Sep 1, 2016

Privatizing public infrastructure is enormously costly. Let’s not repeat the mistake.


An announcement is expected next week on a plan for the long-awaited Victoria wastewater treatment plant, which has been the subject of ongoing controversy about its need and location.

But one question has received much less attention: will this roughly billion-dollar piece of infrastructure be publicly owned and controlled, or will it be handed over to a private for-profit corporation to run?

The terms of reference for a new board charged with overseeing the project leaves the door open to a type of privatization called a “public-private partnership” (P3). “Partnership” has a nice ring to it, but as “partnerships” go, P3s are rather lopsided, as they involve ceding public control over infrastructure and increasing costs, while profits roll in to the “partner” corporation.

First, a little perspective: private enterprises have always had a role in designing and building public infrastructure. The government doesn’t keep a pool of architects and construction workers on hand to build infrastructure as needed. What’s different about P3s is that private corporations are invited to also finance and manage public infrastructure, often for decades. This makes the bidding and awarding of such contracts infinitely more complex, and has produced a host of problems.

P3s gained popularity during the 1990s, when privatization was viewed by many as something of a cure-all. The core case for this type of privatization has always been that it would save money by bringing in private-sector efficiencies and innovations to infrastructure projects, and that they would transfer risk to the private sector.

But these arguments were shaky from the earliest days, and the real world experience leaves little doubt: P3s are an enormous waste of tax dollars compared to traditional public infrastructure projects; very little risk is actually transferred; and to the extent that risk is transferred, the public pays for this at a high premium.

A report by Ontario’s Auditor General in 2014 conducted a review of 74 infrastructure projects over a decade, and found that the province had lost a jaw-dropping $8 billion by building projects as P3s rather than as traditional public infrastructure projects.

P3s are simply less efficient – on average costing dramatically more than the public sector alternative. And it’s not hard to understand why. The private companies in P3s are not engaging in an act of charity – they intend to turn a profit, which has to be added to the cost of any given project.

Traditional publicly-funded and operated projects, in contrast, don’t require paying out profits to private investors and, importantly, have lower financing costs, since government can secure much better interest rates than a private corporation. This has all been well understood since the 1990s and documented over the years in a whole range of research on P3s.

Given this, continued support for P3s among some policymakers might seem puzzling. Why would governments continue to pursue this wasteful infrastructure model – aside from making a few friends in the partner companies?

A recent academic review of the research on P3s offers one answer:

“To an incumbent government, a key advantage of PPPs is the ability to avoid upfront costs… allowing politicians to take the credit for new infrastructure while passing future maintenance and operating costs off onto future politicians, taxpayers and/or users.”

Even though P3s cost more in the long run, they can offer a more immediate political advantage.

The analysis, authored jointly by business professors at the University of British Columbia and Simon Fraser University, concludes that there is “no convincing evidence” of overall benefits from P3s.

In fact, many local governments are coming to the same conclusion on their own. A new report from the Columbia Institute documents how communities across the country have begun bringing public services back “in-house,” after costly on-the-ground experiences with privatization.

The report covers a total of 15 case studies of such “insourcing” across Canada, and also cites growing international trends towards insourcing in the United Kingdom, US, France and Germany.

In the case of the Victoria wastewater project, policymakers and citizens would do well to take note. For example, several Western Canadian municipalities recently reversed previous privatizations of wastewater management.

The communities of Sooke and Port Hardy on Vancouver Island, as well as Banff, Alberta, each decided to bring the wastewater management back in-house, after experiencing higher costs, the erosion of internal expertise, and deteriorating quality of service under privatization.

Moreover, these experiences appear to be the rule, not the exception. A US-based analysis found that sewer costs from privatized utilities were on average 63% higher than those of public utilities.

Yet, despite the weight of evidence against the P3 model – and the momentum on the ground – this debate isn’t going away.

The previous Harper federal government explicitly tied federal infrastructure funding to the requirement of pursuing a P3 arrangement. And while the new government has partly backed away from this “strings-attached” stance, Prime Minister Trudeau and his ministers have expressed favourable views of P3s on a number of occasions. Meanwhile in BC, the provincial government set up a corporation called Partnerships BC to pursue and promote P3s.

As a plan comes forward for the new Victoria wastewater treatment plant, plenty of attention will be focused on the location, size and even the politics of the project. But if the public interest is our concern, we should also be watching closely to see whether policymakers have learned from past mistakes – and from the evidence – about P3-style privatization.

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