Privately-developed London area mental health hospitals justified by massive “risk” calculations

Evaluating value-for-money on a privatized public infrastructure project has always been a bit of a mugs game. A value-for-money (VFM) assessment is produced every time the province engages the private sector in the building of public infrastructure such as hospitals, court houses, or recreation facilities.

The problem with these assessments is they are always done by an organization that has everything to gain by making the assessment support the privatized option. Given these value for money calculations are usually done after the deals are signed, it would be very embarrassing for government to show otherwise.

These assessments were formerly done directly by Infrastructure Ontario (IO), but given IO’s mandate to engage the private sector in such projects, it was felt they failed the test of unbiased independence. A look at the Auditor General of Ontario’s review of one of their earlier projects – the William Osler Health Centre – would suggest IO got quite creative in justifying a project that looks to have cost taxpayers at least $400 million more than had the government taken a more conventional approach to financing and operating the hospital.

After it was acknowledged that perhaps IO wasn’t independent enough, business consultants like KPMG were asked to do this work. Unfortunately these business consultants were also members of the Canadian Council for Public Private Partnerships, and therefore, also subject to criticism of bias. Now a third-party is engaged to evaluate the “fairness” of these evaluations prepared by KPMG and others. These “fairness monitors” are often themselves involved in the world of public-private partnerships, and therefore far from impartial.

While it took several years in the courts to get the information on the William Osler deal, the government has realized that the secrecy behind these privatized public infrastructure projects was the Achilles heel in promoting them to the public. As a result, you can now access the value for money documents on-line. Sort of.

Unfortunately, these documents are lacking in the kind of detail that would allow a more objective third-party to evaluate whether such a comparison was ever done properly. In short, there are very few numbers or justification for those numbers. They also smack of propaganda as the text gushes on about transparency without actually delivering it.

With the opening of the Southwest Centre for Forensic Mental Health Care in St. Thomas this month, we decided to upload the relevant value for money document hoping to look a little further behind this project.

The “fairness monitor,” PRP International, specifically notes that they do not evaluate or read proposals, rather the task is more about evaluating the scoring system used by the company (KPMG) preparing the value for money assessment. That’s less than reassuring.

While the privatized side of the ledger is always far more expensive on the tangible elements of these deals, companies conducting these evaluations usually assign a dollar value to what they perceive as “risk” taken on by the private P3 consortium.

Risk could represent any number of factors that could potentially push the cost of the project skyward.

In the case of this project – which is grouped with the new St. Joseph’s mental health hospital presently under construction in London — the “risk” value is actually calculated to be higher than the entire base project costs. While the base costs are calculated to be $339.1 million, the risk has been assessed as being an additional $398.2 million. That’s right, they just assumed that the value of risk is more than the entire construction cost of the two hospitals.

When that cost is assigned to the traditional procurement side of the ledger (government financing, management), it makes the private alternative appear to be $104 million less – or what they claim is a cost savings of 12.16 per cent.

Risks taken on by the private consortium include price certainty on the construction costs, completion delays, costs associated with design coordination, interest rates on financing, any issues around the life-cycle of the mechanical and electrical systems, building maintenance costs and problems that might be encountered with the site, including ground contamination.

Many of these so-called risks could be built into the public procurement model. Penalties for completion delays are not unknown in the construction industry, for example.

While the VFM tells us that the risk was calculated by another giant international corporation – Altus Helyar – nowhere does it tell us how they came to these exact figures. They don’t even breakdown the number by the type of risk.

The document does tell us that “ancillary costs” – costs associated with project management and the deal transaction – are $7.5 million more under the privatized scheme.

It would be much higher except they calculate $4.2 million back to the government side of the ledger to account for the taxes they wouldn’t receive from the private sector should the public procurement model be chosen. They don’t say how this tax is calculated, especially when the bigger components of design and construction continue to be done by the private sector under such a public procurement model.

They also note that the financing rate the private sector is charged under the privatized model is higher than the rate paid under public procurement. Yet for some reason, the difference is not included in the base costs which are said to include financing. Instead, the charts show the base costs as being equal.

At the William Osler hospital, that “difference” in interest rates meant $200 million more in costs over the life of the agreement. That’s quite a bit missing from the private side of the equation.

Reviewing the William Osler case, the auditor specifically noted the lack of justification for the value assigned to risk on the project, which incidentally, was much smaller than the risk calculated for this project ($67 million vs. $398.2 million).

The deal also puts considerable restrictions on change orders – needed alterations that sometimes take place as a result of shifting health needs, the impact of new technology, or sometimes just poor initial design work. That means the building could potentially be out-of-date before its doors even open.

The original calculation upon the deal close was $757.4 million for the two mental health hospitals, but before construction even began the new cost was inflated to $830.5 million – just $32 million shy of the projection to build the hospital under a public procurement strategy. Adjusted for inflation, the real cost of the privatized development is expected to rise to $1.1 billion over the life of the 30-year contract. We all pay for that.

The last time the Auditor General of Ontario looked at the P3 model was 2008. In it he concluded the value for money assessment had been skewed to make public procurement look a staggering $634 million more expensive than it actually should have been.

There is little in these present-day “value for money” comparisons to suggest much has changed. Under the guise of transparency they have produced a handful of large numbers with no actual justification that can be openly reviewed. It’s time for the auditor to revisit these projects before too many more of these 30-year “deals” are signed. He may very well find that like 2008, the public may find these deals are anything but.

One response to “Privately-developed London area mental health hospitals justified by massive “risk” calculations

  1. It is interssting that the monies show highter risk for P3 hospitals build than for community. No one likes to have further burden of cost on their lifestyle,looks like community members are picking up the bill again. When will we say enough is enough. Looking like some get richer again by the backs of the average individual trying to scrape out a decent living.

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