P is for P3s

On October 14, 2013 · 3 Comments

There has been a good deal of discussion about P3s during this election, particularly with respect to the West-to-Southeast LRT line. I’m against the type that is being pushed for the LRT, and here’s why.

A P3 in its simplest form is simply a situation where a level of government contracts with private firms to build infrastructure or provide services. To some degree, all cities use the services of private contractors to build and/or maintain certain specialized infrastructure. This is the called the design-bid-build approach. But recently an extreme form of P3, known as “design-build-finance-operate-maintain-and own” (DBFOMO) has been favoured by those who believe that the private sector should always have preference over public management. But all the evidence-based research that has been done into P3s of this extreme sort shows that these deals always cost us more.

For example, the Parkland Institute recently shared with media, candidates and the public the results of a report on Edmonton’s LRT and public-private partnerships by John Loxley, Professor of Economics at the University of Manitoba, who has studied and written about P3s since the mid-1990s. The author had to resort to a Freedom of Information and Privacy request to gain access to the business case, only to find that all the material had been “severely censored”. The argument for this “confidentiality” process is that commercially-competitive information might be revealed, but this is a business case that relates only to the feasibility of using the DBFOMO approach, not to the specific information of any one company, so what’s the secrecy all about? The report shows pretty conclusively that the secrecy might have more to do with the information that’s missing or poorly applied, or that might reveal a conflict-of-interest on the part of the authors, Price Waterhouse Cooper. PWC, you see, is also in the business of administering DBFOMOs, so it’s kind of in their interests to recommend to Edmonton that these are a good idea. We could find out more–if the report were public. Or even if the Council members who saw it had been allowed to keep a copy and refer to in in their further deliberations. But these reports were distributed at the beginning of a closed-door information meeting for Council, collected at the end, and Council was even restricted in the kinds of questions they could ask. It all sounds a bit Orwellian.

Hard to say how much of that is the Council’s fault, however. The federal government has been telling the City of Edmonton that it would withhold funding for the W-SE LRT if Edmonton doesn’t accept these extreme p3s for that line. It’s part of a strategy to devolve federal spending onto the civic level so that the feds can reduce budgets and therefore hold the line on their promises to reduce both taxes and government spending. It all sounds rosy: federal spending decreases, the private sector makes money, and we get our LRT for the same money. Right?

Wrong.

DBB P3s can save money because they don’t require a city to keep on permanent staff the construction expertise for specialised projects. However, even then it can often be more economical, given that building and replacing infrastructure goes on all the time,to keep a public — that means non-profit, a term I’ll come back to later — department with the required expertise operating all the time.There are plenty of examples of this in Alberta over many years. (For an interesting example, look at Red Deer’s development of new suburbs in the 1950s-60s — the city bought the land themselves, financed their infrastructure and new land acquisition through land sales, and did so at a lower cost to landowners than if private forces had done the same developments.)

In other areas, there’s no doubt: P3 borrowing is always more expensive than public debt, by at least 2% and sometimes more.  Debt cost on this project would probably be at least $240 million more, without taking into account the cost of private equity, which could swell the additional amount to $300-$500 million more. In addition, base costs are always higher, and P3s never save money on operations–unless of course they cut services, staff and wages compared with the original project specs. In Edmonton’s case, several LRT lines will be operated by the city, while the West-SE line is supposed to be a P3. I can’t see how it’s fair for transit workers on one line to be making less than on the other lines, just so the difference can go into a private company’s pocket. The bottom line in this study? Over the 30 years the city of Edmonton will be committed to this agreement, the cost could be up to 10% more.

P3s get their good numbers by elaborately padding a factor called “risk”. P3 advocates say that the risk of having a private company build and operate the utililty is less than having the city do it. I don’t buy it. How does that work anyway? The main “risk” in a project is in the upfront area, during the building. Isn’t that the phase that is usually contracted out in the old type of DBB process? Yep, it is. So what’s driving this new type?

Government ideology and a huge big-business lobby: both of these would tell us that private is always better than public. I don’t buy that either. In a public project, there is no profit motive, only the desire for a balanced budget. At the end of the day, the public profits by lower expenditures. Profits from the public purse going into a few private pockets used to be called “kick-backs” or “scandals”. Now, thanks to a massive P3 lobby and the myth of austerity, the same process is seen as a public good?

Fake public opinion polls: it’s easy to write a poll asking if people support the idea of saving public money. But if you actually tell the people what’s at stake, the data changes. In Edmonton, a study by Public Interest Alberta showed that 61% of us don’t like how the feds imposed P3 funding on us for the LRT, 71% of us hated how secret decisions were made behind closed doors, 64% of us opposed privatizing operations, and a majority were concerned about loss of accountability (57%), reduced quality of service (59%), poor integration of services (68%), and costs rising to cover profits (69%).

That’s a pretty clear message that Edmontonians don’t buy the rhetoric either.

It will be a challenge to those of us elected to Council to push back against the pressure to extend P3s to this extreme and unsustainable extent. How? First, by getting the discussion out of the closet and back into the public realm. Ending the secrecy and conflict-of-interest by consulting firms. Doing reliable assessments of cost and risk. Having the courage to turn down strings-attached funding if it’s bad for Edmontonians in the long run.

We have to see through the double-speak on P3s. When something sounds like too much of a good thing, it usually is. Sometimes, we have to Just Say No.

 

Under P

3 Responses to “P is for P3s”

  1. kate dyson says:

    great argument, Candas…the BC Ferry corporation was turned into a P3…they cut staff wages and everytime they started to lose money…taxpayer money was brought in to stave off ruination! And…the rates are so high … prepare to mortgage the house to buy a ticket to Victoria…

  2. Wow, Candas. Your website is detailed and very informative.

    I wish you the very best of luck in running for election. You’re a brave soul! Good for you.

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