Ontario Provincial Auditor Throws P3s in the Trash

In her 2014 report, Ontario’s Provincial Auditor has published a damning assessment of the cost effectiveness of Ontario’s large and growing P3 program for public infrastructure. Looking at 75 P3 projects, it found a cost disadvantage for P3 procurement compared with conventional government contracting of $8 billion. More important for P3 advocates, it found that the risk transfer to the P3 operator that supposedly offset higher P3 financing costs is either wildly overstated or non-existent.

Four headlines from the report give a flavour for the its conclusions on the incorporation of risk into its analysis.

“No empirical data supports the valuation of the costs of the risks”

“Some risks considered transferred to the private sector are not supported by project agreements”

“Two significant risks on the public-sector comparator side should not have been included”

The Auditor noted that an addition is made to the public sector alternative’s costs in Infrastructure Ontario’s comparative analysis to offset the benefit to the public sector as a non-taxable entity. In addition to the absurdity of effectively defining the tax not paid by governments as a cost of public procurement, this adjustment ignores the fact that while public project sponsors are not taxable, all of the entities that do the work — from designers to contractors — are themselves taxable.

The Auditor also blew the whistle on a new adjustment planned by Infrastructure Ontario that would award an arbitrary and unsupported  “innovation” bonus to the private side of the comparison, thereby tilting the comparison even further towards the P3 option.

None of this is new, of course.

As far back as 2004 the Association of Chartered Certified Accountants in the United Kingdom issued a massive report debunking the claim that risk was actually transferred in P3 projects and questioning the basis for the valuation of such supposed risk transfers.

Pam Edwards, Jean Shaoul, Anne Stafford and Lorna Arblaster, “Evaluating the operation of PFI in roads and hospitals”, Research Report No. 84, Association of Chartered Certified Accountants, Certified Accountants Educational Trust, 2004

That report actually went further, concluding not only that very little risk was actually transferred to private P3 operators but also that, in the process a significant new risk — the risk that the P3 operator would fail — was created.

I’ve explored this issue in several reports on Canadian P3s. One dealing with P3s for elementary and secondary schools in Alberta; one dealing with privatization of water treatment in Regina; and one dealing with the construction of a new hospital in North Bay Ontario.

Alberta

http://www.cupe.bc.ca/sites/default/files/cupe_alberta_doing_the_math_0.pdf

Regina

http://d3n8a8pro7vhmx.cloudfront.net/reginawaterwatch/pages/20/attachments/original/1375213383/Regina_Waste_Water_Treatment_Plant_Report.pdf?1375213383

and North Bay for the Ontario Health Coalition.

Canadians are paying an enormous price for the ideological predispositions of P3 advocates in provincial governments across Canada and in the Federal government. P3 projects cost more. A lot more. And to add insult to injury, much of the advocacy for this ridiculously expensive approach to financing public infrastructure is, you guessed it, publicly funded via Federal Government funding for P3 Canada.

So not only are we the victims of “don’t confuse me with facts” P3 advocacy, we’re paying for it.

 

Inequality — the good news and the bad news.

It seems we are no longer in denial about growing inequality in Canada, and about its potential consequences. In mid-November, a lot of attention was paid to new Statistics Canada data which show that inequality as measured by the income share of the top 1% of income earners stopped growing in Canada after the Great Recession, whereas it continued to grow in the United States. And while there was a fair bit of self-congratulation about that fact, it was also pointed out that inequality in Canada is still very close to the highest on record.

http://www.statcan.gc.ca/daily-quotidien/141118/dq141118b-eng.htm

However, the state of debate on the issue in Canada continues to be one of good news / bad news.

The next week, the Broadbent Institute Gala featured former US Secretary of Labour and current inequality crusader  Robert Reich as its guest speaker. The good news was that Reich is a very compelling and entertaining speaker, and he has put a lot of effort into popularizing the issue of inequality in America. Check out the trailer.

The bad news is that, despite the compelling information and analysis, the prescriptions leave us hanging. Some are simply beside the point. Sure, investment in education and increasing productivity may enable higher living standards, but as Reich’s own data show, the problem in the past 35 years or so has not been a lack of productivity improvement, it has been the distribution of the benefits from productivity improvement. Others point in the right direction — the need to renew a progressive tax system and strengthen the trade union movement, for example — but fall short of even a hint as to how those things might materialize in the current environment. And perhaps most important, Reich’s prescriptions ignore the way that different levels of public service — collective consumption, if you will — play into differences in income and wealth inequality among nations.

And near the end of November, a report from the TD Bank, no less, warned of the social, political and economic consequences of allowing inequality to continue to grow unchecked.

You can find the report here:

http://www.td.com/document/PDF/economics/special/income_inequality.pdf

Like Reich’s presentation, the TD report is full of compelling statistical analysis of the problem of growing inequality, and its potential consequences. And despite the case it makes, the TD report falls even further short of a credible and compelling response. Not surprisingly, the bank is cool to the idea of increasing income taxes on those with high incomes. And it fails even to mention an important part of Reich’s message — the link between growing inequality and the weakening of workers’ bargaining power as union representation in the private sector continues its absolute and relative decline.

But, astonishingly, the TD report advocates as a solution to inequality one of the key factors behind the growing gap in living standards between the middle and the top of Canadian income earners.  Rather than point to the importance of strong public services as contributors to reducing inequality — just look at a list of countries in reverse order of inequality compared with a list of countries by public services as a share of GDP to see the point — the TD report actually recommends more of the very income targeting of public services that has been a key driver of growing inequality in Canada in the past 25 years.

So the good news is, we’ve moved from denial, to dismissal to acknowledgement of the social, economic and political impact of inequality. The bad news is, we’re not much closer to a response that stands a chance of reversing the trend.