Monday, February 16, 2009

Air Ambulance hangar could be Sask.’s first P3 project; D’Autremont lauds B.C. Sea-to-Sky Highway that reportedly cost taxpayers an extra $220 million

Determined to emulate its Western neighbours in every way the Saskatchewan Party government is following in Alberta and British Columbia’s footsteps by embracing public private partnerships (P3) to build large-scale infrastructure projects.

The news came on Jan. 2 when The StarPhoenix reported the Wall government is setting up a secretariat to explore the possibility of private sector companies being involved in infrastructure projects such as roads, schools and health-care facilities.

Government Services (GS) Minister Dan D’Autremont said the province will proceed slowly when it comes to the public-private partnerships dubbed P3s.

“All of the advice we have received is, ‘do not rush,’ that you need to have a very clear understanding of what you’re looking for and what it is that’s being offered and not to be precipitous,” the minister said in an interview on Jan. 1.

D’Autremont said the government has set $25 million as the minimum cost of projects for which private sector involvement will be considered. [Gov’t explores public-private partnerships (StarPhoenix, Jan. 2, 2009)]

In mid-December cabinet shuffled associate deputy minister Mike Shaw from health to government services as the head and first employee of the new P3 secretariat. The order in council (OC 863/2008) states that Shaw’s appointment is effective Jan. 1, 2009, at a salary of $175,656 per year.

The provincial government has identified at least one potential P3 project.

According to an Oct. 15, 2008, briefing note obtained under freedom of information legislation the Government Services Ministry’s first project could be a new hangar for the province’s Air Ambulance program.

“Government Services is identifying necessary legislative changes if any, and potential staffing options for the P3 secretariat. It is expected that the Secretariat will be operational by December 31, 2008,” the report states. “Currently GS is preparing a Request for Qualifications for a new facility (a hangar) for the Air Ambulance program. While this project is expected to be well under the $25 million benchmark, it may be a good first project as risks may be reduced for a project of this size.”

The briefing note makes it clear that everything is open for discussion: “Any and all areas of traditional P3s (design, build, finance, own, and operate) will be considered for projects over $25 million with a term of at least 20 years that do not fit well within the traditional procurement approach. It is anticipated that Government will own the facilities, or have ownership transferred at the pre-determined time in the contract, that are procured using P3s.”

The report goes on the say that, “Extensive due diligence will be required prior to undertaking a P3 project” and that the “process must be, and be seen to be, fair, consistent, transparent and accountable.”

In the briefing note the government states the following rationale for using P3s:

– Accelerated construction;
– On-time and on-budget delivery;
– Shifting risk to the private-sector;
– Potential cost savings;
– Customer service improvements;
– Allowing the public sector to focus on outcomes and core business; and,
– Fostering additional skill sets/capacity within Saskatchewan.

During his interview with StarPhoenix reporter James Wood, D’Autremont said P3s have a mixed record. British Columbia, which has been in the lead when it comes to such projects in Canada, has seen long-term savings and quality from the public-private Sea-to-Sky Highway, while a P3 school in Nova Scotia, however, failed to meet expectations.

D’Autremont’s use of the Sea-to-Sky Highway Improvement Project in B.C. as an example of a P3 success story is disturbing given that a recent forensic analysis of the project seems to suggest otherwise.

Partnerships British Columbia Inc. is a wholly owned company of the B.C. government. It was established in May 2002 to pursue public-private partnerships in the delivery of public infrastructure. Its work involves preparing Value for Money reports for each P3 project undertaken. The Sea-to-Sky Highway Improvement is one of those projects.

According to a Jan. 29 backgrounder, the B.C. division of the Canadian Union of Public Employees retained forensic accountants Ron Parks and Rosanne Terhart of the firm Blair Mackay Mynett Valuations Inc. to review and comment on costing and evaluation methodology used for P3 projects in B.C. The review focused on four projects: Abbotsford Regional Hospital and Cancer Centre, Sea-to-Sky Highway Improvement, Academic Ambulatory Care Centre (Diamond Centre) and Canada Line Final Project.

In their report, Evaluation of Public Private Partnerships: Costing and Evaluation Methodology (Jan. 2009), Parks-Terhart said that, based on available evidence, “all the projects we reviewed, the nominal costs of the P3 substantially exceeded the nominal costs of the Public Sector Comparator.

“Nominal costs are the actual number of dollars spent over the life of the contract. The difference in the cost between a publicly delivered project and a P3 can be substantial. For example, the Diamond Centre will cost $203 million over the life of the contract as compared to a cost of $89 million had the project been publicly delivered – a difference of nearly 130 percent.”

Other findings include:

– “[B]ased on available evidence and the application of more appropriate discount rates, the cost of P3s exceeds traditional procurement methodology for the projects reviewed.”

– “[T]he methodology used by Partnerships BC to compare the P3 projects to the public sector comparator is biased in favour of the P3 projects.”

– Parks-Terhart could not determine “whether the citizens of British Columbia are at risk of losing opportunities and money because of private equity refinancing arrangements that may occur following completion of the construction stage of the project; however, the private partners are most certainly in business to make a profit while the government is not. The profit made by the private partners, by definition of the term “private”, would not be shared by the public.”

– “[C]ritical information and documentation in support of the Value for Money reports was for the most part denied in response to Freedom of Information requests. In our view this suggests a general lack of transparency and public accountability.”

Specific to the Sea-to-Sky Highway project Parks-Terhart note:

– “[T]he total nominal costs reported in the BC Fiscal Plan were less that the total costs reported in the Value for Money report. We do not know the reason for the difference.”

– “Although the Value for Money report did not disclose a favourable cost savings in the net present value terms, a risk factor of $42.9 million was added to the net present value of the Public Sector Comparator to account for additional risk of public procurement. This added risk is in addition to the risk factor inherently included in the discount rate of 7.5 percent used to calculate the net present value of the project. We find this methodology faulty as it double counts the risk in this project.”

– Parks-Terhart was not provided with annual cash flows for the P3 and the Public Sector Comparator regarding the Sea-to-Sky project.

– Dr. Marvin Shaffer, an adjunct professor in the Simon Fraser University Public Policy Program, in his article titled The Real Cost of the Sea-to-Sky P3, “recommended that the P3 and the Public Sector Comparator be discounted at the government’s cost of borrowing to reflect the money that taxpayers would have to set aside today in order to meet the lease or debt service obligations in the future. Dr. Shaffer applied a 5 percent discount rate to the Sea-to-Sky cash flows (to better reflect the government’s cost of borrowing) instead of a 7.5 percent discount rate used by Partnerships BC. He concluded that the P3 project would cost the taxpayers over $220 million more than the public procurement project using the lower rate.” Parks-Terhart said they agree with Dr. Shaffer’s comments.

In a Feb. 4 editorial, the Vancouver Sun dismissed the Parks-Terhart report for the simple reason that Parks “has been the leading critic [of P3’s] for several years” and that the report “was commissioned by the Canadian Union of Public Employees and the Hospital Employees Union and, to the surprise of no one, lent support to their ideological opposition to P3s.”

The near 600 word editorial defended P3’s and made no attempt whatsoever to discuss or analyze the report’s findings or recommendations to back its position that the document was not worthy of attention. The Sun editorial board instead tossed the report outright based on the sole fact there was union involvement.

(It should be noted that on May 14, 2005, the Sun endorsed Premier Gordon Campbell and the B.C. Liberals for a second term in the general election that was held May 17, 2005.)

The Sun failed to acknowledge that the Parks-Terhart report included details of a scathing report released on Dec. 8 by Ontario Auditor General Jim McCarter on the Brampton Civic Hospital P3 project debacle.

McCarter, who appears to have no connection to CUPE or Blair Mackay Mynett Valuations Inc., found that by going the P3 route cost Ontario taxpayers $194 million more than had the government went with the traditional procurement method of a publicly built and run facility. McCarter also found that taxpayers would have saved $200 million in interest charges because of the government’s ability to borrow money at a lower rate than the private sector.

In their report, Parks-Terhart noted a number of McCarter’s comments that “appear to parallel our view that the methodology used to procure, evaluate and report the benefit of the P3 project was biased in favour of the P3 project.” Apparently Ontario’s experience with P3’s doesn’t interest the Sun.

It’s interesting to note that on Jan. 26 the Ottawa Citizen published a list of other Ontario P3 hospitals with cost overruns:

Hospital Original price / Final price

– North Bay $551 million / $1 billion
Sarnia $140 million / $320 million
– Royal Ottawa $100 million / $146 million

Following the release of the Parks-Terhart report Partnerships BC CEO Larry Blain dismissed the findings telling the Vancouver Sun on Jan. 29 that, “The auditor-general has concluded that our methodology is fairly and reasonably presented.” [Partnership projects pricier, study finds (Vancouver Sun, Jan. 30, 2009)]

In June 2006, however, CUPE and the Hospital Employees’ Union (HEU) released a report, also by Parks, that reviewed the role of the Office of the Auditor General of B.C. in reporting on public-private partnerships and indentified a number of significant problems.

The report, entitled Reporting on Public Private Partnership Projects in British Columbia: The Role of the Auditor General (May 2006), was summarized in a backgrounder issued by CUPE and the HEU on June 7, 2006:

Parks’ findings in brief

• The Auditor General’s process for reviewing third-party P3 reports provide “no positive assurance…as to whether value for money is demonstrable”, “does not provide assurances that there are going to be real cost savings for the public”, and “is appropriate only from the standpoint of dealing with forward-looking information, which cannot be audited.”

• The BC government, provincial ministries and legislators “should exercise restraint in adopting conclusions that the Auditor General has not reached or set out in his reports.”

• “The preferred process is for the Auditor General to prepare a direct report.” Due to underfunding, the Auditor General opted for a review of project reports authored by third parties with a vested interest in their success – Partnerships BC and Canada Line Rapid Transit Inc.

Parks’ recommendations in brief

• “Funding for the Office of the Auditor General should be increased significantly” to enable the Auditor General to prepare independent reports on P3 projects.

• “The Auditor General’s work on P3 projects should be funded out of his general budget” rather than on a fee-for-service basis.

• “The Auditor General should adopt a greater degree of skepticism in regard to P3 projects, and take more of an investigative approach that is apparent to the public.”

• “The Auditor General should address the criteria for successful P3 projects and determine whether the projects he is examining meet those criteria.”

• “The Auditor General’s involvement in P3 projects should be in real time”, in order to influence decisions that will impact the value for money question.

• “The Auditor General should prepare his own independent report on P3 projects…in order to clearly establish what information and conclusions can be relied upon by the public and legislators.” And Parks comments further: “In this manner he can distinguish his information and conclusions from those who have a vested interest in demonstrating the value for money of the P3 model.”

• The AG should conclude if a project demonstrates value for money whenever possible.

To date it appears that Gordon Campbell’s BC Liberal government has not acted on any of the recommendations.

Contacted by email on Feb. 14, Parks said in his view “nothing has improved” in the two and half years since his report was released. As far as he knows “the Auditor General has not changed his approach.”

“The problem may lie in the AG’s budget, or in the reluctance of Partnership BC to open things up to close scrutiny. Certainly nothing is being examined in “real time”, which was one of our recommendations, nor has the AG undertaken an independent examination or review,” Parks said.

“I am not opposed to the concept of P3s as long as they provide value for money for taxpayers. I do question however, the methodology by which they are evaluated,” he later added.

“The BC government says the Sea to Sky Highway is on time and on budget, and I don’t disagree. The problem is that the budget is too high to begin with.”

The Vancouver Sun editorial board doesn’t bother to tell its readers these things.

And if the records recently disclosed by Government Services are any indication the Saskatchewan Party government’s new P3 Secretariat might share some similarities with Partnerships BC in the way it will operate.

According to an undated document outlining the government’s key messages, the secretariat “will manage the resources necessary to fulfill the due diligence requirements of entering into long-term P3 contracts” and “P3 contracts will be considered when it can be demonstrated that a P3 can be cost effective as compared to traditional construction.”

Translated it could mean that the Wall government intends on using the same flawed, potentially biased Value for Money process that is employed in B.C. but only on a smaller scale. There is no mention of an independent body such as the Provincial Auditor of Saskatchewan being involved. The true test will be when the freedom of information requests begins to arrive and what the government’s response will be.


At 10:12 PM, Blogger Rob-bear said...

Good points Joe.

The history of P3 projects, in Canada, as elsewhere, is that they always cost the taxpayer more in the end.

The victory of politics over sanity


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