Public spending in Canada

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Public-privat partnerships are "all the rage" in New Zealand as well

Canada: The hidden price of public-private partnerships

The Globe and Mail,

14 OIctober, 2012

Public-private partnerships are all the rage in Canada for big infrastructure projects – roads, bridges, waste-water plants and the like.

Federal Finance Minister Jim Flaherty is a huge fan. So is Ontario, which has done more public-private partnerships, including 40 hospitals, than any other government in Canada.

Virtually every province and the federal government now have special agencies dedicated to funding and promoting so-called P3s.

Tens of billions of dollars have been sunk into some 180 projects, dating back to PEI’s Confederation Bridge and Toronto’s Highway 407 in the late 1990s. And many more are in the works, drawing investors from Europe and beyond.

Governments insist they’re “leveraging greater value” and generating “efficiencies” by offloading risk on the private sector. P3s are also more likely to deliver projects on time and on budget.

But at what price? Disturbing new research highlights some serious flaws in how governments tally the benefits of public-private partnerships versus conventional projects. Too little is known about how these contracts work, who benefits and who pays.

This week, public-private partnerships will take centre stage when the House of Commons operations committee resumes a series of hearings on P3s, stacked with witnesses who like them.

A P3 works essentially like leasing a car or TV, rather than paying cash up front. At the end of the day, governments pay substantially more, but if something goes wrong, someone else is responsible.

There are various P3 models. But in most cases, teams – typically made up of a contractor, an architect, a lender and sometimes an operator – bid on a project. The winning group puts up the money, takes on the construction risks and then gets repaid when the project is done. Sometimes, the consortium also operates a facility under a long-term contract, getting repaid in instalments over several years.

These deals are politically seductive. Governments like them because they push spending down the road, pointed out business professor Aidan Vining of Simon Fraser University, who argued in a recent study with University of British Columbia business professor Anthony Boardman that taxpayers are too often getting a raw deal.

“They get a service now and they get someone to pay for it later,” Prof. Vining said. “From a political perspective, there’s always an advantage to that.”

Governments are essentially “renting money” they could borrow more cheaply on their own because it’s politically expedient to defer expenses and avoid debt, Prof. Boardman added. P3 has become a “slogan” with often dubious benefits, he said.

Based on a new study of 28 Ontario P3 projects worth more than $7-billion, University of Toronto assistant professor Matti Siemiatycki and researcher Naeem Farooqi found that public-private partnerships cost an average of 16 per cent more than conventional tendered contracts. That’s mainly because private borrowers typically pay higher interest rates than governments. Transaction costs for lawyers and consultants also add about 3 per cent to the final bill.

To make an apples-to-apples comparison, Ontario factors in a risk premium compared with doing procurement the conventional way. The premium reflects the risk shouldered by the private partner, including construction delays, cost overruns, design flaws and fluctuating future revenues. The result: The average premium is 49 per cent, making the P3 the better value on paper in every case, according to the Siemiatycki-Farooqi study.

Unfortunately, quantifying those risks requires a bit of accounting hocus pocus – a concern highlighted by Ontario’s auditor-general. Or, as Mr. Siemiatycki and Mr. Farooqi put it: “No empirical evidence is provided to substantiate the risk allocations, making it difficult to assess their accuracy and validity.”

Without putting a fair price on risk, taxpayers will never know whether P3s are any cheaper than building things the conventional way.

Set the value too high, and P3s become vehicles for governments to subsidize inflated profits of powerful and well-connected contractors and financial institutions.

Notwithstanding these red flags, Ottawa and the provinces continue to embrace the public-private model. P3 Canada Inc., Ottawa’s $1.24-billion P3 fund, has sunk more than $300-million into various projects since the summer, including a GO Transit maintenance yard in Whitby, Ont., an airport in Iqaluit and Edmonton’s ring-road. This week’s hearings are likely aimed at building a case for spending even more in the next budget.

Lost in the fog is the real risk that current and future taxpayers are paying way too much for vital public infrastructure.