Based on our analysis and the experience of our members, there are a number of reasons why CUPE opposes public private partnerships. First and foremost are concerns about quality, access and safety. As well, we are concerned about the impact of PPPs on the jobs, wages and working conditions of our members. But we are also concerned as taxpayers that PPPs will end up costing us more as corporations reap huge profits from essential services, while creating private monopolies and avoiding taxes.
CUPEs concerns are shared by most Canadians, who question private sector involvement in the delivery of public services. Their own experience tells them that for-profit service delivery will increase environmental risks, increase costs, threaten good jobs and reduce access.
Similarly, they are concerned that PPPs will result in poorer quality services at higher cost, with greater risks and less accountability.
An examination of the Canadian experience of PPPs demonstrates that the public has much cause for concern.
- Quality is compromised
- Public Accountability is Reduced
PPPs will make it easier for governments to evade their responsibilities and more difficult for citizens, consumers and taxpayers to deal effectively with problems related to services. Once a private corporation is awarded a contract, especially long-term ones like PPPs, the public is locked into specific arrangements that may reduce responsiveness.
With private sector involvement, the service contract can become an obstacle to addressing problems such as inferior work, damage to property or accessibility. Service delivery problems that are not covered by the PPP agreement cannot be easily and cheaply rectified. Unexpected problems would require negotiations with the company that is performing the contracted out work.
A resident or user who has a complaint may not know whom to contact or how. They can expect a round of buck-passing with politicians and bureaucrats pointing the finger at the private contractor while the corporation claims that it has complied with the requirements of their contract.
Under public service delivery, problems can be more quickly addressed since politicians, administrators, supervisors and front-line employees can be held accountable to the public.
Another issue related to public accountability and quality of service is the need to ensure adequate access to information about PPPs. When services are provided by public institutions, access to information is protected by law. But the private sector often demands that access to information be denied or severely limited on the grounds that it might undermine the commercial stability and profitability of individual companies.
Unions representing workers at the Philip Services water and sewage treatment facilities in Hamilton Wentworth Region had to wait the better part of a year to obtain a copy of the contract between the Region and the corporation. Even then not all information on the PPP agreement was disclosed.
Restrictions on access to information limit the publics ability to judge the appropriateness of a PPP. It also prevents the public from assessing a corporations performance and holding it accountable for any negative impact on service delivery or the community. There should be no reduction in access to information when a PPP is being considered. If anything, access should be enhanced.
Finally, legal accountability is necessary to maintain quality of service. Unfortunately, it is usually the public entity, and not the corporate contractor, that is held liable for damage to property or injury to people.
When 180 million litres of sewage backed up into 70 homes and businesses in Hamilton, it was the Regional Government that was stuck with legal and cleanup costs, not the private firm operating the facility. Total legal costs resulting from this dispute are estimated at $400,000.
- Taxpayers Pay More
Advocates of PPPs often argue that they will help governments avoid borrowing and save the taxpayer money. On the contrary, PPPs cost taxpayers more.
Public sector does not avoid debt
The driving force behind politicians and bureaucrats support for PPPs is the desire to avoid borrowing and debt. But are public sector employers really avoiding debt with PPPs? Are they reducing the cost of financing infrastructure and service delivery? In almost all cases the answer to both these questions is NO.
PPPs do not help the public sector avoid debt. At best, they only help it defer debt. In the end, the public sector pays more under private sector financing arrangements.
It costs private companies more to borrow money
The public sector borrows money at a rate of interest that is usually a half per cent or more lower than the rate available to private sector companies. Governments, including municipalities, have a better credit rating than even the largest corporations. This is because governments and public sector bodies have stability and longevity that reduces the risk that they will default on loans.
As well, the public sector usually finances its debt over a twenty-year period instead of the 30 or more years common to corporate financing arrangements. These additional years of principal and interest repayment further increase the cost of private sector borrowing.
The Charleswood Bridge in Winnipeg is a clear example of the greater cost of private sector financing.
The company which financed the bridge-building project paid a higher interest rate than would the City; a difference that is estimated to cost taxpayers an additional $1.2 million. Also the City normally repays loans over a 20-year period while the company chose a 30-year period, increasing costs and incurring debt for an additional 10 years. Furthermore, the lease payments made by the City on the bridge are considered financial liabilities so the Citys financial status is not improved by the PPP.
Even small public sector authorities can borrow more cheaply than the private sector, especially if they cooperate with others. For example, the Municipal Finance Authority of British Columbia (MFABC), enables smaller authorities to borrow on the most favourable terms. (MFABC has a triple A bond rating; something most large corporations do not have.)
Leases cost more than debt repayment
Over the long term, it is more expensive to rent a house or lease a car than it is to buy, even if you have to borrow money and repay the loan. In the same way, when you add up lease payments, plus any lump sum payments, it is usually more expensive for the public sector to lease a facility from a private corporation than to borrow and repay the debt. As was the case in Port Alberni, B.C., public financing usually costs less.
The municipality of Port Alberni looked at several options for private sector financing and operation of a new arena. After careful study, the City Council decided it would be cheaper for the municipality to finance and operate the arena itself.
Lease payments are (and should be) counted as debt
The myth that PPPs reduce debt persists because lease payments to private corporations are not usually counted as public debt. Yet lease payments are as much a financial commitment as debt repayment or service charges. For that reason, they should be considered in any assessment of a public bodys liabilities. This would make the true costs of PPPs transparent.
The New Brunswick government has been accused by the opposition of using PPPs as a means of disguising debt and claiming a government surplus. The government had claimed the lease payments on projects such as the Evergreen School in Moncton and the youth services facility in Miramichi were operating expenses and not debt owed by the Province.
Tax breaks make PPPs more costly
Corporations get tax breaks on public assets they own, even if that ownership is for a defined period of time. PPPs allow them to take advantage of tax shelters in the form of a Capital Cost Allowance. As a result, individual taxpayers are forced to make up for the loss in tax revenue.
Avoiding taxes is one of its primary objectives of some forms of PPP. The private developer is allowed to write off the cost of a facility such as a school, hospital or water treatment plant.
PPPs endanger important public assets
Some types of PPPs involve selling off public assets. The lease-back arrangement is one such type of PPP. The private sector actually buys existing capital assets from the public sector and then leases them back to the public sector. The public agency gets a lump sum payment up front that it can use to pay off debt. The corporation gets guaranteed lease payments over a number of years and tax breaks that allow it to write off its capital costs.
This kind of sell-off of public assets and lease financing arrangement has been described as a case of “selling the house to pay off the mortgage.”
“Lease-backs” are most common in the education sector where private corporations have been trying to take advantage of the tax breaks.
In 1996, Johnson Controls and a consortium called the Education Alliance Joint Venture approached the Metro Toronto Separate School Board with a scheme to buy 38 of the boards schools, build 4 new ones, and lease all 42 back to the Board for a period of up to 35 years. CUPE Local 1280 helped expose the deal and made a convincing case against the sell-off.
This type of PPP allows corporate control of a facility during its most profitable years. When expensive renovations are needed, or when demographic changes reduce demand for the facility, the company is conveniently let off the hook.
- Communities Suffer
Some PPPs appear to reduce costs only because they centralize services, creating economies of scale. But these supposed savings do not take into account the negative impact such changes can have on local communities.
Local services are replaced by regional services, providing fewer jobs and robbing the local community of an economic hub. Services are less accessible and responsive to local needs.
Because only large corporations, most of whom are foreign-based transnationals, have the capital and systems to introduce economies of scale, PPPs often serve to transfer economic benefits to other countries. Labour and supplies are more often purchased outside the local area and profits are transferred to other regions.
Local economies suffer when a PPP leads to more unemployment and lower wages for employees. Workers will have less money to spend in their communities due to layoffs and reduced wages and benefits. This will produce further unemployment, welfare and business bankruptcies.
The experience with shared-food services in Canadian hospitals shows that the economies of scale required to make these facilities profitable for private investors damages local communities.
Large corporations such as Sodexho, Versa and Marriott have centralized food services to a number of hospitals. The result has been a displacement of workers and reduced demand for local business.
PPPs can also threaten the health and environment of the community. For example, moving to a PPP might increase pollution and undermine regulations designed to safeguard the environment or protect the occupational health and safety standards under which people work.
As well, corporations may use their control of public facilities to further their economic interests. For example, a software corporation may become invalid in building school facilities in order to promote the marketing of their other products.
- Jobs, Wages and Benefits are Threatened
Many PPPs promise to save the public sector money. One of the principle ways they do so is by reducing staff and cutting wages and benefits.
The Philip Services operation of the water treatment system in Hamilton Wentworth is a case in point. The Corporation promised that it would create 100 jobs for the municipality. Instead, Philip Services dramatically reduced the number of employees.
According to employees at the Hamilton Wentworth water treatment plant, Philip Services has relaxed maintenance standards and has reduced the number of employees from approximately 120 to 75, a decrease of more than 35%. It is estimated that this has reduced Philips wage bill by $2 million per year.
A private corporations demand for greater profit also results in pressure to cut wages, benefits and jobs of CUPE members and other public sector workers.
Over 80% of employer representatives thought that one of the positive effects of PPPs would be lower public sector wages. (CCPPP Report)
Even if a PPP initially includes “successor rights” and the private contractor is obliged to respect the existing collective agreement, the contractor will be involved in the negotiation of a subsequent agreement. Under a PPP, management will want the right to reduce the number of workers and increase workloads through multi-skilling and multi-tasking. They will press to undermine occupational health and safety rules and seek other concessions.
Such changes are detrimental to the workers. Fewer staff doing more work will lead to morale problems that will make it more difficult to attract and keep highly skilled workers.
- Hidden Costs Escalate
The private sector claims that it can provide services more efficiently and more cheaply than the public sector and yet maintain service standards. We know that this is not true.
There are long-term and hidden costs with corporate involvement. Profits for corporate investors are one such cost.
Andersen Consulting has been contracted to re-design social assistance delivery in Ontario. Andersen could earn up to $180 million over six years by helping the government slash $1 billion from the welfare system.
The pursuit of profit compels corporate contractors to increase their market share and cut operational costs. They use “low ball” or “loss leader” bids to gain greater market share, but sometimes find that they cannot deliver on their promises.
The New Brunswick government cancelled an $8.4 million Medicare billing and administration system contract with Blue Cross of Atlantic Canada. The Minister of Health stated that “the government was not confident that Blue Cross could deliver the system called for in a reasonable time and within agreed-upon costs.”
Often the private sector will be guaranteed considerable monies even if it does not complete a project.
The agreement between New Brunswick and Blue Cross has already cost the province $2.5 million and it was reported that “no one will venture a guess on how much the province will have to pay to extricate itself from the deal”.
Once established, the private sector often increases profit by cutting corners on materials, maintenance and service delivery. These “savings” increase the companys profit margin, but they do not reduce the cost of service for the public.
There is a greater likelihood of new or increased user fees under a PPP agreement, fees that will go towards improving the profit margin of the private sector.
The CCPPP survey shows that most public sector managers think that user fees are a good idea. They think that user fees are a way of reminding the public of the “real” cost of services.
User fees are most likely to be introduced when new projects are introduced, such as the toll highways in Ontario and New Brunswick and the Confederation Bridge.
Other costs associated with private sector service delivery include the cost to the public sector of putting in place a selection or tendering process. Developing “requests for proposals”, “requests for expressions of interest” and a system for evaluating tendered bids cost considerable amounts of money.
The contractor too has bidding costs, which again, in the end, the public assumes. For instance, the cost to private corporations of bidding on a major long-term contract can reach $1 million a cost they will want to recoup over the course of the contract. In effect, the public pays the substantial costs involved in turning public services over to private corporations.
The legal costs involved in drawing up and revising contract or leasing agreements can also be significant.
The agreement between Philip Services and Hamilton Wentworth took months to negotiate. The annual administrative and legal costs of maintaining the contract are budgeted at $200,000. This amount equals approximately 30% of total annual savings promised by the company.
Other costs to the public relate to the monitoring and supervising of private contractors to ensure that they are living up to their side of the agreement. As well, the private investor is often subsidized by the public because they still use public facilities, equipment and administrative services. Unless all of these ongoing costs to the public are considered, the full cost of PPPs remains hidden.
Even the promise of improved efficiency and timing under PPPs can turn into just the opposite. Toll highway 407 in the greater Toronto area is an example. Costs were underestimated. The technology was overestimated. And safety standards were not met. As a result, completion was delayed and costs skyrocketed.
The limitations of the toll technology and the inattention to required safety features delayed the opening of the highway. It is estimated that these additional expenses and delays will increase the cost of the project by several hundred million dollars.
The public pays for hidden costs while the private partner is left to reap the profits.
- Governments Bear the Risk
The private sector promotes the myth that they are the ones bearing the risk of PPPs since they often provide the capital. This is false. The public sector often guarantees the private financing for PPPs. As well, it assures the developer a stable, captive market and guarantees that the price of its services may be increased over time.
The privately financed, designed, built and operated Confederation Bridge between New Brunswick and PEI illustrates the risk-free nature of PPPs for the private sector.
Strait Crossing Inc. will receive the equivalent each year of the federal subsidiary to the ferry system ($42 million) plus the revenue from tolls. The company will also have the right to increase toll fees by 75% of the increase in the Consumer Price Index. With a million tourists estimated to visit PEI each year, the revenues to the Corporation are expected to be enormous. Risk for the company is further reduced because the government has issued bonds valued at $661 million to guarantee the debt on the bridge.
Instead of removing risk from the public sector, PPPs actually increase financial risks to the taxpayer, especially if the private sector threatens bankruptcy or defaults on loans.
When Andersen Consulting couldnt find anyone to finance its scheme to reform New Brunswicks justice system, it and the government had to part ways. However, the Province had already paid Andersen $2.9 million to cover computer equipment, leased office space and six months of consultants fees.
It is important to remember that corporations, even large ones, do not have the stability and longevity of municipalities and provinces. PPP agreements are often 25 to 35 years in duration while corporations can prosper one year and be out of business the next.
- Private Sector Monopolies are Created
PPPs are promoted in the name of competition. The private sector claims that by breaking the public sector monopoly on service delivery, service will be improved and costs reduced. But their real objective is to secure a very profitable monopoly for themselves.
Many services to the public are “natural monopolies” because only one organization or agency can deliver them. Water and sewage treatment services are a case in point. If a “natural monopoly” exists, it makes sense that democratically controlled and accountable public bodies deliver this service, not a foreign-controlled transnational.
PPPs replace accountable public agencies and governments with investor-controlled private corporations. This is especially troublesome where the contractor wins long-term agreements of up to 35 years. Such contracts are highly prized by the private sector because they assure a captive market and guaranteed income.
Once a public service has been converted to a PPP, the public may become completely dependent on private contractors. By selling its facilities and equipment and losing its in-house delivery expertise, a public agency loses the capacity to directly deliver service. As a result, the public is more vulnerable while the private contractor is in a position to extract ever more money and other concessions.
- PPPs Lead to Full Privatization
Full privatization, the sale of public assets to private investors with some public sector regulation, is considered by most to be a step beyond PPPs. However, there is a connection between full privatization and PPPs.
Toll highway 407 in the Toronto area is an example. Although the highway has just come into service, the 35-year design, build, operate and transfer deal is under review for full privatization by the Ontario Government.
PPPs can be viewed as a phase or stage in the privatization process. Once a corporation begins to play a significant role as a service provider within the public sector organization, it can more effectively promote privatization of a service.
Private delivery of public services will lead to a reduction in the quality of service as staff and standards are reduced in a drive to maximize profits. For capital projects and infrastructure, corners are cut, reducing safety. For services and programs, access is reduced as barriers to participation increase. For example, increased user fees and reduced first language services will limit access for the poor, women, ethnic communities and persons with special needs.
The pursuit of profits under PPPs increases the likelihood that the public will experience a decrease in the quality of service, such as occurred with private sector involvement in New Brunswicks welfare system.
When Andersen Consulting, the transnational consulting firm, revamped the welfare system in New Brunswick, hundreds of jobs were lost. The remaining workers were told they could spend no more than 4.5 minutes per month talking to each client and it became very difficult for clients to speak with welfare staff.
The long-term ownership or control over public assets by private sector companies may encourage neglect of maintenance standards. To increase profit, the private sector may delay repairs and other types of maintenance until ownership reverts back to the public sector. In a battle of profit against service, it is the profit driven agenda that wins out.
Alternatively, privately operated facilities will receive more support than publicly operated ones. This promotes two tier services. For example:
Toll highway 407 may receive priority support and maintenance over the parallel public highway 401 because the government is committed to repayment of financing costs and operation of the toll highway. Because they need to encourage a high volume of use by the travelling public, there will be pressure on government to use scarce financial resources to maintain the private toll highway at the expense of public roads.