More absurdity with P3s

Last week, the British Columbia government announced that its $2.5 billion public-private partnership (P3) deal for the Port Mann bridge expansion had failed and that it would now finance the project directly instead.   Despite the failure of the P3 financier, Macquarie, to put together a deal the Province is still going to pay them for financial advisory services, which seems a particularly absurd and costly attempt at saving face.  

Marc Lee had previously written about other problems with this particular project on this blog.  It is a larger bridge than what is needed, has been opposed by environmentalists, urban planners, had major cost overruns and will involve costly tolls.  

The Port Mann project is far from the only P3 project that has sunk in recent months.  More and more failures with this model continue to mount in Canada and elsewhere.   These problems weren’t caused by the financial crisis, but the crisis has exposed the flaws in this model, as Corina Crawley and I  detailed in a paper last November.  

Since then the Ontario Auditor General issued a report confirming that the Ontario government coudl have saved over $200 million if it had financed, built and operated the Brampton Civic Hospital itself, rather than as a P3.  Highly respected forensic B.C. accountant Ron Parks also issued a report showing how much more expensive a number of that province’s P3s were than if they had been publicly financed.

Now the latest is that the UK Treasury just announced yesterday that it would lend 2 billion pounds ($3.6 billion in C$) to rescue up to 110 of its PFI (Public Finance Initiative) P3s, upon which Canada’s P3 initiatives are modeled.  

Okay, so now the circle of public policy stupidity with P3s is complete again.  

The  UK government is directly lending money to these private sector run P3 projects so it can pay a much higher costs, using taxpayer dollars, to finance the construction and operation of public services.  Of course the Treasury government may claim that they will make money on the deals, but that is because they will ignore the higher costs of the annual payments and all the financing costs.

The reality is that P3s are being aggressively pushed by the financial industry and investors, who make risk-free financing fees and relatively low-risk high returns from the investments.   Politicians used to use them because they provided off-book financing and made the government’s debt appear lower than it was, but then auditors caught up with this practice.  

A variety of rationales have been used since then, but the most common used in Canada is that they transfer massive amounts of risk to the private sector.  The methods they use to calculate the value of risk transfered are frankly so flimsy to be utterly embarrassing from a public policy perspective, although they do their best to keep much of this under wraps and away from the public.  And in BC, the methods that they use involve double-counting of the risks being transferred.  

The argument that massive amounts of risks are being transferred from the public to the private sector should have no credibility at this stage, with the increasing number of failures in these projects around the world, from the failures of small P3 arenas in Ottawa to the multi-billion Metronet fiasco in the UK.  However, because of the secrecy surrounding the financial aspects of P3 deals, the public generally only hears about the failures and rarely about the massive overpayments, except in the rare cases where auditors take a look at them.  The Conservatives massive Federal Accountability Act actually reduced the transparency and accountability involved in private contracts, including P3s. 

The Canadian Construction Association and others who actually do the work have been very critical of P3s because they say that all the risk is being pushed down to them with few of the rewards.  Many renown architects have also been highly critical because the projects end up being developer and financier driven, with the public getting inferior design.

There is little doubt that P3 proponents will come up with yet another rationale now that yet another of their previous arguments has been discredited.  

It looks like they are now focusing on the argument that P3 deals guarantee maintenance and operation funding, unlike public projects that rely on annual budgets to do this.  In effect, this is a claim that P3s cost more, but they save government from itself, by tying the hands of future generations to multi-decade long deals.

Addition:  Karin Jordan, who knows a phenomenal amount about P3s in Canada and elsewhere, suggested the following editorial in the Guardian newspaper as a good critique of the UK’s PFI policy.