At what cost? Ontario pushes ahead with P3s

The Ontario government is once again touting the wonders of using public-private partnerships (P3s) to build infrastructure.

In an update released September 10, Infrastructure Minister Laurie Scott said the province has $65 billion worth of projects in the pipeline to build new transit, expand hospitals and construct a new correctional facility in Thunder Bay.

There is no dispute that Ontario needs new infrastructure, and lots of it. Unfortunately, the P3 model invariably costs more than traditional procurement. So who does benefit from building with P3s?

P3s can offer a political benefit to governments, who can take on large debt repayment obligations without those debts appearing on their books. Public-private partnerships also deliver economic benefits to corporate law firms and financiers, who earn high fees arranging complex contracts and lending money to government at rates higher than government normally pays.

But for the people who actually pay for P3s—like the people of Ontario—they are costly disasters that drag on for decades.

It is very hard to get information about P3s. Details of bids are confidential, and this lack of transparency makes it difficult to assess whether the public is really receiving value for money on P3 contracts. But on one occasion, five years ago, Ontario’s auditor general got a chance to see the data behind all of the province’s P3s. What she found was illuminating.

Looking at $36 billion worth of P3s contracts, Auditor General Bonnie Lysyk estimated that the province had paid $8 billion too much for 74 projects. She noted that “tangible costs (such as construction, financing, legal services, engineering services and project management services) were estimated to be nearly $8 billion higher than they were estimated to be if the projects were contracted out and managed by the public sector.”

In other words, Ontarians had paid an average premium of 28 per cent more for these projects than they needed to.

P3 supporters objected to Lysyk’s numbers, arguing that she had failed to fully appreciate the risk companies take on by signing long-term contracts with government. Those risks centered on the possibility that a given project might not go exactly as planned, or that cost estimates put forward in bid documents might turn out to be too low.

Any project can go wrong, and costs become increasingly harder to estimate when companies not only design and build projects, but are also contracted to operate them over several decades, as is frequently the case with hospitals. Knowing this, private companies aiming to maintain a consistent rate of return have little choice but to put a very high price on the risks they take on. That way, if things go wrong with a project, they still turn a profit. If things don’t go wrong, they get an additional windfall profit.

Traditional government procurement doesn’t work that way. If the costs of a traditionally-procured project rise unexpectedly, government pays for the cost overrun. But if things go according to plan, there is nothing extra to pay, and government saves the money the contractors would have otherwise reaped as a windfall profit under the P3 model.

The price of risk is one reason P3s cost more than traditional procurement. But this pales in comparison to the higher cost of borrowing money privately to finance projects.

Compared to private lenders, governments can borrow money at much lower rates. When borrowing is stretched out over decades, as is usually the case with infrastructure projects, even a small difference in rates adds up to a big difference in overall costs. In the auditor general’s 2014 report, financing charges accounted for 80 per cent of the extra cost of the P3s she looked at.

It’s no wonder P3s have been likened to buying a car with a credit card. For Ontarians who pay the bills, the cost is just too high.

 

Randy Robinson is Ontario Director of the Canadian Centre for Policy Alternatives. Follow him on Twitter at @Randyfrobinson.

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