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City of Regina, Show us your Math!

August 6, 2013

3-minute read

In the continuing cavalcade of P3 proponents adorning the Leader Post's opinion page, today's edition comes to us from the champion privatizers at the Fraser Institute. Thankfully, authors Hugh MacIntyre and Charles Lamman promise to clarify three facts about P3s that will clear up any "misunderstandings that have clouded the debate so far." Let's take each in turn,

  1. "P3's are not privatization... The government still owns the infrastructure and is ultimately responsible for ensuring related services are up to snuff."

Since when has privatization only been about ownership?  While the defenders of the P3 model would like to narrowly define privatization as the sale of public assets, that simply isn't the case. No less an authority than the Organization for Economic Cooperation and Development (OECD) defines privatization as "the transfer of ownership and control of government or state assets, firms and operations to private investors, [including] other policies such as "contracting out" that is, the process by which activities, while publicly organized and financed, are carried out by private sector companies, e.g., street cleaning, garbage collection, housing, education." Certainly, while the terms of the P3 grant the City ownership of the wastewater facility, control of those operations will be privately managed and determined for the next thirty years. I'm less inclined to dismiss private control of essential public infrastructure solely because we ultimately hold ownership. I would consider the contracting out of services by a crown corporation to be a form of privatization even though the crown remains in public hands even when its functions and operations are not.

  1. "The superior performance of P3s, not funding from higher level governments, should determine whether to go the partnerships route...When it comes to the construction of public infrastructure, P3s have a strong record of being delivered on time and on budget."

Here MacIntyre and Lamman have more ground to stand on, as P3's do appear to have a better track record in regards to on-time completion. However, much of this success can be attributed to the longer pre-negotiating phase leading up to P3s. The Association of Certified Chartered Accountants in the U.K argues that it is this longer negotiation phase, in which penalties, prices and rewards are determined, which allows the private sector partner to better determine how to deliver its obligations on-time. But the authors found no evidence that P3s were more successful at delivering projects on time because they were P3s, rather they succeeded because of the detailed way the contracts were written. There is no reason why the same sort of pre-negotiations and safeguards could not be applied to projects financed in the conventional public build model. Indeed, it begs the question of why such conditions were not previously made in traditional public procurement contracts. As for P3s being superior on cost, perhaps I should let John McBride, CEO of PPP Canada - the federal institution in charge of promoting P3s - speak for me:

“The answer to that is, yes, the private sector costs more...That’s why it’s important to do detailed analysis for value. The P3 approach isn’t always the right approach. We do a detailed assessment of the risk and see whether it warrants the costs.” Mr. McBride estimates P3s make sense only for about 10-15% of infrastructure projects needed today."

  1. "The P3 option can be less costly when project risks are accounted for. In a P3, the risk of additional costs is borne by the private sector partner, which makes the government rate bargain a much less attractive deal when the full risk-adjusted cost of the project is taken into consideration."

Now we come to a phrase that will no doubt become ubiquitous in the coming weeks before the referendum, "risk transfer." Risk transfer is the supposed amount of potential dollars in risk we transfer to the private sector for things like cost-overruns, delays, etc that may inflate the overall cost of the project were it solely in public hands. Here's the thing about risk transfer, it's not free. Multi-national consortia are not in the habit of taking on risk for free, that’s why they build in risk premiums into P3 contracts whether or not the risk (such as construction delays) actually materialize. They get paid regardless. Moreover, the monetary value assigned to such risks are notoriously subjective and often less than transparent - sometimes even considered "proprietary secrets" that can not be disclosed to the public. The City of Regina's reluctance to share its calculations used in their own risk-cost estimates certainly attests to this.

The one thing that MacIntyre, Lamman and I do agree on is the need for open and transparent debate. As the authors state in their own report, "P3s will fail when governments have not established "an open, transparent and accountable environment," and when thorough and transparent value-for-money assessments are not conducted." Now, as long as the City of Regina decides to show it's math to the rest of us, maybe that open and transparent debate can actually begin.

Simon Enoch

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