Problematic partnerships in BC communities show that toying with recreation services doesnt pay off, as schemes in Cranbrook and Victoria show.
Cranbrooks Rec Plex P3 has been plagued with financial problems. The private partner had trouble securing financing, causing delays. Promises that a long-term lease wouldnt affect the citys borrowing power didnt hold true. Taxpayers have shouldered the costs of budget overruns, and the original corporation was taken over by a large American company.
A 1999 referendum on the issue split the community, as residents who supported expanded recreation facilities questioned the P3 approach. A narrow margin voted to proceed, and the city signed a contract with KeenRose Technology Group, despite evidence the project could be financed more cheaply through the provinces Municipal Finance Authority. The contract to design, build, finance and operate the complex did not distribute risk evenly, leaving KeenRose responsible for only $142,000 in possible yearly shortfalls, while the citys liability was open-ended.
Securing the $22.2 million proved difficult, and caused a three-month delay. Eventually two companies split the loan to KeenRose and construction began in October 1999. The following year, before the facility had even opened, KeenRose was bought by the US firm Cinergy Corporation. Cinergy in turn created a new subsidiary, Vestar, to manage the recreation complex. The complex opened in the fall of 2000.
By the following spring, more problems had popped up. Cranbrook Mayor Ross Priest announced a 10.87 per cent tax increase, and linked much of the increase to the Rec Plex, including a $500,000 construction cost overrun. On the heels of the news, the city auditor announced Cranbrooks borrowing power had dropped substantially. The auditor had included the $22 million Rec Plex lease on the citys financial statement.
The complex also falls short of community needs. The actual project ended up being far from what the community wanted, says Keith Nielson, president of CUPE 2090, which represents the citys recreation workers. Cranbrook is a hockey hotbed. Originally they were talking about more ice surfaces, and a place for kids to hang out. In the end, only one big sheet of ice was added instead of two smaller sheets and fees have gone up. Minor hockey teams still go to a neighbouring community to play. Its cheaper, and there are better times, says Nielson.
KeenRoses original bid vastly underestimated many costs, including maintenance needs. They were unrealistic, but they sure looked good during the referendum, says Nielson. Now, the facility doesnt have enough staff to keep it clean. Further compounding problems, projected revenues from concerts and special events are way below budget. Given the rough ride so far, people are worried over the next 28 years how much this will truly cost us, says Nielson.
Victoria arena a steal of a deal
In Victoria, a $30 million deal to design, build and operate a new arena is riddled with problems. The city is paying a developer to build the facility, and then handing it over to the developer for 30 years, leaving the city with the debt while the developer gets to run the facility rent-free.
The city has signed a P3 memorandum of understanding with RG Properties Ltd. CUPE analysis found that RG Properties is a small, indebted penny stock company trading at a five-year low that hasnt turned a profit in that time. Their shaky structure relies heavily on subcontractors and subsidiary companies for the bulk of their operations.
The problems continue from the choice of partner on down. While the city will keep borrowing costs down by using the Municipal Finance Authority, the final price tag is actually far more than
$30 million, and leaves little remedy for default of payment. The city can only terminate the deal on 12 months notice, and an arbitrators power to force RG to make defaulted payments is limited.
Key financial conditions, such as RGs liability insurance, arent indexed to inflation and thus decline in value and power over the life of the agreement. Important provisions in the deal around liability are ambiguous, and other sections give RG the balance of power, exposing the city to major risks.
Community access is limited, with the public only getting half of non-peak hours and only 34 per cent of prime ice time. RG can unilaterally reschedule the community use time. CUPEs analysis concludes RG has struck a steal of a deal.
A recent community referendum gave the project a green light, but it says more about the publics strong desire for a new arena than their support for P3s. With the city presenting no options, citizens took what they could get.
The deal still hinges on Victoria securing a Western Hockey League franchise and RG Properties has lost contracts before. Two years ago, a P3 leisure centre deal in Chilliwack slipped through RGs hands at the last minute. The city had planned to design, build and operate a P3 and had signed a preliminary agreement with RG in 1999.
However the following year the city announced they were ending their relationship with RG Properties, after receiving an accounting firms review of the proposal. A heavily edited copy of the review, obtained through Freedom of Information gives a hint of the full contents. The accounting firm, BDO Dunwoody, said that while there was a financial advantage, the city was losing control over its properties and handing away the power to make future decisions. The accountant said these intangibles could easily outweigh any immediate cost savings of a P3.
Unfortunately, Chilliwack city council didnt follow through on a good first step. They decided to build the facility themselves, and then contracted out the management to Leisure Aquatics. The corporation manages a pool complex in Surrey that saw fees rise when Leisure Aquatics took over.
RG Properties President and CEO Graham Lee has told the media he wants nothing to do with a union, something that has probably contributed to the companys high regard in the P3 community. The Canadian Council for Public-Private Partnerships gave RG its gold award for infrastructure for the companys Skyreach Place in Kelowna.