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Tax cuts + ensuing loss of revenue = a deliberate financial crisis…and a reason to introduce P3s to BC

 I  have never seen more senators express discontent with their jobs. … I think the major cause is that, deep down in our hearts, we have been accomplices to doing something terrible and unforgivable to this wonderful country. Deep down in our hearts, we know that we have bankrupted America and that we have given our children a legacy of bankruptcy. … We have defrauded our country to get ourselves elected. ~ John C. Danforth.

A powerful quote by yet another American politician, because I can’t seem to ever find anything as good that a Canadian politician has ever said.  To me, it merely takes a quick swap of the words British Columbia for America and you have a good indicator of where ten years of Liberal policy have gotten us.

In all of the examination of the P3 (public private partnership) projects I have been investigating, I have yet to take the time to sit and determine how it was the conditions became ripe to introduce the contentious idea of inviting private partners into public projects. British Columbia has long been a province of labour driven markets, union built and strongly possessive of that. P3s are one of the top threats to unions, because the private partners building and financing them here are for the most part, foreign offshore companies that hold massive portions of their respective markets. Peter Kiewit and sons- American, Macquarie- Australian although the appear to own a good portion of BC assets, Bilfinger-Berger- German, ACS infrastructure/Dragados-Spanish. How did we get to a point in this province when the building of our largest public assets are under direct administration of non-Canadian corporate interests?

A bit of research put the pieces together in short order – pieces that indicate a calculated and dedicate  strategy of privatization of nearly all of British Columbia’s infrastructure. Let’s begin with a jaunt back to 2001,when Campbell first stepped into the captain’s chair:

In May 2001, the voters of  British Columbia, went to the polls and swept away a decade of social democratic public policies instituted by the New Democratic Party. The Liberals won virtually every seat in the provincial legislature (seventy-seven of seventy-nine), as well as a strong majority of the votes in every region of the province. The new government, which emphasized its leadership capabilities, quickly settled down to a short-term agenda of increasing business confidence by implementing, among other reforms, an across-the-board twenty-five-per-cent cut in personal income tax (the provincial government’s single largest revenue source). The resulting financial crisis was then used as a driver to not only cut government activity but to encourage a re-thinking of what the responsibilities of the provincial state should be and how the public sector should go about meeting these responsibilities.  It was within the context of a majority government enjoying strong popular legitimacy and determined to make the province more business-friendly, a financial crisis, and a deeper drive to “re-invent government” that public-private partnerships (P3s) were introduced into British Columbia as an important option for executing large infrastructure projects.

Aha. Bingo. Makes sense to me, and makes one look at all the tax cuts to income tax Campbell has brought in, in an entirely new light. Sure, they give us more money to spend, in theory anyways, but certainly they also cut revenue from the governments bottom line. Hence, the public began to see other ways to increase the government coffers, such as increase in user fees, msp premiums, university tuitions… But I digress, let’s go back to how the government forged ahead with its plan to thrust P3′s into play when building public projects, and how far they went to make sure they happened – no matter what.

The Government of British Columbia ran into substantial difficulty in developing P3s. This was at least in part due to failure in the early days of the initiative of moving beyond transactional leadership. As a result of the government’s failure to provide transformational leadership on this issue, there was confusion as to whether the government’s interest in P3s was a product of a sincere desire to re-invent the role of the state along New Public Management lines or whether it was merely an attempt to deal with the fiscal crisis it had invented for itself. This was problematic: saving money is not generally something P3s can do for government, other than over the very short-term.  Yet, as we will see, for many it became the key reason to either engage in P3s or not to engage in them. Meanwhile, other critics began to question whether the government’s embrace of P3s had more to do with ideology than a sincere commitment to better public-sector management. In the second section of this article, I will look at two early flagship projects that ran into trouble: the Abbotsford Regional Hospital and Cancer Centre (Abbotsford Hospital), with an approximate public-sector cost of $1.6 billion, and the Richmond-Airport-Vancouver rapid transit, transportation system designed to allow passenger travel within or throughout an urban area, usually employing surface, elevated, or underground railway systems or some combination of these.  Line (RAV Line), with an approximate public-sector cost of $1.5 billion. Difficulties were only overcome when the government undertook extraordinary efforts to intervene in the decision-making processes of local officials.

This author is right on the money, literally. The P3 projects undertaken in our province will not, I repeat, will not, save the government or taxpayer any money. In fact, it would be in publics best interest for the auditor general to call an immediate halt to the P3 method of building right now, and for him to undertake a meticulous audit of every single project that has been built-in this manner. There is a far bigger story here than the shadow tolls, which are just part of the secrecy involved in not telling the public the whole story.

The real issue is the total cost of the project, however paid.  And of course the fact that the cost of the project is off-balance sheet is lost on most of the public. Because the government doesn’t have to finance the job, the billions of dollars of P3 debt needn’t be carried on the books - at least that is how the BC government sees it.

There is no doubt that the government could have continued its efforts to introduce P3s without alteration. Holding all but two seats in the legislature, it could have easily bulldozed several into place, regardless of opposition. However, such an effort would have undermined its efforts to re-invent government along the lines and patterns associated with the New Public Management. If P3s were going to be accepted in British Columbia as more than an ideological project or a piece of financial sleight-of-hand, a different approach was required both for P3s and other forms of alternative service delivery, one that shifted leadership on the issue from a transactional to a transformative basis. Much of this new approach was codified  in a collection of documents released roughly around the government’s first anniversary in office, the Capital Asset Management Framework, or CAMF . At the same time, the government also created Partnerships BC.  This agency has several functions. It acts as a champion for the P3 model within government and as a consulting agency and adviser

Ah yes, Partnerships BC, that government-created entity that is not only in charge of promoting and facilitating the growth of the Public-Private partnership in BC, they are also, conveniently, the ones in charge of evaluating those same projects – using  faulty and many would call, highly deceptive accounting methods to ensure each project gets a passing grade on their Value for Cost reports. These reports are ridiculous at best and would not pass muster in any legitimate business practice outside of the P3 industry because of the sleight of hand manner in which they are crafted.

Time to get back to the origins of P3s in British Columbia.

Clearly, there had to be a first, and Abbotsford Hospital was forced to be the first project on the books. Some might say forced is a strong word,but the facts support that description:

According to those interviewed, members of the Fraser Health Authority board–some of whom had substantial expertise in private-sector finance and real-estate development–found problems with the consultant’s report and the arguments made in favour of a DBFO P3. One interviewee indicated that the FHA board instead preferred a design-build contract, with more traditional public financing and operation. In addition to their skepticism regarding the consultant’s work, members of the FHA board were also seriously concerned that the savings usually achieved through competitive bidding would not be realized.

 The FHA board felt that the facility being contemplated would be too small to generate returns on a scale sufficient to attract widespread interest among firms with expertise to execute such contracts, given the risks and costs involved in bidding. At this point, the provincial government ordered the board to accept the project as a P3 or face removal. Either way, the province had lost confidence in the ability of the FHA board to lead the project and transferred some FHA staff members and responsibility for executing the project to Partnerships BC.

Subsequently, an operating company  was set up to manage the relationship with the successful proponent, which would be at arm’s length from both the FHA and the Provincial Health Services Authority.

Some insight into why the government made the decision to override the Fraser Health Authority can perhaps be gained in an interview given to a trade journal by then-finance minister Gary Collins regarding the Abbotsford Hospital. He said that the project was not only important as an individual health facility but also for the future of the P3 model in British Columbia. Some projects had to be first, and the Abbotsford Hospital was seen as a good candidate. This was not only because of its attributes but also because of the strong support that voters in the area had shown for the government. He told the reporter that this reduced the political risks involved, since there was little likelihood that voters would change allegiances if the project were to turn out badly. In other words, the new Abbotsford Hospital would be built as a P3 because it was feasible both economically and politically, not necessarily because it was the best way to build this particular hospital.

In the end, the fears expressed by the FHA board did come to pass when one of the two finalist consortiums declined to submit a bid, leaving Partnerships BC with an uncontested “best and final offer” stage of the proposal process. Since 2001–when the present attempt to build a hospital in Abbotsford was set in motion–costs have increased substantially to the present $424 million up front, plus total lease payments of $1.2 billion over thirty years, excluding various adjustments.(2008 $$)

You may recall, there were issues to be worked out with the RAV line as well, in which the project was nearly stalled several times. It took a great deal of negotiation, debate and financial inducements to sweeten the deal -all of which I won’t rehash for the sake of space,but can be read by clicking on the link at the end of this post. Clearly, there are more than a few issues with P3 projects in this province, and I am not the first to harp about it by far, but I may perhaps end up being the one who won’t let it go. Read on:

The government’s inability to offer a clear answer to the question of why it decided to undertake each of these projects as a P3 helps to explain why these two projects (Abbotsford Hospital and RAV line ) became so controversial and were a symptom of its failure to demonstrate transformational leadership on the issue. When it could not produce a coherent answer rooted in its desires to reform and improve public management, the quality of public projects and other such beneficial aims linked to values, the government fell back on the stock answer that employing the DBFO P3 model would save money. However, this is a difficult claim to justify.

As an example, the government found itself stumbling for answers when a report prepared by a prominent accounting firm questioned whether undertaking the Abbotsford Hospital as a P3 would produce any savings over the lifetime of the anticipated contract (the goal traditional procurements are meant to emphasize). When confronted with the opinion of the accountants–who had to piece their evidence together using forensic techniques because of the government’s lack of disclosure–the province’s health minister admitted the case in favour of building the Abbotsford Hospital as a P3 was not fully established. The situation provoked the following rebuke from Vaughn Palmer, British Columbia’s most widely read political columnist:

The Liberals have articulated only the vaguest notions about public-private partnerships. And they have deliberately, systematically withheld key information about the Abbotsford P3…. Now we have the spectacle of one of B.C.’s most respected accounting firms being forced to rely on cloak-and-dagger methods to try to get some measure of the project…. The case for a P3 to build the hospital in Abbotsford is “not proven,” to quote the health minister. Until the case is proven, the Liberals should not be risking tax dollars on this adventure. (51)
[from Vaughn Palmer, no less! ~LY]

This shouldn’t be surprising, since it is very difficult to reduce costs simply by converting a proposed project into a P3. This is why proponents have to delve into attaching values to “risks” transferred to private parties in order to justify such projects on a cost-to-the-taxpayer basis. Such valuations are highly subjective and opaque. They also hide at least one important fallacy: while it is theoretically possible to successfully transfer the risks related to a project to one private partner and allow the state to save money, it is probably impossible for the state to do so over the long term if it wishes to undertake more than one project.

This is because such transactions only save money if the private partners mis-calculate the costs of the risks they have assumed (in other words, the private partners accept a greater risk than they are being paid to take).

It stretches credulity to believe that the powerful pension funds and transnational financial institutions that finance P3s will not learn from such mistakes and re-price their services to both re-coup their losses and improve the profitability when subsequent projects are developed. At some point, enough cycles of the game are completed that the province will end up paying exactly the same amount as if it did not transfer risks, but it will be out of pocket for the higher tendering costs associated with a P3.

The theoretical difficulties involved in saving money through the use of risk-transferring P3s (especially in the hospital sector) are matched by the concrete evidence from the United Kingdom, noted above.

That the province’s motivation for using P3 models was at best, unclear, bred suspicion among stakeholders.

 There is always a risk that a government will use the P3 model to “Enronize” its books: in other words, turn capital costs (which count as debt) into lease payments (which don’t count as debt) in order to claim it is reducing deficits and debts when in fact it is not doing so. This possibility was raised by consultants hired by unions opposing the RAV Line P3 after they reviewed some important correspondence between the premier’s top public servant and the CEO.

Preventing this requires a great deal of vigilance on the part of accountants and other watchdogs, such as credit-rating agencies. The suspicion of unions and other civil society stakeholders was only compounded by the government’s use of the term P3 in association with transactions that were clearly privatizations.

These included the sale of BC Rail (through a ninety-nine-year renewable lease) and a similar scheme that would have involved the Coquihalla Highway in the interior of the province. This latter deal was scrapped due to near-unanimous protests from communities along the highway. Meanwhile, trade unions in British Columbia came to see P3s as a threat and something to be opposed on principle.

This suspicion was further strengthened by provincial legislation (now ruled unconstitutional by the Supreme Court of Canada that abrogated a number of clauses in union contracts so as to facilitate the contracting-out of support services, such as would occur through the construction of a P3 hospital. Even some prominent investors were unclear as to why the provincial government wanted to embark on the construction of infrastructure using P3 models and proved hesitant to commit capital to the province.

This all came from a  2008 report written by Daniel Cohn  in which he clearly answers some of the many questions I, and others, have had.

The Liberals have since completed the Sea to Sky highway, the Golden Ears Bridge, and started the South Fraser Perimeter Road. The Port Mann, of course, tanked. From  research and investigation, and from what I can see of the few documents made public in these projects, the Liberal government has definitely ”Enronized” the books in a manner befitting a full forensic audit of all the P3 projects in the province, every single one of them.

Partnerships BC is in a clear and substantiated conflict of interest in its designated roles of promoting and furthering the development of P3s in BC, as well as monitoring, advising and fairly evaluating those same projects. The so-called independent fairness advisors have previous relationships with the government, which calls into question how independent they really are. Campbell decreed every project over a certain amount must be considered as a P3 first and foremost. How much do you want to bet he ends up on the board of directors of perhaps one or more of the companies involved in these deals?

Like Enron, the Liberal government has used accounting loopholes, special purpose entities( Partnerships BC, Transportation Investment Corporation) and poor financial reporting to hide billions of dollars of debt as a result of these projects.  And also like Enron, at some point it’s all going to come crashing down around Kevin Falcon, Shirley Bond, and the rest of the Liberal team in the finance department.

I just hope Campbell is still around when it happens.

Laila Yuile is a BC-based journalist and blogger. This column originally appeared in here blog, I'm Laila Yuile and This is How I See It. Reprinted with her kind permission.