Saturday, November 9, 2024

Rhetoric Won’t Solve Thorny P3 Debate

Decision must reflect what’s best for the taxpayers.

The decision whether or not to adopt a Public-Private Partnership (P3) model for the construction of new infrastructure must be based on evidence, not rhetoric.

Unfortunately, the debate surrounding the largest P3 project in Canadian history – a 20-kilometre rapid transit line linking Richmond-Airport-Vancouver (RAV) at a cost of $1.7 billion – has been reduced to rhetoric.

Decision-makers within the Greater Vancouver Transit Authority identified a shortlist of four consortiums as potential partners. Included in these consortiums are several leading and politically influential Canadian companies including Bombardier.

The successful P3 partner will build, operate and manage the line. In return, they will receive back the principal and a return on investment for the next 35 years. The rapid transit line will then be transferred to the public sector.

Although the bid process is not transparent and as a result contributes to the spectre of distrust by British Columbians, we do know that the ridership break-even point is 100,000 passengers per day by 2010.

Until this point is reached, the public sector must underwrite the shortfall. This could be a significant and very real cause for concern.

Indeed, the transit authority initially voted against proceeding with the project.

However, driven by the 2010 Olympics as well as federal and provincial elections on the horizon, the two senior levels of government have committed $750 million toward the cost of the project.

The government bodies have made it clear that the funding is only available for this P3 project. If the transit authority does not reverse its position and proceed, the funding will be withdrawn. Pressure has also been exerted by the Vancouver Chamber of Commerce to influence the transit authority decision-makers to support the initiative.

Are P3s of this nature something new? P3s were not new even when re-introduced by British prime minister Margaret Thatcher and U.S. President Ronald Reagan in the early 1980s.

The combinations and permutations of partnership arrangements that are possible between the government and the private sector number in the 30s. They evolve around some component(s) of the private sector being asked to design, build, finance, operate or own a facility.

The crafting of the appropriate partnership entails assigning risks and costs on an equitable basis. The private sector requires, among other things, a return on investment. The public sector’s paramount concerns tend to be transparency and the P3 not bringing the government into disrepute.

The national champion for P3s is the Canadian Council on Public-Private Partnerships. For more than a decade, this association has been a leading proponent for many of the world’s largest private-sector entities in promoting the synergies of P3s.

In Britain, the private sector has invested $47 billion to date in P3s as a result of partnering with more than 500 projects. Two hundred of these P3 ventures are operational with another 300 in progress.

Currently, the Fraser Health Authority is exploring a P3 – a build-finance-operate model – for the health centre in Abbotsford. If it proceeds, it will cost in excess of $200 million.

As a P3 consultant, I believe that P3s have limited application. A strong case can be made in favour of adopting P3s for highways, hotels, hospitals, bridges, sky trains and a number of other ventures. Globally, there is evidence of successful ventures in these areas.

However, P3s are not suitable for general applications for the delivery of health care. Britain adopted P3s in support of its acute-care system with disastrous results.

Nevertheless, there is evidence to support the notion that small boutique components of the healthcare industry can be effectively served by P3s.

Whether or not to adopt P3s cannot be based solely on ideology.

What is clear is that British Columbia finds its ministries have to do more with less.

Consumption of public-sector funds by education and health leaves little for the other ministries. And tax fatigue has set in.

Accordingly, it comes as no big surprise that B.C. ministries are seeking ways to attract private-sector funding to support much-needed infrastructure.

In fact, the media has reported provincial Deputy Minister to Premier Ken Dobell declaring, “the choice is now between either not getting the project at all or delivering it through a P3.”

Dobell and his colleagues might be accused of seeing P3s as a panacea for meeting all their demands for hospitals, roads, schools and recreation centres. This would not be a good thing.

The Liberal government has established a budget for $2 billion for public-capital P3 projects this year.

The Liberals’ P3 champion, Finance Minister Gary Collins, was instrumental in establishing a new agency called Partnership British Columbia. It is headed by Al Sakalauskas, the assistant deputy minister for finance, and is the government’s focal point for P3 projects.

The agency has produced a set of guidelines, called the Capital Asset Management Framework, to assist all government agencies in analyzing P3 proposals.

This framework should provide the evidence and critical thinking required to evaluate whether or not projects are viable, provided there is no political influence exerted on those charged to undertake the analysis.

The Ministry of Transportation recently announced the Transportation Investment Act, which provides a financial framework for developing P3s. The department says it recognizes that traditional approaches to financing infrastructure can no longer meet the needs of the province.

At the other end of the continuum is the powerful union sector claiming P3s are ideologically driven and fail to deliver as promised.

Unions frequently cite a number of European Union countries’ initiatives as evidence of P3 failure.

While lessons can certainly be learned from the failures of P3s, this should not dissuade us from considering the P3 models as a vehicle to provide much-needed infrastructure.

I would recommend that bureaucrats facing a P3 decision develop a flowchart of the total business process in order to understand how the P3 initiative might interface with the other components in the value chain/supply chain.

For example, if BC Ferries, or some part thereof, was to be considered a P3 candidate, then the decision-makers must examine the integration and coordination within the context of the complete British Columbia intermodal transportation system.

Is the component under consideration a core component of the transportation system? If so, then a P3 would be difficult to support. However, if alternate routes are available and are not a core component, then further examination of the P3 candidate should continue.

A further consideration requires decision-makers to undertake a life-cycle approach to capital management. This means linking all capital expenditures and the operating costs for the life of the project and fully costing them before committing to a P3.

This is one of the troubling constraints with proceeding with the RAV project. I don’t think the full operating costs have been evaluated.

At the end of the day, RAV and other P3 projects being considered must be evidence-based and not simply a reflection of the rhetorical philosophies of unions and government officials.

The test I would commend is:

What is in the best interest of B.C. taxpayers?

Note: This article was originally published in 2005.

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Terrance Powerhttps://terrypowerstrategy.com
Terrance Power is a Wharton Fellow and professor of strategic and international studies with the Faculty of Management at Royal Roads University in Victoria. This article was published in the Business Edge. Power can be reached at tpower@ancoragepublications.ca

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