P3 or not P3

A hot-potato question for supporters and opponents of delivery method

Public private partnerships (P3s), typically for public sector capital construction and operating contracts, can trace their origins in the stampede to government privatization, deregulation and outsourcing that began in the late 1970s and took off in the 1980s. The P3 model has been used in Russia, China, the United States, Brazil, India, Australia, South Africa, Ireland, Germany, France, Britain and, of course, Canada.

Despite this extensive history, however, P3s are not without controversy.

Proponents of P3s argue that they save money, prevent cost overruns and fast-track the construction process.

Critics on the other hand complain of poor accountability, insufficient transparency and lack of innovation, and say that P3s, in fact, generally cost more. Also, they say, many P3 projects have been approved as a result of comparative cost analyses that are skewed to P3s.

In neighbouring British Columbia, a 2009 study of four P3 projects by Ronald Parks, a forensic chartered accountant at Vancouver-based Blair Mackay Mynett Valuations Inc., found that, "the methodology used by Partnerships BC to compare the P3 projects to the public sector comparator is biased in favour of the P3 projects." (Partnerships BC is a government-owned company that promotes P3s.) The 51-page study concludes that the P3 projects cost substantially more than their traditional counterparts, and that "critical information and documentation" was lacking.

Across the country, provincial auditors general in Quebec, Ontario and Alberta have questioned the value for taxpayers of specific P3 projects in their respective jurisdictions.

Even the International Monetary Fund (IMF), traditionally a powerful advocate of deregulation, privatization and P3s, has weighed in. It has criticized the British government for excluding P3-related future liability - i.e., debt - from its balance sheets. In 2004, the country's then finance minister, Gordon Brown, clashed with the IMF over his government's accounting of this debt, at the time equivalent to about C$240 billion.

Closer to home, British Columbia's controller general recently told the B.C. government that its P3 liability belongs on the government's balance sheet.

"The debt is on the government's books, even though the private sector borrowed the money, because the government has undertaken to make payments," Parks says.

PREVENTING OVERRUNS

P3s emerged in the wake of delays and cost overruns of large government-funded infrastructure projects. Although some privately owned projects - in the oilsands, for instance - are no stranger to cost overruns, the spectacle of publicly funded ones was particularly irksome - and politically risky - as they could burden the taxpayer directly.

"The view was that the private sector might be more efficient at doing infrastructure," Parks says. "If the consortium that performs the contract - it typically includes a bank, builder and maintenance provider - only starts to receive payment on completion, then there's an incentive to get it done on time. But the government could sidestep P3s by having an iron-clad contract in place."

Governments, especially ones with excellent credit ratings like those in Canada, can borrow money at lower cost than the private sector. This largely accounts for the advantage of traditionally procured projects over the P3s in British Columbia, Parks says.

"It's the cost of borrowing over the long period that results in the greater cost for P3s," he points out.

In both British Columbia and Alberta, P3s have not always had a smooth road. Although 18 Alberta elementary and elementary-junior high schools, built on the P3 model, opened in September, and another 10 such schools are going ahead as a P3, four high schools were dropped from what was to have been a 14-school package. In May 2009, the province, citing "the economic climate," announced that the four schools would instead go ahead on a design-build basis. Also, six months after a September 2008 provincial news release announcing the go-ahead for the 18-school package, one of the partners in the P3, Babcock and Brown, the project's banker, collapsed under the weight of $3.8 billion of debt, and in August 2009 Deloitte was appointed liquidator.

In British Columbia, the $3-billion facelift for Vancouver's Port Mann Bridge was originally to have been done under a P3, but the government eventually stepped in, saying it could borrow for less.

The declared mission of Partnerships BC is "to structure and implement partnership solutions which serve the public interest." Parks counters this, saying, "You can have all the mission statements you like, but if a company is not going to make money from a P3, they are not going to do it. Over the long haul, they want to make oodles of money. But there are lots of risks in long-term deals. These contracts remain confidential. If I were a business involved in these contracts, I would not want to carry all the risks."

This past April, an Alberta Auditor General report faulted the government for overstating savings by $20 million but a few months later did accept that the government's 18-school P3 deal will saved taxpayers $97 million over 32 years. But the April report also cited a lack of transparency.

Lack of transparency around P3s is an issue for Vic Walls, president and GM of Border Paving Ltd., an Alberta firm founded in 1955. Although he considers P3s as "a very worthwhile approach" to the timely completion of infrastructure projects, he wonders whether taxpayers are really getting a bargain.

UNANSWERED QUESTIONS

"I think we will never get the answer to [this] question," he says.

Some ring road sections and bypasses around Edmonton and Calgary are being built as P3s. Long-term, they are needed, says Walls, "but do they have to be built rapidly, one after another?"

Noting that P3 road projects typically include long-term maintenance contracts, he says it is not clear that, "the government has the measures in place to enforce these contracts."

The sheer size of P3 contracts could affect their potential savings for taxpayers. That's because these contracts are often too big for smaller firms. Walls says that one P3 road contract could equal a typical season's work for a smaller firm.

"I know something about the benefits of competition for the taxpayers," he says. "When you deal with smaller companies, you deal at the maximum competitive level. When you make it difficult for small contractors, you remove competition, which benefits taxpayers."

Few would disagree. It is generally accepted wisdom that contractors sharpen their pencils better if they face lots of competitors, rather than just one or two, when bidding a project.

"Big corporations would like you to believe that they sell for less," Walls says. "They claim better economies of scale, but I compete with them daily."

Some contractors say that the big corporations are using their muscle to lobby hard for P3s.

"As a taxpayer, I'm concerned when big multinationals take the profits out of the country," says one veteran builder, who spoke on condition of anonymity. "P3s do accelerate the work, but when you want something done fast, there's bound to be a premium." He says that the size of P3 contracts, especially like the ones for schools, accounted for so much work within one sector, that it hurt smaller players, forcing them to seek work elsewhere.

P3s do seem to offer a clear advantage for politicians, however, as they prevent any unsightly association with publicly funded cost overruns for their governments.

"From the government's point of view, there can't be cost overruns," notes Ted Zandbeek, vice-president of Carlson Construction. "If there are overruns [in a P3], the contractor has to deal with them as the government has a fixed delivery price, but how big is the premium? There has to be one, " Zandbeek spoke as a taxpayer, not on behalf of members of the Edmonton Construction Association, of which he is president. He said P3s could deliver "more product quicker, but there is a cost and we don't know what it is."

Two books published in the last year may shed more light on the debate. One, Public Service, Private Profits by John Loxley, is focused on Canada. The other is Global Auction of Public Assets by Dexter Whitfield, director of the European Services Strategy Unit, and looks at alternatives to P3s in the global infrastructure market.

Although plenty of questions remain, one thing is certain. The P3 debate will continue to be a hot potato issue - and not just in Alberta.


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