When will governments figure out that they’ll never come out on top on a P3 deal? Never. These special interests have armies of lawyers to write these contracts in a way where taxpayers will always be on the hook for the losses and will guarantee the profits of these corporations. This example in Ontario is just another in a Texas-sized stack of examples of P3s that fleece the public.
Public-private partnerships come with a high cost
North Bay Regional Health Centre
By Rebecca Zanussi
December 26, 2014
North Bay Nipissing News
ALMAGUIN – An initiative meant to save the province money is actually costing more — $8 billion more to be precise.
Auditor General Bonnie Lysyk released her annual report on Tuesday, Dec. 9, reviewing a number of initiatives led by the Ontario government. One of the areas she examined in detail was private-public-partnerships, known as P3s or Alternative Funding Procurements (AFPs).
“For 74 projects that were either completed or under way under Infrastructure Ontario, tangible costs, such as construction, finance and professional services, were estimated to be nearly $8 billion higher under the AFP approach than they were estimated to have been if the projects had been delivered by the public sector,” Lysyk said following the release of the report.
“About $6.5 billion of this is due to higher private-sector financing costs.”
The North Bay Regional Health Centre was one of the first AFP projects built in Ontario. And Dave Smits, vice president of corporate and support services for the health centre, believes that the process was worth the investment.
“In a traditional method of funding, you would bid the work for the new hospital project, pick a general contractor, and after the new building was built undergo a typical warranty period of about a year,” Smits says.
“But after that the contractor’s work is essentially done and you’re responsible for the maintenance of the building for the rest of its life cycle.”
That could give way to complications, Smits says, because while the costs for constructing the building were approved, maintenance issues had to be dealt with as they arose, and sometimes the funding wasn’t there.
But in an AFP hospital the onus of maintenance — and the estimated cost over the hospital’s mortgage — is on the contractor.
“With AFP hospitals, the government realized the traditional approach to funding ongoing maintenance hadn’t been particularly successful,” Smits says.
“Over the life, the buildings were falling into a state of disrepair. Certain systems were maybe not maintained or kept in line.”
And that’s where AFPs come in. The contractor bids a capital cost for building the new project, but also includes the maintenance costs. And if any of it isn’t maintained — whether it’s walls needing a new coat of paint, or equipment being out of commission — the contractor could face a financial penalty written into the contract.
However, Lysyk said in her report that a typical AFP project almost always costs significantly more than if governments just put up the money themselves and hired contractors to build the same infrastructure, under conventional contracts.
But Smits says it’s not quite that simple.
“What we’ve seen in the past, often from a life cycle perspective, is that the cheapest isn’t necessarily the best,” he says.
Smits provided his personal opinion that before using the AFP model, a hospital would have to consult on a design, submit it to the ministry for approval, and likely be told to cut down the cost. That meant either shrinking the space, or compromising on value of equipment upfront. The practical example Smits gave for this is choosing a vinyl flooring over tile because the vinyl would cost less, even though the tile would last longer. In the long run the cost of maintaining and replacing would actually be more, but that wasn’t the ministry’s focus: the upfront costs were deemed the priority.
“The difference with AFP is the contractor has been given that responsibility to come up with the best accommodation of finishes, quality of equipment, etc. that they as experts have to figure out how to balance the upfront costs and maintenance,” Smits says.
“So, it makes them think really hard about, ‘Am I going to just cheap out on all the finishes because I’m going to have to replace them,’ versus, ‘No, I’m going to go with better finishes that will last longer.’”
P3s began appearing on the provincial landscape in 2001, when the then-Minister of Finance announced that public-private partnerships would have to be seriously considered before the Ontario government would commit any funding for new hospitals that were needed at that time.
In November of 2001, the government approved the development of two new hospitals (in Brampton and Ottawa) using the P3 approach.
According to Lysyk’s report, as of March 31 there were almost $23.5 billion in liabilities and commitments that current and future governments will have to pay for AFP projects. The province has also borrowed money to pay AFP contractors when projects were substantially completed. The Auditor General estimates these borrowed amounts to be an additional $5 billion, included as part of the total public debt recorded in the Public Accounts.
Lysyk also found that two of the risks Infrastructure Ontario used in its assessments for P3s should not have been included. Without them, public-sector delivery for 18 of the 24 projects would have been assessed as $350 million cheaper than delivery under AFP.
Infrastructure Ontario estimated that this $8-billion difference was more than offset by the risk of potential cost overruns if the construction and, in some cases, maintenance of these 74 facilities was done by the public sector.
Smits says while there are some complications that arise with AFPs, such as different sets of complexities, he has found the model much less stressful than the previous method.
“At the end of the day I’m getting funded to keep this building in what I consider a very good state of repair,” he says.
“And I’ve been guaranteed that funding in my contract. It gives me a certain comfort I couldn’t have had in old delivery model. In past, you weren’t sure where the money was going to come from to keep your building up to date and looking good and functioning well.