Commentary by Paul Moist, CUPE National President
This commentary ran in the National Post on August 25, 2004
Writing on these [National Post] pages last month, Andy Manahan of the Universal Workers Union, which represents construction workers, argued that public private partnerships (P3s) are the best way to address Ontario’s infrastructure deficit – and that union pension funds should pursue them as investment opportunities. As the National President of the Canadian Union of Public Employees, I wish to voice my disagreement. Make no mistake: Ontario’s decision to begin rebuilding its crumbling physical infrastructure is welcomed by the province’s union members. However, P3s are not a necessary or desirable solution.
Union members and pension-fund holders should be wary of the P3 model, which is risky, politically unaccountable and more expensive than a purely public investment model. Ontario’s infrastructure crisis – indeed Canada’s – can be solved through public financing.
Read the fine print of your average P3 – if you can get access to it, which is rare – and you will find that the risk is not transferred away from taxpayers and on to private investors, as proponents often claim. Look closely to see how much risk – including budget, planning and design, environmental, labour dispute and operating performance risk – has actually been transferred to the investors. Most of the risk in P3s remains with the public “partner,” while their commercial secrecy confounds transparency.
Investors look for political certainty to ensure long term returns – they won’t find it in P3s. Just recently, a controversial P3 recreation centre in Cranbrook, B.C., was taken back into the public sector in what the Mayor calls a “new beginning” for the city. Certainty is not a strength of P3s, no matter how long the nominal term of the legal contract.
A more consequential example of P3 risk comes from the U.K., where schools are being built by a private company facing collapse. Jarvis plc, which is involved in the construction of dozens of schools, suffered a 30% fall in its share price in June on top of an earlier 50% slump after it ran into trouble with bankers. Other British P3 school projects have also run into trouble. Thus, most have now been brought back into the public sector.
P3s carry election risk too. In New Brunswick, public anger against tolls on the Trans-Canada highway became a major election issue in 1999 and contributed to the massive defeat of the province’s Liberal government, whose toll-plans were subsequently watered down. P3 hospitals in Ontario became the subject of controversy in the province’s last election, and the McGuinty government is now adjusting these arrangements in ways that, while not completely clear, stand to hit Ontario taxpayers badly.
P3s are almost always more expensive, if only due to the higher costs of borrowing for the private sector – this alone should cause pension fund managers considering investments in P3 infrastructure projects to think twice. Hidden legal and administrative costs pile up too, P3 user fees also resist gravity: Ontario is grappling with steep toll hikes on its P3 highway, the 407, as the company running it has raised rates for some peak hours by more than 200% in the past four years, prompting a court battle over the terms of the 90-year deal.
Budget overruns are common as well. In 2000, the Nova Scotia government scrapped its plans to build more schools after 33 P3 facilities came in $32-million over-budget due to lax building standards, lack of accountability, last-minute design changes and unmanaged site development costs. Finance Minister Neil LeBlanc said that “the PPP school program was an expensive experiment that cost Nova Scotians dearly.”
When unions, community groups and Conservative finance ministers come to the same conclusion about P3s, you know there’s a problem.
There’s nothing wrong with pension funds being lent to governments to help them build public infrastructure and services. These loans have their advantages: They are secure, provide a good rate of return for pension plan members, and help provinces borrow money at reasonable rates so they don’t have to turn to more expensive sources of credit in the private sector. But union pension funds should play an active role in financing Ontario’s infrastructure renewal in ways that retain public ownership and protect the money of pensioners.
Ironically, the P3 infrastructure projects Mr. Manahan and the Universal Workers Union support will not create any more jobs than publicly funded projects. What they will surely produce is more bad deals for union members, pension funds and taxpayers. P3s are risky propositions, combining higher costs, reduced accountability and poorer service. Pensioners, beware.