What’s the real risk and cost for Regina’s wastewater P3?

The City of Regina is engaged in a controversial debate about a proposed public private partnership (P3) for the city’s wastewater plant.

Residents formed a Regina Water Watch group to keep the facility public.  They collected enough names to take the issue to a municipal referendum on September 25^th, despite attempts by the city to disallow signatures on spurious grounds.   Regina mayor Michael Fougere launched an aggressive advertising campaign in support of the P3, spending over $300,000 in advertising and robocalls.  (For its part he Regina Water Watch group has produced an excellent video, starring Eric Peterson).

Three issues haven’t received much attention in the public debate over Regina’s controversial wastewater P3 project, but they should give residents there and elsewhere cause for concern (although others have raised some of them elsewhere).

First is the issue of risk transfer.  The higher costs and profits associated with public private partnerships (P3s) in Canada are now all justified because they’re supposed to transfer large amounts of risk to the private sector.

The proposed wastewater P3 plant in Regina is no exception.   According to the Deloitte report assessing the options, a P3 would supposedly involve transferring more than $40 million of “risk” to the private sector.

But how do they calculate the value of this risk?   They don’t say: it’s a closely guarded secret.   While this information is absolutely central to claims that P3s provide value for money, P3 agencies and governments in Canada refuse to make it public.

So, are we just supposed to trust them?   The recent financial crisis should have taught us to be more skeptical of the creative financing accounting that often hides behind these claims.  And whenever auditors have conducted full reviews of P3s, they’ve invariably found they cost more than the public alternative.

Increased transparency is central to accountable democracy.  It’s disturbing government representatives want to push through a controversial major infrastructure project without revealing these details to the public who will ultimately pay for it.   But even if they continue to hide this information, there’s a simple calculation that can demonstrate if these claims of risk transfer are excessive.

The only real risk private operators assume in a P3 is limited by the net amount of unsecured money or equity they have in the project: usually no more than 10-15% of their total capital, as I pointed out in a previous post.   Since P3s are set up as “special purpose vehicles”, the big companies behind them can simply walk away if they aren’t making enough profit or if problems develop, or use the threat of doing so to get more money out of the government.   The maximum they lose is their unsecured equity and cash.  And a number of P3 companies have abandoned their projects—from small P3 arenas in Ottawa to the multi-billion dollar Metronet failure in London—leaving government with the responsibility for delivering the service and paying off the creditors.

Any calculations of risk transfer exceeding the private equity in a project should have no credibility.   The amount of private equity involved in the Regina wastewater plant has not been revealed, but with total private financing at just over $118 million, it is highly unlikely the private equity share (usually a maximum of 15%, so $18 million) exceeds the estimated value of risk they claim will be transferred, which amounts to $40 million according to some of their calculations.

So even if the city administration continues to hide the financial details, it appears these claims of risk transfer are simply not credible.

A second issue of concern is the total liability a P3 would impose on Regina taxpayers and residents for decades. P3s seem attractive to politicians of all stripes because they appear “innovative”; because they can relinquish responsibility and blame others if something goes wrong; and also because they can get a shiny new facility for little money up front during their term in office, and foist the real cost onto residents over future years.

This P3 wouldn’t just commit Regina to $224 million for the capital costs, but also to $760 million in operations, maintenance and debt servicing costs over thirty years, as the Regina city council report of February 2013 shows.   Instead of being a project with a price tag of about $240 million; it’s really a project with a cost approaching a billion dollars, or close to $10,000 for every household in Regina.

While it’s understandable that politicians are attracted to P3s, the residents of Regina—who will be liable for the full cost of the P3—should be much more concerned.

The fate of the UK’s Private Finance Initiative (PFI) program, on which Canada’s P3 program was based, should be a warning.  After numerous P3 failures and scandals, the UK’s PFI program imploded.  The excessive cost of servicing PFI liabilities ate into funding for basic public services and put over 60 hospitals into financial difficulty.  The Conservative government significantly reformed and scaled back their PFI program, renaming it PF2, but not before revealing it had built up £300 billion in liabilities, equivalent to C$490 billion or more than C$20,000 per UK household.   This is a massive liability—equal to 80% of the Canadian federal government’s total debt—that was largely hidden off-book through P3 accounting.

Canada is following closely behind in building up our very own P3 debt bomb.  Canada’s market for P3s is now considerably larger than the UK, but our governments are keeping the true extent of these liabilities a secret.

The third issue of concern is why the city doesn’t apply for other federal and provincial sources of funding.   When Regina’s wastewater project was initiated, there was no money left in the Building Canada Fund because the federal government had fast-tracked spending of it through the stimulus program.   The only federal funding available at that time was the P3 Fund.  But that changed with the March 2013 Federal Budget commitment of funding for a new Building Canada Fund. There will be plenty of funds available in this when the wastewater plant construction is expected to be completed and bills will be paid in 2016/17.

Expansion and upgrading of the Regina wastewater plant is a prime candidate for funding through this program because it’s required as a result of new federal and provincial wastewater regulations.   Municipalities across Canada expressed strong concern to the federal government about the estimated $20 billion cost to meet these new wastewater standards and they were a major factor behind the new federal infrastructure funding.

The Building Canada Fund provides up to one third of funding for projects, cost matched by provincial and municipal governments.   This means Regina could potentially receive two thirds of the $224 million capital cost, or $149 million, from federal and provincial governments for the wastewater plant.   That’s a lot more than $58 million funding through P3 Canada.  This would mean a cost of only $75 million to Regina for this project—far less than the total liability a P3 would impose.

It’s true the federal government requires larger projects to undergo a “P3 screen”—that’s already been done and they found a non-P3 option would cost less, even after inflated calculations of “risk transfer” for the P3.  In addition, the Deloitte report acknowledged non-P3 options could proceed faster.

City councillors and officials may be excused for not understanding the creative accounting that goes into the value for money assessments used to justify P3s, but they shouldn’t be excused for refusing to release this information to members of the public who can make sense of it.

It’s understandable that politicians find P3s attractive by foisting debt onto future taxpayers, but the residents who will ultimately pay the real cost for these bills should be a lot more skeptical.

What’s harder to understand is why city councillors don’t take advantage of new federal funding programs that could provide far more funding for the wastewater plant at a much lower cost to Regina residents, without embarking on a controversial and costly P3.