The problem at the heart of Ontario’s gas plant fiasco: public-private partnerships

So. Former McGuinty government Finance Minister Dwight Duncan is belatedly celebrating the anniversary of his departure from government to the more lucrative world of the private sector by touting the benefits for public services of – wait for it – public-private partnerships.

This from the man who, as Minister of Energy, was the driver behind the disastrous foray into privatization of electricity generation that led, inevitably, to the gas plant cancellation scandal.

Ontario has spent so much time figuring out what happened after the cancellation of the plants that we’re in danger of forgetting what happened before the cancellation, and why.

Under Duncan, the Ontario Ministry of Energy issued a request for proposals for the gas plants in 2004. It awarded the contracts in 2005. The tender process and the resulting contracts were unusual, to say the least.

Under the tender process,the only entity in the province with any experience in building large generation projects – Ontario Power Generation – was prevented from bidding. It was not even permitted to participate as a partner with any of the proponents.

The RFP contained no restrictions at all with respect to the location of the plants. That, along with the land acquisition and approval process, was entirely the responsibility of the bidder.

The contracts – as the government subsequently realized, to its chagrin – effectively guaranteed the proponents’ anticipated profits and transferred to the Ontario Power Authority – and ultimately electricity ratepayers — all of the risk associated with fluctuating demand.

With a guarantee that the successful bidders would have no experience with major electricity projects in Ontario and with a guarantee that the proponents could build the plants anywhere permitted by local zoning by-laws, the process was a community planning accident waiting to happen.

And it was a certainty that any interference with the private sector’s guarantee of profits would be extremely expensive for the government.

A careful reader of the documents issued in 2004 and the contracts awarded in 2005 could have predicted what happened in 2010 and thereafter.

Why does this matter now that the bills have been paid and the focus has shifted to the hunt for culprits?

It matters because all of this has happened before. It matters because the issues raised by the privatization of electricity generation as a public service are not unique to the gas plant scandal.

And it matters because we risk yet again learning nothing from the failure of yet another high-profile experiment with public-private partnerships.

The problems have nothing to do with gas plants. They have to do with a fundamental issue in any contractual relationship to provide a public service.

Any time a public service is delivered by a third party, regardless of the circumstances, it creates what is referred to as an “agency problem”. It puts the delivery of the service under the control of someone – an individual or corporation – whose objectives are not the same as the government’s.

The private contractor’s principal objective is to fulfill the terms of the contract at the lowest possible cost, thereby generating the largest possible profit. That’s why the terms of these contracts are so important. That’s why these contracts routinely run to hundreds of pages.

And that’s why the overhead costs associated with creating these contracts – as much as 10% or more of the total value of the contract – are so high.

These contracts are so complex because they attempt to foresee all of the ways in which the goals of the government and of the contractor might differ, and address those differences.

That is a very tall order. And the more complex the public service being privatized, the more difficult it is to pull off.

For some services, the issues are relatively straightforward. In a building cleaning contract or a food services contract, for example, you can specify standards, inspect for compliance with those standards, and decide not to renew the contract if expectations are not met.

That’s not to say it is either inexpensive to police the contract, or cost-effective overall to pay someone else to do what you could do yourself. And often what seem even to be relatively simple short-term contracts carry inherent risks. Think, for example, of the competitive environment the next time Toronto’s garbage collection contract comes up for bidding, and only one bidder has both the experience and the trucks to do the work.

But as the service becomes more complex, the number of ways things can go wrong grows. It becomes much more difficult to anticipate the problems.It becomes more costly to ensure that the government’s expectations are being met – and the consequences of failure to meet expectations become more significant.

Think about the Harris government’s economically disastrous foray into private provision of new hospitals in Brampton and Ottawa.

Think about Highway 407, a deal which effectively gave the government no influence over the tolls charged for the use of a public highway.

Think about the Ornge ambulance service.

These deals didn’t go south because the people who made them were stupid. They went south because the government, in each instance, started out with a solution – private-public partnerships – for which there wasn’t a problem.

And because the primary objective was not to ensure the effective delivery of a public service at the lowest cost. The primary objective was to get costs ‘off book’ bydelivering that service through a public-private partnership, .

Starting out with public-private partnership as a solution, without reference to any “problem”, represents a denial of the fundamental conflict of objectives inherent in such arrangements. In light of these basic agency problems, it is not possible to protect the public interest in a service if the overriding objective is to privatize its delivery.

The gas plant scandal is the poster child for how badly things can go wrong when solutions precede problems, when fundamental objectives clash, and when the public interest cannot be adequately protected.

 

eEconomist Hugh Mackenzie is a CCPA Research Associate.

 

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