Less ideology, more case studies:some real world results Blair Redlin Canadian Union of Public Employees (C.U.P.E.) Public-Private Partnerships Conference.

Less ideology, more case studies:some real world results

Blair Redlin

Canadian Union of Public Employees (C.U.P.E.)

Public-Private Partnerships Conference

Canadian Institute

Vancouver, B.C.

November 19th, 2007

CUPE Research 2 COPE-*491 BR/MOH

What are P3s? Many definitions

Key feature is multi-decade private operation of public services (operational contracts of 10-40 years in duration. Generally 25 or 30 years). Often through taxpayer funded “performance payments”

In Canada, most P3s are “design/build/operate” (d.b.o.) and many include some private finance (d.b.f.o.). Yet most risk is in construction and design phase which can be mitigated through design/build.

Design/build is not a P3 method Public and private sectors have always partnered to build

infrastructure in Canada


Top Arguments for P3s

Cost control Risk transfer “Value for Money” Debt management Efficiency


Cost control

ProjectDecision

Point budgetCurrent Estimate

Abbotsford Hospital and Cancer Centre $211,000,000 $355,000,000

Canada Line $1,550,000,000 $2,000,000,000

Golden Ears Bridge $600,000,000 $808,000,000

Sea-to-Sky Highway Project $600,000,000 $789,000,000

William Bennett Bridge $100,000,000 $170,000,000


Cost control Increase in costs from OBC (opening

business case) to 1999-2000 (U.K. hospitals)

Source: Will the N.H.S. be privatised? by Professor Allyson Pollock, Centre for International Public Health Policy University of Edinburgh, January 26, 2006

Trust OBC Cost(₤m)

Current Cost(₤m)

Change(%)

Swindon 45 148 229Worcester 49 116 137South Manchester 40 89 123

Norfolk 90 200 122Bishop Auckland 26 52 100

South Tees 65 106 63North Durham 60 96 60Bromley 80 120 50Dartford 97 137 41Calderdale 55 77 40Wellhouse 30 40 33


Procurement negotiations: in the public interest? P3 process lengthy, bureaucratic,

complex Confidential negotiations with single

preferred proponent for final contract After years of prep., public owner and

managers mostly concerned that the P3 “succeed”

Result: public owners out-negotiated


Public Sector Cost Control Kamloops Centre for Drinking Water Quality

As public project, 20% cheaper than projection for P3 ($48.5 million, not $60 million)

As a P3, Whistler project costs jumped from $22 million to $36 million in just one year. As a public project, construction contract 11% less than engineering estimates

Hamilton water and wastewater saved $1.2 million in first year of renewed public operation

Seymour Capilano Water Filtration:$600 million public project. $34 million under budget!


Cost Control and Risk

“The case studies indicate that the potential benefits of P3s are often outweighed by high contracting costs and opportunism. These costs are often particularly high when construction or operating complexity is high, revenue uncertainty (use risk) is high, both of these risks have been transferred to the private sector partner and contract management effectiveness is poor. In infrastructure projects it rarely makes sense to try to transfer large amounts of use risk to the private sector”

Source: Public Private Partnerships in Canada Theory and Evidence by Aiden R. Vining and Anthony E. Boardman. U.B.C. P3 Project. Working Paper 2006-04. December 5, 2006. Sauder School of Business, University of British Columbia


Risk Transfer “Our analysis of the Canadian P3 evidence indicates

that the willingness of private sector firms to bear user risk declines with the level of user risk. Private sector firms will not participate in a P3 if it bears cost risk and large revenue risk. Thus, it is not surprising that emerging case study evidence from the U.K….and Australia…have found that government have not been particularly successful at shifting risk to private partners. Nor is it surprising that contract negotiations associated with attempts to shift risk were extremely costly.”

Source: Public Private Partnerships in Canada Theory and Evidence by Aiden R. Vining and Anthony E. Boardman. U.B.C. P3 Project. Working Paper 2006-04. December 5, 2006. Sauder School of Business, University of British Columbia.


Risk Transfer

Canada Line – TransLink has ridership risk. Must pay for 100,000 riders per day (up from 40,000 on transit corridor today).

City of Hamilton water and wastewater debacle – companies refused liability for sewage spills and floods. 200% risk premium in contract renewal proposal.


Risk Transfer – Metronet, 2007

Metronet Tube Maintenance P3 Regulator denied additional public money for

cost overruns Consortium collapsed Risk reverts to public, since Tube must be

maintained Transport for London has already provided a

loan of 897 million pounds to administrator Ultimate cost of collapse for Transport for

London likely to be $1.7 to $2 billion pounds (i.e. $4 billion Canadian)!


Risk Transfer “…although risk transfer is the central element

in justifying Value for Money and thus PFI, our analysis shows that risk does not appear to have been transferred to the party best able to manage it. Furthermore, rather than transferring risk to the private sector, PFI has, first, created additional risks to the public agency and the public sector as a whole that must increase costs to the taxpayer and/or reduce service provision, a travesty of risk transfer.”

Source: Evaluating the operation of PFI in roads and hospitals by Pam Edwards, Jean Shaoul, Anne Stafford and Lorna Arblaster. The Association of Chartered Certified Accountants Research Report # 84. London, 2004


“Value for Money”? Value for Money reports lack credibility. Too often they are

justification reports…especially since they’re produced AFTER the final contract is signed.

They are often “….pseudo-scientific mumbo jumbo where the financial modeling takes over from thinking…it becomes so complicated that no-one, not even the experts, really understands what’s going on”

Jeremy Colman, Deputy Controller and Auditor General National Accounting Office – U.K. Financial Times June 5, 2002


Value for Money

Sea-to-Sky highway P3 – Partnership B.C.’s V.F.M. report incorrectly assumed the cost of government borrowing is the same as the cost of capital for the P3

“…the Sea-to-Sky P3 will cost taxpayers over $220 million more than a traditionally procured and financed project” Source: The Real Cost of the Sea-to-Sky P3 by Dr. Marvin Shaffer, Canadian Centre for Policy Alternatives, September 2006

Public sector borrowing always cheaper than private finance. Current Municipal Finance Authority of B.C. rate for a ten year term is 5%.


“Value for Money” Discount rates discount the value of money over time Partnerships B.C. rationale is discount rate should include risk

premium. Discount rate is key to public sector comparator results. Is risk double-counted?

Varying discount rates: Bennett Bridge – 8%. Preliminary Canada Line review - 6%. Final Canada Line - 7%. Whistler 6%. Maple Ridge 7%. Sea to Sky – 7.5%. Kicking Horse - 6.95% Abbotsford Hospital – 5, 6 & 7%

U.K discount rate for all P3s is 3.5% real For an excellent powerpoint on Value for Money see: “How to make the public sector

advantage disappear” by Keith Reynolds, CUPE Research. Presentation to the Municipal Finance Authority, March 2007

http://mfa.bc.ca/ppt/CUPE%20BC%20MFAFF%202007.ppt


Debt Management There was once hope P3 debt could be “off-book”. No

longer “…how the accounting profession looks at P3s and how debt is treated

has actually been evolving since 2003…the capital costs of our P3 projects will be treated as assets and liabilities on (the government’s)

books.” Kevin Falcon, B.C. Minister of Transportation, B.C. Legislative Assembly Hansard. October 25, 2005

From 2008/09 U.K. public financial statements will have to abide by International Financial Reporting Standards rather than U.K. G.A.A.P. This will bring PFI projects on to the public balance sheet. In 2006, Office for National Statistics calculated the imputed value of PFI. The result increased U.K. public sector debt by 6 billion pounds. Source: Public Finance Magazine March 3, 2007


Debt or Liability?

2006 Public Accounts of B.C. show provincial contractual obligations up a staggering $21 billion in just one year…up from $34 billion in 2005 to $55 billion in 2006!

“What (the Public Accounts) show is the effect of the Liberal government’s determination to turn to the private sector to provide services and facilities that were in the past provided by government” “P3s just put the bill in another pocket” by Craig McInnes Vancouver Sun July 19, 2007


Efficiency “A P.F.I. Transaction is one of the most complex

commercial and financial arrangements which a procurer is likely to face. It involves negotiations with a range of commercial practitioners and

financial institutions, all of whom are likely to have their own legal and financial advisors.

Consequently, procurement timetables and transaction costs can be significantly in excess of those normally incurred with other procurement options.”

Source: HM Treasury, Value for Money Assessment Guide, August 2004 p. 30

Efficiency Kicking Horse Pass – Park/10 Mile Bridge. Fed/Prov. funding confirmed March ’03. Took three years to put a single shovel in the ground

Whistler Wastewater Treatment

Capital costs rose from $22.5 million in Jan. 2005 to $36.5 million in June 2006 as complex P3 procurement delayed start of project.


Efficiency Millennium Line Skytrain

(design/build) – took only three years to complete

Canada Line (d.b.f.o. P3) – scheduled to take five years from signing of contract, but has been in P3 process since 2001, so really 8 years in total


Secretive and Unaccountable Councillor in Hamilton told he had to pay $5000 for

F.O.I. request on P3 water contract with City

P.W.C. financial feasibility study on Canada Line withheld from TransLink Directors

Quiet deal between Epcor and Regional District of Nanaimo managers.

Critical Dayton and Knight report not shared with Whistler councillors

Maple Ridge process ruled illegal by B.C. Supreme Court


F.C.M. conclusion August 2007

“There is no evidence to suggest that P3s consistently cost less or provide better services than traditional public projects

P3s do not offer municipalities a magic solution to the problem of securing additional funds for infrastructure

P3s give the responsibility for financing infrastructure to the private sector, even though traditional municipal financing is simple, relatively easy, and less costly than private sector financing

Long-term P3 arrangements, which often keep proprietary information out of the public domain and put the day-to-day management of public services in private hands for periods of 20 to 30 years, can reduce flexibility, transparency, and accountability for local governments.”

Source: Public-Private Partnerships and Municipalities: Beyond Principles, a Brief Overview of Practices by Dr. Pierre J. Hamel for Federation of Canadian Municipalities. August 31, 2007


Some Key Resources Value for Money? Cautionary Lessons about P3s from British

Columbia by Stuart Murray. Canadian Centre for Policy Alternatives. June 2006

Evaluating the Operation of PFI in Roads and Hospitals Research Report 84. The Association of Chartered Certified Accountants, London. 2004

Public Water for All: The Role of Public-Public Partnerships Transnational Institute, Amsterdam. March 2006

Public Private Partnerships in Canada Theory and Evidence by Aidan R. Vining and Anthony E. Boardman. Sauder School of Business, U.B.C. P3 Project. Working paper 4. December 2006.

Public-Private Partnerships and Municipalities: Beyond Principles, a Brief Overview of Practices by Dr. Pierre J. Hamel. Federation of Canadian Municipalities, August 2007.

Less ideology, more case studies:some real world results Blair Redlin Canadian Union of Public Employees (C.U.P.E.) Public-Private Partnerships Conference.

Documents

cost risk

public project

cupe research

public private partnerships

ridership risk

risk premium

shifting risk

brmoh risk transfer