Policy

The False Economy of Public-Private Partnerships

By Ryan McGreal
Published October 18, 2012

In the September 27, 2012 issue of Now Toronto, former TTC Chair Adam Giambrone wrote a scathing report on the Metrolinx plan to fund and operate the 52 kilometres of new LRT lines being built in that city.

Giambrone takes careful aim at the province's strategy of using public-private partnerships (P3) that outsource not only the construction but also the financing of new infrastructure. In the general P3 model, companies bid to take over the entire process of designing, financing, building and operating a project.

In this model, private companies borrow to pay building costs, and the government doesn't have to shell out at the beginning, so debt servicing doesn't appear on its books. That's precisely why it's so attractive to governments.

The debt doesn't disappear, it simply gets punted down the line - and the eventual cost often ends up much higher than if the government had borrowed the money directly.

Worse, the structure of the contract between the government and the company often results in either higher operating costs, lower service levels or both - and such contracts tend to be hidden from the public.

At the time of writing, it looked like Metrolinx intended to contract out the operation of the new lines, though they reversed course just a few days later and announced that TTC will operate the lines after all.

As Giambrone argued, the TTC runs one of the most cost-effective transit operations in the world - in fact, Giambrone had even suggested that the TTC could bid to get the contract - and a private operator would not be able to deliver the same service at a better price.

Further to Giambrone's larger point about P3s, a report in this past Sunday's Globe and Mail highlights the "hidden price of public-private partnerships".

Reiterating Giambrone's critique, the report goes on to point out that governments can borrow money at better rates than private companies, so P3s actually cost more in the long run.

Based on a new study of 28 Ontario P3 projects worth more than $7-billion, University of Toronto assistant professor Matti Siemiatycki and researcher Naeem Farooqi found that public-private partnerships cost an average of 16 percent more than conventional tendered contracts. That's mainly because private borrowers typically pay higher interest rates than governments. Transaction costs for lawyers and consultants also add about 3 percent to the final bill.

The main benefit is that governments get to go ahead with projects without having to add the debt to their books. An ancillary benefit is that the private company assumes the risk of delays and cost overruns, but again, the contracts come with a significant risk premium paid to the companies.

Without proper oversight - and the secret nature of these contracts means such oversight is missing - there is no way of knowing whether taxpayers end up overpaying in risk premiums and lining the pockets of the contractors.

(h/t to the RTH readers who sent in links to these articles)

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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By brodiec (registered) | Posted October 18, 2012 at 14:25:20

Or ask any P3 architect how public projects are "value engineered" by P3 contractors to reduce costs and short change the public.

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