September 24, 2008

Public-Private Partnerships

Cost of Alberta schools’ P3 partnerships could rise 50 per cent, critics claim

RICHARD GILBERT

staff writer

The cost of building 18 Alberta schools under a public-private partnership (P3) contract could be 50 per cent higher than traditional methods.

An Australian-based investment group was awarded a massive contract by the Alberta government to build schools under a public-private partnership.

Babcock & Brown Public Partnerships Ltd. (BBPP) is an international public infrastructure fund specializing in the development and operations of P3 projects.

The company won a 32-year contract to design, construct, finance and maintain the schools in Calgary and Edmonton with a low bid of $634 million.

The cost of doing the same work through traditional delivery methods was pegged at $752 million.

However, some people disagree with those figures.

An economic consultant hired by the Canadian Union of Public Employees said it will cost at least 50 per cent more to build schools through a public-private partnership than through the traditional public sector model.

“The basic underlying reason the cost is greater is because the private operator will pay more to borrow the money to build the project,” said Hugh Mackenzie, principal with Toronto-based Hugh Mackenzie and Associates.

“The differential between public and private sector borrowing is 200 basis points or two per cent, which translates to a 40 per cent difference in price.”

This is considered a conservative estimate because Mackenzie calculated these numbers in December of 2007.

“The spread between government borrowing rates and private borrowing rates that would be paid for this type of project are greater now than in December,” he explained.

“Now, it is in the range of 300-400 basis points or three to four per cent of borrowing cost.”

Mackenzie said the traditional method of financing this type of project is to float a bond, which costs about .05 per cent to .1 per cent of the amount that has to be borrowed.

“The rough rule of thumb that emerges in the cost of putting a P3 deal together is about four per cent of the project cost for each party involved in the agreement,” he said.

Companies involved with the contract include Edmonton’s Barr Ryder Architects and Interior Designers, GEC Architecture, Honeywell Canada Limited and Bird-Graham Schools, a joint venture between Bird Design-Build Limited and Graham Design Builders.

The credit crunch in the United States is also impacting the project.

“This is one of the things that makes it odd they (the Alberta government) are proceeding with things right now,” said Mackenzie.

“Risk has been re-priced in the international financial markets. Big infrastructure companies bring great leverage to a project to generate a high rate of return on assets. Any company that does this kind of work is in trouble unless interest rates are locked in for a long period of time.”

Despite the detractors, the Australian-based company is excited about the project.

“This is an excellent investment in what is Canada’s largest Kindergarten to Grade 9 schools project to date,” said Giles Frost, director of BBPP.

“The project has a traditional PPP structure and offers strong and long-term cashflows, has debt terms matched to the concession length and fully hedged interest rates. BBPP is investing approximately $28 million.”

The P3 selection process is based on the net present value of the project or the total value of all aspects of the project expressed in today’s dollars.

The schools are scheduled to be completed in July 2010.

Print | Email | Comment