High price, high risk

One of the often-repeated rationales for entering into so-called partnerships is that, under operating leases in particular, the corporation shoulders some of the risk of building and running schools. The reality is the public sector still bears responsibility for most of the risk, making many of these leases a licence to print money.

In the case of Nova Scotia schools built by Ashford Investments, the risk assumed by the company for operation and maintenance is essentially covered off in monthly service fees paid by the province. Even insurance premiums are calculated in the cost of the fees, and the province is responsible for property taxes and any increases in utilities. In addition, the province is obliged to make payments to the bondholders who have lent the corporation money, no matter what happens. The only way out of the lease before it is due is to buy the school.

Minimizing corporate risk is a common feature of lease-back schools. The Moncton Greenarm deal leaves the province responsible for Greenarm’s maintenance costs, plus all utility costs, all land and building taxes and a yearly operating cost that increases by 1 per cent each year. In addition, the province has agreed to assume any unforseen increases in operating costs, in a deal that gives Greenarm secure revenue for 25 years.

The O’Connell Drive school lease leaves the Nova Scotia government with the majority of the risks, including the cost of capital improvements, operating costs for the school and technology upgrade costs. As the Auditor General points out, the private consortium’s main risk was the residual value of their investment. In fact, this is a minimal risk given that at the end of the lease they will have recovered 88.9 per cent of their investment and will own both the land and the building.

While the Nova Scotia P3 process has changed since this early lease, the province still bears the bulk of the risk, as shown with the recent Ashford deals. A shroud of secrecy surrounding the leases leaves many unanswered questions, and leaves the private landlords getting risk-free monthly lease payments while the province is on the hook for many ongoing and unforeseen expenses related to the school and its maintenance, furnishing and operation.

In another risky aspect of the P3 scheme, the Nova Scotia department of education and culture made construction advances of $36 million to several consortia unable to raise the funds quickly enough on their own. Unsigned leases are another common thread in this story, with several leases being signed months after construction was completed and the schools were open. In several cases, development agreements included an unsigned lease document, but the dollar signs had been left blank. Negotiation at this point in the lease process leaves the government with little or no room to manoeuvre.

The final risk concerns the volatility of the private sector. Many corporations have meteoric rises only to be followed by spectacular crashes. It is a very real concern that over the long term, the lease-back school tab will spiral even higher as governments are forced to bail out private sector failures.