Thanks very much for inviting us.
Our president, Mr. Paul Moist, had hoped to be here, but he has to be at an important meeting in Toronto at this time.
I'm really glad that you're investigating this issue, one that I feel has not, despite the increasing number of P3s in Canada, been adequately analyzed in an objective way in Canada.
I'm also delighted to be here with Brock Carlton, Adam Thompson, and Michael Atkinson. We are all members of what's called the Municipal Infrastructure Forum, which is a body that the FCM set up develop some constructive solutions on the whole long-term infrastructure program that the federal government is planning.
I commend the FCM for setting up this organization. It's been a very constructive exercise whereby different sectors of society can get together to try to come up with constructive solutions.
We approach the issue of public-private partnerships very much from a public policy perspective. The overriding concern we have with P3s is concern for public finances and the delivery of quality public services.
I've worked as an economist at the federal, provincial, and territorial level, as well as in the private sector, and I dealt with P3s during that time. I approach this issue very much from an economist's perspective and in terms of the best use of the public's and taxpayers' dollars.
We also want to underline that this isn't about the public sector doing everything or about the private sector doing everything, but about the appropriate role for each.
In Canada, traditional procurement involves the public sector determining its priorities and requirements. It may contract for design and then contract to the private sector to construct infrastructure—the private sector constructs infrastructure in Canada. That's the way it works, and of course we accept that. We see those as appropriate roles.
The public sector provides financing because it can borrow funds at the lowest rate, and it owns and operates public infrastructure because it is a public good and government is ultimately responsible for it. If it fails 10 or 20 years down the line, government has to provide it and make sure that it's available to its citizens.
We are extremely concerned that Canada will soon follow the U.K., which was the model for Canada's P3 program, down the road of massive failures of P3s. These undermine the viability of providing quality public services because governments are under contract to pay billions in excessive fees for P3 projects.
Proponents in Canada claim that we have taken the best practices from elsewhere and that we are a global leader in P3s. From everything I've seen, the Canadian model may be good at promoting P3s, but it doesn't do a very good job of providing objective assessments and evidence, or accountability and transparency, for P3s.
There are many different issues here. You could probably be studying this for a year, but I don't think you want to. I'm going to focus on some economic aspects in the value-for-money reports. The value-for-money reports are key to P3s, and they're supposed to provide evidence for the benefit of P3s.
I and others would say that value-for-money reports are not credible. In fact, some proponents would say this as well.
Promotion and analysis of the value-for-money reports in Canada is done by P3 agencies. They involve both promotion and analyses, and those roles should be separated, as far as I'm concerned. There is very little transparency of key information in the value-for-money reports; high discount rates are used to minimize future liabilities, and I'm going to talk about that a bit later; and risk transfers are exaggerated. Auditors in pretty much every province in Canada have frequently found particular P3s to be bad deals, and in the U.K.—I don't know whether you're following this—there have been massive P3 failures in recent years.
To help you understand why the mixing up of promotion and advocacy is a problem, here's a quote from Larry Blain, a former CEO of Partnerships BC, which pretty much established the Canadian model for P3s. He said: Public sector comparators won't do you much good anyway, because I can make the public sector comparator as bad as I want to, in order to make the private sector look good.
The public sector comparator is an essential part of a value-for-money assessment, because it's upon that basis that the costs of a P3 are compared. You can't have a value-for-money report without a PSC.
It is a remarkable admission. He is basically saying they are useless because they can change it with creative accounting.
I want to get into the way they do this. I'm sure some of you may be aware of the issue with discount rates. I am taking a hypothetical example of a P3 that runs for 30 years and pays $10 million. It could be a million dollars; the ratios are the same. Over 30 years the government would be paying $300 million in nominal dollars, assuming there was no cost escalator there. People use discount rates. The federal government can now borrow at 2.5% over 30 years. That's a yield on a 30-year bond. If you use a discount rate of 2.5%, you come up with a present value of $209 million. A lot of accountants argue that's what the federal government should use. Provincial governments in Canada can borrow at 3.5% over 30 years right now. That would give a present value of $184 million.
Unfortunately, in B.C. the government uses a present value of $7.5 million. They use a private sector cost of capital. What is actually a cost and a liability of $300 million would be more than that because usually there is an inflator there. Actually, in current dollar terms it looks like $118 million. It should be $184 million. That's a massive difference there.
The federal government's Treasury Board guidelines are for a discount rate of 8% real, plus inflation. That would amount to a discount rate of 10%. When you see the value-for-money assessment, that $300 million in future liabilities is reported as $94 million in liabilities. They are hiding these future liabilities by using discount rates. Unfortunately, the value-for-money assessments don't show those future liabilities. They just show the present value on that.
That's the first form of what I would call creative accounting on this. B.C uses it.
The second form of creative accounting that is used is assuming very high levels of risk transfer to justify P3s without evidence. I have a few examples here.
This is what Ontario uses. For instance, for the Bridgepoint Hospital in downtown Toronto, the traditional all-in procurement costs were supposed to be $452 million. The P3 cost was substantially more than that, but what the Ontario government assumed was that $352 million was transferred to the P3 operator.
Now, is there any evidence for this? There is absolutely no evidence provided for this. Even in Infrastructure Ontario's methodology, they just provide a short document. I have a copy of it here. They just have a little matrix. They don't provide any empirical evidence for why those risks should be transferred. Now, in Ontario, if you add it up, there is about $3 billion or $4 billion, probably about $5 billion now, that they assume is risk that is transferred to the private sector.
In the case of Bridgepoint, the risks transferred amount to over 60%. The average risk supposedly transferred to the private sector in Ontario is about 50%. There is absolutely no evidence for that.
As a former public servant, I'm appalled there is no evidence for this. People in California asked me.... Schwarzenegger was interested in pursuing P3s. They got some of the information and the methodology from Ontario. They were flabbergasted. I was embarrassed as a Canadian on that.
What does this creative accounting lead to? I'll just go back on the whole risk transfer. Typically with P3 projects, a private operator only puts up about 10% or 15% equity, and they set them up as what are called “special purpose vehicles”. That means that even though there are big companies behind them, they can walk away at any point and only lose that 10% to 15% equity.
As far as I'm concerned, there's absolutely no rationale for assuming any risk transfer beyond that, because private operators frequently do work away from that. It's happened here in Ottawa. It's happened all around the world.
I'm going to quickly sum up. I can talk later about what auditors in Canada have found, but the U.K. experience now is that there'll be massive P3 failures with what they call the private finance initiative.
The first of these was Metronet subway. It was a P3 failure that amounted to $2.7 billion and an extra cost to taxpayers of about $640 million. The real problem now is that more than 60 U.K. hospitals are in financial difficulty due to PFI debt payments. They need bailouts.
The total cost of the PFI now was recently calculated to be £300 billion or $480 billion. Those are big figures. That's about one-third of Canada's total GDP. In the U.K. it works out to about $20,000 per household.
The U.K. health minister, a Conservative, said that the PFI deals are millstones and have brought parts of the health system to the brink of financial collapse. Other people have described them as debt time bombs and staggering mountains of debt.
I'm sorry to go through this in some detail, but I think it's important to understand some of the accounting that goes on behind this. I'll be very happy to hear your questions.