Government Inc.

A new book questions the efficacy of public-private partnerships.

Over the next several years, Canadian governments at all levels will undertake a multi-billion dollar attack on the so-called infrastructure deficit. Good infrastructure decisions will serve us for generations, expanding the quality and sustainability of our public services, improving productivity and increasing employment. Poor decisions will burden us for decades. We must also choose the right infrastructure, using financial and fiscal prudence while anticipating future technological and societal trends. If our priorities are wrong or if we pay too much, vital projects will be neglected.

All this is a tall order. In accomplishing it, the model of public procurement referred to as a ­public-private partnership—typically called a PPP, P3 or AFP, the latter based on the Ontario government variant called alternative financing and procurement—will be prominent. Heather Whiteside’s recent book, Purchase for Profit: Public-Private Partnerships and Canada’s Public Health Care System, is therefore a timely one. An expert on privatization, financialization and fiscal austerity at the University of Waterloo, she uses theories from political economy to examine Canada’s experience with P3s, with a particular focus on health care.

Purchase for Profit opens with an analysis to explain the desire to involve the private sector in public infrastructure. Whiteside’s logic here is based on political economy theory, including no fewer than four references to Karl Marx himself in the early pages. (Older readers may be reminded of the frothy change-the-world student politics of the late 1960s, at institutions such as Simon Fraser University, where Whiteside received her PhD.) Faced with this ideologically tinged introduction, readers grounded in contemporary public affairs might be discouraged from continuing. But they should persevere. Whiteside is offering practical advice on one of the most significant fiscal and public policy issues of our day. Although she fires off periodic polemical broadsides throughout her discussion, the rest of the book is much clearer sailing.

Admittedly, her propensity to cite public sector trade union sources and their allies as authoritative on the performance of PPPs can be unpersuasive, but so is the too-common practice of PPP proponents citing equally self-interested sources in the financial services sector and pro-business organizations. The ground between the ideological left and the ideological right on the topic appears to leave little room for objective, evidence-based analysis and hypotheses. Interestingly many would even exclude most auditors general from the middle ground. As Whiteside notes, “provincial auditors’ reports have thus far proven to be a leading source of support for anti-P3 campaigns.” Still, despite the ideological tilt of her own research, she does make an important contribution, by rigorously framing the debate over PPPs and implicitly inviting evidence-supported counterarguments where they exist.

Looking at the entire gamut of PPP projects would be overwhelming, so the book focuses on the financing of public hospitals in British Columbia and Ontario. Whiteside deconstructs four PPP hospital projects and the two provincial PPP programs for which those projects arguably cleared the way. In her view, the rationale for PPPs is the notion of “accumulation by dispossession,” whereby the accumulation and concentration of wealth is enhanced by allowing commercial interests to move into fields such as government programs, facilities and services that were previously closed to capitalism.

One of Whiteside’s main conclusions is that the commitment to PPPs is hard to kill off. When the earliest PPP projects failed to deliver on their promises, she argues, their successors were allowed to morph into something else, rather than being discarded as allegedly unsuccessful fiscal policy. She introduces the notion of RID—routinization, institutionalization and depoliticization—to refer to the means supporters used to overcome PPPs’ shortcomings. The model’s advocates, she asserts, wanted to ensure that disappointing outcomes did not result in the PPP principle being abandoned in favour of traditional government tendering—or even simple contracting out individual services—funded by tax-supported debt financing.

How did this RID process work in practice? Whiteside rightly points out that early high-profile PPP projects attracted so much intense scrutiny and opposition that proponents realized the model would have a short political shelf life if projects were developed and launched individually. The solution was twofold. First, an overall policy was crafted to govern all major sectoral infrastructure procurement using PPPs. Second, there was a transfer of responsibility away from proponent organizations or ministries to arm’s-length entities that had PPPs as their sole raison d’être.

The result was what Whiteside calls “P3 enabling fields”: crown corporations such as Partnerships BC and Infrastructure Ontario as well as fiscal policy frameworks to guide the initial evaluation and detailed structuring of projects. With considerable justification, she suggests that an agency committed to PPPs is impartial neither in developing a project evaluation model nor in applying it to individual proposals. She outlines a number of consequences of creating PPP agencies—in particular the fact that broader social and governmental policy questions receive limited attention, understanding or weight by these agencies. In my own experience, I would add that the PPP agencies usually have mandates and attract personnel for whom “the deal” is the main focus.

Whiteside is not always balanced in her treatment of various projects. Her book goes into considerable detail about the early Ontario hospital PPPs in Brampton and Ottawa, but neglects to discuss the contemporaneous and celebrated failures of the conventional procurement processes for similar major hospital projects in Sudbury and Thunder Bay. The latter were arguably among the strongest arguments within the Ontario government for an alternative procurement model. She also accepts some assumptions that are subject to considerable debate. An example is her assertion that conventional procurement is no more vulnerable to delay, scope creep or budget overages than PPP projects—a viewpoint she shares with some provincial auditors. For those who have worked in government for any length of time, that faith seems naive. In fact, a number of factors that Whiteside cites as shortcomings may well be among the non-financial reasons that PPPs of various kinds are embraced by governments.

Whiteside’s comparisons between original project cost estimates and ultimate costs make for interesting reading. She argues that Infrastructure Ontario and Partnerships BC were on time and on budget with their early projects, in part because they redefined the timelines and the budgets against which they would be measured. In fact, many commentators would argue that pliant timetables and soft budget estimates have been commonplace in many such major projects, regardless of procurement method. Reading past auditors’ reports, even when projects were successfully bid under conventional tendering, two patterns recurred. Client groups—from judges to transit operators to medical staff—were known to urge post-design or even post-tender modifications to project specifications to accommodate new equipment and functions, or for less justifiable reasons, like end-user preferences. This pattern was compounded by a practice within the construction industry of bidding low on government jobs and then “change-ordering to profitability,” with project sponsors having few options to restrain such contractor behaviour. (In other words, because the project was already underway, re-tendering or dispute resolution were not timely options.) Project sponsors had even fewer incentives to say no. (In most cases, funding through to completion was effectively guaranteed by the province and not a primary concern of those requesting changes). Infrastructure Ontario’s ability to insulate itself from stakeholder pressure, in order refuse change orders and to impose penalties for project delays, changed that dynamic. Under Ontario’s AFP model, both practices—change orders and delays without consequences—have largely disappeared.

When it comes to employing what commentators refer to as value-for-money analysis to different projects, matters become even more complicated. That is partly because of the need to make mathematical assumptions about the cost of capital when calculating a project’s discount factor, which is used to estimate the project’s long-term cost. Whiteside cites the debatable pricing assumptions imbedded in the discount factors used to contrast PPP projects with conventional projects. She further suggests the problems in making objective comparisons are compounded by double-counting the resulting unnecessarily wide cost differentials over time. These are not mere methodological criticisms. Alternative mathematical assumptions could have reversed the ranking of PPP and conventional projects, as corroborated to some extent by calculations carried out by auditors general in Quebec, British Columbia and Ontario. Whiteside’s analysis is precise and convincing, and she is right when she notes that the “black box” nature of pro-PPP value-for-money analysis has not helped win over skeptics.

Some of the subjectivity in employing the value-for-money analysis has since been reduced by greater process transparency. Perhaps more importantly, the discount factor problem has been largely eclipsed, at least for the foreseeable future. That is because of the large and sustained drop in inflation rates and cost of capital, both public and private, and a greater availability of private credit for infrastructure projects, especially on the part of pension funds and similar pools of “patient” investment capital. This has brought the PPP model and the conventional financing model much closer together, for purposes of calculating long-term cost estimates. Given governments’ desire to reduce debt and deficits, the fact that PPP debt is only marginally more expensive is not, on its own, likely sufficient motivation to go the conventional procurement route through incurring general public debt by any level of government.

The passage of time has other implications. As Whiteside notes, PPPs were initially justified as a less expensive and quicker way to build infrastructure. That debate continues. Later, for sponsoring governments looking to avoid further near-term debt burdens and deficits, the off-book financing feature of PPPs was cited as a primary benefit, attracting external financing that governments were either unable or unwilling to incur themselves. Finally, the arguments for PPPs have become more nuanced, including both explicit and unspoken advantages. This includes the placement of political risk, potential scope creep and possible delivery problems at a greater distance from a range of challenging stakeholders and near-term fiscal and political circumstances that are difficult to predict or control.

Whiteside argues that problems that should have forced a fundamental re-evaluating (and abandoning) of the PPP model were allowed to be corrected through process redesign and modifications, thereby giving the model a new lease on life and even more support. Others would argue that policy makers did what policy makers are supposed to do: learn from their mistakes and hone the policy, rather than throw over the whole initiative. One wonders how many hospitals in Ontario would have been built or expanded in the subsequent period if they had relied on taxpayer-funded conventional debt financing and stakeholder-driven program design, with the attendant scope creep and likelihood of change-orders from contractors.

Perhaps it is a function of the extended cycle time for academic publishing, but Purchase for Profit would have benefited from looking at these issues from the perspective of 2015, rather than the first decade of the millennium. For example, citing credit conditions before and during the 2008 fiscal crisis seems like ancient history in our protracted low-interest environment, where investment capital for infrastructure projects is readily available from pension funds and other sources of patient capital at historically low cost. So does looking at several prototype PPPs from the late 1990s, when these do not shed much light on the dozens of subsequent multi-million dollar hospital projects that have been completed in British Columbia and Ontario, most of which benefitted from the hard-learned lessons that Whiteside illuminates. For Ontario, it is also important to consider both the relatively small number of AFP procurements among the thousands of projects procured through traditional processes, as well as the annual third-party reports on the timeliness and budget performance of AFP projects.

While Whiteside’s objective may have been to discredit PPPs, her work will also serve to bolster those engaged in what she terms RID, addressing things such as private windfalls from refinancing (where high-cost early financing is renegotiated at lower rates when risks are better understood and discounted by lenders). As government’s skill in structuring and negotiating PPPs improves with time and transparency, public officials should negotiate the opportunity for further financial gain to the taxpayer’s advantage. Partial equity sales, the refinancing of project debt, and “participation agreements” could generate dividends. The Ontario government’s experience with the Teranet land-registry system illustrates the point. The public land-registry system was an early public-private venture in Ontario, with few precedents and no clear understanding of its potential commercial value. With commendable foresight, and to ease the transition, the Ontario government retained a significant but largely hands-off minority interest. The initial sale terms also provided that any unforeseen upside on the transaction down the road would be shared between the private operators and the treasury. Although satisfied with the initial financial terms and the level of investment by pension funds and others, the Teranet enterprise was later launched as an initial public offering for a significant increase in value, thus substantially increasing the value of the Ontario government’s continuing part interest. Later, the private partners successfully sought to buy out the remaining Ontario government’s interest, again at a premium over the IPO value.

Whiteside disparages the so-called design-build-finance-operate model of PPPs, common in the United Kingdom’s Public Finance Initiative. However, she incidentally makes a good case for distinguishing the so-called design-build-finance-maintain model from the former model. By retaining responsibility for maintaining and refurbishing physical systems (e.g., HVAC, renovations, telecom) but leaving other soft functions (e.g., catering, cleaning, pharmacy) outside the deal, the private partner in the latter model assumes significant long-term risk, but does not become involved in the kinds of issues best managed by those running the facility, including labour relations, clinical activities and patient satisfaction.

At the beginning of this review, I referred to the need to invest in the right infrastructure, allowing for the larger technological and societal trends that will change the kinds of infrastructure we will need in the future. That is nowhere more obvious than in health care. As Whiteside notes, the lengths of Ontario’s PPP agreements are being reduced, since financing can be secured and amortized over shorter periods with greater certainty, without prejudicing the benefits and financing of long lifecycle projects. She also persuasively argues for more graduated penalties and provisions for publicly initiated course corrections during the term of long agreements.

It is equally important, however, that we not commit ourselves for decades to a healthcare delivery model that is in a state of flux. With chronic disease displacing acute illness as the prevailing feature of public health care, and with hospitals being the most expensive way to offer care, there will be increasing efforts to stream patients away from hospital admissions, emergency rooms and long-term care homes, in favour of community-based and home-based healthcare delivery. Ironically, hospitals are among the most “recyclable” forms of physical public infrastructure. They require reformatting and adapting with each decade, since what happens within the walls is far more important (and expensive) than the physical plant. Our PPP agreements need to have a range of opportunities to share investment obligations, and to alter underlying business assumptions, if they are to serve us throughout their extended terms.