Archived columns and blog posts by Matt Elliott

We must ask tough questions about the cost of public-private partnerships

By: Metro Published on Wed Dec 17 2014

In the wake of the Ontario auditor general’s 2014 report, I've got a lot of questions about the province's use of public-private partnerships, or P3s.

Like, for instance, did P3s really cost the Ontario government more than would have been spent had they not bothered with them in the first place? Like, EIGHT BILLION DOLLARS more?

That’s a big question with big implications. An extra $8 billion could have paid for the entirety of the downtown relief line and knocked off a chunk of the TCHC’s capital repair backlog. But in trying to find an answer, I’ve just been left with more questions.

To explain, let's start with the basics.

What is a P3 anyway?

Public-private partnerships are all the rage these days. The Ontario government calls them AFPs (alternative financing and procurement), but I’m going to keep calling them P3s because everyone else does.

Here’s a simplified way to understand them. Imagine you’re a homeowner in need of repairs and renovations. You need electrical, plumbing, roofing, landscaping — your whole house is falling apart, basically. I don’t even know why you bought the damn thing.

You’d have two options for getting the work done. You could co-ordinate the project yourself, sourcing the necessarily materials and finding electricians, plumbers, roofers and other handy people to fix your house. This is the basic equivalent of how projects have traditionally been delivered by the government.

But there’s an alternative. Instead of trying to co-ordinate several people from several trades, you could just find one person and pay them to handle the entire project. You’d agree on a total price — probably a whole lot — and they’d be responsible for all the sourcing of materials and subcontracting of labour.

The benefit of the former approach is that, assuming everything goes well, it would be cheaper. There’s no middleman demanding a profit margin. The benefit of the latter is that you’re taking a lot of pressure off yourself. With a proper contract, it’s no longer your problem if your electrician disappears for a week or if your granite shipment is delayed. You’ve put most of the pressure — and most of the risk — on someone else.

That’s what a P3 does for government.

How does the Ontario government decide whether to use a P3?

When the province decides to build a fancy new something like a fancy new courthouse or a fancy new hospital, they go through the same decision process. Infrastructure Ontario (IO), the government corporation responsible for delivering these projects, does a value-for-money analysis, comparing the cost of the government financing and managing the project with the cost of just offloading everything to a private company.

It all kind of makes sense so far, right?

But this is where the auditor general started uncovering problems, because the comparisons done between traditional delivery and the P3 model don’t seem to totally make sense.

To illustrate, here’s a chart using data from the auditor’s report — it adds up numbers from the last 74 projects analyzed by IO.

The first thing to note? The base costs are exactly the same no matter what model is used to deliver the project. This makes sense because raw materials cost what they cost no matter who’s buying them. Labour is also the same under both models, because generally we're talking about the same construction crews regardless of whether the project is a P3. The only thing that changes is the manager.

After that, IO applies the P3 model’s “premium” — this is basically the private company’s profit. Governments don’t need to worry about making a profit, but capitalism demands private companies must. Then there’s a “competitive neutrality” amount which applies to the traditional model mostly because governments don’t have to factor in the cot of paying taxes to themselves. There’s also ancillary costs, which are pretty well the same.

The two biggest differences between the delivery models come when you consider what IO calls “financing costs” and “retained risks.”

Financing costs are way cheaper with the traditional delivery model, because governments have access to absurdly low interest rates — lower than any private company could ever get.

So far the comparison doesn’t look great for P3s, but then you get to the big orange section of the chart, the part that tips the scale in favour of P3s: risk. The risk calculation puts a monetary amount to the likelihood of a project going over budget, or falling behind schedule, or just generally becoming a disaster.

Let’s not sugarcoat it. IO’s analysis assumes government is not very good at managing projects. With the P3 model, they pegged the risk of things going over budget or behind schedule to be worth about $4 billion for all 74 projects they analyzed. Under the traditional model? $18.6 billion.

“In essence,” the AG writes, “Infrastructure Ontario estimated that the risk of having the projects not being delivered on time and on budget were about five times higher if the public sector directly managed these projects versus having the private sector manage the projects.”

Five times! Infrastructure Ontario assumes private companies are five times better at managing projects than the government. That’s a giant margin. And, crazily enough, it doesn’t seem to be based on anything.

“There is no empirical data supporting the key assumptions used by Infrastructure Ontario to assign costs to specific risks,” writes the auditor. “Instead, the agency relies on the professional judgment and experience of external advisers to make these cost assignments, making them difficult to verify.”

This is the root of the problem, and the centre of the debate we should be having about P3s. It’s not about whether P3s are magical sources of free money — we know they aren’t. And it’s not about claims that the government would have saved billions if only they hadn’t use P3s, because that’s not a fair characterization either. Unless you’re willing to believe that the government could have delivered these projects with no cost overruns.

Instead, it’s about questions like this: how much is it worth to offload the risk that a project might go over budget? Is it really worth what Ontario taxpayers have been paying? And if it is, could it be cheaper to address the systematic issues that have led to government-managed projects going over budget and created this environment of risk?

Is the answer to budget overruns really to have the government declare itself incompetent and start offloading projects to private sector companies that demand a profit margin?

And here’s a tricky one: How much of this is about politicians — at any cost — wanting to avoid wearing the blame when government-managed projects run into problems?

Those are hard questions, but they’re the ones we should be asking.

It’s not about whether P3s are good or bad, it’s about whether the provincial government has been using them the right way — and for the right reasons.

This post was originally published at on 2014-12-17T00:00:00.000Z

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Matt Elliott

City Hall watcher, columnist and policy wonk in Toronto.
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