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Less ideology, more case studies:some real world results Blair Redlin Canadian Union of Public Employees (C.U.P.E.) Public-Private Partnerships Conference.

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Presentation on theme: "Less ideology, more case studies:some real world results Blair Redlin Canadian Union of Public Employees (C.U.P.E.) Public-Private Partnerships Conference."— Presentation transcript:

1 Less ideology, more case studies:some real world results Blair Redlin Canadian Union of Public Employees (C.U.P.E.) Public-Private Partnerships Conference Canadian Institute Vancouver, B.C. November 19th, 2007

2 CUPE Research 2 COPE-*491 BR/MOH What are P3s? Many definitions Key feature is multi-decade private operation of public services (operational contracts of 10-40 years in duration. Generally 25 or 30 years). Often through taxpayer funded performance payments In Canada, most P3s are design/build/operate (d.b.o.) and many include some private finance (d.b.f.o.). Yet most risk is in construction and design phase which can be mitigated through design/build. Design/build is not a P3 method Public and private sectors have always partnered to build infrastructure in Canada

3 CUPE Research 3 COPE-*491 BR/MOH Top Arguments for P3s Cost control Risk transfer Value for Money Debt management Efficiency

4 CUPE Research 4 COPE-*491 BR/MOH Cost control Project Decision Point budget Current Estimate Abbotsford Hospital and Cancer Centre$211,000,000 $355,000,000 Canada Line$1,550,000,000 $2,000,000,000 Golden Ears Bridge $600,000,000 $808,000,000 Sea-to-Sky Highway Project$600,000,000 $789,000,000 William Bennett Bridge$100,000,000 $170,000,000

5 CUPE Research 5 COPE-*491 BR/MOH Cost control Increase in costs from OBC (opening business case) to 1999-2000 (U.K. hospitals) Source: Will the N.H.S. be privatised? by Professor Allyson Pollock, Centre for International Public Health Policy University of Edinburgh, January 26, 2006 Trust OBC Cost (m) Current Cost (m) Change (%) Swindon45148229 Worcester49116137 South Manchester 4089123 Norfolk90200122 Bishop Auckland2652100 South Tees6510663 North Durham609660 Bromley8012050 Dartford9713741 Calderdale557740 Wellhouse304033

6 CUPE Research 6 COPE-*491 BR/MOH Procurement negotiations: in the public interest? P3 process lengthy, bureaucratic, complex Confidential negotiations with single preferred proponent for final contract After years of prep., public owner and managers mostly concerned that the P3 succeed Result: public owners out-negotiated

7 CUPE Research 7 COPE-*491 BR/MOH Public Sector Cost Control Kamloops Centre for Drinking Water Quality As public project, 20% cheaper than projection for P3 ($48.5 million, not $60 million) As a P3, Whistler project costs jumped from $22 million to $36 million in just one year. As a public project, construction contract 11% less than engineering estimates Hamilton water and wastewater saved $1.2 million in first year of renewed public operation Seymour Capilano Water Filtration:$600 million public project. $34 million under budget!

8 CUPE Research 8 COPE-*491 BR/MOH Cost Control and Risk The case studies indicate that the potential benefits of P3s are often outweighed by high contracting costs and opportunism. These costs are often particularly high when construction or operating complexity is high, revenue uncertainty (use risk) is high, both of these risks have been transferred to the private sector partner and contract management effectiveness is poor. In infrastructure projects it rarely makes sense to try to transfer large amounts of use risk to the private sector Source: Public Private Partnerships in Canada Theory and Evidence by Aiden R. Vining and Anthony E. Boardman. U.B.C. P3 Project. Working Paper 2006-04. December 5, 2006. Sauder School of Business, University of British Columbia

9 CUPE Research 9 COPE-*491 BR/MOH Risk Transfer Our analysis of the Canadian P3 evidence indicates that the willingness of private sector firms to bear user risk declines with the level of user risk. Private sector firms will not participate in a P3 if it bears cost risk and large revenue risk. Thus, it is not surprising that emerging case study evidence from the U.K….and Australia…have found that government have not been particularly successful at shifting risk to private partners. Nor is it surprising that contract negotiations associated with attempts to shift risk were extremely costly. Source: Public Private Partnerships in Canada Theory and Evidence by Aiden R. Vining and Anthony E. Boardman. U.B.C. P3 Project. Working Paper 2006-04. December 5, 2006. Sauder School of Business, University of British Columbia.

10 CUPE Research 10 COPE-*491 BR/MOH Risk Transfer Canada Line – TransLink has ridership risk. Must pay for 100,000 riders per day (up from 40,000 on transit corridor today). City of Hamilton water and wastewater debacle – companies refused liability for sewage spills and floods. 200% risk premium in contract renewal proposal.

11 CUPE Research 11 COPE-*491 BR/MOH Risk Transfer – Metronet, 2007 Metronet Tube Maintenance P3 Regulator denied additional public money for cost overruns Consortium collapsed Risk reverts to public, since Tube must be maintained Transport for London has already provided a loan of 897 million pounds to administrator Ultimate cost of collapse for Transport for London likely to be $1.7 to $2 billion pounds (i.e. $4 billion Canadian)!

12 CUPE Research 12 COPE-*491 BR/MOH Risk Transfer …although risk transfer is the central element in justifying Value for Money and thus PFI, our analysis shows that risk does not appear to have been transferred to the party best able to manage it. Furthermore, rather than transferring risk to the private sector, PFI has, first, created additional risks to the public agency and the public sector as a whole that must increase costs to the taxpayer and/or reduce service provision, a travesty of risk transfer. Source: Evaluating the operation of PFI in roads and hospitals by Pam Edwards, Jean Shaoul, Anne Stafford and Lorna Arblaster. The Association of Chartered Certified Accountants Research Report # 84. London, 2004

13 CUPE Research 13 COPE-*491 BR/MOH Value for Money? Value for Money reports lack credibility. Too often they are justification reports…especially since theyre produced AFTER the final contract is signed. They are often ….pseudo-scientific mumbo jumbo where the financial modeling takes over from thinking…it becomes so complicated that no-one, not even the experts, really understands whats going on Jeremy Colman, Deputy Controller and Auditor General National Accounting Office – U.K. Financial Times June 5, 2002

14 CUPE Research 14 COPE-*491 BR/MOH Value for Money Sea-to-Sky highway P3 – Partnership B.C.s V.F.M. report incorrectly assumed the cost of government borrowing is the same as the cost of capital for the P3 …the Sea-to-Sky P3 will cost taxpayers over $220 million more than a traditionally procured and financed project Source: The Real Cost of the Sea-to-Sky P3 by Dr. Marvin Shaffer, Canadian Centre for Policy Alternatives, September 2006 Public sector borrowing always cheaper than private finance. Current Municipal Finance Authority of B.C. rate for a ten year term is 5%.

15 CUPE Research 15 COPE-*491 BR/MOH Value for Money Discount rates discount the value of money over time Partnerships B.C. rationale is discount rate should include risk premium. Discount rate is key to public sector comparator results. Is risk double-counted? Varying discount rates : Bennett Bridge – 8%. Preliminary Canada Line review - 6%. Final Canada Line - 7%. Whistler 6%. Maple Ridge 7%. Sea to Sky – 7.5%. Kicking Horse - 6.95% Abbotsford Hospital – 5, 6 & 7% U.K discount rate for all P3s is 3.5% real For an excellent powerpoint on Value for Money see: How to make the public sector advantage disappear by Keith Reynolds, CUPE Research. Presentation to the Municipal Finance Authority, March 2007

16 CUPE Research 16 COPE-*491 BR/MOH Debt Management There was once hope P3 debt could be off-book. No longer …how the accounting profession looks at P3s and how debt is treated has actually been evolving since 2003…the capital costs of our P3 projects will be treated as assets and liabilities on (the governments) books. Kevin Falcon, B.C. Minister of Transportation, B.C. Legislative Assembly Hansard. October 25, 2005 From 2008/09 U.K. public financial statements will have to abide by International Financial Reporting Standards rather than U.K. G.A.A.P. This will bring PFI projects on to the public balance sheet. In 2006, Office for National Statistics calculated the imputed value of PFI. The result increased U.K. public sector debt by 6 billion pounds. Source: Public Finance Magazine March 3, 2007

17 CUPE Research 17 COPE-*491 BR/MOH Debt or Liability? 2006 Public Accounts of B.C. show provincial contractual obligations up a staggering $21 billion in just one year…up from $34 billion in 2005 to $55 billion in 2006! What (the Public Accounts) show is the effect of the Liberal governments determination to turn to the private sector to provide services and facilities that were in the past provided by government P3s just put the bill in another pocket by Craig McInnes Vancouver Sun July 19, 2007

18 CUPE Research 18 COPE-*491 BR/MOH Efficiency A P.F.I. Transaction is one of the most complex commercial and financial arrangements which a procurer is likely to face. It involves negotiations with a range of commercial practitioners and financial institutions, all of whom are likely to have their own legal and financial advisors. Consequently, procurement timetables and transaction costs can be significantly in excess of those normally incurred with other procurement options. Source: HM Treasury, Value for Money Assessment Guide, August 2004 p. 30

19 Efficiency Kicking Horse Pass – Park/10 Mile Bridge. Fed/Prov. funding confirmed March 03. Took three years to put a single shovel in the ground Whistler Wastewater Treatment Capital costs rose from $22.5 million in Jan. 2005 to $36.5 million in June 2006 as complex P3 procurement delayed start of project.

20 CUPE Research 20 COPE-*491 BR/MOH Efficiency Millennium Line Skytrain (design/build) – took only three years to complete Canada Line (d.b.f.o. P3) – scheduled to take five years from signing of contract, but has been in P3 process since 2001, so really 8 years in total

21 CUPE Research 21 COPE-*491 BR/MOH Secretive and Unaccountable Councillor in Hamilton told he had to pay $5000 for F.O.I. request on P3 water contract with City P.W.C. financial feasibility study on Canada Line withheld from TransLink Directors Quiet deal between Epcor and Regional District of Nanaimo managers. Critical Dayton and Knight report not shared with Whistler councillors Maple Ridge process ruled illegal by B.C. Supreme Court

22 CUPE Research 22 COPE-*491 BR/MOH F.C.M. conclusion August 2007 There is no evidence to suggest that P3s consistently cost less or provide better services than traditional public projects P3s do not offer municipalities a magic solution to the problem of securing additional funds for infrastructure P3s give the responsibility for financing infrastructure to the private sector, even though traditional municipal financing is simple, relatively easy, and less costly than private sector financing Long-term P3 arrangements, which often keep proprietary information out of the public domain and put the day-to-day management of public services in private hands for periods of 20 to 30 years, can reduce flexibility, transparency, and accountability for local governments. Source: Public-Private Partnerships and Municipalities: Beyond Principles, a Brief Overview of Practices by Dr. Pierre J. Hamel for Federation of Canadian Municipalities. August 31, 2007

23 CUPE Research 23 COPE-*491 BR/MOH Some Key Resources Value for Money? Cautionary Lessons about P3s from British Columbia by Stuart Murray. Canadian Centre for Policy Alternatives. June 2006 Evaluating the Operation of PFI in Roads and Hospitals Research Report 84. The Association of Chartered Certified Accountants, London. 2004 Public Water for All: The Role of Public-Public Partnerships Transnational Institute, Amsterdam. March 2006 Public Private Partnerships in Canada Theory and Evidence by Aidan R. Vining and Anthony E. Boardman. Sauder School of Business, U.B.C. P3 Project. Working paper 4. December 2006. Public-Private Partnerships and Municipalities: Beyond Principles, a Brief Overview of Practices by Dr. Pierre J. Hamel. Federation of Canadian Municipalities, August 2007.

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