Is the stimulus killing the P3 model?

While BC has not formally abandoned the P3 model, there is a notable absence of new P3 announcements at a time when billions of dollars are being channeled to infrastructure spending. If P3s really provided value for money and brought the benefits of private sector efficiency and innovation to the delivery of public-sector infrastructure, then why aren’t we seeing more of them?

I’d love to think that the government has come to recognize the multitude of problems of this model of providing public infrastructure (which have been described at length in many other posts), but it seems unlikely. And while it was the financial crisis which made it considerably more difficult and considerably more expensive for the private sector to secure financing for these type of projects, I think it’s stimulus spending that is killing the P3.

You see, two decades of spending cuts in Canada (and many other Western countries such as the UK and Australia) resulted in chronic underinvestment in public infrastructure. At a time when raising taxes or running deficits amounted to political suicide, it’s hardly surprising that governments would be tempted by the idea that they could provide much needed public infrastructure without having to put the money up-front (by using a P3). This, in my view, was the big attraction of the P3 model for governments.

I doubt that high-level bureaucrats were not aware that P3s cost more over the long-run and that they expose taxpayers to higher risk over the lifetime of complex 30 to 40 year-long contracts, but as long as they weren’t prepared to raise taxes or run deficits, what other options did the government have?

Now that it is once again politically acceptable and even desirable to run budget deficits and to spend public funds on infrastructure projects, the model looks like it has outlived its usefulness (at least temporarily). It’s no longer worth the government’s effort or political capital to have to come up with ways to rationalize the cost overruns and project downsizing that have aroused considerable dissatisfaction with the outcomes of many P3s.

But until the public realizes that there is no such thing as free public infrastructure and that we all have to pay for the roads and hospitals we rely on, governments will be tempted to engage in short-sighted deals like P3s, putting short-term considerations ahead of long-term gains.

7 comments

  • A P3 is also only viable in a world of cheap credit, which is the world that came crashing to a halt last year. Even though private sector borrowing costs were higher than governments, they were in the same neighbourhood. With the seismic shift in finance that has now taken place, they need to pay a huge premium to get financing.

    Ultimately, I think P3s were about crony capitalism, a means of funneling public dollars into the hands of your buddies (as in, “oh, and thanks for that campaign contribution; see ya at the Granite Club this weekend.”) James Galbraith lays out such an argument in The Predator State for the US.

  • I like it: P3 = Plumbs for Political Pals.

    However, I do think Iglika’s point about the ideological prohibition against deficits and for tax cuts also explains some of the dynamic and thus I think the P3 movement will re-awaken sometime as the recovery starts and the austerity kicks into high gear. For as you say Marc it also has the benefit of being an effective way of funnelling public money to political pals.

  • I would add that the Granite Club thing goes beyond the corporations and into individual professionals. The whole P3 agenda was effectively a make-work project for accountants, engineers, and lawyers. Extra costs in those areas ended up as billable hours and cash windfalls for the professionals involved. Naturally, they would be ideal targets for political fundraising.

  • P3’s cost more period. The only way they look “more efficient” is if they cut services while raising prices on the few services they do provide.

    Even then there are backdoor loopholes to hand boatloads of cash to the private operators. Mr. Monboit wrote about such a loophole in Britains NHS P3s. Financing would be secured at a high rate and a contract written based on that rate. Then the project would be re-financed at a lower rate and the difference pocketed by the operators. One health region pocketed a nice extra 90 million pounds that way.

  • P3s often end up costing more, but I think it is disingenuous to argue that backroom deals are the only reason why governments pursue them. And while we are often told about the potential benefits of P3s to society (see, for example, here), I think it’s important to consider the direct benefits for the public sector as an agent that enters the contract (through the lens of public choice theory).

    There is an excellent paper on the Canadian experience with P3s in infrastructure recently published in Canadian Public Administration by Vining and Boardman, professors of Business Administration at SFU and UBC, respectively. The authors explore the benefits of the P3 model for both the public and private sector and argue that despite the term “partnership” the two have diverging goals, which create incentives for opportunistic behaviour on both sides and this opportunism leads to very high contracting costs, especially in cases of high project complexity and high uncertainty about future revenues (which is the case with most large infrastructure projects). They examine case studies of ten Canadian P3s and evaluate their success from a social perspective (as in, did they work for the public rather than did they work for the government or the private partner).

    Perhaps not surprisingly, their analysis leads them to the recommendation to limit the scope of future P3 contracts.

  • I am not optimistic that the current economic troubles will cause a more complete evaluation of the value of P3s. Albert Einstein is reputed to have said “we can’t solve problems by using the same kind of thinking we used when we created them,” yet this is exactly what is happening. Tax cuts and deregulation are being proposed (In Canada and BC) as the solution to our economic problems. By the same token, P3s will be pushed as a solution both to a shortage of government funds, and at the same time as a solution to shortfalls in pension funds.

    You raise the point, “as long as they weren’t prepared to raise taxes or run deficits, what other options did the government have?” But I think you also answered this point when you said, “I doubt that high-level bureaucrats were not aware that P3s cost more over the long-run and that they expose taxpayers to higher risk” They also knew they would have to pay taxes to pay for long term contracts and that, as Larry Blain himself has admitted, these long term contracts were every bit as much debt of the province as bonds.

    It is always a challenge to answer the question – if P3s are so bad why do people do it? – with sounding too ideological. But I think we should treat seriously Joseph Stiglitz’s response in the forward to Privatization: Success and Failures, where he says:

    “One of the reasons for the drive to privatization is simple-minded ideology…but another of the motivations for the drive for privatization is special interests (greed): even an inefficient privatization process can generate large wealth for a few. Financial markets in the United States looked with hopeful anticipation at the commissions they would earn from managing trillions of dollars in the social security system While pensioners may lose from increased transaction costs, Wall Street would gain”

    We face the same thing here with P3s. Enormous private profits and when things go wrong, as in the case of the Port Mann bridge, tax payers to pick up the pieces.

  • Its like this why in the world would anyone buy into transit? Its a losing proposition always has been always will be. The buses are half empty for sure as job loses take their toll on translink also the unemployed worker can’t afford the ride.
    Expect fare increases along with high security costs for police as they have trippled but understand the No Tax and Spend on the Rich party has taken additional measures to keep the low income public off the trains.
    I understand the students were getting a class action together before Liberals agreed to give them lower fares as the sited “We can’t afford to get to school and therefore believe this government has discriminated against students when it comes to necessary public service.
    Now the working stiff needs to get out there and do the same as if its good enough for the students then its good enough for the rest of the public who is struggling.

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