Did the federal government bait and switch when it comes to municipal infrastructure? And will we get real transparency?


800px-CPR_GE_AC4400CW_Ashcroft_-_Kamloops_WikiMediaCommons

By Keith Reynolds (Policy Analyst, Columba Institute Associate)

It’s an article of popular wisdom that “the taxpayer only has one pocket.” Whether the taxes come from the federal, provincial or local governments, taxpayers still have to pay them. But this is also true when a private operator delivers public services: People still have to dig into that pocket to pay for them, and usually they pay more. In fact, cost savings are the most frequently mentioned reason that local governments give when they bring services back in house.[1] 

In light of last fall’s “Unleashing Productivity through Infrastructure Report” by the Federal Government’s Advisory Council on Economic Growth, which encourages private delivery of infrastructure, the track record of private operator delivered public services deserves a thorough review.

These commercial deals often have a level of secrecy that would not be permitted with government delivered services. Important details of public-private partnerships are often hidden behind “commercial confidentiality” or even denied from the public as being a government “cabinet secret.” At a minimum, Canadians should demand transparency legislation reporting on the real costs, benefits, and outcomes of any new public-private partnership agenda from the federal government.

In the 2015 federal election, the Liberal Party made some important commitments to Canadians regarding municipalities and infrastructure in their platform document.[2]

They promised, “The federal government can use its strong credit rating and lending authority to make it easier and more affordable for municipalities to build the projects their communities need.”  The new governing party campaign document promised to “establish the Canadian Infrastructure Bank to provide low-cost financing for new infrastructure projects.” They said further, “Where a lack of capital represents a barrier to projects, the Canada Infrastructure Bank will provide loan guarantees and small capital contributions to provinces and municipalities to ensure that the projects are built.”

With the October 2016 release of the report of the federal Minister of Finance’s Advisory Council on Economic Growth,[3] those promises appear to be moving in a very different direction. The Advisory Council is made up of 14 members representing a remarkably narrow point of view. More on this later.

The report itself identifies the demonstrable need for infrastructure investment in Canada. However, instead of focusing on the government’s own strong credit rating to provide support for infrastructure, the report called for greater participation from banks, pension funds, insurance companies, state-owned investment funds and other long-term investors. Instead of a new Infrastructure Bank providing low-cost financing and contributions, the Council recommended an Infrastructure Development Bank that would attract institutional capital and act as a centre of expertise “to minimize the tax dollars required.”

Banks, insurance companies and state-owned investment companies don’t work for nothing so the Council recommended that revenue streams be attached to “new and in some cases existing infrastructure.” Involving banks and insurance companies does not come cheap but the Council made the questionable claim that “Cost-reduction levers like fact-based project selection and streamlined delivery are estimated to bring average savings of 8 percent and 15 percent respectively.”

The high cost of public-private partnerships has actually been one of the key issues criticized by public auditors in Canada. BC’s General has observed that it costs nearly twice as much to borrow privately through a public-private partnership as it does for the government to borrow the money for the project itself.[4]

In Ontario, the Auditor General concluded the higher borrowing costs for P3s had cost the province an additional $6.5 billion.[5]

What kind of projects would have a revenue stream? The Council describes what might not have a revenue stream: Things like affordable housing and First Nations infrastructure. It leaves projects like roads, bridges, water and sewer systems and transit wide open to for-profit investment. This could be a slippery slope. A number of hospital services are already open to public-private partnerships. All of British Columbia’s hospital P3s, for example, have some areas of non-clinical services delivered by the private sector. Even social services are becoming open to private investment through so-called social investment.

How risk is treated also plays a big role and can deliver both money and control of a project to the private partner. A revenue stream on these projects often means that the public is paying through tolls, charges or fares. And there is a risk that not enough people will use the new infrastructure to pay for the costs.

The private sector is pretty good at is calculating risk and doesn’t take on risk cost-free. Some sort of “risk premium” is usually part of the deal. This risk premium can be steep. University of Toronto’s Matti Siemiatycki and Naeem Farooqi looked at how much Ontario was paying for the private sector to assume risk in public-private partnerships in a 2012 article. Looking at 28 projects they found the government assumed a 49% risk premium.[6]

These means that when the government is deciding between using a public-private partnership or traditional delivery mechanisms, 49% of the value of the project cost was added to the anticipated cost of delivering the project publicly. This amount is the supposed extra “risk” the public would have to take on to deliver the project publicly.

Using an artificial risk adjustment to significantly inflate the assumed cost of carrying out a project publicly allows a P3 bidder to significantly inflate their own bidding costs. This can provide a very large financial protection to the private operator to cover any risk in delivering a project “on time and on budget.”

This all assumes the P3 would assume the extra risk, but just how much risk is actually transferred is questionable. In most Canadian cases the private partner does not assume real risk for projects, such as risk for how many people might make use of the infrastructure.

Despite claims about risk transfer, if something goes terribly wrong it is always the public who assume the risk. Government will not shut down a bridge, water system or a highway if the private partner gets in financial trouble. The real private partners are usually hidden behind “special purpose” consortiums to ensure the cost of failure does not fall back on the individual corporate members of the consortium. While the consortium might face limited financial risk, its individual members are protected financially.

Tolling paid to private companies offers an advantage to government in that government can argue that the debt paid to build the bridge is not really government debt. Something similar happened in BC with the Port Mann Bridge. Originally planned as a public-private partnership, the Provincial government backed away during the financial crisis of the past decade when borrowing costs for the private sector went through the roof.

During a lengthy fight with BC’s Auditor General, the provincial government argued that debt for the bridge should not be on the government’s books. They said “We believe that the Transportation Investment Corporation (the owner of the bridge) is best disclosed as a government business enterprise.” The government said that because the corporation will support its operations from toll revenue collected from users, not from government subsidies its operations should not be included in the province’s summary financial statements.[7]

This has been a continuing issue as tolls remain at disappointing levels, inadequate to pay for costs. The Golden Ears Bridge public-private partnership in British Columbia has never achieved the projected traffic of 50,000 vehicles a day. Since the private operator did not take on usage risk on the project, the government continues to pick up these costs.

In some foreign examples, private firms have been willing to accept the tolling risk on roads and the outcome has not always been a happy one. In Australia, the private partners in the Sydney Cross City Tunnel did accept the usership risk but in return demanded “traffic shaping” to restrict alternatives available to drivers forcing drivers to use the tunnel.[8] Even with traffic shaping the project failed to meet revenue projections.

Chicago offers a truly dreadful example of just how much a private partner can dominate in a public-private partnership. In 2008 Chicago leased out rights to its metered parking to a consortium in return for a payment of over $1 billion. By 2013 parking rates in the downtown had risen by 117% making Chicago the most expensive city in the U.S. for curbside parking. The private partner also got concessions limiting the operation of any new public parking facilities and making the city pay if any meters are removed. In 2012 the City was charged $61 million for street closures including construction and street festivals and for the use of handicapped parking arrangements.[9]

450px-Lions_Gate_Bridge_in_Vancouver,_B.C._(2013)_WikiMediaCommons

There have also been problems in Ontario where in 1997 the Conservative government signed a 99-year lease for the management of Highway 407 for what has been described as a “fraction of its true value.”[10] In 2004 an arbitrator ruled that the private partner had the authority to raise tolls without consulting the government.[11] The private partner charges 26% interest on unpaid tolls and the provincial government has agreed to act as a collection agency for the private operator by denying driver’s licenses to people who didn’t pay up. The company has been slapped by the courts for its collection practices.[12]

The argument is made that higher costs for P3s are worth the price because public-private partnerships deliver projects “on time and on budget.” On time and budget is questionable. For example, one feature of P3s is that project budgets often rise dramatically before the contract is signed.

To illustrate this point, the William R. Bennett Bridge P3 in Kelowna was announced with a cost of $100 million.[13]  After the contract was finally signed the cost came in at $144.5 million.[14] In 2005 the BC government announced costs for the Canada Line transit corridor at $1.72 billion.[15] In 2009 the provincial government announced the project was “on budget and ahead of schedule” at a cost of $2.054 billion.[16]

When things go over time and budget, any guarantees can go out the window. While the Evergreen Line transit project in Metro Vancouver was completed within its announced budget, the BC government has refused to release information on mediation with the private partner when the Evergreen Line went well over the contracted delivery time.[17]

The very large risk premiums discussed earlier for these projects also go a long way in paying the price for on time delivery. When a P3 operator builds very large costs for anticipated risk into its contract costs it is giving itself a substantial cushion of spending to make sure it delivers on time.

With these multiple issues and questions how did the Canada’s Minister of Finance’s Advisory Council come to the conclusion that private investment in public infrastructure through public-private partnerships was a good idea? The large majority of the 14-member committee may not have been in a conflict of interest because they were only providing “advice” but their interests were clearly aligned with their findings.

Eight of the 14 Council members came from the business community, including management consultants, bankers, investment bankers and other companies directly involved with P3s. The Council Chair, Dominic Barton, is reported as working for McKinsey and Company, a consulting firm that has promoted public-private partnerships. Work by McKinsey is the most frequently cited source in the report.

Maclean’s magazine said Barton’s role in the advisory committee was “singular.” It continued, “The Department of Finance confirmed to Maclean’s that McKinsey consultants are providing the Council, which has no budget of its own, with ‘research analysis and administration’ – all for free.” Why would McKinsey do this work for free, the article asks and goes on to observe, “For private investors, including McKinsey clients, there is an obvious attraction in the prospect of up-front government money providing a measure of security in what might otherwise look like risky infrastructure ventures.”[18]

Both the Canada Pension Plan and Caisse de dépôt et placement du Québec are represented on the Council and both have invested heavily in P3s earning very high returns. The Caisse has plans for a privately operated transit system in Montreal (Reseau électique métropolitain project) which has already seen expected costs jump by $400 million.[19]

The Chief Executive Officer of Toronto’s controversial MaRS Discovery District is also on the Council. The MaRS project was bailed out with government loans after the private partner failed to come through with funding.[20] Another Council member works for the World Economic Forum, an enthusiastic international supporter of public private partnerships.

There appears to have been no one on the Council likely to challenge a public-private partnership orthodoxy. It would not have been hard to find people with a different point of view. No one from municipal governments was represented on the group. No one from labour was asked to participate. There was no room on the panel for the many economists and academics who have raised questions about privatizing public services.

Even the BC government, one of the earliest proponents of public-private partnerships has stepped back somewhat. While still supporting P3s a BC review of Partnerships BC, the governments P3 agency, raised significant questions about the way projects were chosen, evaluated and being delivered. The review committee called for Partnerships BC to have less influence in municipal decisions to use public-private partnerships.[21]

Then there is the issue of secrecy. Much of what goes on in these projects is hidden behind “commercial confidentiality,” but secrecy does not stop there. In BC, critical financial information is withheld from the public as a “cabinet secret.”[22]

In Ontario, the Globe and Mail described the government’s treatment of P3 hospital information as “near obsessive secrecy.”[23]

In Saskatchewan, academics studying the Regina water treatment plant P3 complained about information being withheld from the public calling it a “complete misuse” of freedom of information legislation. “Information opacity and democracy is not a good combination,” they concluded.[24]

Currently, in Canada, these private arrangements with governments are not necessarily covered by Freedom of Information and Privacy provisions. If the Federal government proceeds with a P3 agenda, which is likely, at a minimum Canadians should demand transparency legislation reporting on the real costs, benefits and outcomes.

At least one province has acted on the secrecy issue. The former government of Manitoba in 2012 passed its Public-Private Partnerships Transparency and Accountability Act. While the legislation could have gone further it did demand a preliminary analysis, outlining the risks, costs and benefits of using a P3 agreement. Public consultation was required and the involvement of the provincial auditor was mandated.

In the UK, some companies providing public services are at least partially subject to Freedom of Information legislation. The recent legislative review of British Columbia’s Freedom of Information legislation recommended that the government “Consider designating all publicly-funded health care organizations as public bodies under FIPPA.”[25] This would ensure that FOI rules apply. It would at least be a beginning and could be applied to private corporations delivering public infrastructure services in the federal government plans.

While it may be obvious why investors, bankers and management consultants are enthusiastic about P3s, reasons for government support for the program are more subtle. Here’s why:

  1. First, these are long-term projects, often with a hefty payout at the end of thirty years. They permit the cost of projects to be kicked down the road. It is “buy now pay later: with the cost being shifted for a generation.
  1. Second, if the project is paid for by tolls or charges that go directly to a private company, then it doesn’t show up as taxes or debt, both of which governments want to avoid. The public still has to pay for it. In other words, the taxpayer still has to reach into their pocket to pay the private operator.

Regardless of the reason for public-private partnerships, public services need public scrutiny to protect the public interest. This even more important when these services are delivered by profit-driven corporations at potentially significantly higher costs to the public. The bottom line is that corporations are not structured to operate for the public good. They are structured to operate for their own interests.

In conclusion, it is hard to improve upon a sentence from an Edmonton Journal editorial in 2014: “There are three “Ps” in the phrase public-private partnership, but there is no question that the “public” piece of the equation should rule when it comes to matters of openness, transparency and Edmontonian’s right to know.” The same should be true for all Canadians.[26]

*** *** ***

[1] Reynolds, Keith, Gaetan Royer and Charley Beresford, “Back In House: Why local governments are bringing services home,” Columbia Institute Centre for Civic Governance, 2016. http://columbiainstitute.ca/resources/back-house-why-local-governments-are-bringing-services-home

[2] New Plan for a Strong Middle Class, 2015. https://www.liberal.ca/files/2015/10/New-plan-for-a-strong-middle-class.pdf

[3] Advisory Council on Economic Growth, Unleashing Productivity through Infrastructure, October 2016. http://www.budget.gc.ca/aceg-ccce/pdf/infrastructure-eng.pdf

[4] BC Auditor General, “The 2014 summary financial statements and the auditor general’s findings,

October 2014. http://www.bcauditor.com/sites/default/files/publications/reports/AGBC%20ROPA-FINAL.pdf

[5] Auditor General of Ontario, “Infrastructure Ontario—Alternative Financing and Procurement” (2014). http://www.auditor.on.ca/en/content/annualreports/arreports/en14/305en14.pdf

[6] Siemiatycki, Matti and Naeem Farooqi, “Value for Money and Risk in Public–Private Partnerships,” Journal of the American Planning Association, 13 September 2012.

[7] “Bridge project issue for BC auditor general,” CBC News, 29 September 2011. http://www.cbc.ca/news/canada/british-columbia/bridge-project-issue-for-b-c-auditor-general-1.1127248

[8] Ergas, Henry, “Cronyism on the sly,” The Australian, 30 October 2009. http://www.theaustralian.com.au/opinion/cronyism-on-the-sly/story-e6frg6zo-1225792583411

[9] Farmer, Stephanie, “Cities as risk managers: the impact of Chicago’s parking meter P3 on municipal governance and transportation planning,” Environment and Planning A, 2014, Volume 46, pp 2160-2174. http://blogs.roosevelt.edu/sfarmer/files/2013/02/Final-Cities-as-Risk-Managers.pdf

[10] Cohn, Martin Regg, “PC blunder over Highway 407 looms over Liberals on Hydro,” Toronto Star, 30 March 2015.

[11] Vining, A.R. and Anthony E. Boardman, “Public-Private Partnerships in Canada: Theory and Evidence,” UBC P3 Project, Working Paper 2006 – 04. http://d3n8a8pro7vhmx.cloudfront.net/cupebcvotes2014/legacy_url/950/2006_04_vining.boardman.pdf?1460990474

[12] Mandel, Michelle, Hwy. 407 fees decision affects ‘staggering’ number of motorists, Toronto Sun, 11 November 2014

[13] BC Government, “SNC-Lavalin Chosen to Deliver William R. Benett Bridge,” press release, 29 June 2005

[14] BC Government, “Premier and Bennett open William R. Bennett Bridge,” press release, 25 May 2008

[15] BC Government, “Further Assessment on RAV Line,” press release, 19 April 2005.

[16] BC Government, “BC Celebrate Near Completion of Canada Line,” press release, 27 March 2009.

[17] Mackin, Bob, Liberals mum on mediation and Evergreen Line costs, Business In Vancouver, 20 September 2016, https://www.biv.com/article/2016/9/liberals-mum-mediation-and-evergreen-line-costs/

[18] Geddes, John, This one’s on the house, Maclean’s Magazine, 14 November 2016, page 22.

[19] Scuffham, Matt, Caisse warns Montreal transit project to cost more, Globe and Mail, 25 November 2016.

[20] Auditor General of Ontario, MaRS Loan Presents Financial Risk to Taxpayers, Auditor General Says, Media release, 9 December 2014. http://www.auditor.on.ca/en/content/news/14_newsreleases/2014news_3.06.pdf

[21] Milburn, Peter, Chair, Executive Steering Committee, Internal Audit & Advisory Services, Letter to Hon. Michale de Jong, QC, BC Minister of Finance, subject: Review of Partnerships BC, 23 October 2014. http://www.fin.gov.bc.ca/iaas/pdf_docs/PBC%20Steering%20Committee%20Recommendations.pdf

[22] This was the response given by the Province to several Freedom of Information requests by the author.

[23] Campbell, Murray, “Queries raised about new hospital deserve answers,” Globe and Mail, 8 January 2008.

[24] Lypny, Natascia, “P3 referendum a ‘war of numbers,” Regina Leader Post, 7 March 2015.

[25] “Report of the British Columbia Special Committee to Review the Freedom of Information and Protection of Privacy Act,” May 2016. https://www.leg.bc.ca/content/CommitteeDocuments/40th-parliament/5th-session/foi/Report/SCFIPPA_Report_2016-05-11.pdf

[26] “LRT deal can’t be secret,” Edmonton Journal, 15 October 2014.


About Centre for Civic Governance

The Centre for Civic Governance works to support community leadership meeting today’s social and environmental challenges: climate change, Canada’s increasing equity gap, and shifting social trends. At the Centre for Civic Governance, our goal is to strengthen Canadian communities through sharing best practices, providing tools for locally elected leaders, and progressive policy analysis. We strive to provide knowledge and information to make real and positive social change.