Jun 2, 2011

Suspicion about private finance schemes growing in the UK


On May 16th British Columbia’s Auditor General published a report on Vancouver General Hospital P3 that raised serious doubts about public private partnerships in British Columbia.  In the UK, where P3s have been around a lot longer, the doubts are getting even graver.

Under P3s, or private finance initiative (PFI) as they are known in the UK, private corporations put up some of the money for local infrastructure or services in return for a guaranteed contract to deliver services for 30 years or more.  Now government and auditors in the UK are saying these projects are far too expensive and that they want some of the money back. 

This is important for British Columbia because much of our own model for P3s was directly borrowed from the UK which had much more early experience with the projects.  Here in BC we have had approximately 35 “partnership projects” with an estimate value of more than $12 billion.  We no longer build hospitals here without private financing and handing some services over to the private sector in multi-decade contracts.

The latest development in the UK was a report in late April tilted Lessons from PFI and other projects from the National Audit Office (equivalent to our Auditor General). 

Here are some of the findings of the National Audit Office report:

  • There is no clear data to conclude whether the use of PFI has led to demonstrably better or worse value for money than other forms of procurement.
  • There is insufficient data on the returns made by equity investors for the risks they are bearing.
  • There is still limited data on investors’ returns.  In particular, when investors sell their shares in project companies to other investors, there is little transparency of the price at which these shareholdings are bought or sold or the impact of these transactions on investors’ returns.
  • There is a need for greater challenge of both the decision to use private finance and the scope of the deal…It is therefore essential that there is a robust, impartial scrutiny of the business case, decisions on the form of procurement and project scope….The case for the use of private finance therefore needs to be challenged, given our analysis which showed that the costs of debt finance increased by 20-33 per cent since the credit crisis.

Knowledge of how much the investors are getting in return for whatever risk they take?  Challenges of decisions to go with a P3?  Impartial scrutiny?  None of that happens in British Columbia. 

In the UK both Cabinet and Treasury officials are now looking for ways to claw back some of the profits made by P3 companies.  In fact, the Treasury Branch has launched a pilot project to look at P3 savings.  A cross-party group of MPs (including government members) has even set up a PFI Rebate campaign to ask for some of the money back.

Meanwhile, both local governments and hospitals in the UK have started buying out their P3 partners.  The cost of buying them out is high, but not as high as paying for the contract another 20-30 years. 

Here in BC the government’s privatization agency, Partnerships BC, merrily rolls along looking for new projects that it can tie into 35 year contracts.  When it is not pushing P3s on government agencies and ministries it is pushing them on local governments like the Capital Regional District, Powell River, Abbotsford and Mission

Why is the UK so far ahead of us in questioning P3s?  They have been in the game a lot longer than we have and they are seeing the real impacts and costs. 

How much longer will we have to wait before the burden of these projects becomes obvious to everyone here?  How long until some government members begin to question the P3 orthodoxy?

Until then we can only conclude they have forgotten the First Law of Holes: When you find yourself in a hole, stop digging.

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