After months of heated debate about using a public-private partnership (P3) to upgrade Regina's wastewater treatment system, the city council recently decided to put the issue to a municipal-wide referendum later this year. Since the debate will continue, it is important to clarify some facts about P3s. Only then can the residents of Regina make an informed decision about whether to move forward with the proposed P3.
Here we clear up three common misunderstandings that have clouded the debate so far.
Fact 1: P3s are not privatization.
As the name implies, P3s are partnership arrangements between the government and private firms to share the risk and rewards of providing public infrastructure. They involve an ongoing relationship between the partners, not the selling of public assets. The government still owns the infrastructure and is ultimately responsible for ensuring related services are up to snuff.
To that end, the government establishes desired outcomes for the project--things like safety and water quality--while a consortium of private companies takes on the task of achieving them. If the private partner does not deliver, the government can reduce or withhold payment. The point of a P3 is to harness the innovative capacity, efficiency, and expertise of the private sector for achieving the public sector's ends.
Fact 2: The superior performance of P3s, not funding from higher level governments, should determine whether to go the partnerships route.
Although the federal government has committed $58.5 million to the wastewater project on the condition that it moves forward as a P3, funding from higher level governments is not the only reason to choose the P3 option. A more important consideration is the performance advantage of P3s.
When it comes to the construction of public infrastructure, P3s have a strong record of being delivered on time and on budget. In a recent analysis of 19 Canadian P3 projects from 2004 to 2009, an impressive 90 per cent finished on time or early.
International evidence shows that P3s substantially outperform conventional government-led projects both in terms of cost and completion time. A study from the United Kingdom found that P3 projects typically finished one per cent earlier than scheduled and with virtually no cost overruns, while government-led projects finished 17 per cent late with cost overruns of 47 per cent. An Australian study found similar results with 3.4 per cent of P3 projects completed ahead of schedule and 23.5 per cent of government-led projects completed behind schedule.
Fact 3: The P3 option can be less costly when project risks are accounted for.
We often hear the P3 option is more costly than government-led projects because governments can raise capital in debt markets by borrowing at lower interest rates than private companies. This is an incomplete comparison because it fails to include project-related risk.
Government-led projects are not risk free. While a more attractive interest rate may make them appear less costly, such projects have a history of being over budget and delivered late. When this happens, taxpayers are responsible for the extra costs. In a P3, the risk of additional costs is borne by the private sector partner, which makes the government rate bargain a much less attractive deal when the full risk-adjusted cost of the project is taken into consideration.
In fact, an independent value-for-money assessment by the accounting firm Deloitte concluded that the risk-adjusted cost of Regina's wastewater treatment plant would be lower if delivered as a P3. Specifically, Deloitte analysts peg the total construction, operation, and maintenance cost of the P3 option at $479.2 million, some seven per cent less than the $514.5 million cost of government-led provision. Importantly, the P3 cost estimate excludes the $58.5 million federal subsidy, which would further reduce the cost of the project from the city's perspective.
Projects like the wastewater plant last many decades so calculating value-for-money depends on various assumptions about the future. But to claim that lower borrowing costs make government-led delivery always a cheaper option simply isn't true.
The upcoming referendum is an opportunity for Regina taxpayers to genuinely debate the merits of using the P3 model. For that to happen, they will need facts rather than misleading arguments that muddy people's understanding of P3s. And the facts point to a P3 as the better bet for Regina's wastewater plant upgrade.
This piece was co-written by Hugh MacIntyre, a co-author of the Fraser Institute study Using Public-Private Partnerships to Improve Transportation Infrastructure in Canada.