Money Pit: The Case Against P3s

Public funding cuts created Alberta’s infrastructure deficit. Now the Alberta government wants us to believe that private investment through P3s is the only solution.

Communities are built around public facilities and the services they deliver. Town halls, libraries, hospitals, schools, arenas, recreation centres, roads and water treatment plants are traditionally financed and owned by the public. But public private partnerships (P3s) have become Alberta Infrastructure’s new mantra for privatizing the financing and delivery of public services in Alberta communities. Under P3s, public services become merely investment opportunities for multinational corporations and profit for private consultants. When private enterprise enters, democratic controls exit.

Despite provincial government surpluses available to invest, and despite serious public concerns about privatization, the province’s lack of commitment to public funding has forced communities to consider P3s.

Hamilton, Ontario, knows about the disastrous results of P3s. In 1994, Hamilton became the first major city in Canada to turn its water and wastewater treatment over to a private contractor. It’s been a costly experiment marked by controversy, secrecy, bankruptcy and raw sewage spills. In 2003, Sam Merulla, a Hamilton city councillor, was told he personally would have to pay $2,800 to process freedom of information requests to find out the cost to the city to maintain and repair the privatized system.

“It became evident that those on council who favoured the private contract model, along with senior city staff, wanted as little scrutiny and as little public input as possible,” said Gus Oliveira, president of CUPE Local 5167, which represents the workers in the Hamilton water and wastewater treatment plant. In P3s, the contractual relationship is binding for the public partner, but the private partner can freely buy and sell such assets on the market at any time. After a decade of numerous changes in ownership, the City of Hamilton brought water and wastewater services back in-house.

While Hamilton was repairing the damage done by privatization, the Municipal District of Rockyview, just west of Calgary, teetered on the verge of entering into a P3 with Terasen Inc. Terasen proposed to finance, design, build and operate the new water and wastewater facility for the municipal district. Terasen Inc. (formerly Terasen Gas, and before that,  BC  Gas) wanted to undertake a large-scale water P3 as part of its expansion into private water services. However, citizens raised serious concerns, including questioning why they needed a P3 when public investment and operation of the water services was available. In the end, public concerns, and changes in council after municipal elections, stopped the project—but the municipal district was still required to pay Terasen $372,689 after the project was abandoned.

In August 2005, Terasen was sold to Houston-based multinational Kinder Morgan and in January 2006, Kinder Morgan sold Terasen Water & Utility Services to CAI Capital Management Co., specialists in corporate restructuring. Transfer of ownership and assets and private-sector restructuring are not the exception, but the rule. Private owners make decisions based on commercial interests and opportunities to enhance investment returns—not on the basis of public interest. When public infrastructure and services are involved, this takes significant control away from democratic community decision-making processes. It doesn’t take a leap in logic to argue that regional planning priorities, community concerns and environmental issues are likely to be a low priority for shareholders.

The Alberta government, as well as private interests, continues to promote P3s as an innovative, cost-effective way to provide public infrastructure and services. However, a new report released by health coalitions and national unions, Flawed, Failed, Abandoned: 100 P3s, Canadian and International Evidence, undermines the overblown claims of P3 backers. The study exposes 100 dubious P3 projects in the health, municipal and education sectors, with examples from across Canada, as well as Australia and the UK.  It details a litany of cost overruns, legal disputes, bankruptcies, environmental disasters and shoddy construction. Many P3s have been abandoned outright as the steep terms required by for-profit companies become clear.

The news is the same in every Alberta community. We need to restore and upgrade old schools and build new ones. We need to expand hospital facilities. Our public water and wastewater systems, especially in rural areas, require urgent investment to protect public health and the environment.

But we didn’t get to this point by accident. In Alberta, slaying the debt dragon was the single-minded focus of the Klein Conservatives. Beginning in the early 1990s a frenzy of government cutbacks to reduce budget debt created a massive “infrastructure deficit.” Now, despite phenomenal and continuing provincial budget surpluses and the elimination of the provincial debt, Alberta continues to fall behind on even the most urgent community infrastructure needs. In July 2005, Calgary Herald columnist Don Braid estimated that infrastructure requirements in Alberta exceeded $20-billion.

This shortfall in public funding for infrastructure set the stage for privatization through P3s. Instead of increasing funding, the provincial government is actively encouraging, even compelling municipalities and school and health boards to seek “innovative solutions” and “alternative financing”—the defining element of a P3—to meet public infrastructure needs. Alberta Minister of Infrastructure and Transportation Lyle Oberg has stated “P3s are a ministerial goal” for Alberta.

At the same time, responsibility for infrastructure has increasingly shifted hands from federal and provincial levels of government to local governments and boards without the required shift in resources. This leaves local governments with inadequate funding for capital projects, increasing public frustration with aging schools and health care facilities, and growing water and transportation infrastructure needs. Under pressure to secure community facilities, local authorities are considering P3s, usually reluctantly.

For a long time, the private sector has been interested in expanding its operations into areas traditionally considered public domain, motivated by the prospect of guaranteed revenue from the public purse. The private financing element of P3s is what makes them different from more familiar forms of privatization such as contracting out and competitive bidding. P3s also typically include privatization of the delivery of public services.

But private financing of public services is bad public policy. Evidence shows that P3s have significant costs, both financial and democratic. In many public private partnerships, the needs of investors—for commercial confidentiality, proprietary control of information and long-term contracts— subvert the normal checks and balances of our democratic system and compromise accountability and transparency. P3s are commercial relationships. The terms of P3 contracts and negotiations are typically held secret, in keeping with the standards of commercial confidentiality. Necessary democratic actions, such as policies and procedures that require public consultation and transparency, are seen as obstacles for P3s.

In P3s, the private sector becomes the lead actor in providing public infrastructure and services. Any service or infrastructure is a candidate, from health care and education, to water, electricity, transportation and more. For a P3, a group of for-profit companies often form a consortium to provide private financing, design, construction, operation, maintenance and sometimes ownership of public services, facilities or infrastructure. The private sector accesses upfront capital to invest in the project and gives the public body terms that will ensure an acceptable rate of return for shareholders. The public body then makes regular leaseback payments to the private financier for the life of the contract, typically anywhere from 25 to 40 years.

Canadians and Albertans remain skeptical about P3s, despite the government hype and well-financed and intensively marketed corporate proposals. Public resistance to recent Alberta proposals for P3 schools, hospitals and other services has been strong. In April 2004, Ipsos Reid released the results of a large poll of Canadians concerning their views on P3s. Of those polled, 83 per cent of Albertans and 84 per cent of all Canadians agreed with the statement “Canada’s public services should be delivered by public sector workers accountable to elected representatives and the public, not by corporations accountable to shareholders.” Similarly, 72 per cent of Albertans and 75 per cent of all Canadians polled agreed with the statement “Canada should rebuild its public infrastructure, such as hospitals, schools, highways and water systems, through direct public investment and not through public private joint ventures with corporations.”

Recent examples in Alberta show that this P3 skepticism is warranted.

In December 2004, the City of Lethbridge approved plans for a public facility that would have housed public and Catholic schools as well as a public library on a connecting campus. Alberta Infrastructure strongly encouraged the community to undertake the project as a P3, but the community resisted and raised significant controversy over the deal. The debate about financing delayed  the project, resulting in higher costs. After a study showed that the private finance option was likely to be more expensive, the P3 plan was scrapped.

In Calgary, health care cuts and the demolition of the General Hospital, together with population growth created a desperate need for public investment in a hospital. The debate about a P3 for the Calgary South Hospital began in October 2003. One commentator stated, “The province won’t dish out the dough to build the hospital, so the Calgary Health Region will have to ‘decide’ (nudge, nudge, wink, wink) if they want the hospital badly enough” to consider a P3.

The Alberta health care advocacy organization Friends of Medicare held a press conference to present the evidence against a P3 hospital. The P3 proposal was described in the media as “controversial” and an “idea that sparked outrage among health care advocates.” In August 2004, the health region announced that the hospital would not be a P3, but the province did not commit to phasing in funding until the spring 2005 budget. The debate and delays related to financing the hospital exacerbated the crisis in Calgary emergency wait times and community access to essential health care services.

In Alberta, slaying the debt dragon became the single-minded focus of the Klein Conservatives. In the early 1990s a frenzy of government cutbacks to reduce budget debt created a massive “infrastructure deficit.”

The public has every reason to be concerned about the privatization of public facilities and services. On the one side, we have governments failing to fund public infrastructure and services, and on the other, for-profit lobbyists promoting privatization to make up for this public-sector failure.

Public funding and cost-sharing agreements between governments, government-issued bonds for infrastructure investment, and low-cost loans are the conventional tools used to build and maintain community infrastructure. Experiments with private financing of infrastructure have proven very costly in terms of price and public accountability, not to mention quality.

Higher borrowing costs and the need to generate profit make private financing more expensive. For-profit corporations cannot borrow money as cheaply as the public sector can. Even though P3 rates may be only 1 to 2 per cent higher than those of a publicly funded project, over the life of an agreement the cost of private borrowing can amount to millions, even billions of dollars more. And with P3s the public pays in the end, since the additional expense is calculated into their leaseback payments (and then some).

The UK’s experience with P3s for hospitals (which they call Private Finance Initiatives or PFIs) clearly shows the costs of privatization. The British Association of Chartered Accountants concluded that costs were higher even though the hospitals were smaller than the ones they replaced. One director quoted in The Guardian said, “Most PFI projects would fail the value for money test.”

Similarly, private financing for Brampton, Ontario’s William Osler Hospital P3, came with a 1¾ per cent higher borrowing rate than the public could get, resulting in a $174-million higher price tag. Other costs and financial information remain secret due to commercial confidentiality. With hundreds of hospital projects required across Canada, the extra costs of P3s seriously threaten the affordability of public health care.

Alberta has first-hand experience with P3 project financing. For example, after selecting a bid for the Calgary Courts Centre, the government liked all parts of the deal, but it made little sense to accept a financing arrangement with higher rates of interest. The government expects to save $30-million by financing the project directly.

The Southeast Edmonton ring road is another case in point. Escalating costs, additions to the project and potential future requirements to add interchanges all call into question the government claims about this being a model P3. The fact is, this P3 road cost the taxpayers more.

“According to PricewaterhouseCoopers, building the Southeast Edmonton ring road using public dollars would have saved taxpayers, most likely, about $41-million,” said Brian Mason, leader of the Alberta NDP. “Under the worst- case scenario, Albertans would have saved $6-million—best- case scenario would have seen a $71-million savings. Either way, building this road as a P3 is a gift to the Tories’ friends in the construction industry.”

Governments have effective and accountable public financing alternatives. “Governments can decide not to make funds available, or to make them available for some kinds of projects and not for others,” says Lewis Auerbach, a former director of the audit operations branch of the Auditor General of Canada. “In other words, the constraints that lead to the choices are self-imposed. P3 is a choice especially difficult to comprehend when it leads to higher, rather than lower, cost to taxpayers.”

Governments can get the lowest borrowing rates around, making public financing the most efficient. When governments partner they can take advantage of these good borrowing rates to invest in quality, sustainable infrastructure and services. Infrastructure can also provide a safe and adequate return on investment for pension funds. Prior to 1998, the Canada Pension Plan and other public and private pension funds used to purchase government-issued infrastructure bonds. Other ways of raising public infrastructure funding include tax- exempt bonds that can be issued by governments and have lower rates of interest than regular ones. These traditional methods of funding public infrastructure are much more “innovative” than the alternative posed by P3s.

The simple cost of capital is not the only thing that makes P3s such a poor investment. Negotiating and managing P3s increases costs yet again. Lawyers, accountants and other consultants, detailed proposal processes, drafting, negotiating and renegotiating complex agreements are all expenses incurred by the public that add up before the shovel hits the ground. For example, the first 18 PFI hospital projects in Britain spent over $110-million on consultants—the lawyers alone got over $50- million. Once a P3 is up and running, legal and forensic advice, audits, termination payments, monitoring and negotiation are additional fees rarely factored into the initial cost of a P3.

Another issue with P3s is the cost to democracy. A recent report by PricewaterhouseCoopers, reviewing a proposal to transfer City of Edmonton drainage service to EPCOR, acknowledged that the success of businesses depends in  part on ensuring “their plans and actions are not visible to competitors…Civic business, on the other hand, often needs transparency, public input and debate.”

One secretive P3 scheme was recently ruled illegal in the District of Maple Ridge, BC. Private proponents convinced the district that it would be in its interests to keep project details hidden from the public scrutiny of a vote. When the project went to referendum as required by the province, the P3, for downtown redevelopment, was overturned.

Auditors and auditors general consistently raise concerns about potential mismanagement of public funds with P3s. In recent reports, even representatives from organizations that typically support privatization, such as the World Bank and the International Monetary Fund, have expressed concerns about the impact of privatization and cannot point to any outright public benefit.

Trade issues further expand the threat to democratic control of public services. Under “free trade” agreements, the power    of corporations has become greater than that of governments. NAFTA’s Chapter Eleven, for example, allows a corporation to sue if a government makes changes in laws or regulations that reduce a corporation’s current or potential profits. No matter how carefully a government drafts a P3 contract, nothing can protect it from a NAFTA challenge if, for example, it were later to raise its standard for water treatment or sewage disposal or hospital safety. The only real protection against NAFTA claims from private companies is to keep services and infrastructure fully public—in financing, ownership and operation.

The consequences of P3s for quality of services were made clear in a Nova Scotia experiment with P3 schools: 33 schools cost $32-million more than the original prices quoted. Among other problems, the tap water at one school was undrinkable, communities had decreased access to the facilities and increased fees for after-school use. One school was relocated without community consultation, resulting in students having to be bused 19 km.

In Alberta, as in Nova Scotia, the pressure to accept a P3 or have no school at all is a powerful mechanism to enforce privatization. But with P3 contracts, serious problems may not surface until after the deal is signed.

The claim that P3s allow the public sector to transfer to the private sector the risks of building infrastructure and providing services is a key argument in their favour, but this has been very difficult for both governments and private proponents to prove. Auditors General of Ontario, Nova Scotia and New Brunswick, and the National Audit Office in the UK, all question P3 accounting practices and the extent to which they obscure real public liabilities. They conclude that the public partner is ultimately responsible for providing the public service.

The UK Audit Office looked at the PFI Fazakerley prison to assess whether a transfer of risk could justify higher costs to the public and found that they clearly could not. A recent report by PricewaterhouseCoopers supported their finding in a study of more than 60 PFI deals which concluded that the public sector had paid too much for risk transfer.

The PricewaterhouseCoopers report on the City of Edmonton’s drainage services also observed that it was difficult to transfer risk away from the municipality: “It is Alberta Environment’s view that many circumstances exist where liability would not necessarily follow the assignment of the licence to operate but may continue to reside with the municipality.”

In other words, when a deal goes bad, the private sector can walk away but the public sector is left to carry on. It is the nature of public services that public bodies are responsible for them. The risk involved in providing public services is nearly impossible to transfer. Taxpayers are left carrying the cost of debt incurred at private-sector borrowing rates. Just ask people in the municipalities of Guelph, Victoria, Cranbrook, Port Alberni and elsewhere, whose failed recreation facility P3s cost them millions of dollars and as many headaches. Public ownership and operation keep public officials accountable whether the issue is the location of a school, public transit safety, or wait times for health care. When public service issues are redefined as part of a commercial contract with a private partner, the obligation of the private partner is to meet the terms of the contract, not the interests of the public.

“The truth about P3s in Alberta and elsewhere is that they have nothing to do with better or faster service or saving tax dollars,” says CUPE national president Paul Moist. “The sole purpose of P3s is to unnecessarily transfer public wealth to the

P3s have significant costs, both financial and democratic. Investors’ needs subvert the normal checks and balances of our democratic system and compromise accountability and transparency.

private sector in order for corporations to realize steady profits. The Alberta government needs to make the choice to rebuild and expand public infrastructure and social programs through public ownership, management and financing. Keeping it public means lower costs, full accountability, higher efficiency and stronger communities.”

It is very difficult to protect the public interest and changing community needs when key decisions become part of commercial contracts with companies that can be bought and sold in the private marketplace. The ability of democratically elected representatives to govern is compromised by deals that take away flexibility to respond to community needs.

Public investment in and accountability for public infrastructure and services—schools, municipal services, health care and transportation—is our heritage. In Alberta, the potential for immediate public investment in essential community services is not a pipe dream. It is time the Klein government stopped blowing P3 smoke.

Bonnie Ferguson and Corina Crawley work as researchers for the Canadian Union of Public Employees. Their work is collaborative in process and they thank the other researchers who have helped them.

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