Here is an interesting article showing the added costs of
private-public partnerships
Cheers, ken hanly
The Globe and Mail Tuesday,
June 27, 2000
THE HIDDEN EXPENSES OF PUBLIC-PRIVATE PARTNERSHIPS
By John Loxley
Brian Neysmith's paean to public-private partnerships
grossly exaggerates
their benefits and leaves some serious misunderstandings
about how they
work in practice (The Future Is In Partnerships -- May 19).
Case studies
I have conducted for the Canadian Union of Public Employees
reveal
quite a different picture.
The most common form of public-private partnerships (PPPs)
in Canada
has been one in which the private partner finances, builds
and operates a
facility, be it a road, bridge, school or office block, and
leases it back
to
government. A legal contract does, in fact, give the private
partner access
to a "tax base" for the life of the lease. The benefits to
government are
said to be lower debt and capital spending, thus easing
compliance with
balanced budget legislation where this exists. In reality,
and without
exception to my knowledge, the implied cost of borrowing
built into the
lease is higher than the public sector's own direct cost of
borrowing.
For the Confederation Bridge in Prince Edward Island, a case
quoted
favourably by Mr. Neysmith, the additional costs of
borrowing have been
calculated by the Auditor-General to be in the region of
$45-million. The
provincial Auditor of New Brunswick concluded that the
Evergreen Park
School in New Brunswick cost tax payers $900,000 more (on a
$14.7-million project) than if a traditional approach had
been followed.
The Charleswood Bridge in Winnipeg cost taxpayers an extra
$1.4-million
in present value terms on a contract of $11.6-million.
Such projects do not reduce public sector debt as the leases
have a
present value that is exactly the equivalent to debt,
regardless of
accounting conventions. They are, at best, an expensive way
of "cooking
the books," as more government auditors are now revealing.
Consultants have complained about the high "hidden" costs of
bidding on
PPPs, both to the construction industry and the public
sector, in terms of
preparing and evaluating requests for quotation and requests
for
proposals. Such costs have been estimated at $1.6-million
for the
Charleswood Bridge (over 10 per cent of the project cost),
with fees to
consultants alone being 6.7 times as high as those incurred
in a normal
design-bid-build project.
Mr. Neysmith argues it both ways -- he says PPPs are more
cost
effective and more efficient, but at the same time he argues
that the
private sector must be allowed to generate more revenue from
assets
than would have been necessary if they had remained in
public hands.
Where the PPP takes the form of a public utility financed by
the
government handing over the operating budget to the private
partner, as is
the case with the Hamilton-Wentworth water and waste
facility in
Ontario, higher private revenues can only take the form of
lower amounts
spent on operations.
This means layoffs of workers, which can lead to reduced
levels of
service. In Hamilton-Wentworth, apparently, it has meant
higher exposure
of the public to risks of service disruption and to
environmental damage.
The private partner has also claimed a portion of savings in
costs that
have resulted from purely public sector initiatives.
There is another common feature of PPPs that ought to
concern
Canadians; they uniformly lead, for reasons of
"competition," to the
privatization of information that was previously within the
public realm.
This inevitably reduces accountability for how public monies
are being
spent.
John Loxley is an economics professor at the University of
Manitoba.
