The utter stupidity of P3s in BC
For the “we told you so” file.
The BC government has been insisting on P3s (so-called “public-private partnerships” where the private sector builds and operates infrastructure) all over the province. We at the CCPA have consistently argued that this practice is foolish: more complicated, more expensive, and leaving taxpayers holding the bag if anything bad should happen. As a companion piece to the recent report on P3s by the Ontario Auditor General, the BC office of the Canadian Union of Public Employees released today a report on P3s in BC by forensic accountants Ron Parks and Rosanne Terhart. Drawing on access to information requests, Parks crunches the numbers on four P3 projects: the Abbotsford Regional Hospital and Cancer Centre, the Sea-to-Sky Highway Improvement, the Academic Ambulatory Care Centre (Diamond Centre) and the Canada Line
The report is timely because of the latest news about a P3 plan to twin the Port Mann bridge (that would be the Trans-Canada crossing between Surrey and the Burrard peninsula including Vancouver and other inner suburbs). This is a highly controversial project opposed by environmentalists, urban planners and the cities of Vancouver and Burnaby, among others, because there is no evidence that highway expansion actually reduces traffic congestion for more than a year or two. Former Vancouver city councillor and urban guru, Gordon Price, has asked repeatedly for anyone to give a single example of this type of thing working; he is still waiting.
The twinning project merely plays on frustrations of the single-occupant vehicle owners who hate sitting in traffic to cross the bridge. The timing of the P3 was to get shovels in the ground for election time to win the vote in Surrey, BC’s fastest growing municipality, and to make it impossible to reverse if the provincial Liberals should lose the May election. But the end result will inevitably be even more unsustainable suburban development down the Fraser Valley, probably on current agricultural land, that will within a couple years of its opening lead back to the status quo of bridge congestion, plus even more congestion closer to the city of Vancouver where it is not possible to widen the roads.
Putting environmental reasons aside for a moment, the economic crisis in the financial markets has now led the government to step in as one of the lenders for the project, rather than bailing on the P3 and building the bridge itself. Savour that for a moment: the public sector contracted this beast out because of the alleged superiority of private financing, and when that private financing proved unavailable, the public sector is bailing out the profits of the contractor. Those profits will come from tolls on the bridge, which they say will be $3 a pop but will inevitably be higher due to higher costs of construction. The province justifies tolling a piece of the Trans-Canada Highway because there is another crossing of the Fraser downriver over the aged Patullo Bridge. Oh, did I mention the Patullo Bridge was recently closed for two weeks for repairs when it caught fire.
Sigh. Here is some of the Sun’s coverage:
The B.C. government said Wednesday it is coming to the rescue of its private partners in the Port Mann Bridge-twinning project, lending the consortium as much as $750 million.
Transportation Minister Kevin Falcon, citing the global financial crisis, said the government had agreed to provide one-third of the money needed to twin the bridge and expand parts of Highway 1.
Falcon would not say how much the province will put in, but the projectâ€™s financiers had reportedly been seeking about $2.3 billion in debt financing for the project, meaning the provincial contribution is likely to be in the neighbourhood of $750 million.
When it was formally announced by Premier Gordon Campbell in 2006, the cost of the project was pegged at $1.5 billion.
Until now, the deal was meant to be financed entirely by a private consortium selected to design, build and operate the project through a public-private partnership.
Called Connect BC Development Group, the consortium featured Australian-based Macquarie Group, an international toll-road operator and investor, which has encountered serious financial difficulty as a result of the global credit crisis.
Macquarie Group had been struggling recently to raise the financing for the project, and this month the province granted the company an extension to complete a deal.
Have we figured out yet to what extent P3 funding is a condition for infrastructure projects in Budget 2009?
Reportedly the condition is unchanged and P3s are required to be considered.
There’s also the OlympicVillage which, while technically not a P3, is certainly quacking like one.
In another article on the same topic in today’s Vancouver Sun, BC Transportation Minister admits that P3 projects cost more.
But what risks are those exactly? If the costs of materials or labour increases unexpectedly, the contract gets renegotiated and the price tag goes up. If the cost of financing for the private partner increases, the contract gets renegotiated again and the public partner comes to their rescue. If the private partner ends up going bankrupt, guess who’s left holding the bag?
It looks to me that the risks ultimately get transferred right back to the public sector.
Hi Duncan, there’s an issue note on the 2009 budget and privatization at:
The P3 conditions from the past continue as far as the Building Canada Fund and the Borders and Gateways funding are concerned and there was also mention of private partnerships with federal building retrofits and some of the aboriginal funding. There is also the sell-off of $10 billion in federal public assets planned…..
The wonderful logic is that the federal government will now help to guarantee private financing (through their Access to Financing initiative), and then through P3s, the private sector can then lend this (publicly) guaranteed money back to the government — at three to four times the interest rate. Brilliant! It’s a double-double public-private partnership in which the public gets screwed coming and going!
Iglika: this “risk transfer” argument is the rationalization that they’ve used for a while in Canada. One would have thought that Falcon might have hesitated in using this particular argument after all the problems with financing, and actual and potential failures with P3 projects recently. The reality is that risks are magnified, rather than transfered with P3s. Last November, Corina Crawley and I wrote a paper dealing in part with this issue in the context of the financial crisis.
That’s hilarious. The government is putting in $750 million because P3s protect the government from the risk that things could go poorly.
Um… Mr. Falcon sir… isn’t risk defined as an unknown outcome, as opposed to a negative outcome that is 100% certain to have already passed because you just parted with $750 million?
Does this mean they are going to lend Macquarie money at 1%, who will charge it back to the government at 5%? We need a calculation on the total cost attributable to this interest rate difference.
If the Auditor General doesn’t call foul on this, then we will have to find his BC Liberal membership card and nail it to his door.
“The wonderful logic is that the federal government will now help to guarantee private financing (through their Access to Financing initiative), and then through P3s, the private sector can then lend this (publicly) guaranteed money back to the government â€” at three to four times the interest rate. Brilliant! Itâ€™s a double-double public-private partnership in which the public gets screwed coming and going!”
Although the Canadian federal gov’t and the BofC Don’t Need To Use This Model,
because the federal gov’t is the sole shareholder of the BofC,
they are Using It Anyway.
Because not only is it extremely profitable for private financiers, this is the model of the Federal Reserve system, which is not publicly owned. The US federal gov’t is a ‘partner’, funneling $ to the private financiers in this very parallel P3 finance arrangement.
This is why so many people have been calling for a ‘public utility’ model for central banks, ie) unwind all the strangulating chains and let the money go from and to the public directly.
But Harper’s, and now Ignatieff’s, refusal to deal with the core issues will not only tighten the chains around our necks, but will make it so much easier for our central bank to be integrated with that of the US.
This is one key area where Canadians can help free ourselves as well as Americans and those elsewhere, by resisting the chains of private finance.