Wednesday, February 16, 2011

The smartest guys in the room negotiate contracts

Since the beginning of time, the public built facilities in partnerships with private industry. Typically, government determined needs according to its priorities, hired consultants for design and tendering, awarded work to the lowest bidder and financed with its usual sources, typically the lowest cost borrowing available. As long as all phases were completed with competence, the project succeeded without surprises.

However, sharp operators with no expertise beyond influence peddling, were left out of the process. So they invented the public-private partnership, the infamous P3, and claimed for it special efficiency. Partnerships BC was created to  sell the concept to plain folks who pay taxes. That led to hiring of a CEO for more than $525,000 a year and appointment of a board room full of Directors, all loyal BC Liberal contributors who are keen to get back give back.

Partnerships BC justifies its existence. They claim timely delivery, risk transfer and innovation as public benefits of P3s. They also claim benefits through international investments and job growth through economic activity. However, if this is the best justification they can make, I have news: more than a million dollars in salaries is being wasted in the executive offices of Partnerships BC.

Financing costs for any project depend on numerous variables. Most are the same for public or private sectors although British Columbia borrows at rates below those of private companies and has more certainty of its borrowing ability. Indeed, we have already experienced P3s in need of public financing to replace collapsed private commitments. There is no intrinsic financing advantage to a P3 but there is a likely disadvantage.

Risk Transfer: In both public and private sector projects, risk is a matter of negotiation. The risk is held by the party to whom it is assigned through the bidding and contracting processes. In a fixed price contract, the contractor carries risk. In a cost plus contract, the buyer holds the risk. There is no certain advantage to a P3 although there is an advantage to the smartest negotiators.

Partnerships BC boasts that, "if the contractors don’t deliver, they don’t get paid." Yes, just like when the public sector tenders a contract. PBC also says "private companies that are fully responsible for overruns have a greater incentive to innovate at every stage." Yes, and so do contractors hired with fixed price contracts.

The silliest claims are about how P3s attract international financial investment, freeing up tax dollars for other priorities and how private sector activity creates jobs for British Columbians. This is not different from the old fashioned system where the Finance Ministry borrowed funds on the New York bond market and contracted a Vancouver company to build a project.

The last justification is that building infrastructure – such as roads and bridges – sets the stage for even more growth and opportunity. No argument there, except there is no advantage for a P3 in creating that benefit.

Certainly though, there are advantages to public private partnerships, at least to the private party. Notice that most P3 business detail is kept secret. Sunshine rules are eliminated. Since taxpayers know only what the contracting parties permit, there can never be an independent evaluation of honesty and fairness.

Let us work through an example. The old fashioned public process:
  • Government decides to build a bridge after staff determines needs and priorities.
  • Qualified local bridge designers are hired to develop a traffic plan and various engineering tests are completed and cost estimates made.
  • When all variables are determined, the job is put out to tender and awarded to the highest rated bidder.
  • Construction is completed according to the contract and the facility enters service.
  • Permanent financing is matched with the asset's useful life and debt payments are serviced from general revenue or tolls.
  • Maintenance and operational contracts are awarded to local companies with appropriate capabilities. These contracts are periodically re-tendered to ensure optimum service.
The new fashioned public private partnership:
  • Government decides to build a bridge after staff determines needs and priorities.
  • A public private partnership is sought from the handful of international infrastructure specialists interested in this work.
  • A private partner is selected. Since design details and project scope are unclear, engineering qualification do not apply so this is awarded to the nicest people.
  • The nice people hire qualified local bridge designers to develop a traffic plan, conduct engineering tests and make construction estimates.
  • When all engineering and design variables are determined, the private partner sits down with government and negotiates a deal.
  • The private partner takes that irrevocable deal to financiers and arranges money to accomplish the project. It will purchase a completion guarantee bond to satisfy the financiers and the province. It will pay dearly for that guarantee.
  • Construction is completed according to the contract and the facility enters service.
  • The private partner now hires local maintenance and operational contractors with appropriate capabilities. (The private partner is a developer not an operator.)
  • With construction complete and operational contracts in place, private partner will now sell its interest to a pension fund administrator like the BC Investment Management Corp.
  • At the end of the initial contract term, the public will purchase the asset for its then market value or will continue renting it for amounts based on its new value.  
It is that final flip that creates the best profit opportunity although every phase from the beginning is a profit making opportunity.


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5 comments:

  1. A true P-3, the partnership consortium ( a true P-3 is a consortium of various private company's to spread the risk) assumes all risk, including toll collection. This is what a P-3 is all about, taking the risk away from the public purse and transferring it to the private purse.

    Campbell has used a P-3 to hide financial accountability on questionable projects (Canada Line), where scrutiny by the Auditor General's office is nearly impossible.

    P-3's are also being used to transfer taxpayer's dollars (legally) to friends of the government, in the form of maintenance fees (Sea to Sky) who have the P-3 contract.

    In the USA, a Campbell style P-3 would be illegal, bordering on racketeering, but not in BC and Canada it seems.

    Until the mainstream media awake from their pro government stupor, the truth about P-3's will never be told and what is taken as news by those in the media, is pure Liberal propaganda.

    ReplyDelete
  2. There is a timely headline in the Vancouver Sun today:

    "Taxpayers to take $33-million hit as fewer drivers than expected use Golden Ears Bridge."

    That adds up to a cumulative shortfall of $63.8 million since 2009. It seems the risk transfer was from private to public.

    ReplyDelete
  3. So,how much was it to operate the old Albion ferries?

    ReplyDelete
  4. I see in today's business news, that Gordo's former 'on staff' advisor on P3's, has received a late Valentine.
    Jackie Hamilton, (who still advises the BC government on P3 possibilities, but now as a private and highly paid consultant), as vice president of Cloudworks Energy (a previous valentine gift from Gord),has sold the assets and BC Hydro contracts(6) of Cloudworks to Quebec's Innergex Renewable Energy Inc., for a cool $185 million.
    No doubt some of her windfall(flip) profit will find it's way back to her benefactor.

    ReplyDelete
  5. The bottom line for any and all P3's is that the tax paying sots like us are the ones ultimately responsible for these things.
    If these deals go south, for what ever reason, we PAY and PAY and PAY.

    CGHZD

    ReplyDelete

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