May 23, 2011

British Columbia Auditor finds costly failings in Province’s first hospital P3


A new report by British Columbia’s Auditor General has debunked nearly every benefit claimed so far for public private partnerships (P3s).

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 16th, 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.

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