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Last Updated: Friday - 09/24/2010

Week of February 17, 2003

P3's tack on costs to facilities

Alberta's move to public-private partnership raises too many concerns

By BISHOP FRED HENRY
Calgary

In recent weeks, the Government of Alberta has created considerable controversy with its proposal to utilize Public-Private Partnerships, or P3s, as a way of financing the infrastructure needs of the province. The proposal, which has the public endorsement of Premier Ralph Klein, is intended to address the backlog of capital construction needs of a rapidly growing provincial population.

The concept of a P3 is essentially quite simple, although there are many variations. The government (public sector) forms a partnership with a developer (private sector) whereby the developer finances, builds and leases back to the government, a school, hospital or other public facility.

The P3 proposal reminds me of that delightful story about the management consultant's analysis of the operations of a symphony orchestra for technical efficiency. It read "All 12 violins were playing identical notes; this is unnecessary and wasteful duplication. The violin section could be cut drastically, saving considerable labour costs.

"The oboe players had absolutely nothing to do for long periods of time. They just sat in their chairs. Their numbers should be reduced. Compositions involving the oboe can be rewritten so that the work is spread out more evenly, thus eliminating costly 'peaks' and 'valleys' of oboe productivity. I noted a recurring repetition of certain musical passages. What useful purpose is served by repeating on the horns what has already been produced by the strings?

"Were all such redundant passages eliminated, the concert time of two hours could easily be reduced to 40 minutes.

"Something should be done about the shocking obsolescence of equipment. Program notes say the first violinist's instrument was several hundred years old. If normal depreciation schedules had been applied, the value of this instrument would be reduced to zero, and a more modern and efficient violin could easily have been purchased."

The consultant's report cautions us to be wary of technical efficiency, arithmetic, over-management and cost-cutting efficiencies because you can't always make music with them. Similarly, we should be wary of P3. The delivery of education and the provision of educational facilities are solid investments in our future, not simply expenses to be trimmed.

Government advantages

For a cash-strapped government, the advantages of the P3 are clear: the public receives the benefits of timely access to newly constructed facilities, while government deals with its cash-flow problem by spreading the cost of such projects over a longer time period. In addition, it is the yearly cost of lease payments that is recorded on the government's books, rather than the full capital debt of a government owned building.

While P3s may serve financial interest of developers, contractors and financiers, they clearly represent a more costly way of providing public facilities. This means less public money is available for the actual delivery of those services.

There are several reasons why P3 projects cost government more money in the long run. First, a partnership agreement with the private sector will be structured, of course, to provide the developer with a guaranteed profit. Second, the cost of borrowing money to finance a P3 project will typically be at a higher interest rate for a private developer than government would be expected to pay. Third, because government can decide not to renew at the end of the lease, terms of the lease often involve premium rates. The net effect of all these factors is a more costly provision of public facilities.

It should also be understood that at the end of a 20-year lease, the government still does not own the facility. Typically, it has the option to walk away from the building, renegotiate a new agreement or buy the building from the developer. The developer, depending upon the agreement, may choose not to lease the facility, but instead tear it down and build condominiums.

Private pressures

There are other major concerns over P3s. Clearly, in the context of current discussions on school facilities, there is a fear the government's desire to promote P3s, and the developers' desire to benefit from their location, could result in significant distortions in the processes by which new schools are approved and prioritized for construction.

There will be significant pressure from developers to alter government specifications for school construction. Public schools are built with an anticipated life span of 50 years or more, while some private school facilities can be expected to last only half as long.

There are numerous other concerns associated with P3 schools. One is the use of public reserve land to build a privately owned building, and the possible loss of this building and its green space to the community use after 20 years.

Also, partnership agreements are designed more to meet the needs of the developer rather than the school and the communities that it serves. For example, P3 may result in lost revenue from school cafeterias, higher costs for community use of school facilities during non-instructional hours, and the inclusion of incompatible commercial partners in a wider joint-use project.

There is a better way to finance the construction of new public facilities and the renewal of the province's existing infrastructure. To find it, however, the government will have to set aside its ideological assumption and preferences.

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