Time to pull the plug on costly P3s

July 12, 2006

Last month Whistler’s municipal council voted to cancel plans for a “P3” sewage plant upgrade. The decision came on the heels of public concern over environmental risks, potential cost overruns and privatization of water infrastructure.

This wasn’t the first P3 (public-private partnership) to cause a stir. As we know from the Coquihalla Highway, RAV and the Abbotsford Hospital, P3s are nothing if not controversial. Advocates say that they save money and shift risk away from government (and taxpayers) into the hands of a private partner. Sounds great. Unfortunately, however, the old saying stands: if it sounds too good to be true, it probably is.

P3s are very different from traditional procurement, where a government hires a private company to design and build a facility such as a bridge or a hospital. The government finances the project, and after the facility is built, operates it.

With a typical P3, most elements — design, building, financing and operations — are bundled into one contract covering a period of several decades. The contractor usually consists of four or more large firms that come together to create a stand-alone company whose sole business is to bid on a project.

Supporters say that P3s save money, but they can actually cost the public millions more than traditional procurement:

  • When a private company borrows money to finance a project, it must pay interest rates that are much higher than the government would normally pay.
  • Because private investors require a profit, the profit becomes an added cost.
  • P3s have a more lengthy and complicated bidding process, which increases the total cost of implementing a project.

Supporters also say that P3s “transfer risk” from government to the private sector. However, companies don’t take on risk just as a goodwill gesture — they do it at a cost, and that cost gets built into P3 contracts. It’s also doubtful, based on experience to date in BC and internationally, how much of the “risk transfer” is real. After all, if a project goes bad, the contractor can simply declare bankruptcy (this happened with two P3 hospitals in Australia). And once the construction phase is complete, the multi-decade operating agreement provides the contractor with a guaranteed client who will never default on payments — hardly risky business.

In BC, the main advocate for P3s is a government agency called Partnerships BC. It has two roles: the first is to provide objective advice on whether P3s are a good idea; the second is to advance P3 projects. This contradictory role puts Partnerships BC in a conflict-of-interest that should disqualify it from providing advice to the public.

When faced with criticism of P3s, Partnerships BC typically argues that they deliver much-needed infrastructure — and who would be against new hospitals or other such facilities? But this clouds the issue — the question of whether a project is needed is separate from how it should be delivered. Take the case of the new Abbotsford Hospital. It is clearly needed. But that doesn’t mean we needed a P3 to make it happen. In fact, the Abbotsford Hospital was much delayed and cost more than it should have in part because it was structured as a P3.

Partnerships BC says P3s will “only” be used for 10–20% of capital projects. But wasted spending in an area covering 10-20% of the government’s capital budget is still a lot of money down the toilet.

Maybe it’s time for the provincial government to take Whistler’s lead and flush its obsession with P3s.

Stuart Murray is the author of Value for Money? Cautionary Lessons About P3s from British Columbia, published last month by the Canadian Centre for Policy Alternatives.