The Private Option

Three years ago a new hospital opened in Brampton, northwest of Toronto. Long awaited in this rapidly growing city, the Brampton Civic Hospital had barely begun operations before it was mired in controversy. Unfortunately, as sometimes happens in hospitals, two of its patients died. But it was not providence, or bad luck, or professional incompetence that in this case was decried. Instead, as an indirect result of a media campaign spearheaded by an alliance of political groups and public sector unions, the blame was laid squarely on the fact that the new Brampton hospital was a public-private partnership.

This assertion—whose speculative logic in relation to the two deaths was almost impossible for hospital officials to rebut—made headlines and the resulting tempest was whipped to a degree that led to dismay even in the highest echelons of Ontario’s Liberal government. The Brampton hospital had indeed been built by an arrangement that gave a private sector builder significant leeway in designing the facility and choosing its materials in order to meet the province’s project budget and constantly changing needs. Otherwise, the new institution was a picture of normality in terms of its human resources: the nurses were on salary, the doctors on piecework, the majority of the staff hired on union-based agreements. As in any large building, some private sector contractors were hired to deliver specialized services: parking, food services, portering, security and cleaning.

This episode pointed not just to the power of politically motivated media campaigns involving emotive issues such as hospital care, but also to a deep-seated unease about public-private partnerships. The suspicion is that P3s, as they have been nicknamed, undermine public sector principles, while favouring corporate interests. Perceived as ideologically driven, P3s are criticized as inefficient, costly and of dubious value in delivering public goods. None of these arguments is new. Indeed, they are eerily similar to those made against the transcontinental railway dreams of Macdonald and Laurier more than a century ago.

In Public Service, Private Profits: The Political Economy of Public-Private Partnerships in Canada, University of Manitoba economics professor John Loxley delivers a sober evaluation of the P3 experience in Canada and concludes that P3s are bad. His assessment is not surprising. As he states in his acknowledgements, much of the book’s research was paid for by the Canadian Union of Public Employees, and he credits several CUPE employees who “provided invaluable help in many ways.” Far from being a disqualification, this association nevertheless qualifies this book. CUPE has long been opposed to P3s and has, in its own often clumsy way, published “research” to show that P3s are unnecessarily expensive. Is it worth noting out loud that P3s are also likely to be contrary to the interests of members of CUPE?

Loxley’s treatment is far more comprehensive than much of this previous CUPE-inspired analysis. Governments are attracted to considering P3s for several potentially sound reasons. Not least, they may save money, although by and large that has proven to be an illusion. Also, they theoretically allow governments to share risk with private sector counterparts; so, if a new roof leaks, the private partner will be the one who is presumably forced to fix it. In addition, governments can benefit from private sector expertise, especially when they incorporate incentives for private partners to perform well. In theory, if the private sector has a stake in a project’s long-term success as a full-fledged partner rather than a mere subcontractor, and can also benefit by saving money, then a better public good will be delivered. Moreover, governments will be exposed to new techniques in building, financing and know-how. Finally, some studies indicate that the involvement of large banks in P3 projects serves a disciplinary role, since bankers’ prying eyes seem to cast more fear in the hearts of corporate players than whatever managerial oversight public servants can muster.

Loxley delivers in explaining the rhyme and reason of P3s to a lay audience. In a well-written and neatly structured introduction, he deftly walks the reader through various P3 categories, and shows how commonplace these initiatives are when the most inclusive definitions are used. State players at all levels (including aboriginal governments) enter into partnerships to consult, to purchase services and goods, and to fund and operate public initiatives of almost every possible type: landfill and recycling activities, water and wastewater treatment, hospitals, prisons, recreation and culture centres, public transit services, energy generation facilities and even government services.

None of this is new, but in recent decades such practice is expanding for several reasons. First, the idea that public policy makers can be all-knowing has perished. Information is too widely diffused to pretend that public servants can comprehend—and act upon—complex realities without outside help. Also, the state is increasingly finding that its room to manoeuvre is being constrained by limits, many of them self-imposed, on new public sector hiring. To a certain extent, these constraints stem from politics and ideology. Few politicians (and that includes many on the left) see much to be gained by having the state employ more and more people on a permanent basis, when the costs of public sector employment tend to be so high and when public aversion to talk of taxation increases becomes ever more pronounced.

And in the way of potential projects, there is much to be done. As Loxley points out, Canada’s existing public infrastructure is old, aging fast and in urgent need of repair or replacement. Moreover, what exists is not sufficient. Canada needs more roads, bridges, railroads, transit systems and electricity generation to guarantee its prosperity. These are mighty good investments to make, but would be massively expensive additions to the state’s budget—especially at a time when health care alone now consumes over 40 percent of it.

Not surprisingly, governments have sought ways to cut infrastructure costs. Mostly, they have delayed improvements and maintenance and put off new construction. Occasionally they have found ways to cut costs by hiring private contractors not only to build infrastructure (governments have never built things on their own), but to design it, own it (so it can be leased back to government on a long-term basis) or operate it. There is an important point to be made here. Intensive forms of private participation in public projects—the sorts of P3 activity that Loxley is most concerned with—are still experiments in this country. The dominant Canadian practice is still for governments to raise money on their own, oversee construction of needed facilities and manage much if not all of their operations. Because such P3s are still pilot projects, it is not surprising that some have delivered uneven results.

To illustrate this performance, Loxley highlights eleven cases: four each from New Brunswick and Ontario, two from Manitoba and a federal initiative. The list includes bridges, highways, schools, hospitals and water-related infrastructure. His conclusions are clear and surprisingly nuanced. “In all cases,” he writes, “value for money was not established,” and in terms of the efficacy of P3s he remains “generally sceptical.” But Loxley recognizes that P3s will remain a popular choice with governments and that they “might be improved.” Interestingly, the Canadian Council for Public-Private Partnerships—the industry-supported cheerleader and repository of argument in favour of P3s—makes the same points.

But Loxley’s case studies also have serious limitations. The projects he has selected were negotiated and completed in the 1990s and early 2000s when cash-strapped governments were desperately looking for new solutions and sent out poorly trained public servants inexperienced in dealing with the few builders and financiers who could manage projects of this scale. This time capsule approach leads to some major oversights. For instance, his discussion of the Confederation Bridge, connecting Prince Edward Island and Nova Scotia, highlights what might still go wrong with the deal, even though the bridge was installed 13 years ago and delivered on time and on budget. Loxley’s treatment of Toronto’s Highway 407 also ignores the great virtues of this partnership that was spearheaded by Bob Rae’s NDP government in Ontario: it developed innovative technologies and delivered the project ahead of schedule and on budget before it was foolishly leased for 99 years by the provincial Tories in 1999.

Still, Loxley’s muscular discussion of the chimera of private sector financing in his treatment of his selected cases is very effective. Using material provided by numerous auditors general, he points to the illusion that governments can either save money or keep their expenses off the books. The idea, originally, was that instead of incurring debt in order to fund the building of infrastructure, governments would ask the private sector to finance and build and then rent out the facilities to their departments and agencies. In terms of reporting expenses, it seemed more acceptable for some governments to declare that they had paid a few million dollars for rent and services, instead of reporting billion dollar expenses for the actual construction. Clearly, the private sector partners, either by borrowing from banks or from gigantic public employee pension funds—as, ironically, was the case for the controversial Brampton hospital—would necessarily face paying interest rates of their own and would have to pass on that cost to the contracting governments. In the end, regardless of whether the government paid for infrastructure out of current revenues or borrowed funds raised through the sale of bonds, auditors general have not been fooled. They insist that the full costs be reported, as they rightly should.

Thanks in large part to these highly public criticisms by auditors general, the practice of organizing P3s has become more sophisticated over the past few years. Governments, through painful experience, are slowly becoming more adept in assessing the relative value of the private sector option in comparison with proceeding on their own, in clearly identifying the risks they are taking and passing on to the private sector, in having a clear idea of what they actually want before signing a deal (governments are notorious for requesting add-ons after contracts have been inked) and in negotiating acceptable terms. Private sector partners are also becoming savvier in perceiving how they can work with governments and earn a necessary profit while helping to deliver a public good. One point that Loxley does not stress is that most of these companies are so large that they employ unionized workers. It is interesting to note in this regard that Loxley’s study has not won the financial and intellectual support of the Steelworkers, the Brotherhood of Electrical Workers or the Bricklayers and Allied Craftworkers Union. Unlike CUPE, these unions frequently benefit from P3 projects.

If, as Loxley says, P3s are here to stay, how can governments do a better job of using them to deliver infrastructure and services? Involving a profit-seeking partner will likely cost more than a government pursuing projects on its own. But costs are only part of the picture. The real issue is whether P3s achieve better value in providing the right goods and services than traditional public provision can. It can be argued that the only way this criterion can be met is by involving all parts of society in conceiving projects and in finding creative ways to spread costs and generate income—and that includes the private sector. In order to build better and deliver better, the state must learn to partner more effectively and seek creative ways to work with the private sector in a sustained fashion that goes beyond merely handing off contracts.

In contrast, Loxley sees P3s as providing an all too convenient way for the state to abandon its responsibilities. In his discussion of project financing and the nature of risk in P3s, and even in his recounting of some of the key events in this early history of P3s, he has furnished an enlightening cautionary tale. But by presenting dated cases and drawing most of his research from the findings of researchers known to be hostile to the idea that governments should partner with the private sector, Loxley overlooks the numerous examples of effective collaboration that shares risks and revenues with suitable accountability. P3s do need to be studied because their management—especially on the government’s side—and the accountability of P3 projects demand constant improvement. But a full analysis of their efficacy demands an objectivity and breadth of vision that Public Service, Private Profits, despite its numerous insights, lacks.