May 20, 2014

Britain and British Columbia now moving in different directions on P3s. BC taxpayers may be the losers


A dozen years ago when Gordon Campbell’s newly elected British Columbia government decided it wanted to build its infrastructure with public private partnerships (P3s) it turned to England for advice.  The British model for infrastructure shaped much of what BC did in the ensuing years.  Lately, British Columbia and the UK have been going in different directions and taxpayers in BC might be the losers.

The agency that promotes and often delivers P3s in British Columbia is Partnerships BC, a private company wholly owned by the Ministry of Finance.  Partnerships BC’s preferred model for P3s is Design/Build/Finance/Operate.  In this model the private corporation not only designs and builds the public facility, it either fully or partially finances the project and operates it with a contract for 30 or 35 years.  BC now has P3s for hospitals, roads, bridges and public transit.

Going back to 2002-03, Partnerships BC’s Annual Report said that to increase their capacity they had “Built strategic alliances with other provinces and with P3 organizations such as Partnerships UK and Australia’s Partnerships Victoria.”  The next year, with an increased focus on health care P3s in British Columbia, this alliance was expanded to “the government of the United Kingdom, its National Health Service and its P3 organization, Partnerships UK.”  The 05-06 PBC annual report showed a $25,000 contract to Partnerships UK.  In 2009 Partnerships BC reported a “Research trip with Partnerships BC’s health care clients to meet with Partnerships UK to discuss the procurement of health facilities in the United Kingdom.”

But perhaps the most telling sign of the influence of Partnerships UK was a line in the Request for Proposals for the BC government’s first P3 hospital which said:

 In developing the Payment mechanism Health Co has reviewed and considered the methods adopted in many other projects and based the proposed Payment Mechanism on the current UK NHS standard payment mechanism.

Basically, Partnerships BC learned at the knee of Partnerships UK and made the British methodology their own.

However, as time moved on the UK began to have concerns about how public private partnerships, referred to as Private Finance Initiatives (PFI) in Britain, were playing out.  PFIs had been initiated under Margaret Thatcher’s Conservatives and then embraced by Tony Blair’s New Labour as a way of keeping government debt “off book.”  Having private companies borrow money for public projects might not have shown up as government debt, but the UK government, and local governments, were still on the hook to pay the money back and the price was high.

By 2010 Britain’s National Audit Office warned that many of the country’s PFI hospitals would have to cut services to afford to continue payments to their corporate PFI partners.  The same year a coalition of Conservatives and Liberal Democrats replaced Labour in a general election.

In 2012 the new Chancellor described the PFI scheme as “discredited” because many schemes were found to be poor value for money and left some hospitals near bankruptcy. While the coalition had earlier vowed to replace the PFI scheme, instead the program was revamped and part of the revamping process was a determination to cut the cost of already signed contracts. In a 2011 speech Lord Sassoon, the Commercial Secretary to the Treasury, said

We have already taken significant steps to improve the cost effectiveness and transparency of PFI. In July I announced plans to deliver at least £1.5 billion in savings across almost 500 existing operational PFI projects across England.

Three years later Britain’s National Audit Office reviewed the success of efforts to cut costs and concluded that the £1.5 billion target had largely been reached.  Transport for London (TfL) alone had reported £476 million across PFI contracts largely through bringing contracted out work back in house.  And, the NAO reported, there was evidence that much more in the way of savings could be reclaimed from PFI contracts.

By aggressively going after its PFI/P3 contracts Britain has managed to achieve significant savings.  What could it mean in British Columbia if our government went back to following Britain’s lead and looked for savings here?  In Lord Sassoon’s 2011 speech he said that a review of pilot projects:

confirmed savings opportunities of up to 5 per cent of annual payments through more effective management of contracts, making better use of space, and by reviewing soft service requirements in contracts.

Partnerships BC’s 2012/2013 Annual Report states:

Since its inception in 2002, Partnerships BC has participated in more than 35 projects with an investment value of approximately $12.5 billion, of which $5 billion is private sector capital.

How much money could British Columbians save if our government pursued their P3 contracts as aggressively as the UK government has done?  Its hard to say.  We have done just over five per cent of the contracts they have done in the UK so scaling it down, five per cent of £1.5 billion would come to about $170 million Canadian.  If we look at our contractual obligations for P3s in the public accounts it comes to about $8 billion over the life of the contracts.  Five per cent of that would come to about $400 million.  The figure probably falls somewhere in between those two numbers but either way the savings would be substantial.

Public private partnerships are a very expensive way to deliver public services and infrastructure.  The best savings could probably be obtained by largely abandoning them altogether.  Failing that, however, the public in British Columbia could still save a lot of money by following the British lead and pushing to recover money from existing contracts.

How did the British save that money?  The publication Partnerships Bulletin reports that in the UK:

Over the past few years, most big firms have been brought into the Cabinet Office for some stern words from Secretary of State Francis Maude, who has been busy arm-twisting major government suppliers to reduce the amount they are charging the public sector for their work.

In BC, when it comes to cutting costs, the government has been tough on people who need services.  When it comes to its employees the government has been willing to twist arms.

In contrast, British Columbia’s P3 partners appear to be untouchable.

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