Public-Private Partnerships may not be the bargain we have been led to believe.

[Drake]

Government-managed projects could save Ontario money: Auditor-General
ADRIAN MORROW
The Globe and Mail
Published Tuesday, Dec. 09 2014, 3:24 PM EST
Last updated Tuesday, Dec. 09 2014, 9:24 PM EST

Public-private partnerships have cost Ontario taxpayers nearly $8-billion more on infrastructure over the past nine years than if the government had successfully built the projects itself.
The revelation, from Auditor-General Bonnie Lysyk, comes as Premier Kathleen Wynne stakes the province’s future on a vast construction program that will see dozens of new schools, bridges and subways built over the next decade. And it suggests Ms. Wynne can build that infrastructure more cheaply as she wrestles down a $12.5-billion deficit.

“If the public sector could manage projects successfully, on time and on budget, there is taxpayer money to be saved,” Ms. Lysyk said Tuesday at Queen’s Park.
Her audit looked at 74 projects – including several hospitals and the Eglinton light rail line – that were built using private partnerships, called Alternative Financing and Procurement (AFP), by Crown corporation Infrastructure Ontario since 2005.

Ms. Lysyk found that the province assumes there is less risk of cost overruns and other problems with AFPs than with the public sector. But she said the province actually has “no empirical data” to back up that assumption. Private partnerships, meanwhile, are more expensive because companies pay about 14 times what the government does for financing, and receive a premium from taxpayers in exchange for taking on the project.

In some cases, she said, the least expensive solution may simply be for government to get better at building infrastructure itself, rather than farming it out.
But Infrastructure Ontario chief executive officer Bert Clark said the current system is working well, and argued it would be impractical for government to directly handle several big, complex projects. Better, he said, to bring in private companies that have extensive experience with such things.

“The guys we’re outsourcing this function to, this is their core competency. This is all they do all day long, is deliver large projects. They take those risks on. That isn’t what we do,” he said in an interview. “It would be a travesty for everyone if we said, ‘Let’s go back and try to deliver our large complex projects using [public] means.”
Mr. Clark said his organization has tried to obtain hard data to compare the risks between private projects and public ones, but the government did not have such information available. Instead, he said, Infrastructure Ontario has turned to auditing firms to try to figure out what the differences in cost would be.

Economic Development Minister Brad Duguid defended this method: “It is a bit of an art, identifying risk, as much as a science.” But both he and Mr. Clark said they would still look at Ms. Lysyk’s recommendations, and see if there is anything they can do to improve their analysis. Interim Progressive Conservative leader Jim Wilson said the first step is for the Liberals to get rid of their “bias” in favour of private partnerships, and analyze projects more objectively. “They have a bias – which normally we would be accused of as Conservatives – [of] wanting to always use an alternative finance plan,” he said. “They need to get rid of the bias … You’re basically skewing all your contracts into one stream.” New Democrat Leader Andrea Horwath called on the government to go further and bring all construction back in house: “This has been a boondoggle for a decade in this province. We need to abandon this extremely flawed model.”

AFPs entail the government bringing in a private company to finance, build and, in some cases, maintain a piece of infrastructure. The private company assumes some of the risk of cost overruns, in exchange for making a profit.

[Drake]

I wonder how relevant this is to our LRT deal.

[BuildingScout]

the least expensive solution may simply be for government to get better at building infrastructure itself

This being something so easily achievable... NOT!

Seriously, the AG seems to be comparing real life costs with an imaginary alternative.

[plam]

the least expensive solution may simply be for government to get better at building infrastructure itself

This being something so easily achievable... NOT!

Seriously, the AG seems to be comparing real life costs with an imaginary alternative.

I think it's good that the AG is pointing out that there are no empirical studies to back up this assumption. The PC response was also quite interesting. But the alternative is quite tricky indeed. It's hard to get good at doing something and it's going to be expensive. The government may have been good at doing this in the 60s (but things were less complex then) but it certainly isn't now.

[Viewfromthe42]

It's what we've always known. Private financing is more expensive than public financing, which makes government projects cheaper on that basis. But governments are not experts at the particulars of infrastructure, especially for new/rare systems, like our LRT or the proposed high speed rail, whereas companies can be global and move their expertise around the world to always be learning, gaining experience, and staying up to date on important trends, thus making private industry cheaper/better on that basis. How the two main factors shake out when intertwined is the issue, same as before.

[MacBerry]

It's what we've always known. Private financing is more expensive than public financing, which makes government projects cheaper on that basis. But governments are not experts at the particulars of infrastructure, especially for new/rare systems, like our LRT or the proposed high speed rail, whereas companies can be global and move their expertise around the world to always be learning, gaining experience, and staying up to date on important trends, thus making private industry cheaper/better on that basis. How the two main factors shake out when intertwined is the issue, same as before.

This is the $6 Billion question  ... a huge amount that could have been put to use by the last few governments of the day  ... education, healthcare, daycare, public housing, pay down the deficit ....

[nms]

If governments were able to look beyond the next election cycle, and maintain a public trust in its bureaucrats, then public ministries could become experts in their respective fields. Some Canadian ministries, federal or provincial, do have globally recognized expertise in their fields and are often called upon to travel elsewhere to share their knowledge. Unfortunately, recent governments have focused on getting out of the business of being good at anything (or for that matter, allowing their bureaucrats to tell anyone about what they are doing). This leads to the public perception that our public servants are not good at doing their jobs and therefore the private sector would be better off carrying out the tasks. Ironically, some of these PPPs are backed by public pension funds.

Public-private partnerships have been around for a very, very long time. Think of where Canada would be without the Canadian Pacific Railway, or even further back, the Hudson's Bay Company, both of which were private enterprises backed by the public purse or, in the case of the HBC, granted a Royal charter to assume the risk in developing Canada.

[JoeKW]

I don't think it's fair to compare real costs with imaginary costs assuming near perfect efficiency.

[Viewfromthe42]

On one hand, we read these AG numbers and say it's outrageous.

Then we'll go talk about all the public works projects that aren't P3 whose risk factors have boiled over into huge budget inflation.

You can have one or the other, both only with a heaping side of cognitive dissonance.

[ookpik]

Auditor questions LRT partnership 

Taxpayers are paying a $48-million premium to have GrandLinq help finance rail transit, which launches in 2017. This represents the higher interest rate the partner charges to lend to taxpayers over 30 years, compared to the lower interest rate the government can get in the open market...

Lysyk revealed Tuesday that taxpayers have paid an extra $8 billion to have private partners deliver 74 public projects including local rail transit and the new Kitchener courthouse. Mostly this is because partners charge higher interest to lend money to taxpayers.

(my emphasis) 

Note that $48M out of $1.9B is a 2.5% premium.

[JoeKW]

Why go through the partners for borrowing?

[BuildingScout]

Why go through the partners for borrowing?

Because often the private party assumes all the risk, i.e. the loan is not government backed.

[mpd618]

Why go through the partners for borrowing?

It's intentional. It means GrandLinq has more to lose if they don't deliver.

You can see the Region's full rationale here.

[BuildingScout]

I find the AG report quite bad which is surprising since she has stellar credentials but the content reads like amateur hour. E.g. comparing private industry expertise with fictional in house expertise OR neglecting to mention that the extra cost of transfers risks to the private partner.

[numberguy]

Actual P3 cost inflation has been greater than CPI in Ontario (by a large margin). Several P3 projects have had cost increases on Annual Service Payments (ASP) partially held back until this problem is mediated or resolved.