Thursday, June 11, 2015

P3 primer for British Columbia

A May 2015 article by Vaughn Palmer reminded me of an article on public partnership first published here in 2013. Palmer's column included this:
"Among the eyebrow-raising details was the disclosure that longtime Partnerships boss Larry Blain had been doing double duty as board chair and a paid consultant on a number of projects."
During time at Parternships BC, Mr. Blain averaged over half a million dollars a year in salaries and expenses. What else he received is not public information.


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 term 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 who earned $1.6 million over three years and appointment of a board room full of Directors, all loyal BC Liberal contributors who are keen to take 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 from economic activity. However, if this is the best they can do, I have news: well more than a million dollars in salaries is being wasted in the executive offices of Partnerships BC. By the way, in this time of Not-Net-Zero, the two senior officers of Partnerships BC had their salaries rise by 11% in fiscal year 2012, costing the corporation almost $5,000 a month.

Financing costs for any project depends 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 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.

In practice, when private partners don't deliver, public partners sweeten the pot through renegotiation and taxpayers pick up the pieces. One study noted as many as 87% of P3s are changed after initial agreements are signed.

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 part. Notice that most P3 business detail is kept secret. 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 designers and traffic engineers are hired to develop a plan and various engineering tests are completed and cost estimates made.
  • When all variables are determined, the job is put 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 friendliest people.
  • The friendly people hire qualified local designers and traffic engineers to develop a 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 such as the BC Investment Management Corp.
It is that final flip that creates the best profit opportunity although every phase from the beginning is a profit making opportunity. Profit making opportunities with almost no public scrutiny.

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25 comments:

  1. What a P-3 was originally created for was to get private money for a government project, where the private lender would assume "risk" by making money from the project over a period of time.

    The Nottingham LRT is a good example. In order to meet a financial timetable, the government put the tender for the (then) Notts LRT project to tender. There was a bidding process by various consortium's for the project and the winning consortium (after much public consultation)"hired" money from a bank to complete the financial deal. The winning consortium assumed the risk of operation over a period of many years and the payback was the fares generated by the project.

    Today, the Nottingham LRT operates at a profit, so much so, that a second line is being built.

    This was a win-win situation where the government got a well designed transit system, which success, ensures its expansion.

    (Please Note: The winning consortium paid compensation to those businesses affect LRT by LRT construction)

    In Gordon Campbell's BC, a P-3 project is a give away to political friends and insiders.

    The government designed a light-metro in a subway, with little or no public input and the consortium's that bid on the project could not alter the nature of the project.

    (Please note: Both Siemens and Alstolm strongly recommended a change from SkyTrain light metro to a larger LRT network using Arbutus. Alstolm dropped out of the bidding process and the govern met kicked Siemens out)

    SNC Lavalin was part of the two winning bids and the government opted for the cheaper bid using a dumbed down Hyundai 'ROTEM' metro cars built to a light metro standard. So Mickey Mouse was the winning bid, that the consortium winning the bid DID NOT ASSUME RISK and instead collects an annual stipend from the government based on ridership. As the P-3 is considered a "private" deal, the public have no way in finding out the real contract and its obligations.

    The Canada Line was ill designed and as costs soared, the scale of the project was reduced.

    Example:

    1) Bored tunnel was changed to cut-and-cover construction.
    2) No compensation was to be paid to affectedbusinessess.
    3) The metro was so designed to accept only too car trains.
    4) Capacity of the light metro is a mere 15,000 pphpd (a streetcar can carry more) and the cost to increase capacity is well over $1 billion.
    5) There is no scope to expand the metro in Richmond.
    6) The Canada Line and the SkyTrain system are incompatible in operation.

    What Gordon Campbell's P-3 has left the taxpayer with is a white elephant, which left a train of financial destruction and bankruptcy behind it. Not nearly carrying the ridership to sustain the metro (400,000 passengers a day), the Canada Line will be financial drag on TransLink for generations to come.

    And now here comes the kicker, the agreement with the operating consortium, comes to the end, just in time, when the subway will need refurbishment and refurbishment may cost , not millions of dollars, but billions of dollars!

    Gordon Campbell's P-3 have left the BC public with massive debt and his corporate friends, very wealthy.

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  2. Norm and Zweisystem: thanks for such in-depth explanations of this made-in-BC scam.

    Perhaps I wasn't paying attention but I didn't realize that the Canada line and Skytrain are not compatible systems. That's contemptible.

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  3. There's a special place in Hell for Gordon Campbell.

    I hope he faces the full consequences of his thievery from the BC taxpayer, instead of this cushy UK appointment Harper gave him.

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    Replies
    1. It is in the cell with Christy Clark.

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  4. @ B. Stewart:

    What we call SkyTrain, is a proprietary railway system whole owned by Bombardier Inc. and has been marketed as ICTS, ALRT, ALM, and now ART SkyTrain is powered by Linear Induction Motors or LIM's and require a 'reaction' rail in the centre of the tracks to operate. As well, the SkyTrain system is automated (driverless), which requires a completely grade separated R-o-W.

    The Canada Line has cars built by ROTEM (Hyundai) a standard electric (squirrel cage) motor and is compatible (depending on the loading guage) with all other railways. The Canada Line is also automated (driverless).

    The Canada Line cars operate by adhesion, they cannot operate with the SkyTrain cars which are propelled by magnetic force. Because SkyTrain is not compatible with other railways including other LIM operated railways, the mini-metro can only operate on other ALRT/ART Bombardier systems, it can not operate on other railways. Therefore the Canada Line and the rest of the SkyTrain system are incompatible in operation. Through running on each other's lines is impossible, therefore we must purchase different vehicles for each metro system and both the Canada Line and SkyTrain must compete for the transit dollar.

    This suits InTransitBC, because they do not give a damn about good transit, all they care about is receiving their $100 million per annum P-3 concessionaire fee! What is really nasty about all this, not once in the past decade has the mainstream media ever mention this, nor have they investigated the real costs of operating the SkyTrain mini-metro system.

    It's sad that Good & Co. at CKNW never investigate the real causes of TransLink's dubious finances and keep chortling along about fare evasion which is nickle and dime stuff compared to the other financial outrages happening with TransLink.

    ReplyDelete
    Replies
    1. Media, NW in particular, mislead the public about fare evasion. For example, TransLink is spending more than $100 million for turnstiles. They cannot say how much they will save but estimate $14.5 million was lost in 2011. However, that is system-wide, including buses and they claim that, through increased enforcement, they've already saved 45%. In other words, TransLink suggests fare evasion losses are now around $8 million a year, system wide. On Friday, Simi Sara's program described gates as necessary to show the transit agency is serious about dealing with fare evasion. Yet, most of that occurs on buses and SkyTrain turnstiles will do precisely nothing to reduce loss of revenue on buses. Perhaps, TransLink is spending $100 million plus to save $2 million a year of SkyTrain fare evasion. Almost everyone would agree that would be financial insanity.

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    2. And who lobbied for the group that provided the fare gates? KEN DOBELL!

      I bet he has a sailboat called the "S.S. BC TAXPAYER"

      Delete
  5. Time for a Quebec style judicial inquiry in this backwater. Lots of candidates. We're looking at you Coleman, Hochstein, and Brucie Clark, etc, etc.

    ReplyDelete
  6. We had practically the whole beach to ourselves save for a group of a dozen people working at the south end.
    "Great, let's start digging right over here!"
    "Nope," says my buddy, "we're gonna go dig over there where all those people are."
    "Why? Plenty of room right over here."
    "Why?...'cause that's where the clams are!"
    And he was right: the better clam digging drew a crowd to that end of the beach and we joined them. Didn't have to pay anybody, didn't need a special invite, didn't have to send a cheque to the Band Office (we were on an Indian Reserve); but then again we obviously weren't there to pillage the beach for profit (only had one bucket) so nobody begrudged us a spot to dig amongst them, even invited us over to the big old aluminum pot cooking clams over the fire.

    P3s certainly attract a lot of interest, too, so much so I've wondered just what kind of "efficiencies" the profiteers talk about that would make these projects so, to judge from the crowds, profitable. Do they pay their workers less? Do they cut corners or use cheap materials? They can't get financing more cheaply than government does so that can't be one of the "efficiencies". Now I see the sweet little risk-aversion deal they got goin' for themselves. Thanks, Norm, for clearing this up for me.

    Hitherto I had based my shallow analysis on a few simple red flags: the puddles of drool whenever profiteers start salivating over government contracts is a clue; the suspicion that contractors who contribute to the BC Liberal party expect to get an inside track to the goodies; the creation of a publicly funded PBC office where party contribution correlates more starkly to lucrative executive positions and may also be decisive in awarding contracts on the same basis. But the thing that informed me most was Gordon Campbell's fingerprints all over the P3 concept: his reputation for dishonesty will forever by exemplified by the BC Rail scandal, the 2009 deficit lie, the HST lie and the demise not only his government, but probably his party as well. Pretty shallow analysis, I know, but my gut reaction has been to distrust anything Campbell has touched, P3s being right up there.

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  7. Two of the "efficiencies" when it came to the Canada Line...going with cut and cover over the originally proposed bored tunnel, then refusing to compensate the merchants on Cambie Street for destroying their businesses, even though compensation was part of the formula for pretty much every other rapid transit project of this scope in the civilized world.

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  8. One significant alarm bell is secrecy.

    For example, regarding the North Island Hospital Project, which the province is rushing to finalize before the election, consultants presented a business case proposal to Treasury Board. The approved business case is a secret treasury board document, unseen by the public. Even the local regional health board members are not allowed to see it, and their organization paid 100% of the costs to produce it. They are also responsible to collect 40% of the cost of the new buildings from their local tax base.

    This is one more deal that ought to be delayed until the election if decided.

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  9. The P3s in B.C. were to benefit el gordo and his gang. the people of b.c. got nothing out of them, beyond few temporary jobs building the whatevers. el gordo is still enjoying "the good life" in england on our tax $. I do hope the drag the bastard home and put him on trial once a B.C. Rail inquiry exposes who did what to whom and who benefited.

    the article is good reading and simply explains for every one how b.c. is going down the drain

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  10. The private sector would not be involved in P 3's unless they make sure they have gotten the bigger end of the stick,when it comes to benefits . Liberal backers and friends have made out quite handsomely,on these kinds of deals.

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  11. And he has the 'Order of BC'! That'll teach him a lesson ..

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  12. Note the key words..not operators but developers, easy to see how this got implemented. Gordo and his cronies were heavily into this from the beginning.

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  13. If one thinks about the net result to taxpayers, the way the Clean Energy Act regarding the IPPs was constructed by Campbell & Co. should also be considered a form of a P3. Our kids and grandkids will still be paying off various consortiums for the follies foisted upon us by the BC Liberal Party.

    What really pisses me off is the fact that this government still tries to portray themselves as fiscally competent when in reality they are anything but, and on our dime as well.

    AARGH!!!

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  14. NOTICE TO READERS!!!!SUPER ANALYISIS!!! REQUIRED READING!!
    In fact, anyone considering voting should have to attest to reading the foregoing!
    I HAVE NEVER IN MY 55 YEARS IN THE CONSTRUCTION BUSINESS SEEN ANYTHING AS EGREGIOUS AS THIS METHOD CONSTRUCTION PROCUREMENT!!
    Unfortunately I'm not as capable as Norm is in explaining it. And I tend to splutter and spit when I get upset. (My keyboard is s sea of spittle, and I'm only writing!)

    And just think, this is only ONE of dozens of stories. Someone contact Quebec - we have you beat every which way but up!
    John's Aghast!

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    Replies
    1. Agree, you hit the nail on the head.

      Delete
  15. I agree John...AGT should get a peek at this! Superb analysis Norm, right on the money.
    The next question is how do we undo all the damage,... corruption commission, judicial enquiries, class action lawsuits...how bout all three!

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  16. $102 billion of BC Govt Contractual Obligations, many of which are P3's:

    http://www.fin.gov.bc.ca/ocg/pa/13_14/Contractual_Obligations.pdf

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  17. Unbelievable, the only thorough solution to this entire 15 year kleptocratic regime, is a Quebec style criminal corruption enquiry. This incredible ripoff of the taxpayer, and future generations, is an organized and orchestrated white collar, mess, akin to corrupt regimes in the third world.
    Massive debt, corrupt spending practices, and abuse of taxpayer funds, what else can this group of miscreants be involved in?
    Organized criminal empires have a new poster child. A dubious comparison indeed.
    This corruption is so ingrained and so wide spread, one has to wonder, how it can be dismantled as well as legally prosecuted. This discussion is incredibly revealing in its scope and depth in terms of the malfeasance within this governing body. How are the citizens to proceed? Is this a new "criminal" form of governance that has found its way into Canadian politics?

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  18. Well, I just got up off my spittle covered keyboard (two plus years later) to realize absolutely NOTHING has changed. The corrupt group of miscreants still abound, secret deals are still the norm and we're even further in debt in spite of Chrispy's job opportunities and LNG specials. The future does not bode well! I would hazard a guess that after two more years of corruption and sweatheart deals there will be no one willing to take on the thankless job of governing this debt ridden Province.

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  19. So a lot of what would previously be considered government debt is now in the category of contractual obligations (which is now at $102 billion)? See:

    http://www.fin.gov.bc.ca/ocg/pa/13_14/Contractual_Obligations.pdf

    That would be in addition to the BC total provincial debt, now at about $64 billion, projected to grow to over $70 billion by 2017/18:

    P. 35
    http://bcbudget.gov.bc.ca/2015/bfp/2015_budget_and_fiscal_plan.pdf

    That's about double what it was in 2005:

    http://bcbudget.gov.bc.ca/2005/summary/default.htm

    The government's response to this would be that it's ok for the debt to keep growing by $billions every year.

    Why, because they project that BC's GDP will keep growing infinitely, so the debt/GDP ratio will stay roughly the same.

    However, I'd say there is a problem with assuming the economy will keep growing every year for infinity, on a finite planet.


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  20. Our economic strategy going forward into the future will work, as long as there is a continually expanding supply of resources like clean water, minerals, soil etc.

    Similarly, a ponzi scheme will keep working as long as there is a continually expanding supply of new investors willing to buy in.

    ReplyDelete
  21. One of the key targets for anyone looking to obtain the best bang for their buck is to eliminate or reduce economic or operational middlemen. It’s common sense. So why would a government go out of its way to install, rather than remove, middlemen?

    It’s easy to surmise that the government is simply not looking for the best bang for our buck, or that there is a dearth of common sense available within. But Captain Obvious would point out the statement in the post that explains everything concisely. “Since taxpayers know only what the contracting parties permit, there can never be an independent evaluation of honesty and fairness.”

    He would also quibble with the starting point in the new-fashioned public private partnership. Given examples such as the new bridge to replace the George Massey Tunnel, staff no longer determines needs and priorities. Christy does. And her needs and priorities rarely align with those of the public.

    ReplyDelete

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