Dissecting a P3

Editor’s note: Welcome to the first in what will be at least a four-part series in which we try to unravel the complex financial underpinnings of public-private partnerships such as the ones in place for the Okanagan Correctional Centre and Penticton Regional Hospital, and determine if they are actually a good deal for taxpayers.

Construction of the Okanagan Correctional Centre near Oliver only took about 2 1/2 years, but the battle to unlock the financial model underlying the project has taken much longer.

This week, a judge in Vancouver is expected to finally decide whether The Herald should be granted full access to the 30-year deal between the B.C. government and Plenary Justice to design, build, finance and maintain the 378-cell jail.

The contract was finalized in April 2014 and sets out the terms of the public-private partnership worth hundreds of millions of dollars that both the B.C. government and Plenary Justice are fighting against releasing to the same public that is footing the bill.

Parts of the contract have been released in response to a freedom of information request filed in August 2014 by The Herald, but the financial model and construction schedule have been withheld.

Plenary Justice and the B.C. government claim release of those documents would unfairly damage Plenary Justice’s business interests elsewhere. The firm’s Australian parent company boasts of operating 44 projects around the world worth a combined $32 billion.

P3 PRIMER

Public-private partnerships began taking off in B.C. in 2002 when the then-Liberal government created Partnerships BC to both promote and evaluate such developments.

To date, the agency has overseen 52 projects worth $18 billion, including the OCC, to which a $192.9-million capital cost has been attached.

Both the OCC and the new patient care tower currently under construction at Penticton Regional Hospital are what’s known as design-finance-build-maintain projects.

They get started when the B.C. government issues a request for proposals from consortiums of companies interested in handling all aspects of the job, from raising cash for construction on the bond market and drawing up blueprints, to building walls and mopping the floors once the facility is complete.

At the end of the 30-year contract, the B.C. government will have paid back the money the consortium borrowed on its half and the public finally assumes ownership of the asset.

A more traditional method of public procurement sees the B.C. government act as its own general contractor to build and finance major projects, as the NDP intends to do with a new $1.3-billion Pattullo Bridge in Surrey that was announced earlier this month.

P3 BENEFITS

The benefits of building infrastructure as a P3 are numerous, according to Penticton Liberal MLA Dan Ashton.

Contracting with a private-sector partner mitigates the risk of delays and cost over-runs by penalizing the builder for not meeting agreed-upon targets. And having the partner raise funds on its own keeps debt off the government’s books.

P3s are also a reflection of the right-leaning Liberals’ belief in smaller government.

“Government has traditionally shown that private enterprise is able to deliver on time and on budget, and usually operate these facilities better than what we can as a government,” said Ashton.

“Private enterprise has a tendency to be a lot quicker on their feet and address issues a lot quicker than government can.”

P3 DRAWBACKS

While those benefits sound good on paper, they don’t necessarily translate in the real world, according to Alex Hemingway, who studies P3s as an analyst for the Canadian Centre for Policy Alternatives.

P3s can actually take longer to build, he explained, as the tendering process and final negotiations on a long-term deal can take months – 13 months in the case of the OCC – leading to a delay in starting construction.

And transferring risk to the private partners also comes at a cost, although ascertaining the price to taxpayers is impossible without seeing the contents of a project’s financial model.

“You’ve got to think about this from the perspective of the private partner. If they’re going to bear risk about unforeseen things that are going to happen over the life of the project, they’re also demanding what’s referred to as a risk premium in the payment they’re going to receive,” explained Hemingway.

Other concerns include the flight of money out of province – Honeywell, the company responsible for maintenance of the OCC, is headquartered in New Jersey and trades on the New York Stock Exchange – and the length of decades-long contracts.

“Sometimes the private sector partners will go under as businesses do, and government is left holding the bag,” said Hemingway.

Finally, he pointed to the cost of having the private sector borrow the money as another major source drawback.

“The public sector government is able to borrow dollars for capital investment at a much lower rate than the private sector can,” explained Hemingway.

“So when you have a capital-intensive, long-term project, that higher cost of borrowing can significantly drive up costs over the life of the project.”

AUDITORS

The concern over higher private borrowing costs is so great that it was studied by two provincial auditors general in 2014.

B.C.’s watchdog examined 16 P3 projects and found interest rates paid to private lenders averaged 7.5 per cent and ranged as high as 15 per cent, at a time when the provincial government was borrowing at four per cent.

And the auditor general in Ontario assessed 74 P3 projects in that province and determined taxpayers would have saved $8 billion had the work been financed by the government.

WHAT’S THE OCC REALLY COSTING?

Information obtained to date by The Herald suggests the public here is also paying a steep premium to finance the OCC through the private bond market.

According to a schedule of payments, the B.C. government anted up $72.3 million during construction and will hand over another $255.6 million in capital payments over the 30-year life of the deal. That would seem to put the true capital cost of the jail at $327.9 million – about $135 million over the sticker price.

In addition, Plenary Justice will receive monthly lifecycle payments totalling $28.3 million, for replacing equipment like computers and air conditioners, and maintenance fees totalling $63 million, which covers everything from changing lightbulbs to snow plowing.

All told, the contract is worth $419.2 million in 2015 dollars and it’s indexed for inflation.

VALUE FOR MONEY

It’s impossible for the public or a layperson to analyze the deal without access to the 587-page financial model attached to the P3 contract, so such work is left to Partnerships BC, which uses a complicated formula to determine net present cost, which favours long-term, private lending and penalizes risk.

“Part of the problem is it’s largely theoretical,” said Hemingway, who has studied such calculations and believes they’re slanted towards P3s.

Partnerships BC’s dual role as a promoter and watchdog was also flagged as a concern by the B.C. auditor general, he noted.

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Tomorrow in Part 2, we dive into The Herald’s original request for the entire OCC contract, the B.C. government’s denial, and subsequent reversal of that decision by the Office of the Information and Privacy Commissioner.

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