Problems with Potential Public-Private Partnership | By Jordan Hupka

The City of Edmonton is the latest victim of the Federal Government’s unpopular infrastructure privatisation agenda. News broke this week that City Council has decided to contract-out the operation of the planned South-East LRT expansion line. “Decide” is not the right word, however, as councillors admitted they made their decision with a metaphorical “gun to their head.” After a May Council vote of 7-4 (two absent) in favour of a funding application to Ottawa that would keep operations and maintenance of the new line in Edmonton Transit’s hands, federal officials made it clear that no funding would be awarded unless a private, for-profit firm ran the line. So on August 29, in a secret meeting, Council voted in favour of an application that would transfer operations of the line to the private sector. This decision is an affront to public ownership, local autonomy, and democracy.

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This arraignment is known as a public-private partnership, PPP, or P3 and is all the rage in Ottawa. P3s are an “alternative public procurement method” where a private sector partner, theoretically, shares the risk of infrastructure development. The private firm (or a consortium of firms) will contribute to the financing, design, building, maintenance, and/or operation of a public infrastructure project. P3 contracts vary on how many aspects the private partner will be involved in, but most contracts have significant private funding while ultimate ownership resides in the public sector. Essentially, the private partner puts in a lot of initial capital and recoups the investment through maintenance and/or operating revenues. Proponents argue that since the private sector shares capital risk and is responsible for upkeep and operation the public sector saves money and is able to focus on “core business.” Also, because of strict contractual obligations, projects don’t go over budget and are completed on time, most of the time.

P3s have a lot of critics including this writer, private and public sector unions, civil society groups, academics, and provincial Auditors-General. And while P3 do tend to be completed on time and on budget, the notion that they reduce public expense or risk has been seriously challenged. First off, governments can borrow at much lower rates than any company. Two University of Toronto researchers calculated the mean P3s are 16% more expensive than public financing. Additionally, because complex contracts are needed in these deals, fees for lawyers, consultants, and negotiators run up the bill and an extra 3%. Despite this, P3s are politically expedient because they allow governments to avoid borrowing. However, debts are simply pushed off the books as governments lose in the long-term by having to pay for private facility maintenance and/or surrender revenue (such as ticket fees and advertising space) to the private sector. Thus, instead of your ridership fee being paid to ETS and used for transit upgrades and expansion, they line the pocket of corporate executives and pay for other P3s outside your city.

There is also little evidence to back up the claim that private sector partners share risks. This makes intuitive sense. P3s fund critical public infrastructure like schools, hospitals, transit, and water and waste systems. If the private partner is unable to carry out its responsibilities and folds, the public sector must clean-up the mess to save critical infrastructure. If the SW LRT partner cannot run the line properly, ETS will have to take over to ensure Edmontonians have access to rapid transit. This would involve a huge payout to the failed company because the contract would be terminated before they received a return on their investment. In these cases, average people would end up paying for the service twice: as users or ratepayers, and again as taxpayers, when their government has to buy-out its failed partner.

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The list of P3 failures is all too long. London’s trouble with its light rail P3 clearly shows that it is still the public sector that shoulders the project’s risk. Transport for London (TfL), the public authority in charge of London’s subway, struck a P3 with two separate consortia, Metronet and Tube Lines. The private partners helped finance expansions and then took up responsibility for maintenance and rolling stock. This is not as far as our SE deal goes as operations were still left to TfL. Nevertheless, the private-sector managed to royally screw-up. After a few years, costs spiralled out of control and Metronet went into administration. TfL bailed the company out with £2 billion of public money. Undeterred, TfL sought a new, less bankrupt private partner. None stepped forward, thus Metronet’s duties were returned to TfL. Tube Line, also in trouble asked for an extra £1.2 billion in operational subsidies, a la Daryl Katz. The government refused but a P3 arbitration panel ordered it to subsidize the company to the tune of £400 million. In 2010 Tfl bought-out Tube Lines’ shares for £310 million. As of 2011 the P3 is dead and London Underground is wholly managed in house. The cost to create the P3, handle the private partners’ risk, and buy-out the remaining partner totaled £3.17 billion, or $5 billion Canadian. The Tube debacle is just one prominent example of a P3 gone wrong.

In the face of all the evidence to the contrary, our market fundamentalist Conservative Government continues to promote P3s, local opinion be damned. The newly formed Crown Corporation, PPP Canada is essentially the only source of federal funding for crucial municipal infrastructure, at least until the new Building Canada Fund starts up in 2014. Across this country, Canadians are standing up to Harper’s strong-arming of local governments to privatise their public infrastructure. PPP Canada has been a huge failure as it has been used a handful of times, but whenever desperate municipalities turn to it for funding, opposition follows. In Winnipeg, a plan to hand its Water and Waste Department to notorious water-profiteering giant Veolia was scuttled after concerted public opposition led by the civil society group, the Council of Canadians. Veolia has now been reduced to the role of “consultant” in Winnipeg’s Water and Waste Department’s new water treatment plant expansion. A similar plan to dispossess city water systems in Abbotsford, BC was soundly rejected in a public referendum and the pro-P3 mayor was thrown out of office. The Mayor of Calgary, Naheed Nenshi, after hearing of how Edmonton has been forced to give up its new LRT line, is off to Ottawa to demand that the feds cuts the strings attached to its current funding model and allow municipalities to decide how to develop their infrastructure. Mayor Mandel should join his colleague and present a united Alberta front to this gross invasion by the Federal Government.

Even more disturbing is the fact that the Conservative Government is currently wrapping up negotiations with the EU on Comprehensive Economic and Trade Agreement (CETA).  This, the largest Canadian free trade deal since NAFTA, makes it nigh impossible for governments to re-nationalise services once they are privatised. Just like under NAFTA, foreign corporations will be able to challenge government policy and legislation though an appeal to an international trade tribunal, bypassing Canadian courts. Europe has the world’s largest service sector with many huge private players in the transportation, engineering, and water services industries. These companies want this deal to open the Canadian market. While the nationalisation of a fully privatised service would open governments up to huge trade lawsuits, it is unclear how a partially privatised P3 would be treated by these unpredictable troikas. Critics worry that under CETA governments may be challenged if they try to buy-out failed private partners. If CETA is signed and the SE line is under a P3, Edmonton may be prevented from doing what TfL did with the threat of huge lawsuits if it buys out a private partner. And after the P3 contract is up, foreign companies might sue the City if it doesn’t keep the privatised line “open for investment” and tender a new public-private contract.

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If the P3 goes though, Edmontonians will have to get used to private Council meetings and secret negotiations. P3s are notoriously secretive and undemocratic. The public has limited say in areas the contract delegates to the private sector because of private involvement. In Edmonton’s case, that would be all matters. The aborted arena deal with Daryl Katz was an example of a P3. Edmontonians have first-hand knowledge how secretive, exploitive, and complicated these “partnerships” can be. Why try another?

Outright privatisation, common in the late 1980s and 1990s, is unpopular. Conservative-minded governments know they can’t privatise Crown Corporations and government services openly without being thrown out of office. P3s are a way to sneak the for-profit sector in the back door. Edmontonians should be concerned about real threat that this deal will increase costs, jack-up ridership fees, lock-in privatisation, reduce the quality of service and maintenance, and limit public involvement. Council’s initial rejection of this plan is telling. In accordance with the City’s P3 policies, Council ruled that privatising maintenance and operations was not in the public interest. If the city manager’s comment that handing over the running of the SE line makes sense, why didn’t Council commit to that the first time? We are now getting an inferior deal and should not be happy about it. Tell Council and the Mayor about your dissatisfaction with the new plan. Ask Conservative Edmonton—Mill Woods—Beaumont MP Mike Lake why the Government has overturned a local decision and forced a huge P3 on the City.

There are options. Other Canadian cities have signed recent P3s, but have retained the right to operate their transit systems. The City could lobby the Province to cover Ottawa’s funding, demand the feds to cuts the string attached to this money, or wait until 2014 when new, unconditional federal funds hopefully open up. The City’s own policy on P3s promises consultation of stakeholders before committing to a public-private partnership. A referendum should be held on this important issue, as had happened in Abbotsford. At the very least, citizens should be consulted before the City signs away our LRT.

What can you do at this point in time? First, get the right information. Here are a few articles that can get you started:

Edmonton Journal – Council set to privatize southeast LRT line (Oct. 16, 2012)

Edmonton Journal – P3 for LRT shifts risks to private partners, transport manager says (Oct. 17, 2012)

Edmonton Journal – Council approves P3 funding plan for southeast LRT line (Oct. 17, 2012)

The Globe and Mail – The hidden price of public-private partnerships (Oct. 14, 2012)

Public Interest Alberta (PIA) – Council Challenged on Secret Decision to Run SE LRT privately (Oct. 16, 2012)

If you are interested in doing more, you can voice your concern to the City by writing to the City Council and/or to the Mayor.

Jordan Hupka is a fourth-year BA (honours) student in history. After graduation he hopes to get a graduate degree in Public Administration and pursue a career in government.

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  • John Hunter

    Boy, this writer, in my opinion, sure drank deeply of the CUPE Kool-Aid. He might at least give attribution to CUPE. And he sure has, in my view, little clue about how PPPs work. I led three successful ones for Canada in Asia and advised on two successful ones in Mexico. I know the pros and cons of PPPs. And there are both.
    There are just too many errors in his article to correct all. For examples, PPPs and privatization are not the same. CN was a privatization; after the deal the government has no contractual arrangements with the private sector party; PPPs include performance contracts. How long do you enjoy the somewhat lower debt service cost of traditional procurement when the project is late, grossly overrun, or fails to work – we have many examples of all of these – think BC Fast Ferries, or Darlington nuke, or any of dozens of others. In addition, in a non-PPP, government takes all the risk – the advantage of lower debt cost is generally illusory, and focus on this aspect alone is like buying a house with focus only on mortgage rates at not on any other aspects of the house deal, including risk.
    The claim of PPPs costing 16% more is based on Ontario only projects and the vast majority of their sample excludes the best type off PPP, where the private sector operates the facility. The claimed 16% higher cost of PPPs is before risk transfer effects and ignores the fact that innovation, with full life cycle cost savings, may be part of that “base” cost increase. This claim is highly dubious.
    He lists a bunch of PPP failures; where is the far longer list of successes?
    Let’s just leave it at that.

    John Hunter, P. Eng.
    President & CEO
    J. Hunter & Associates Ltd.
    Energy Sector, Private Public Partnership, and International Business Consultants
    North Vancouver, BC, CANADA V7G 2M2

    • Dave

      Amen, John. I wanted to draft a response to this article, but you’ve done it better than I could have. Kudos.

  • Jordan Hupka

    The private and public sector have conflicting goals. Public: service-provision, private: profit-maximization. It is naive to suggest these difference are not problematic.

    Independant experts agree:

    Vining, Aidan R.; Boardman, Anthony E. “Public-private partnerships in Canada: Theory and evidence.” Canadian Public Administration. Spring2008, Vol. 51 Issue 1, p9-44. http://ehis.ebscohost.com.login.ezproxy.library.ualberta.ca/eds/pdfviewer/pdfviewer?sid=ebf33dcc-cce3-4263-b9c5-0a4202d796a0%40sessionmgr113&vid=1&hid=115

    “The ten case studies indicate that the potential benefits of P3s are often outweighed by high contracting costs due to opportunism generated by goal conflict. These costs are particularly high when construction or operating complexity is high, revenue uncertainty (use-risk) is high, both of these risks have been transferred to the private-sector partner, and contract management effectiveness is poor. In infrastructure projects, it rarely makes sense to try to transfer large amounts of risk to the private sector.”