Feb 27, 2009

P3s? Fairly ridiculous


They keep moving the goal posts for using public private partnerships (P3s) in BC to procure large projects.

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.”