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Sound and fury signifying … something
The battle around P3s

by Richard Bray

The lines are drawn. Many government and private sector leaders campaign for public-private partnerships (P3s); many labour and political leaders oppose them and bureaucrats struggle to understand, negotiate and implement them. The stakes are huge for politicians wrestling with budgets, for private sector companies looking for profits and for government employees facing the uncertainties of privatization.

It is possible to find examples to prove almost anything about P3s. That is why, among the many investments being made in the future of P3s, efforts to influence perceptions may be the most important.

Jacques Huot, vice-president of Ontario SuperBuild Corporation, speaking in Kingston to Ontario municipal bureaucrats and politicians, quickly sums up what his government expects from P3s: "I assist in the delivery of $20 billion of infrastructure with $10 billion in planned government spending, using P3s." But there is nothing simple or easy about P3s. "It all relates to risk," Huot says, "and from where you sit currently there are three primary risks.

"There is financial risk. Many municipalities think 'we're too small to be able to do that.'" Some of the world's largest corporate entities, he points out, are ready to work with small municipalities to provide the needed capital and expertise.

"There is operational risk - the risk that the thing won't work, whatever it is, once it is finished," Huot says.

He continues, "There is political risk." How do you make the public understand a complete change in service delivery? And if it doesn't work, the people who promoted it will obviously have a political and perhaps a career price to pay for that, he concludes.

He uses fewer words to tell his now attentive audience why they should consider P3s in their own communities. "Basically, you don't have a choice."

The pressure is on every level of government and the alternatives to P3s have narrowed. Budgets have tightened, citizens expect more and the private sector's ability to deploy new technology, innovate on the run and beat the status quo on both price and performance has increased dramatically. Early success by British Prime Minister Margaret Thatcher's privatization initiatives brought widespread emulation, and P3s are now seen as one way to deliver more with less.

Within the Canadian government, Industry Canada's Lucien Bradet, director general of the Service Industry Branch, promotes P3s saying Canada wants to develop P3 expertise for export. "Our mission is to develop Canadian industry, to be more successful domestically and internationally," he says. "More and more opportunities in our country are being taken over by other countries, or are being considered by other countries who have more experience than us."

While the officers leading the charge in the P3 army are mainly in the federal and provincial governments, municipal public servants, mayors and councillors are on the front lines. Big P3s, like Ontario's Highway 407 and Prince Edward Island's Confederation Bridge, make big headlines, but the municipal level is where the greatest savings will be made.

The message from the senior levels of government is "you can do this." P3 educational literature, both unrelentingly optimistic and practical, stresses the issue of leadership. Without a champion many P3s come to nothing. That champion is more than likely a politician.

Abraham Akkawi, vice president with PricewaterhouseCoopers Financial Advisory Service says, "In many municipalities, especially the medium-sized to large ones, I can pick projects that could be done through P3s but people are not doing it, or they are still planning it and studying [the concept] to death - that's what happens. [Why not] engage in a serious discussion of how to deliver that service or infrastructure?"

Unwillingness to champion a P3 may result from negative feelings, like distrust of complexity, or fear of the unknown, but often it comes from a desire to be re-elected. The challenges of a P3 could be an impediment to that.

Duncan McCallum, managing director of RBC Dominion Securities and a veteran of large P3 projects, says, "There have been some highly successful P3s; some were less successful … one has to watch very carefully the level of complexity, the amount of time and money spent paying lawyers and accountants and other similar consultants. The implementation costs of a P3 can be prohibitive."

And the politician's worst enemy can be another politician. Doug Lychak, formerly Hamilton, Ontario's city manager, says, "In the Hamilton sewer and water P3, with $30 million in savings over 10 years, the council vote was 14 to 13. And, once a vote is taken, it doesn't mean council is on side. The other 13 shoot at you for the next 10 years while the contract is ongoing."

Ned Lathrop, a former public servant in Cumberland (now part of Ottawa), relied on support from then-Mayor Brian Coburn to move the highly successful Ray Friel Recreation Centre P3 ahead despite several difficulties. "We did [some] research to find out whether anybody had done this kind of relationship before. Nobody had done it before in Ontario." Lathrop said. "When you don't have relevant experience, when you don't have background, your natural tendency is to fall back on the same old, same old."

There is little doubt that the private sector believes in the P3 concept. But increasingly, it questions governments' commitment to implementation, having become wary of prolonged, detailed and expensive preliminaries to projects that never materialize.

A government department's internal culture can also prevent viable P3s from going ahead. Lychak says, "Often, for me, one of the biggest problems has been managers afraid to lose control - afraid because they don't have the expertise, because instead of telling 100 people what to do, you manage a contract."

Citizen perceptions are part of the battle and Lychak puts his view succinctly: "Taxpayers are really into value for money. The research I've done in various municipalities tells me they really don't care what colour the garbage truck is or whether the person driving the truck has a blue uniform or a green uniform."

Large or small, each P3 must provide quality service at a fair price. David Leonhart, director of government and public relations for the Ontario division of the Canadian Automobile Association took a special interest in Ontario's Highway 407 project, hailed as a successful P3. ##He gives it a mixed review. "What has succeeded is that we've got a desperately needed highway, which literally cuts right through the section of this country where most of the increase in commuter traffic is happening and is expected to happen in the next two decades." He is less pleased about the toll and early billing irregularities. "The fact that there are highway tolls while we continue to pay extravagant gas taxes and licensing fees is, in our mind, a total failure of the entire accountability system." And, "The deal was structured that, if you didn't pay up, you were not allowed to renew your licence." Although there is now an appeals process, the province has retained the right to enforce private sector billing through public sector regulations.

Citizens also want a fair, open and competitive process. Ottawa's Lathrop says, "We were quite concerned about sole sourcing [the Ray Friel Centre]. A red flag goes up when you are talking about the public sector and how to deal with an individual company without being accused of not tendering or not going out and doing the appropriate canvassing."

Using private sector techniques, long-term financing and innovation to provide public services means tapping into a new, multi-billion dollar market. The companies involved look for long-term arrangements because, as Akkawi says, "Except for purely service oriented P3s, the private sector is bringing financing." Where there is significant capital investment, the private sector partner may not see a return for several years.

The good news, according to SuperBuild's Huot, is that, "Private sector resources are virtually limitless. They have access to world-wide markets."

McCallum says, "The Canadian financial community has a huge amount of money ready to invest in public infrastructure projects, if they can feel comfortable that the return is commensurate with the risk. The difficulty with many of these things is establishing any revenue stream at all. If you invest money, then you need to have money come back, both to pay off your initial investment and to give you a return. There are many areas in which, under the current conditions, it is hard to provide that money."

But no matter how well they're sold, not everyone buys into P3s. The Canadian Union of Public Employees (CUPE) has waged the P3 public relations battle with skill and resourcefulness, minimizing successes and trumpeting failures.

"Higher borrowing rates and lengthy lease schemes mean these partnerships cost taxpayers more than publicly financed services. Quite simply, the private sector can't borrow as cheaply, or with as good a credit rating, as any level of government - municipal, provincial or federal," says Judy Darcy, national president of CUPE. "Where there are cost savings - often generated by cutting services and staff - they're pocketed by the corporation. New user fees often erase any savings that do trickle down. Paying more for eroded services is no partnership."

Even Darcy acknowledges that the private sector has a role in public services and infrastructure. "In most provinces the private sector has been involved historically in designing and building new water treatment plants, schools and hospitals. But we believe that's where the involvement must stop, and the keys turned over to the public."

CUPE, she continues, has other issues with P3s. "On democracy, P3s also get a failing grade. Lengthy lease agreements, negotiated in secret with little or no public input, saddle governments with deals that can stretch over 20 or 30 years. Community control and accountability are diminished, as the public is shunted to the side in decision-making processes."

Lychak says, "One of the problems faced in some of the bigger municipalities where CUPE plays a larger role and CUPE national keeps their local presidents of those bigger organizations on a very short chain, is the opposition for any kind of innovation or change that impacts their membership and indirectly their dues. The union never gives up."

In the perceptions battle, Industry Canada's Bradet points out that CUPE has the advantage of a higher profile than P3 proponents. "CUPE is a public figure. The labour movement is a public figure. There are hundreds of people in every municipality who are CUPE members, very vocal and with a big PR budget. Who talks for the other side unless you have a champion?"

CUPE has built credibility protecting its members from unfair P3 implementations. Akkawi describes a situation several years ago where the Ontario Realty Corporation released an RFP that it had to withdraw after the union challenged it in court. "Union issues had not been dealt with up front and legislation was not in place; these are show-stoppers. It can't only be a win for the public sector in terms of value for money, or for the private sector's return on their investment; there has to be fairness for the employees impacted by the transaction," he says.

In other cases, Akkawi says, "…the private sector walked away because the process was not well defined and did not include all the stakeholders." Pensions are a challenge, because "there's simply no portability between public and private sectors." However, the marketplace is beginning to provide solutions that mirror an equivalent to the public pension.

Whatever else they are, P3s are neither quick nor easy. Public services still cost money, no matter how the deals are structured - budgets aren't getting any bigger, nor are taxpayers any easier to please. The message from the top is that governments can minimize the risks of a P3 with thorough negotiations before a contract is signed and later, through the regulatory power. But as McCallum points out, "They are extremely complex … in the manner in which they are being documented. The sheer complexity poses a hurdle that, for smaller projects, often proves to be insurmountable." In his opinion, widespread acceptance of P3s will hinge on the standardization of supporting legal and financial documentation. Because it takes time and experience to develop that foundation, the struggle to make P3s business as usual in Canada is far from over.


Richard Bray is an Ottawa-based freelance writer. He has been published in magazines and newspapers in Australia, the United States and Canada. Before freelancing, he worked as a producer, reporter and senior writer for CBC in Toronto.


 

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