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Beware of foreign private self-servicers: the league of public-private confusion profiteers after the Dutch Deal of 1963!
Public-private partnerships are joint ventures between the public sector and a private company. A particular public sector group such as the government, hires the public company to build an infrastructure or services project. This is known as privatization.The company continues delivering the service after the project is finished. The public acts as a watchdog to assess the quality of services.
Many lobby groups in favour of P3s say hiring a private contractor to provide a public service is more efficient. They also say it helps lower taxes, and can help put more money back into the local economy. Some lobby groups also argue private companies can meet the public's demands faster than government. P3s are now widespread in the United Kingdom and Australia. Canadian provinces like Ontario, Nova Scotia, and British Columbia are now experimenting with P3s.
Source: National Council for Public Private Partnerships
The Canadian Union of Public Employees (CUPE) says nothing about public-private partnerships makes them better than government-funded public services.
It says contrary to some claims, P3s actually end up costing the public more than regular services. This is because once a service is privatized, the company running it can set charges. This means consumers can see fee hikes, CUPE says. It also says quality of services often declines after they are privatized. An additional problem is that P3 contracts are kept secret, it says.
Private companies maintain P3s help take the blame off government if something goes wrong, but CUPE says that's not the case.
Source: Canadian Union of Public Employees
An inconvenient fact: P3s cost more, deliver less
July 27, 2006 02:14 PM
This opinion piece appeared in the July 27 National Post.
By Paul Moist
When the facts don't serve the privatization lobby, the privatization lobby ignores the facts.
Faced with higher costs and lower service levels, proponents of public private partnerships (P3s), such as TD Bank economist Don Drummond (“The P3-rebuilt city”, July 26), have taken to arguing that, magically, governments are off the hook for financing P3s. As if the private sector “pays” for them!
Drummond’s piece follows Gordon H. Homer’s proposal that accounting rules be changed to reduce transparency and hide P3s’ higher costs ("Why not P3?" National Post, July 6, 2006).
At first, proponents used "off-book financing" to hide the additional public debt of P3s, but then public sector accountants caught on to that trick. Then proponents claimed that P3s would cost taxpayers less, but now even they admit that costs are higher. Now they argue that P3 projects will be more responsive and accountable, but instead the public faces increased costs and reduced services. Added to that, basic accountability information remains hidden under commercial confidentiality clauses.
Even Mr. Drummond’s own bank recently acknowledged that P3s generally cost more than public sector projects. It stated that “the concern that P3s can cost more is true at face value [but] it is not the cost, but the net benefit, which is the most relevant benchmark in considering” whether to use P3s. The evidence shows that P3s in Canada, Australia and the United Kingdom consistently result in higher costs and poorer service.
One P3 hospital in Brampton, Ont., is estimated to cost an extra $124 million in private sector borrowing charges alone. A P3 agreement between Philip Utilities and the City of Hamilton took months to negotiate, and the annual administrative and legal costs of maintaining the project were budgeted at $200,000. That was about 30 per cent of total annual savings promised by the company. There are countless other examples.
The real problem for the privatization lobby is that the public is beginning to recognize that P3s cost more and deliver less. This explains the renewed P3 push, now dressed up to “solve” the municipal infrastructure deficit.
The privatization lobby has its work cut out for it. Statistics Canada recently showed that every dollar invested in public infrastructure projects generates an average of 17 cents in savings a year to Canadian businesses. This is a better return than private sector projects provide, but this is an inconvenient fact, so P3 proponents ignore it.
Ultimately, the core responsibility of the public sector should not be to subsidize private sector companies with high-return and low-risk projects or to bail out private sector companies. Yet this is what happens with P3 projects.
Most P3s really don't transfer risk to the private sector, since government will always be there to pick up the pieces and since governments are required to cover the cost of services guaranteed to their citizens. The driving force behind P3s is that the private sector wants guaranteed higher returns with any risk falling to taxpayers.
Who carried the risk in Hamilton? Its citizens, as the company changed ownership four times. The P3 project was the site of the largest-ever sewage spill in Lake Ontario. The full cost of the cleanup and details of the city’s attempt to hold the company responsible have been kept secret. Water and wastewater systems are now back in-house.
It is true that municipalities have budget constraints, but this is mostly because the federal and provincial transfers to municipalities have dropped from 26 per cent of their revenues in 1995 to 17 per cent of their revenues in 2005. This decline in share represents about $5 billion in lower transfers and is the cause of the real fiscal imbalance in Canada – about the cost of the recent 1 per cent cut in the Goods and Services Tax.
The federal government could eliminate the infrastructure deficit in less than a decade by transferring the amounts of the GST cuts (which will be almost $10 billion a year) to the municipalities instead of implementing tax cuts that disproportionately benefit the wealthy.
But again, some facts don’t fit the privatization bill.
Before proceeding with more P3s, Canadian governments should undertake cost-benefit analyses that compare all the costs and benefits of the alternatives. They should stop relying on the inadequate and sloppy analyses conducted by pro-P3 groups such as Partnerships BC and rely on ones by objective bodies such as auditors general.
Finally, let’s drop the fantasy that P3s are open, transparent and accountable. Health groups faced a long court battle to get basic financial information about a P3 hospital in Ontario – information that should have been readily available if it was a public project. And Prime Minister Stephen Harper’s Conservatives as well as the Liberal Party recently rejected our proposals to increase the transparency and accountability of contracts, privatization and P3s deals as part of their proposed Federal Accountability Act.
Is it any wonder that Canadians are highly skeptical about P3s and their privatization agenda?
Paul Moist is national president of the Canadian Union of Public Employees (CUPE), Canada’s largest trade union.
|Risks to the Public Partner: P3s Are Not a Low-Risk Option|
P3 supporters share the assumption that the party best equipped to cope with a given risk should bear that risk. In an ideal P3, since the government pays a fixed amount, it is the private partner that bears the risk of cost overruns, delays or labour shortages. The private partner should possess superior management and technical expertise, and should thus be better equipped than the government to address this risk.
In fact, governments face significant risks. When a company secures private financing, a government is protected from risk only to the extent that the private partner is able to absorb potential financial difficulties. If the private partner defaults or fails, or is unable to meet the cost of continuing with a necessary project, the public has no choice but to provide a bail-out or to take over the project., often at a cost of millions.
The City of Cranbrook, BC used a P3 to construct a new 4250-seat arena. The private partner had difficulty securing financing and meeting construction deadlines, and suffered cost overruns. Ownership changed hands several times, and fees increased from what was charged at city-owned rinks. In March 2007, the City signed a termination agreement and brought the arena under City control.
In 1998, Guelph signed a DBFO deal with Nustadia Developments to provide a $21 million arena facility. The City paid half of the initial construction cost, and Nustadia was responsible for the rest of the financing. In 2001, Nustadia was unable to make its payments, and the City was forced to take over its loan and capital tax payments at a cost of almost $4 million over four years. In 2005, Nustadia walked away from the deal completely, leaving Guelph with $9 million in unanticipated debt. In addition, in order to build the arena, the City had to buy the adjacent mall, which cost $1.7 million plus $500,000 to 600,000 in annual operating losses.
In California, one highway P3 deal was extended from 35 to 45 years after cost increases meant that the private partner was no longer earning its expected 18.5% rate of return.
Governments can consider the size, equity and cash flow of bidders and subsidiaries in awarding P3 contracts, but it is impossible to prevent a corporation from gaining or losing assets, selling or losing equity, or re-organizing such that the P3 contract is transferred to a subsidiary. Ownership of Hamilton-Wentworth's 10-year water services P3 contract changed hands several times before the agreement was finally severed in 2004.
The Negotiating Advantage of the Private SectorThe Complexity of P3 Contracts
P3 contracts are extremely complex, and a P3's effectiveness in sharing risk fairly depends greatly upon the specific structure of the agreement. For example, if a project is perceived to be high risk, the private partner may insist on a higher rate of return or a certain guaranteed profit, which would transfer some of the risk back onto the public partner.
The private sector has a considerable advantage in experience and expertise in structuring P3 deals. For example, one of the bidders in Edmonton's Southwest Recreation Complex project is a group headed by Forum Leasehold Partners Inc., a nationwide company with numerous P3 holdings, including a $225 million project in Ottawa, while this would be the City's first attempt to structure a P3 deal of this sort.
Given the complexity of P3 deals, a relative lack of experience and expertise puts the public sector at a major disadvantage. In Nova Scotia, a highly complex school construction P3 deal went to arbitration several times, and as a result schools lost the right to cafeteria and vending machine profits, and saw the hourly rate for the rental of school sports facilities rise from $7 to $57.
Nova Scotia had no idea it was conceding these terms when it negotiated the contract.
Even in the UK, where PFIs make up 15% of all infrastructure spending and public sector expertise is concentrated in a government corporation, a recent House of Commons report indicated that the private sector possesses a major negotiating advantage, and that this has resulted in delays in the tendering process, added costs to the public, and inaccurate cost and revenue projections.
On a related note, the Federation of Canadian Municipalities emphasizes that one of the key factors in apportioning risk between public and private partners is the capitalization rate granted to the private partner, i.e. the percentage of the total capital cost that the government pays each year. A higher capitalization rate means that the private partner receives a greater guaranteed return in the project’s early stages. When the company's capital investment is repaid faster, it is protected from radical fluctuations in costs or revenues. The public and private partners have opposing interests in determining the capitalization rate, and the accuracy of cost and revenue projections is crucial. Once again, the private sector has a resource and negotiating advantage, as is demonstrated by the number of P3s that have proven unfavorable to the public sector.The Cost of Developing Proposals and Contracts
It is enormously expensive to evaluate and develop P3 deals, in terms of both real costs and delays. In developing Abbotsford's 35-year hospital P3 contract, lawyers and consultants were paid $24 million before the contract was even signed
In Calgary, in the time between the announcement that the new South Health Campus hospital would be considered as a P3 and when the P3 option was ruled out, project costs had soared from approximately $500 million to over $1 billion. In Edmonton, the City spent $1 million and took close to a year to evaluate P3 options for the construction and operation of a badly needed new transit garage. In that time the estimated cost of the project has gone from just over $50 million to well over $90 million.
Calgary opened the $5.8 million Radisson Park School this year, announcing it as a success. Contract negotiations on that project took two years.
Britain's House of Commons Committee of Public Accounts
released a report this October indicating that the cost of the tendering process has reduced the level of competition for P3 contracts, and that the average tendering time for projects from 2004 to 2006 was three years.
Some provinces have taken steps to concentrate and centralize public expertise in evaluating and structuring P3 proposals. The BC government has established Partnerships BC, a government-owned corporation dedicated to facilitating and developing P3s. Ontario Infrastructure is a similar arm's-length Crown Corporation. In Alberta, the Capital Planning Initiative (CPI) provides support to Alberta Infrastructure, but does not provide any support to municipalities. The British House of Commons report indicates that this sort of centralization of expertise does not mitigate against the private sector's advantage.More:
Cost and Quality: P3s Lead to Higher Costs and Lower Quality Than Public Service
How P3s Erode Transparency and Accountability
Loss of Flexibility: P3s Reduce Public Control Over Services and PlanningGet Informed and Take Action
Current P3 Projects in Alberta: More Expensive, Less Effective