As the referendum on whether to privatize Regina’s wastewater plant nears, the Regina Leader-Post is printing a column a day advocating the P3: John Gormley on Friday, Bruce Johnstone on Saturday, and Murray Mandryk today.
Johnstone and Mandryk repeat three of the City’s key claims. Gormley only gets to one of these claims because he mostly just attacks the messenger, implying that a P3 would be good because CUPE opposes it (another common City tactic).
It does not make sense for governments, which can borrow at low interest rates, to pay private operators to finance public infrastructure at higher interest rates.
P3 Canada acknowledges a private financing spread of between 200 and 375 basis points (figure 13 on page 22). If this spread is compared to federal or provincial borrowing costs and the City must pay an extra 1%, its interest rate would still be 1%-3% less than a private company.
Yet Johnstone writes, “But the difference in borrowing costs between the public and private sector is narrowing, and may be as little as one percentage point or less.” Mandryk writes, “More likely, it would be a percentage point or less.”
Neither presents any analysis, examples or evidence of how the interest-rate differential could be less than one percent. They simply repeat the Mayor’s assertion that it is, preceded by the qualifier “may be” or “likely”.
Gormley writes, “The federal government, which encourages P3s, will contribute $58.5 million of the $224-million price tag if the project goes ahead as a P3. If it doesn’t, there’ll be no federal money.”
Similarly, Johnstone writes, “Vote yes and finance the $224-million sewage treatment plant through public borrowing . . . You’ll be saying goodbye to a $58.5 million grant from the federal government.”
The P3 Canada grant is 25% of project costs, so Regina would actually have to spend $234 million to access the maximum grant of $58.5 million. Beyond getting the numbers wrong, Gormley and Johnstone ignore the existence of federal infrastructure funding that is not tied to P3s.
Mandryk at least acknowledges this possibility, but dismisses it based on “how manipulative/vindictive Harper will choose to be if Reginans reject the P3 proposal Wednesday.”
The Conservatives may be manipulative and vindictive, but would their response to a “Yes” vote be: “We don’t care how you people voted, we’re taking our public money away”? The federal finance minister certainly steered clear of any such statement in his Leader-Post opinion piece.
Mandryk writes, “If you vote yes in the referendum to punish Harper for pushing P3s, you punish yourself (and your neighbours) to the tune of $276 a year.” Johnstone refers to “potential utility rate increases of $276 a year for four years.”
The City’s website states: “If the P3 does not proceed, rate increases will continue at the current pace and residents will need to pay an additional $276 for utilities annually for the next four years because the traditional model is an estimated $79.6 million more expensive.”
The federal grant and the projected value of “risk transfer” allegedly outweigh the public option’s lower base costs. Deloitte estimated $79.6 million as the difference in net present values between the P3 and public options over 30 years.
Neither Mandryk nor Johnstone attempts to explain the rationale for compressing this estimate into a four-year increase in utility rates, let alone the secret “risk transfer” assumptions behind it. They simply repeat the City’s figure, preceded by the qualifier “potential” or “to the tune of”.
Regina voters deserve better commentary than a trio of columnists singing the City’s tune, with two of them throwing in some qualifiers.
UPDATE (Sept. 25): To his credit, Bruce Johnstone responded by e-mail yesterday, citing a recent Conference Board report:
Before the financial crisis in 2008, P3 financing spreads were as low as 100 basis points. However, during the financial crisis the spread rose to over 300 bps for the majority of projects. The spread has since narrowed for most Canadians P3s . . .
But his column stretched from “as low as 100 basis points” (i.e. one percentage point) to “as little as one percentage point or less.” (As noted above, Mandryk also deployed the “or less” wording.)
Johnstone’s e-mail also cites the C. D. Howe Institute’s recent commentary arguing that public and private financing costs for capital projects are the same after taking account of risk. Risk is extremely difficult to quantify, but surely it should not be double-counted.
He cannot cite public-sector risk to boost the assumed public interest rate to within 1% of the private rate while simultaneously accepting the City’s figures ($79.6 million and $276), which assign tens of millions of dollars of “retained risk” to the public option.
So, I’ll still be volunteering for the “Yes” campaign in today’s referendum, but I appreciate Johnstone engaging with this blog post.