P3s: the cubic zirconium of public projects
Jonathan Fowlie and Lori Gilbert did a first rate job of looking at one facet of public private partnerships (P3’s) in the January 23 Vancouver Sun. P3’s are one part of the BC government’s enthusiasm for privatization. Private companies pay for the development of public infrastructure or services and then run the projects for decades while the government pays them back. Fowlie and Culbert found many of the companies involved in P3 financing were in serious trouble.
But like a diamond, or more appropriately in this case, a cubic zirconium, there are many facets. The government makes many claims about P3’s. These claims are questionable and I will discuss some in later posts.
In 2006 the Canadian Council for Public Private Partnerships gave BC’s Golden Ears Bridge project its Gold Award for Project Financing. Part of the reason for the prize was that privately financed borrowing for the project achieved a triple-A credit rating. That meant lower borrowing costs for the project. The triple-A rating was achieved because private companies that insure bonds had guaranteed the borrowed money would be repaid. This was the first such guarantee for a P3 in Canada.
But a full year ago the Globe and Mail reported those bond insurers were in big trouble. It turns they were guaranteeing residential mortgage deals in the US as well as P3’s. We all know how well that worked out.
Rating agencies downgraded the bond insurers. Their stock prices collapsed. The cost of borrowing went up for private financiers. By autumn P3 financiers were having trouble raising money in the marketplace. Things just got worse from there. So much for the Gold Award for financing.