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PPPs: Like using a credit card to buy a house

October 30, 2014

1-minute read

On Monday, we published a study in which we estimated how much Quebec could save by putting an end to our unsavoury experience using public-private partnerships (PPP) to manage Montreal’s two university health centres, MUHC and CHUM. Our verdict: savings could reach $4 billion over the next thirty years, i.e. the current PPPs’ duration.

Why the heck did the government of Quebec get bogged down in this type of partnership? Well, on top of a certain liking for privitization, politicians find this formula appealing because it makes it possible to finance new infrastructure without increasing public debt.

However, it’s expensive. As British economist Chris Edwards said, a PPP is “a bit like financing the purchase of a house through a credit card rather than a mortgage”. Just swipe it and voila! But the whole thing sours when you need to start making payments.

Take for example the case examined by Edwards in 2009: the Norfolk and Norwich University Hospital. Seven years into this 35-year PPP, it came under scrutiny at the Committee of Public Accounts. The private partner had invested the equivalent of $318M at the construction stage for the new building. In only seven years, the public side of the partnership had already paid $402M in rent to its private counterpart. At that rate, it was more advantageous for the state to pay the $603M penalty and take over the management of the hospital for the remaining 28 years of the partnership.

Yes, that’s right: the private partner had gotten the equivalent one billion dollars out of taxpayer money for a hospital that had cost $318M to build. Lucky strike? Wait, it gets even worse.

After Edwards published his proposal to buy back the hospital, British civil servants told him that it couldn’t be implemented because an additional clause had been introduced into the PPP contract. As astonishing as it may seem, it provided for payment of all anticipated profits over the 35-year period to the private partner should the partnership be terminated! Now that’s an outrageous example in squandering of public funds, if there ever was any.

Is this also the case for MUHC and CHUM? Should we fear the worst? Do the contracts allow us to terminate agreements as more and more foreign governments are doing? At what cost? IRIS’s conservative estimates are based on the United Kingdom’s numerous PPP projects. Buying back the two superhospitals seems the only responsible option for Quebec’s public finances.

But to ultimately validate these proposals, the government will need to finally show some transparency and reveal without delay the terms of the contracts with the private consortia. Otherwise, the people of Quebec will end up thinking that nasty surprises are (still) lurking as the saga of the superhospitals continues.

This article was written by Guillaume Hébert, a researcher with IRIS—a Montreal-based progressive think tank.

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