Time for a review of Ontario’s P3 program

Dalton McGuinty fought the 2004 provincial election vowing to stop two public-private partnership hospital deals. After he got elected, he not only signed off on deals to build Brampton’s William Osler Health Care and the Royal Ottawa Mental Health Centre, but he opened the door wide to more than 30 additional privatization deals.

Using the private sector to design, finance, build, and operate public infrastructure has been controversial from day one.

In Britain, where they refer to P3s as Private Finance Initiatives (PFI), there has been considerable documentation into how these privatized hospitals have cost much more, distorted public priorities and inflated long-term debt obligations.

In Ontario the auditor had a chance to look at the first general hospital to open under the P3 model and concluded that it was not good value for money, that public procurement would have resulted in savings of close to $500 million.

One of the biggest P3 financiers internationally is Dexia, the Franco-Belgian bank currently at the centre of the European debt crisis. Dexia is the financier behind part of the redevelopment of the Centre for Addiction and Mental Health as well as the new Bridgepoint Hospital. The British Treasury says Dexia’s problems will not impact UK PFI projects. Dexia was bailed out in 2008 by taxpayers in Belgium and France to the tune of $8.4 billion (Cdn). Not only did it maintain its interest in P3 projects, but it continued to work on new deals.

The financial pages are now speculating that this second rescue of Dexia could lead to the sell off of parts of the company, leading one to question who will eventually hold the debt of such infrastructure projects? With European banks on increasingly shaky ground, it will likely lead to much higher rates of borrowing, which in turn will make many of these projects even less viable under the privatized model.

In August a UK Parliamentary committee looked at the issue of British PFIs and concluded that the cost of borrowing for the private sector had risen steeply after 2008’s financial crisis and that the cost difference with public financing was “significant.” While at one point the difference in the cost of borrowing was about 1 per cent, now it is around 2.5 per cent and that some will rise to more than 3 per cent in stages over the project life. That’s a significant premium for private financing.

“The substantial increase in private finance costs means that the PFI financing method is now extremely inefficient,” the report states.

While direct cost comparisons have always favoured the public sector, privatizers have always argued that there are substantial savings accrued from the private consortiums taking on public risk. The UK report largely dismisses this argument, suggesting the only inherent risk that the private sector handles well is during the construction period.

“We have seen evidence that PFI has not provided good value from risk transfer – in some cases inappropriate risks have been given to the private sector to manage. This has resulted in higher prices and has been inefficient,” the report bluntly states.

When Ontario began establishing P3s the labour movement had argued that they would come to regret linking ancillary services (such as food, IT, cleaning and security) at the hospitals to these long-term deals. OPSEU’s Local 479 issued two detailed reports highlighting the problems of operating a mental health facility when key support services were under the control of a third-party.

(Read Local 479’s Risky Business here:  http://www.opseu.org/bps/health/P3Report.pdf  )

Britain also faced higher health care cost related to the spread of hospital-borne infections at P3 hospitals. Clearly one of the ways of making greater profits was by cutting the number of cleaning staff. It wasn’t the P3 that would pay for the negative health results from such an action.

When the Cameron government put the National Health System on a new austerity footing, it also meant that obligations to the P3 contracts came first, leaving hospital administrations no choice but to cut core health services.

Ontario eventually took ancillary services out of the P3 deals, although nothing could be done about the arrangements at both the Royal Ottawa and the William Osler.

With increased turmoil in the world of P3 financing, it’s time for the Ontario government to take a step back and evaluate this privatized model before any more deals can be signed.

There is enough evidence now that we no longer need to rely on the foreign experience with this method of financing and operating public infrastructure.

When the P3 bandwagon began, politicians were giddy about private involvement in public infrastructure as if they had found a big pot of free money. Any grade school kid could have probably figured out that the world’s largest corporations weren’t out to give us free money, but to take as much public money as they could get their hands on.

For every $1 it cost to build a public, finance and operate a hospital in the UK, it cost $1.70 to do it under the privatized model.

Given the billions we are spending on new hospitals, the evidence suggests its time to stop what we’re doing, and at the very least, evaluate the results.

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