Public-private partnerships (P3’s) have cost Ontario taxpayers nearly $8-billion more on infrastructure over the past nine years than if the government had successfully built the projects itself. $6.5 billion of the overpayment of $8 billion comes from the higher borrowing costs of P3’s relative to traditional government infrastructure financing.
The revelation, from Auditor-General Bonnie Lysyk’s annual report, comes as Premier Kathleen Wynne stakes the province’s future on a vast construction program that will see dozens of new schools, bridges and subways built over the next decade using the P3 model.
And the report strongly suggests that the Liberal Government can build that infrastructure more cheaply using conventional public sector financing. The current Ontario deficit stands at $12.5-billion.
“If the public sector could manage projects successfully, on time and on budget, there is taxpayer money to be saved,” Ms. Lysyk said last week at Queen’s Park.
Her audit looked at 74 projects – including several hospitals and the Eglinton light rail line – that were built using private partnerships, called Alternative Financing and Procurement (AFP), by Crown corporation Infrastructure Ontario since 2005.
Ms. Lysyk found that the province assumes there is less risk of cost overruns and other problems with AFPs than with public sector financing and project management. But she said the province actually has no historically based evidence on public sector overruns to back up that assumption. Private partnerships, meanwhile, are more expensive because companies pay about 14 times what the government does for financing, and receive a premium from taxpayers in exchange for taking on the project risks. This “risk” premium paid to private partners is often more than 50% over the project “base” costs.
In most cases, she said, the least expensive solution may simply be for government to get better at building infrastructure itself, rather than farming it out to the private sector and the much higher borrowing costs. Building on this insight, she suggested Infrastructure Ontario finance the projects at the much lower government interest rate and tender the projects directly itself.
But Infrastructure Ontario chief executive officer Bert Clark said the current system is working well, and argued it would be impractical for government to directly handle some of the big, complex projects. Better, he said, to bring in private companies that have extensive experience with project management.
Mr. Clark said his organization has tried to obtain hard data to compare the risks between private projects and public ones, but the government did not have such information available. Instead, he said, Infrastructure Ontario has turned to auditing firms to try to figure out what the differences in cost would be.
Economic Development Minister Brad Duguid defended this method: “It is a bit of an art, identifying risk, as much as a science.”
But Ms. Lysyk took exception to the lack of evidence that would justify paying out 50% more on P3’s and basically suggested that until there is solid evidence on public sector cost overruns, infrastructure in Ontario should be built with traditional public sector financing and project management.
AFPs entail the government bringing in a private company to finance, build and, in some cases, maintain – often for 30 years or longer – a piece of infrastructure. The private company assumes some of the risk of cost overruns, in exchange for making a profit.
Besides the lack of data, Ms. Lysyk took issue with some of Infrastructure Ontario’s methodology. For instance, she said, its calculations assume it will cost more for governments to maintain a piece of infrastructure than a private company, because the government will fall behind on fixing things when they need to be replaced.
And she said that in some cases, the benefits of AFPs failed to materialize.
In one instance, a new Ontario college building was constructed by the government on time and on budget. But a second building, constructed using AFP, turned out to cost 10 per cent more a square foot than the first, publicly built facility.
In another case, the province had to pay $2.3-million extra to a company building a hospital because the contract had not actually transferred the risk of design changes to the company, she found.