The road to saving our services
We can’t afford to fix our highways, sewers and transit on our own. But public-private partnerships can help do the job, says former finance minister
Monday, March 8, 2004 - Page A13
A handful of projects operating in Canada – and the track record of countries like Britain and Australia – have demonstrated an innovative way to deal with the crumbing infrastructure that bedevils cities around the world: public-private partnerships. As the P3 model works in Britain and Australia, private-sector partners not only finance, design and build a project, they also maintain and operate it.
Contractual penalty provisions guarantee that services will be operated and maintained to a high standard, and that facilities will be kept in good repair throughout the life of the contract. When those facilities revert to the public sector, they are in good shape, not victims of years and years of underinvestment.
The federal and provincial governments, and every city and town council across Canada, know that our infrastructure is wearing out faster than we can repair or replace it. Roads are congested and in poor repair, water mains leak, transit systems struggle to cope. For the past 15 years, governments have concerned themselves with eliminating deficits, cutting taxes and funding programs like health care, education and social welfare. In 1962, 22 of every 100 public dollars spent in Canada were for capital investments. By 2002, the proportion had dropped to 12. Now the bill for those years of neglect is coming due.
How big is the gap? In Ontario alone, rebuilding the province’s crumbling hospitals, schools, roads, water and sewer systems will cost an estimated $75-billion. Some set the national bill at $130-billion, or higher, with more than $16-billion needed for water treatment and distribution, almost $37-billion for wastewater facilities, $10-billion for roads and bridges – the list goes on.
Those are just the amounts required to meet existing needs. They don’t begin to address future replacement (50 per cent of our civil infrastructure will reach the end of its serviceable life span in the next 25 years) or expansion to meet the demands of a growing population.
Yet even if we consider only replacement and refurbishment, the figures are large enough to dispel any notion that this investment will come from the public purse. Federal, provincial and municipal tax bases are stretched to the limit. The current federal spending freeze and a $5.6-billion deficit in Ontario are ample evidence of budgets under severe pressure.
Fortunately, the infrastructure deficit provides an opportunity to transform for the better a badly flawed system. If we grasp this opportunity, Canada will enter a new era in which governments are able to harness the expertise and vast financial resources of the private sector to achieve public-policy goals.
With public-private partnerships, the role of governments will change. Their task will be to identify needs, select partners, design appropriate contracts and then let the partners get on with the job of delivering the service. Governments will continue to be responsible for monitoring the contract and enforcing regulations.
Where P3 has been used, the results are impressive. Billions of dollars of private capital has flowed into the construction and upgrading of highways and bridges, schools, prisons, airports, water systems, transit, energy utilities, ports, airports, police stations and housing.
Britons protect their National Health Service as carefully as we guard our health-care system, yet in the past five years the Blair government’s Private Finance Initiative (PFI) has delivered the biggest new hospital-building program in NHS history. In England alone, 64 major capital projects worth more than $26-billion have been given the green light. All of the 21 hospitals already completed opened on or ahead of time, a rare feat when the government was builder and project manager.
Under the P3 model, the government specifies how much it is going to pay and when it wants the project operating. After that, taxpayers are off the hook. If the construction costs go over budget, the private company is obliged to absorb them. If the project isn’t operational by the date specified, the company may be forced to pay a penalty for every day it is late.
Value-for-money studies show that in the appropriate context, a P3 will provide faster, better and cheaper services than traditional government delivery or procurement. Naturally, the private partners expect to make money, and to this end they will strive to innovate and operate more efficiently. After examining projects financed under the PFI, the Britain’s National Audit Office found that making a profit and delivering value for money to taxpayers are not mutually exclusive.
This week the Ontario government released a discussion paper on P3 as the start of a public consultation on infrastructure financing. It is a frank admission that years of neglect have left our public infrastructure in disrepair, and it recognizes the need for, in the words of Public Infrastructure Renewal Minister David Caplan, “real, positive change in the way we plan for, procure, finance, deliver and manage public infrastructure projects.”
Canada has the ideal partners for P3: a dedicated, professional civil service, a vibrant private sector, and considerable private capital, such as pension funds, looking for good long-term investments. With the infrastructure-investment gap growing bigger by the day, we cannot afford to ignore this dynamic model.
Michael Wilson is a former federal finance minister.
The P3 record in Canada has not been pretty. P3 schools in Nova Scotia were unaffordable while P3 hospitals are reporting skyrocketing costs, some doubling their projected costs - with little or no competition. Water contamination and sewage spills by privatized systems have made headlines. Highway privateers have imposed rate hikes unilaterally.
Meanwhile, the public in Britain and Australia are crying foul. Last October, the British government suspended all seven railways contracts with private rail maintenance companies after a series of accidents and skyrocketing debts were shifted to the government.
2 It’s a myth that privateers will live up to high standards. They would rather opt out of the contract if high standards means lower profit margins. In Halifax, Suez refused to take responsibility for meeting environmental standards - a move that would have left taxpayers on the hook for any fines. So the city council canceled the P3 deal to privatize sewage treatment.
A cost-reduction scheme with a private partner at the Highland Creek sewage treatment plant in Toronto resulted in a deterioration in the quality of the plant’s discharge.
Given that P3 contracts often run for 30 years or more, it’s a little early to be claiming that maintenance and upkeep are sustained throughout the life of the building. On the contrary, there’s every indication that governments will be faced with increased costs as they repair crumbling infrastructure or are left to rehabilitate facilities after the private sector has extracted profits from them for 35 years.
In the case of Hamilton’s water system, five different companies held the contract over the first ten years and the city was left to pay for any repairs amounting to more than $10,000 - a recipe for disaster. The fact is that privateers boost profits by cutting corners, making it unlikely that facilities will be returned in good shape.
That’s because of delayed reinvestment and neglected maintenance, a direct result of the spending cuts that Wilson, Martin and others have made. The hysteria around borrowing public money to finance public infrastructure doesn’t make economic sense. Public bonds for public infrastructure is a good investment in our communities, costing much less than any P3 models.
It’s true that tax cuts have led to funding and staff cuts that have resulted in crumbling infrastructure. Instead of investing in our communities, governments have provided big tax cuts to the richest 10 per cent of the population. Look at the Martin government. It froze public spending while handing a $4.4 billion tax cut deal to big corporations.
Cuts in federal and provincial spending and the downloading of responsibilities to cash-strapped municipalities have contributed to this lack of capital investment. For example, in Quebec, the Ryan Reform in 1992 transferred funding responsibility for public transit to the municipalities. As a result, Montreal and Quebec City have lost more than $1 billion in support from the province for transit.
With limited sources of income, municipalities have their hands tied. But the solution is exploring new sources of income for municipalities, not privatization.
The bill is a big one, but financing the infrastructure deficit with P3s will only make it worse. A study of 17 different P3s in Canada shows the private sector paid a 0.5 to 2 per cent higher rate of interest. Over the course of 25 to 35 years that adds millions to financing costs. Public borrowing is the cheapest way to finance public infrastructure with more dollars actually going to direct services. The need for privateers to build in their profit margins only makes that more true.
Britain and Australia provide classic examples of skyrocketing costs. In Britain, P3 hospitals have been forced to cut clinical budgets, because of 72 per cent cost over-runs. In Australia, the cost of a P3 hospital doubled, but the government still will not own the hospital.
It’s naive to believe the private sector will take responsibility for meeting our future public infrastructure needs. Where there’s a profit to be made, they’ll be there. But that doesn’t ensure priorities are met or protect the broader public interest. Any move toward privatization comes with a price tag. Toronto drivers are seeing a 200 per cent rate hike since the former Ontario Tory government sold out Highway 407. Where the governments don’t pay more, users pay more in fees.
There are many investment opportunities available that don’t involve privatizing public services. Public bonds are a good alternative, building government’s financial capacity for needed infrastructure. Canada has a strong capacity to borrow because our GDP to debt ratio is low at both the federal and provincial levels. Debt as a portion of local government revenues has dropped since 1998.
Governments are not just there to pick up the pieces when the private sector fails. Public delivery of public services assures quality, safety and access and provides best value for money. Corporations are accountable to their shareholders to make a profit - not the public. And most of those corporations are multinationals - protected from public scrutiny by commercial confidentiality and insulated from government regulation by trade agreements. Under NAFTA and GATS, governments’ power to set higher health, safety or environmental standards for P3s are severely constrained.
There’s no doubt P3s are a magnet for private investors. They are guaranteed profits they can’t get elsewhere and most often, the public assumes the risk. But at the end of the day, they are still bad news for consumers and taxpayers. In the US, a study found there is an increased risk of death in for-profit dialysis clinics compared to not-for-profit clinics. And in a P3 hospital in Britain, a patient was contacted by the Guinness Book of World Record after he was left waiting on a trolley for 144 hours, shattering a 60-hour record in the same hospital.
What Wilson does not mention is that the number of beds in British P3 hospitals has been cut by 26 per cent, the number of staff has been cut by 30 per cent and the average cost is running 72 per cent above initial projections. Meanwhile, profit margins for the new private owners range from 15-25 per cent.
Look at Hamilton. The P3 water and sewage contract there left the city paying the bill after 180 million litres of raw sewage flooded homes and businesses and spilled into the harbour. It’s government (ie. taxpayers) that is left to deal with problems and the public to assume all risks.
Privatization delivers poor value for money. A study comparing the costs of improving the water distribution system in Moncton found it was cheaper to go public. In Abbotsford, an independent auditor has criticized the increasing costs of constructing a new hospital with a lone bidder. Private profits and public interests cannot be reconciled.
It’s more of a broken promise. McGuinty is reneging on his election pledge to keep public infrastructure in public hands. It seems that everything is on the auction block: hospitals, water and sewer systems, LCBO and more. The discussion paper outlines nine P3 models, leaving few options to keep infrastructure public.