The enormous cost of public-private partnerships
Three recent BC public private partnership (P3) hospitals developed in co-operation with the province’s Partnerships BC (PBC) will cost the public $260 million more than traditionally delivered projects, according to figures released in July in response to a Freedom of Information request.1
The three projects will cost the public $260 million more than they would have using traditional project delivery.
The FOI request, submitted in April, asked for comparable data—for the P3 and for a public sector comparison—on the amount that would be spent in nominal dollars for the life of the projects. This information has now been attached as a supplement to several of Partnerships BC’s ‘Project Value for Money’ reports.2
While the figures for the life of the projects are huge, the figures for the annual differences are also large. In the year 2021, for example, the three projects combined will cost nearly $36 million more using P3s than they would have using traditional (public) project delivery. That’s $36 million that could have gone into providing better health care services to British Columbians. It is also the approximate cost of building a new high school.
Information released on another project, the Emily Carr University of Art and Design Campus Redevelopment, does show a saving of nearly $7 million for the P3 over the life of the project—however this is only because the PBC methodology overestimates the cost of public projects.
Inaccurate assumptions about the timing of spending
There are two key elements in PBC’s methodology that make it almost certain they will find a public private partnership offers better value than traditional, public sector procurement. These are how cash flows (spending over time) are shown and how the value of money is discounted over time.
The PBC methodology will almost necessarily lead to a result that shows public projects costing more than P3 ones.
Additionally, PBC makes the bizarre and inaccurate operational assumption that the province does not borrow money for public projects—and as such they do not spread the borrowing costs over the life of a public project.
PBC even acknowledges they use “an unfinanced” public sector comparator not because the government doesn’t borrow the money, but because (a) they can’t figure out how much it would cost to borrow the money, (b) the cheap cost of government borrowing really doesn’t reflect the “risk” of the project and, (c) there is really a lot of risk they haven’t already counted in their costs and doing this deal with that.
Applying private rates to public borrowing
Further, PBC based the discount rate it applied to public delivery on the private sector’s cost of capital. For example, the estimated rate for the BC Children’s and BC Women’s Redevelopment Project Phase 2 project is 6.87%, but the BC government’s actual cost of borrowing in 2014 was 3.2%—less than half the private sector cost of financing the project. This roughly matches the BC Auditor General’s comment that borrowing for P3s was twice as expensive as borrowing for traditionally delivered projects.
PBC even acknowledged in their Value for Money report that if they had used just a slightly lower discount rate—6.5%— the numbers would have shown better value for money to have not used the P3.
An expensive model of public procurement
In addition to their problematic cash flow and discounting assumptions, in each case Partnerships BC compared a P3 with a form of public procurement referred to as Design/Bid/Build (DBB).
In 2014 BC’s Auditor General found the cost of borrowing through P3s was double the cost of public borrowing.
An earlier review by the Ministry of Finance criticized PBC for its consistent use of DBB when comparing public and P3 costs. In their 2014 report, the Ministry wrote that PBC should instead consider “the most likely alternative that the project owner would use, to ensure that value for money is correctly stated and is understood by all parties” (emphasis added).
High P3 costs a concern to Auditors General
While the release of comparative costs between public procurement and P3s is new, concerns about the cost of P3s is not: Auditors General in BC, Ontario and other provinces have all raised issues around the high cost of P3s.
In 2014 BC’s Auditor General found the cost of borrowing through P3s was double the cost of public borrowing. The same year Ontario’s Auditor General said Infrastructure Ontario’s use of P3s has cost $8 billion more than traditional public financing. In July 2017 Nova Scotia announced it was buying back ten P3 schools from its private partner, because it was cheaper than continuing to lease them.
The release of this information is timely. The new government will have the ability to review infrastructure procurement processes, and this information should certainly be taken into account.
Notes
- The release of this information is unprecedented. For more than a decade, Partnerships BC and Health Authorities have declared such information was a Cabinet Secret and refused to release it. Their position was upheld by a ruling from the Information Commissioner in 2009. However, Partnerships BC, in a letter on June 28, 2017, said that instead of providing the information to the FOI requester they would post it publicly to their website, which they did on July 20.
- The five comparisons of P3 versus public delivery costs for the projects may be found in supplements to Value for Money Reports, which can be found via the following URLs:
http://www.partnershipsbc.ca/files-4/project-bccbcwr-schedules/PBC_BCCBCW_Project-Report.pdf
http://www.partnershipsbc.ca/files-4/documents/PBC_ECUAD-Project-Report.pdf
http://www.partnershipsbc.ca/files-4/documents/PBC_NIHPReport_2015.pdf
http://www.partnershipsbc.ca/files-4/documents/20160818_PBC_PRH_Project-Report.pdf
http://www.partnershipsbc.ca/files-4/project-occ-schedules/2014-July_OCC-Project-Report.pdf
Topics: Economy, Privatization, P3s & public services, Transparency & accountability
