Report identifies cost of Ontario P3s: 16 per cent more

Ontario has moved much faster than other provinces in establishing private contracts to design, build, finance, maintain and sometimes operate public infrastructure projects. Despite many warnings, the province appears to have dismissed evidence that shows these kinds of arrangements can be poor value for the public purse.

Now researchers at the University of Toronto have put a price on what the average public-private partnership (P3) costs compared to traditional public procurement – 16 per cent more.

The new research, highlighted in Sunday’s Globe and Mail Report on Business (ROB), looks specifically at 28 Ontario P3 projects worth more than $7 billion. At a 16 per cent premium, that means the projects in the study would have been about $1.12 billion less had the government tendered these contracts under traditional procurement rules. Or about what it would cost to build three Peterborough hospitals.

Most of this additional expense is based on the higher cost of borrowing for the private sector, although about 3 per cent is additional transaction costs, one of the reasons why so many law firms belong to the Canadian Council for Public Private Partnerships.

Proponents for this kind of private development argue the savings take place when the cost of risk is calculated – the average P3 estimating risk to be a startling 49 per cent of the project’s cost.

As the Ontario auditor has previously noted, the problem is there is no justification for these risk calculations. Nor does establishing a P3 guarantee that a consortium will not find other ways of pushing that risk back on government, or that the cost of the project has not already been inflated to account for potential cost overruns.

“Unfortunately, quantifying those risks requires a bit of accounting hocus pocus,” writes Barrie McKenna in the ROB. No kidding.

Here at Diablogue we see it this way: the cost of “risk” is whatever it takes to make a more costly P3 look viable.

While the P3 advocates frequently claim that such arrangements bring projects in on time and on budget, there is plenty of evidence to suggest the contrary is true. Of the first two P3 hospital in Canada, Brampton’s William Osler was late and the Royal Ottawa was occupied long before it was ready to try to salvage the reputation of this method of new infrastructure development.

It was also noteworthy that when the Federal stimulus program first got underway (following the financial meltdown of 2008), that the rules requiring new infrastructure projects to first explore the P3 option were suspended. If the federal government thought suspending these rules to be a faster way of getting “shovels in the ground,” then it would also suggest they too recognized this as a more cumbersome way of getting infrastructure underway.

Even today politicians claim that P3s are the only option when the cupboard is bare, but they truly cannot be so naïve to believe that these costs will never come home to roost. The private sector is not building this infrastructure for free.

While the U of T report may be raising eyebrows in some elite circles, it is by no means the first report to highlight P3s as poor value for the public.

Britain has done more than any other country to promote the concept of P3s, yet last year MP Margaret Hodge, the UK Parliament’s Chair of the Committee of Public Accounts, noted that “PFI (the UK equivalent of the P3) looks like a better deal for the private sector than for the taxpayer.”

The committee specifically noted that “this form of financing has been based on inadequate comparisons with conventional procurement which have not been sufficiently challenged.”

“We have seen information which strongly suggests that investors are making excessive profits from selling on shares in the PFI projects,” she stated. “Government currently lacks sufficient information on the returns made by investors, who have been able to hide behind commercial confidentiality.”

Britain has undertaken 700 P3 contracts. In Canada the U of T report notes that 180 projects – including Ontario’s costly Highway 407 – have been undertaken using this model.

In Ontario the value for money comparators are done by Infrastructure Ontario (IO), which also promotes P3s as a means of infrastructure development. The inherent conflict raises questions about whether such comparators can ever be fair or meaningful.

While the Ontario government preaches harsh austerity, new P3 projects are still being planned and tendered. The latest is a new $300 million rehab and mental health facility in Kingston.