns from P3s when the parent company moved their operations. Most tellingly, after all these years of P3s in the UK, their auditor finds, “There is still a lack of data available on the benefits of private finance procurement.”

The NAO finds that, even if there are benefits that have been harnessed under P3s, “these can also be achieved without the use of a long-term private finance contract.” In other words, public projects funded by government borrowing could achieve the same benefit.

As the NAO notes, “The use of fixed-price contracts [in which the price is set up-front, and is therefore ultimately independent of costs] for publicly financed projects can be effective in reducing cost overruns.” In another approach, “The risk of construction cost overruns could also be transferred using a shorter private finance contract that only covers the construction period but this option has never been pursued in the UK under PFI contracts.”

Economist Marvin Shaffer has raised exactly this point in the BC context. In fact, the latter option was pursued in BC with the building of the Evergreen Line transit route (as opposed to the full-fledged P3 model under which the Canada Line was built).

There were also questions about the costs of having private corporations act as ongoing service providers in public facilities. The NAO found “recent data from the NHS London Procurement Partnership shows that the cost of services, like cleaning, in London hospitals is higher under PFI contracts.”

That may be rather understating the point. While the Audit Office took an intensive look backwards, there is a more recent development they did not examine. Carillion, one of the UK’s largest providers of P3 services, fell apart in early 2018 and went into receivership.

(The NAO notes early in its report, “This briefing was prepared prior to the announcement on 15 January 2018 that the construction company Carillion was in liquidation.”)

BC barely escaped getting caught up in this Carillion mess. Carillion, as part of consortiums, was a bidder on several BC P3 projects, though ultimately unsuccessful. But it was successful in bidding on projects both in Ontario and Saskatchewan where its contracts are now in question.

Instead of objectively assessing whether P3 is the best model for any particular infrastructure project, decision-makers in the UK have tipped scale in favour of P3. The same complaint has been raised in BC.

Ontario’s Auditor General has also raised questions about P3s both in her 2016 and 2017 reports. Following up on earlier reports, in 2016 the Ontario AG said, “There is no empirical data supporting the key assumptions used by Infrastructure Ontario to assign costs to specific risks.”

And like the UK’s NAO report, the Ontario Auditor found that, with good contract management practices, public sector projects could reap the theoretical benefits of P3s, while also benefiting from the savings of lower public financing costs.

Or, in Auditor General-speak, “Based on our audit work and review of the AFP model [‘Alternative Financing and Procurement’ is the Ontario term for P3s], we noted that achieving value for money under public-sector project delivery would be possible if contracts for public-sector projects have strong provisions to manage risk and provide incentives for contractors to complete projects on time and on budget, and if there is a willingness and ability on the part of the public sector to manage the contractor relationship and enforce contract provisions when needed.”

In 2017, the Ontario AG concluded that Ontario hospitals were not receiving many of the benefits promised by P3s. While there are mechanisms for solving disputes between hospitals and their P3 partners, Ontario’s auditor found these were ineffective (and involved potential conflicts of interest). The AG said, “hospitals informed us that the independent certifiers assigned may not always be impartial because their ongoing work comes from the private-sector companies and not the hospitals.”

In the UK the government has actually managed to claw back profits from some P3s while other P3 contracts have been cancelled or bought out. The official opposition Labour Party has proposed bringing P3s to an end altogether.

Despite the mounting evidence against P3s, here in BC several P3 projects are still moving ahead. In an October 2, 2017 news release the government announced that in an Interior hospital project the “preferred proponent will be responsible for designing, building, partially financing, and maintaining the new tower.” The Royal Columbian Hospital Redevelopment Project, with construction due to start this year, is also going down the ‘design-build-finance-maintain’ P3 procurement road.

It is long past time for both the BC government and our Auditor General to give these projects the kind of critical attention we are seeing in the UK and Ontario. Ideally, we’ll see action before we waste more time and money on new P3 projects—and before a crisis forces us to pay attention.

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