Those watching the federal and provincial focus on infrastructure will notice a shift towards public-private partnerships (aka P3s, aka PPP, aka AFPs in Ontario only). The main players are Ontario and BC, with Quebec also in the game. The feds have been pushing it at every opportunity.
So what are they all about? The basic story is that most P3s involve the private sector building the piece of infrastructure and leasing it back to the government over a 20-30 year period. In many cases, the private sector operates/maintains the building and usually provides financing. All of these costs are built into the lease payments made by the government.
Governments have made several arguments for going ahead with this type of arrangement rather than sticking to traditional infrastructure financing (which usually involves government financing it’s own project, hiring the private sector to build it, and keeping operations and maintenance public). They say that P3s allow governments to shift “construction risks” to the private sector, a fancy way to say that cost overruns will be absorbed by the private sector. The key to a successful risk transfer, they say, is for the private sector to operate the asset over its lifetime so that they properly maintain it. Incentives, incentives, incentives.
There are at least two problems with that argument. First is that risk transfers come at a cost: ultimately, risk is priced and governments pay to transfer this risk. Secondly, the root of the alleged cost overruns is unclear. Some cost overruns have occured because of governments changing the project itself. This could be, for example, adding more beds to the original hospital expansion plan. Obviously, here the cost would be higher than the original estimate. Other cost overruns occur because building costs rise significantly for various reasons. I will return to the cost overrun issue.
Groups like the Ontario Health Coalition have slammed P3s because of their fear that this arrangement is a first step towards privatization and job losses. They also note that private sector financing costs are higher than governments, an irrefutable point which has been acknowledged by the Government of Ontario.
While I agree for the most part with groups like the Ontario Health Coalition, the most significant problem with P3s are what they mean to the public sector as a whole. Business groups and “the right” have used the cost overrun issue to sell the public on the idea of P3s. (See speeches by David Dodge and Don Drummond.) Few have suggested the logical approach to this problem, which would be to analyse why cost overruns are occuring in the traditional infrastructure financing approach.
The reason why this step is not being taken is because this was never the point of pursuing P3s in the first place. Supporters of P3s (ranging from banks to pension funds) want access to guaranteed streams of revenue that stem from these leasing arrangements. What is dangerous about the ideology of P3s is that they sell the idea that we cannot as a society undertake projects without profits. And that, of course, undermines the very idea of government.
First in an ongoing series on P3s.