An award-winning Winnipeg professor has published a new book warning of the hidden dangers of private-public  partnerships while using a New Brunswick deal to back up his point.

John Loxley, an economics professor at the University of Manitoba, released his newest book entitled Public Service, Private Profits this week complete with a case study that dissects the water-treatment plant deal between the City of Moncton and the largest publicly traded water company in the world.

The book uses case studies in Canada over the past two decades while aiming to explain the economics of private-public partnerships–or P3s–as a future guide for provincial and municipal governments to use in negotiations or decision-making.

Loxley has been working on the book since the late 1990s.

”The argument in favour of P3s is to shift the risk from the public sector to the private sector,” Loxley said. “So what you have to look at carefully in each case is to analyze how much risk is transferred and whether that risk is worth the extra cost that all of the deals involve.”

”The record is not very good and the book is designed to help.”

One of the studies sinles out the city of Moncton and the deal struck more than 10 years ago to build its water treatment plant. 

Veolia Water Canada built the Moncton plant at a cost of roughly $23 million in a lease-to-buy agreement. The private firm fronted the money and built the plant and then took over operations.

After 20 years, the city will own the plant outright and can renew or terminate the operating agreement.

”But there is a capital charge in water fee that you pay and that capital charge is basically paying for the debt that the private company borrowed,” Loxley said. “Inn analysis for the book, the cost of borrowing which is applied in a capital charge is much higher than what Moncton could have borrowed at.”

”And Moncton now ends up paying $31 million for a $23 million water-treatment plant.”

Loxley added: “The dispute here is not about the quality of product that Moncton received, that’s indisputable knowing the quality of Moncton’s water before, it’s about whether or not the private partnership was cheaper alternative.

The City of Moncton maintains it was.

”This project came in on budget and on time, “Said Steve Trueman, Moncton city solicitor. “I think this particular agreement can be held out as a model of what is good about P3s.

We retain ownership of the water supply, they treat it for us and we control the water rates of the citizens and the private contractor does not.

Truman said the operating costs are also tied to the product pricing index, meaning the private partner has assumed the risk of market price jumps for water treatment chemicals and other expenditures.

”Professor Loxley’s book was just released and we have not had the opportunity to review the citations or calculations for his work,” said Lou Ann Baker, spokeswoman for Veolia Water in a statement. “We do know , however, that his suggested profit margins are grossly overstated. More importantly, we know that the citizens of Moncton are benefiting from a partnership that delivered and now operates a state-of-the-art drinking water facility that exceeds Canadian water quality standards.”

Veolia Water Canada also argued that Moncton is receiving a savings of $12 million less in capital, operating and maintenance costs over the life of the contract than if it had been done by the utility alone.

”We also believe it is important to remind citizens that the greater Moncton community was suffering through repeated boil-water advisories and was at risk of water-borne pathogens prior to the partnership,” Baker said.

Loxley won the 2010 John Kenneth Galbraith Prize in Economics in March, for a demonstrated contribution combining economic analysis with a commitment to social justice.

He has priviously been commissioned by the Canadian Union of Public Employees to investigate P3 agreements across Canada.

Those findings include a scathing report on the Evergreen Park School in Mincton, a P3 project which Loxley said cost the province roughly $900,000 more than a publicly financed and owned project at the end of its lease.

Loxley cited the New Brunswick Auditor General’s 1998 report which underlines expensive borrowing costs because of a high interest rate for the inflated price tag.–Adam Huras, Telegraph Journal June 2010

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 THE P-3 CHALLENGE

Who should be building Canada’s roads, hospitals and schools?

Patrice Dutil

Public Service, Private Profits

The Political Economy of Public-Private Partnerships in Canada

By John Loxley, with Salim Loxley

Fernwood Publishing, 224 pages softcover

ISBN  9781552663387

Three years ago a new hospital opened in Brampton, northwest of Toronto. Long-awaited in this rapidly growing city, the Brampton Civic had barely begun operations before it was mired in controversy. Unfortunately, as sometimes happens in hospitals, two of its patients died. But it was not providence, or bad luck, or professional incompetence that in this case was decried. Instead, as an indirect result of a media campaign spearheaded by an alliance of political groups and public-sector unions, the blame was laid squarely on the fact that the new Brampton hospital was a public-private partnership.

This assertion—whose speculative logic in relation to the two deaths was almost impossible for hospital officials to rebut—made headlines and the resulting tempest was whipped to a degree that led to dismay even in the highest echelons of Ontario’s Liberal government. The Brampton Hospital had indeed been built by an arrangement that gave a private sector builder significant leeway in designing the facility and choosing its materials in order to meet the province’s project budget and constantly changing needs. Otherwise, the new institution was a picture of normality in terms of its human resources:  the nurses were on salary, the doctors on piece-work, the majority of the staff hired on union-based agreements. As in any large building, some private sector contractors were hired to deliver specialized services: parking, food services, portering, security and cleaning.

This episode pointed not just to the power of politically motivated media campaigns involving emotive issues such as hospital care, but to a deep-seated unease about public-private partnerships. The suspicion is that P3s, as they have been nicknamed, undermine public sector principles, while favouring corporate interests. Perceived as ideologically driven, P3s are criticized as inefficient, costly, and of dubious value in delivering public goods. None of these arguments is new. Indeed, they are eerily similar to those made against the transcontinental railway dreams of Macdonald and Laurier more than a century ago.

In Public Service, Private Profits, University of Winnipeg economics professor John Loxley delivers a sober evaluation of the P3 experience in Canada, and concludes that P3s are bad. His assessment is not surprising. As he states in his acknowledgments, much of the book’s research was paid for by the Canadian Union of Public Employees, and he credits several CUPE employees who “provided invaluable help in many ways (p.v).” Far from being a disqualification, this association nevertheless qualifies this book. CUPE has long been opposed to P3s and has, in its own often clumsy way, published ‘research’ to show that P3s are unnecessarily expensive. Is it worth noting out loud that P3s are also likely to be contrary to the interests of members of CUPE?

Loxley’s treatment is far more comprehensive than much of this previous CUPE-inspired analysis. Governments are attracted to considering P3s for several potentially sound reasons. Not least, they may save money, although by and large that has proven to be an illusion. Also, they theoretically allow governments to share risk with private sector counterparts; so, if a new roof leaks, the private partner will be the one who is presumably forced to fix it. In addition, governments can benefit from private sector expertise, especially when they incorporate incentives for private partners to perform well. In theory, if the private sector has a stake in a project’s long-term success as a full-fledged partner rather than a mere subcontractor, and can also benefit by saving money, then a better public good will be delivered. Moreover, governments will be exposed to new techniques in building, financing, and know-how. Finally, some studies indicate that the involvement of large banks in P3 projects serves a disciplinary role, since bankers’ prying eyes seem to cast more fear in the hearts of corporate players than whatever managerial oversight public servants can muster.  

Loxley delivers in explaining the rhyme and reason of P3s to a lay audience. In a well written and neatly structured introduction, he deftly walks the reader through various P3 categories, and shows how commonplace these initiatives are when the most inclusive definitions are used. State players at all levels (including aboriginal governments) enter into partnerships to consult, to purchase services and goods, and to fund and operate public initiatives of almost every possible type: landfill and recycling activities, water and wastewater treatment, hospitals, prisons, recreation and culture centres, public transit services, energy generation facilities, and even government services.

None of this is new, but in recent decades such practice is expanding for several reasons. First, the idea that public policy-makers can be all-knowing has perished. Information is too widely diffused to pretend that public servants can comprehend—and act upon—complex realities without outside help. Also, the state is increasingly finding that its room to manoeuvre is being constrained by limits, many of them self-imposed, on new public sector hiring. To a certain extent, these constraints stem from politics and ideology. Few politicians (and that includes many on the left) see much to be gained by having the state employ more and more people on a permanent basis, when the costs of public sector employment tend to be so high and when public aversion to talk of taxation increases becomes ever more pronounced.

And in the way of potential projects, there is much to be done. As Loxley points out, Canada’s existing public infrastructure is old, aging fast, and in urgent need or repair or replacement. Moreover, what exists is not sufficient. Canada needs more roads, bridges, railroads, transit systems and electricity generation to guarantee its prosperity. These are mighty good investments to make, but would be massively expensive additions to the state’s budget—especially at a time when health care alone now consumes over forty percent of it.

Not surprisingly, governments have sought ways to cut infrastructure costs. Mostly, they have delayed improvements and maintenance and put off new construction. Occasionally they have found ways to cut costs by hiring private contractors not only to build infrastructure (governments have never built things on their own), but to design it, own it (so it can be leased back to government on a long-term basis) or operate it. There is an important point to be made here. Intensive forms of private participation in public projects—the sorts of P3 activity that Loxley is most concerned with—are still experiments in this country. The dominant Canadian practice is still for governments to raise money on their own, oversee construction of needed facilities, and manage much if not all of their operations. Because such P3s are still pilot projects, it is not surprising that some have delivered uneven results.

To illustrate this performance, Loxley highlights eleven cases: four each from New Brunswick and Ontario, two from Manitoba and a federal initiative. The list includes bridges, highways, schools, hospitals and water-related infrastructure. His conclusions are clear and surprisingly nuanced. “In all cases,” he writes, “value for money was not established,” and in terms of the efficacy of P3s he remains “generally skeptical.” But Loxley recognizes that P3s will remain a popular choice with governments and that they “might be improved(p.viii).” Interestingly, the Canadian Council on Public Private Partnerships – the industry-supported cheerleader and repository of argument in favour of P3s—makes the same points.

But Loxley’s case studies also have serious limitations. The projects he has selected were negotiated and completed in the 1990s and early 2000s when cash-strapped governments were desperately looking for new solutions and sent out poorly trained public servants inexperienced in dealing with the few builders and financiers who could manage projects of this scale. This time capsule approach leads to some major oversights. For instance, his discussion of the Confederation Bridge connecting PEI and Nova Scotia highlights what might still go wrong with the deal, even though the appliance was installed thirteen years ago and delivered on time and on budget. Loxley’s treatment of Toronto’s Highway 407 also ignores the great virtues of this partnership which was spearheaded by Bob Rae’s NDP government in Ontario: it developed innovative technologies and delivered the project ahead of schedule and on budget before it was foolishly sold for 99 years by the provincial Tories in 1999.

Still, Loxley’s muscular discussion of the chimera of ‘private sector financing’ in his treatment of his selected cases is very effective. Using material provided by numerous Auditors General, he points to the illusion that governments can either save money or keep their expenses off the books. The idea, originally, was that instead of incurring debt in order to fund the building of infrastructure, governments would ask the private sector to finance and build and then rent out the facilities to their departments and agencies. In terms of reporting expenses, it seemed more acceptable for some governments to declare that they had paid a few million dollars for rent and services, instead of reporting billion dollar expenses for the actual construction. Clearly, the private sector partners, either by borrowing from banks—or from gigantic public employee pension funds, as, ironically, was the case for the controversial Brampton hospital—would necessarily face paying interest rates of their own and would have to pass on that cost to the contracting governments. In the end, regardless of whether the government paid for infrastructure out of current revenues or borrowed funds raised through the sale of bonds, Auditors General have not been fooled. They insist that the full costs be reported, as they rightly should.

Thanks in large part to these highly public criticisms of Auditors General, the practice of organizing P3s has become more sophisticated over the past few years. Governments, through painful experience, are slowly becoming more adept in assessing the relative value of the private sector option in comparison with proceeding on their own, in clearly identifying the risks they are taking and passing on to the private sector, in having a clear idea of what it actually want before signing a deal (governments are notorious for requesting add-ons after contracts have been inked), and in negotiating acceptable terms. Private sector partners are also becoming savvier in perceiving how they can work with governments and earn a necessary profit while helping to deliver a public good. One point that Loxley does not stress is that most of these companies are so large that they employ unionized workers. It is interesting to note in this regard that Loxley’s study has not won the financial and intellectual support of the Steelworkers, the Brotherhood of Electricians, or the Bricklayers and Allied Craftworkers Union. Unlike CUPE, these unions frequently benefit from P3 projects.

If, as Loxley says, P3s are here to stay, how can governments can do a better job of using them to delivering infrastructure and services?  It goes without saying that involving a profit-seeking partner will likely cost more than government pursuing projects on its own. But costs are only part of the picture. The real issue is whether P3s achieve better value in providing the right goods and services than traditional public provision can. It can be argued that the only way this criterion can be met is by involving all parts of society in conceiving projects and in finding creative ways to spread costs and generate income—and that includes the private sector. In order to build better and deliver better, the state must learn to partner more effectively and seek creative ways to work with the private sector in a sustained fashion that goes beyond merely handing off contracts.

In contrast, Loxley sees P3s as providing an all too convenient way for the state to abandon its responsibilities. In his discussion of project financing and the nature of risk in P3s and even in his recounting of some of the key events in this early history of P3s, he has furnished an enlightening cautionary tale. But by presenting dated cases and drawing most of his research from the findings of researchers known to be hostile to the idea that governments should partner with the private sector, Loxley overlooks the numerous examples of effective collaboration that share risks and revenues with suitable accountability. P3s do need to be studied because their management—especially on the government’s side—and the accountability of P3 projects demand constant improvement. But a full analysis of their efficacy demands an objectivity and breadth of vision that Public Service, Private Profits, despite its numerous insights, lacks.

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