Marvin Shaffer: Flawed analysis props up B.C. public-private partnerships
By Marvin Shaffer
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 B.C. 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, Partnerships B.C. 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 B.C. 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 B.C.’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 B.C. 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 B.C.’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 B.C. 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 B.C.’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 B.C.’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 B.C.’s methodology should raise the alarm about any real value for money for taxpayers.
Marvin Shaffer is an economist and the author of two cost-benefit studies for the Canadian Centre for Policy Alternatives. He recently authored a review of Partnerships B.C.’s methodology for quantitative procurement options for the Canadian Union of Public Employees.
Nov 20, 2009 at 11:42am
I wonder when the man that Rafe Mair has so aptly called "the government environmental poodle" will sign his tenured scholar's name to a cheesy op-ed piece, prepared by the BC Liberal Government's notorious Propaganda Affairs Bureau, denouncing Shaffer in abusive terms for horribly misrepresenting P3s as well as IPPs?
Duck is a Duck
Nov 21, 2009 at 11:07am
Flawed analysis = purposeful LIE
lets use the language properly!
Nov 21, 2009 at 11:38am
According to British Columbia public accounts, BC's total contractual obligations amounted to $52 billion, $22 of that from BCHydro IPP contracts. With soon to be added new contracts of $10 billion and a just announced call for 5000 gigawatts costing $24 billion that figure will rise to $86 billion.
In any private business, these "obligations" appear as debt but with Canwest/Gordo's new slick accounting practices they appear as a footnote to the provinces finance report. BC's debt on the books and erroneously bragged about by Canwest pundits and ignored by the our yappy but uninformed progressive media is really $118 billion almost all of it accumulated during the Canwest/Gordo administration.
BCHydro won't need the Pirate's power for a few years and will have to sell most of that new must buy power on the open market at a price averaging 3 cents a kilowatt hour a 75% loss. Five years from now with 35 years to go on the average contract, if there is support for massive action against global warming, mass produced nuclear will cost as little as 1 cent a kilowatt hour. BCHydro losses will amount to around 95% or $50 billion on the entire set of IPP contracts.
Close to 90% of BCHydro's five year and beyond costs is now contracted Pirate Power purchases effectively privatizing it, and rates will have to more than double to cover it. Of course by then every business that uses electricity will have moved to Alberta and BCHydro will be bankrupt.
Numerous times Rafe Mair and other commentators have tried to point all this out during the election campaign to that moron Carole James. She the rest of the her weenies were too stupid to run with it in a campaign where all the polls were saying the economy was most important and the public erroneously trusted Canwest/Gordo with it more than the NDP.
Dec 4, 2009 at 3:29am
We're supposed to encourage development of sustainable, clean power. Run of the river isn't subject to the sedimentation problem the large dam projects must deal with. Activist and hobby critics complain the power will be sold to the U. S. when we don't need it - well DUH! Ten years of NDP mis-administration made BC a net importer of power, the Libs have been trying to undo that mistake since. Hydro is only recently upgrading existing facilities to be more efficient and to produce more. They are also planning new large scale facilities. It's all part of a fairly obvious plan to create clean power for our use and for sale to our neighbours. How anyone could complain about that is beyond me, especially the sales which provide us with revenue and prevent possible use of fossil fuel generation in the markets to which we sell.
This is why I'm convinced opposition to run of river is entirely due to the PPP involvement. It's not being done by the BC Hydro unions, that is why the CCPA was called in to propagandize about the issue.
Hydro showed it couldn't deal with small projects by botching efforts early on in the program, which is why the private sector was brought in. Calling them "pirates" only reminds us we're still recovering from the NDP's version of PPP - Pirate the Public Purse.
Sleep comes like a drug in God's country
Jun 1, 2012 at 3:45pm
I know of some individuals in a public P3 company who are using airmiles for their family and personal vacation trips ( these airmiles were earned during business trips and is considered public money). THIS IS NOT FAIR,and a PROCUREMENT VIOLATION. As per Procurement, all airmiles are to be pooled and to be re-used for business trip bookings and not to be used for PERSONAL USE.