February 25, 2009

Canadian Union of Public Employees

CUPE study finds P3s more expensive

RICHARD GILBERT

staff writer

A recent study found that construction costs for P3 projects in B.C. are substantially higher than using traditional procurement methods, but some claim the study is flawed.

“The difference in the actual cost between a publicly procured project and a P3 (public private partnership) can be substantial,” said forensic accountants Ron Parks and Rosanne Terhart with Blair Mackay Mynett Valuations, who were hired by the B.C. division of the Canadian Union of Public Employees (CUPE) to undertake the study.

Parks and Terhart performed a cost analysis of the Abbotsford Regional Hospital and Cancer Centre, the Sea-to-Sky Highway Improvement, the Academic Ambulatory Care Centre (Diamond Centre) and the Canada Line, using material accessed by the union under Freedom of Information provisions.

“We conclude, based on available evidence and the application of more appropriate discount rates, the cost of P3s exceeds traditional procurement methodology for the projects referred to above,” they reported.

The pair used a financial calculation called the discount rate, which is used by Partnerships BC to compare P3s to publicly procured projects.

Partnerships BC is a private company, wholly owned by the provincial finance ministry.

Its mandate is to facilitate the development of public private partnership infrastructure projects, to advise the government on whether to use these partnerships and to evaluate their value for money.

A formula is used to calculate the nominal cost of each project by determining the cost that these assets will generate over their lifetime.

According to the study, Partnerships BC creates a bias toward public private partnerships by assuming a borrowing cost (the discount rate) that is much higher than what the government would be able to secure.

As a result, the value-for-money reports conclude that public private partnerships are more affordable than they really are, in comparison to publicly funded projects.

For example, the nominal cost of the Diamond Health Centre as a P3 was $203 million, as compared to $89 million for public procurement.

This is a difference of $114 million or nearly 130 per cent.

The study calculates the extra cost to the public for the Abbotsford Hospital at $377.9 million and for the Sea-to-Sky at $434 million.

The study didn’t provide an estimate for the Canada Line.

“It’s a taxpayer rip-off, plain and simple,” said Barry O’Neill, president of the B.C. division of CUPE.

“The hundreds of millions of extra dollars we pay in what amounts to privatization premiums should be used to improve roads, transit, schools and health care.”

The CEO of Partnerships B.C. rejects the idea that his agency has a bias toward P3 projects and argues that the study produced by Park and Terhart is seriously flawed.

“In all our modeling and for every project, we have always hired the big four auditors Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG,” said Larry Blain.

“The auditor general has looked at the Sea-to-Sky, Canada Line and the Abbotsford hospital and reviewed our methodology.

“He has attached a message to the value-for-money reports that said our methodology is fair and reasonable.”

Blain said the reason the CUPE study concludes that P3 projects are more expensive is because the discount rate does not factor in the risks that come with financing a project.

“Our view on the discount rate is we use a rate that reflects the way the private sector would look at the project,” explained Blain.

“If you lend money to a project, it (the discount rate) is not the cost of raising debt, it is also the risk involved in the investment you are making. If you believe there is no risk, then his (the study’s) conclusion is correct.”

Under the P3 model, the private sector is taking a risk.

This is because the project needs to be designed well and the government doesn’t pay for the project until it is complete.

There are also fixed maintenance costs and provisions for handing the project back.

The CUPE study also concludes that Partnerships BC has denied the public access to critical information and documentation.

“I think our level of disclosure exceeds that of traditional procurement,” said Blain. “When a contract is finalized we release all the documents. The only time documents are not released is when the information is commercially sensitive.”

Blain said Partnerships BC has a fairness advisor, who attends all meetings, as well as a conflict of interest adjudicator.

“We go out of our way to make sure the process is fair and open,” he said.

“We are trying to make it an attractive market for contractors to bid.”

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