Flawed analysis props up BC public private partnerships

November 20, 2009

Many will have heard Premier Gordon Campbell and his cabinet colleagues talk in glowing terms about public private partnerships (P3s) for major projects like hospitals, highways, bridges and sewage treatment.

Traditionally, governments borrow money for things like hospitals and bridges. They use that money to pay the private sector to design and build the projects. Once built, the facility or infrastructure is wholly owned, operated and maintained by government on behalf of the public.

In P3 projects, however, the government typically enters into multi decade contracts with private corporations to design, build, finance and operate facilities, whether that be hospitals, toll highways or sewage treatment systems. Rather than financing and operating these facilities, the government effectively leases them from the private partner, paying for the right to use them over the life of the contracts.

How does government decide when to stay public and when to do a P3? That’s a good question. In August, after more than six years in the business of assessing and promoting P3s, Partnerships BC finally released the methodology it uses to decide whether to build something publicly in the traditional way or to use a P3. And sadly for B.C. taxpayers, who are locked into $10 billion worth of spending on P3 projects over the next 30 to 40 years, the methodology is fundamentally flawed.
In its methodology document, Partnership BC explains how it calculates value for the ‘risk transfer’ to the private partner and the benefits from long term performance guarantees it achieves with P3s. Partnerships BC doesn’t explain why risks can’t be transferred under traditional fixed price design-build contracts, and why long-term performance can’t be guaranteed with bonds or similar mechanisms as is commonly done in traditional (non-P3) contracts. That is problematic in itself.

However, the major and most obvious failing of Partnerships BC’s methodology is that it only focuses on the benefits of P3s and completely ignores the cost side of the equation. When private companies finance public projects, they pay higher interest rates on what they borrow and require a high rate of return on what they invest. The higher costs of private financing for P3s are built into the lease rates that taxpayers ultimately pay, and are much higher than the debt service costs that government would pay if it financed the projects itself. For large, expensive public infrastructure, that can add hundreds of millions of dollars to the total expenditures government incurs over the life of the project.

For inexplicable and certainly unjustifiable reasons, Partnerships BC completely ignores the higher financing costs of P3s in its assessment methodology. It pretends the financing costs are the same. In other words, its methodology looks at the potential benefits of P3s without considering the costs. And it compounds that problem by giving very little weight in its analysis to the future tax burdens the P3s impose.

No wonder all of Partnerships BC’s so-called ‘Value for Money’ assessments find that P3s are preferred to the more traditionally procured, publicly financed approach. Its methodology, which provides estimates of benefits, and which assumes incorrectly there are no costs, guarantees the result.

All of this would be rather amusing if it were just a silly error on the part of an over-exuberant Partnerships BC. But it isn’t just that. This is the methodology government is relying on to justify the many P3s it is entering into. And the fact of the matter is: Partnerships BC’s assessment methodology provides no justification for selecting P3s over more traditionally procured publicly-financed projects, and in fact, evidence suggests taxpayers will pay more in the long run.

In very simple terms Partnerships BC’s analysis is flawed and shortsighted, doing a disservice to future taxpayers who must pay the extra costs of the P3 for the full length of the contract.

With $10 billion tied up in P3 projects, the questions raised by Partnerships BC’s methodology should raise the alarm about any real value for money for taxpayers.

Marvin Shaffer is an economist and author of two cost-benefit studies for the Canadian Centre for Policy Alternatives. He recently authored a review of Partnerships BC’s methodology for quantitative procurement options for the Canadian Union of Public Employees.