P3 Or Not P3? These Are The Questions

Not sure how to vote in the upcoming waste water referendum? We can help. Maybe.

by Paul Dechene

The sewage referendum — or as it should be known, the wastewater treatment plant public-private partnership referendum — is coming up on Sept. 25. That’s less than a week away. And compared to what I saw during last year’s mayoral election, there are a lot more undecided voters at this point. And they keep asking me if there’s some kind of reputable, unbiased clearing house for information about the issue.

They want to escape the spin. Unfortunately I can’t help them.

I’ve read too much, interviewed too many people and my mind is a blender. All I can say for certain now is this isn’t one of those issues where you can sit down and write out a table of Pros versus Cons then make up your mind based on which column comes out longest. This is an issue where one person’s pros are another’s cons, one person’s sludgy brown sewage is another’s shimmering liquid essence of life.

So instead of an orderly catalog of facts and a gentle list of figures, I offer a riot of questions I’ve collected from Prairie Dog friends, associates and staffers. I will do my best to answer them, however flailingly.

How you vote in this referendum really is up to you.

What’s it going to cost us if the No side wins?

If we decide to fly with the numbers in the various city reports and in the report prepared by their consultants, Deloitte, then just designing and building the wastewater treatment plant through a Design Bid Build Finance Operate Maintain Public-Private Partnership (DBFOM P3) is going to cost $224 million. But that only accounts for about a quarter of the entire project. The P3 is a 30-year deal that also covers, as the name suggests, the financing, operations and maintenance of the facility and that will tack on another $760 million over the lifetime of the project.

Grand total, that’s nigh on a billion dollars — $984 million when all the bills come due.

In other words, it’s a big honking project. But if it’s any consolation, that $984 million is the end price valued in the dollars of 30 years into the future — and who knows, we may not even be using dollars by then. In 2043, maybe we’ll be paying the Sewage Consortium in Quaatloos.

Fortunately, in their report, Deloitte calculates the net present value of the P3 project — that is, the price in 2013 dollars — as being about $434.9 million.

Give or take a Quaatloo.

What’s it going to cost if the Yes side wins?

This is where things start to get contentious. If you take Deloitte at their word — and the Yes side will say that’s a pretty big “if”, and that Deloitte’s delivery model assessment should be treated with suspicion — then, according to their net present value analysis, the Design-Bid-Build approach proposed by the Yes side in the referendum will cost about 15.5 per cent more than the DBFOM P3. And that’s why the No side is saying utility bills will increase by $276 per year if the Yes side wins.

Where does that $276 per year utility increase come from — the one that’s on all those city billboards?

The $276 is based on Deloitte’s assessment of the extra cost of a DBB project divided by the number of utility rate payers and spread out over the first four years of the project. So, using their 15.5 per cent figure, Deloitte says the Yes side’s DBB will cost an additional $79.6 million. You get that mainly because with a DBB project, the city will not receive $58.5 million from the federal government’s P3 Canada Fund.

Deloitte also argues that a DBB exposes the city to considerably more risk than with a P3 — $61 million worth of risk under a DBB compared to $13 million with a DBFOM P3.

Wait, the utility increase is only for four years, not forever?

Yes it is. According to Brent Sjoberg, deputy city manager and executive lead on the wastewater P3 project, if the P3 falls through, the contractors who build the wastewater plant under a DBB will still need to be paid over those first four years. And the money lost by abandoning the P3 will have to be made up with utility hikes.

“You need the money to pay whoever is doing the work,” says Sjoberg.

What was that “risk” you talked about two questions ago?

In any major project, there are dangers that things could go wrong and when they do someone will have to pay to fix them. Under a P3, many of the project risks are transferred to the private partner, the Sewage Consortium. Common things the private partner would be responsible for would be making sure the plant is completed on time and that the treated water that leaves the plant conforms to provincial environmental expectations. In preparing their delivery model assessment, Deloitte estimated the value of the risk that the city will transfer onto the Sewage Consortium. And because the Consortium is paying the costs associated with that and the city isn’t, the P3 comes out looking much cheaper than a DBB.

So how did Deloitte estimate the value of risk transference?

We don’t know, and this is one of the red flags the Yes side has thrown up about the Deloitte report.

The report does say, “Risk costs for the Project have been estimated through a series of workshops,” but that’s about it. The assumptions and calculations used to estimate risk are not included.

Hiding risk calculations behind walls of confidentiality is standard practice among consultants who work on P3s. And that’s a source of aggravation for academics studying them.

“The whole argument for the superiority of the P3 approach is that it rests on a couple of assumptions, the main one being risk transfer. And you cannot ever get to the bottom of what they’ve done on risk transfer. Simply can’t do it,” says John Loxley, an economist at the University of Manitoba and one of the foremost experts on P3s in Canada.

And economic consultant, Hugh Mackenzie, in a report titled “Flushing Money Away” which he prepared for Regina Water Watch about our P3 project, looks to the U.K. where they have considerably more experience with P3s and have found that risk is rarely transferred as expected. At the outset of a project, the consultants will make pronouncements about how much risk the private sector is taking on but in practice it rarely seems to work out that way. In fact, the public sector ends up taking on additional risks because they’ve entered into a P3 and thus must increase cost to citizens.

Additional risks? That doesn’t sound good.

Mackenzie points out that under a P3 the public sector assumes one additional, especially ominous risk: that, if the project turns out to be a total disaster, the private partner could be forced into bankruptcy or simply walk away from it. The city, however, can’t shirk their water treatment responsibilities and will be left holding the bag.

So we should take these risk estimates with a grain of salt?

The salt dosage recommended by the Yes side is “large.” They note that before the risk estimate is factored in, Deloitte actually pegs the base cost to build and run the plant to be lower with a DBB (at $452 million) than it would be with a P3 (at $460 million). But it’s only after Deloitte adds in their risk estimates — which, remember, are based on calculations we can’t see — that the DBB becomes considerably more expensive than the P3. Convenient, that.

Is the Yes side suggesting Deloitte is fudging their numbers?

Hey! Nobody is “suggesting” or “implying” anything. But the Yes side does point out that Deloitte is demonstrably sympathetic towards the P3 model. In fact, they’re a sponsor member of the Canadian Council of Public-Private Partnerships, a non-profit organization with a mandate to “promote innovative approaches to infrastructure development and service delivery through public-private partnerships.” According to the Council’s website, the role of a sponsor member like Deloitte is “to make a significant contribution to the activities of the Council and to the furtherance of its purposes.”

That’s cute, suggesting the city’s consultant has an agenda when everybody knows Regina Water Watch is just a front group for CUPE, the largest public sector union in the country. Aren’t they just trying to protect their members jobs?

Actually no one at the wastewater plant, union or otherwise, is going to lose their job if the city goes with a P3. Thanks to provisions in the provincial Trade Union Act, the Consortium will have to keep the existing collective bargaining agreement in place. In the near term then, the employees will retain their benefits and salaries. They’ll even continue as union members.

Of course, the question then becomes what happens when the collective agreement expires? And what happens as employees quit or retire? According to Maude Barlow, national chairperson for the Council of Canadians, the private partners in a P3 are there because they expect to make a profit. And to that end, there will be a strong incentive to contain costs.

And we all know what containing costs usually means…

“On average what goes is 30 to 50 per cent of the workforce,” says Barlow in a phone interview. “This is the story around the world of privatized systems. The only way they can keep up with the public system is to keep raising water rates. So they either cut their workforce in half or 25 to 35 per cent. Or they cut services.”

She said “privatized system.” Is it really privatization if the city still owns and controls the wastewater plant?

It depends on how broadly you define “privatization.” It is true that the city will retain ownership of the plant and so that asset will remain in public hands. By the strictest definition, where privatization only concerns who owns what, this doesn’t count.

But control of the asset is another thing. The Sewage Consortium will control the operations and technology of the plant for three decades while the city’s role will be scaled back to setting rates and making sure that the Consortium is performing up to specifications. The city may own the plant but they’ve effectively handed it over to the private sector for a generation.

And by most definitions of the term, that counts as privatization.

What’s more, John Loxley argues that because the project is for 30 years the city is giving up far more than just control of the plant.

“That’s a huge period of time, by the end of which, there will be no institutional memory in Regina. All the institutional memory will be with whatever company gets the deal,” he says.

Okay, but none of this answered the question of whether Regina Water Watch is a front group for Big Labour?

Regina Water Watch does receive financial and marketing support from CUPE Local 21 and they have never hidden that.

Maude Barlow, meanwhile, has a “so what?” attitude towards this accusation that the labour movement is involved in the referendum.

“There is absolutely nothing wrong with public sector unions promoting and protecting the public good. I mean, what the heck should they be doing? And I thank them for it and I think people should stop thinking of that as a negative thing. These are people who deliver essential services caring about the quality of that delivery,” she says.

“But my heavens, if you want to look at a special interest group, let’s look at the big business lobby, let’s look at the companies that are going to spend to make such a windfall if this continues to be a landslide across the country and we start to lose control of our water systems. These corporations stand to make billions and billions of dollars. That’s where your special interest lies.”

But how do these corporations stand to make billions off of a sewage plant?

This is one way that the DBFOM P3 looks more costly than other delivery methods. When potential Sewage Consortiums bid on the project, they’ll factor a rate-of-return — a.k.a. a profit margin — into their calculations. And that doesn’t just include the construction of the plant. The Consortium will also factor a rate-of-return into what they’ll be paid to operate and maintain the plant for 30 years and that will be reflected in the utility fees that the city collects. In any other procurement method where the city continues to operate and maintain its plant, that rate-of-return is unnecessary. The city doesn’t need to collect a profit when it’s treating wastewater on its own and can instead funnel 100 per cent of our utility payments into supporting our infrastructure. A private Sewage Consortium meanwhile will always have to pass on a portion of what it collects to its investors.

How else are P3s more expensive?

Not only are the O and M in a DBFOM more expensive, the F — which stands for “finance” — is as well. The Sewage Consortium is going to responsible for securing a portion of the financing for the construction of the plant and to do that they are going to have borrow money.

And one thing that everyone agrees upon, whether they’re Yes side, No side, Council of Canadians or Deloitte is that it costs the private sector a lot more to finance a project than it does for the public sector.

In “Flushing Money Away,” Hugh Mackenzie notes that the city can borrow money at 3.82% while he estimates that the cost of financing for the private sector will be two per cent more, or 5.82%.

And, he says these are very conservative numbers and the difference could be quite a bit larger.

Thus, in supplemental calculations he provided to Regina Water Watch, Mackenzie estimates that the cost of private financing under a P3 will be $95.5 million more than financing the project entirely through the city.

“The numbers speak for themselves. They say clearly that it will be more expensive to carry out the project through a P3 than through conventional procurement. More expensive by enough to more than offset the P3 tied funding from the Federal government,” says Mackenzie by e-mail.

“The math is pretty simple. To build a project, somebody has to borrow the money and someone has to pay the carrying costs. It costs the P3 more to borrow money for public projects than it does for the city to borrow directly. And those higher costs will ultimately be reflected directly in utility bills.”

If the Yes side wins, what happens next?

The city will have to scrap all the work it has done setting up for a P3 and get to work on a Design-Bid-Build project. Personally, if it comes to this, I’ll feel most sorry for Brent Sjoberg. He’s been working really hard.

Is there any other federal funding that we could apply for to offset the cost of this project?

Mayor Michael Fougere says categorically no, there isn’t and if the P3 doesn’t go ahead we’ll have to go it alone on financing the wastewater treatment plant upgrade.

But some among the Yes side point to the soon-to-be replenished Building Canada Fund. That’s $47 billion the federal government has earmarked for infrastructure projects just like this one. And traditionally BCF support doesn’t come tied to a specific business model. Granted, the feds say projects applying to the new Building Canada Fund will be subject to a “P3 screen” to determine if a P3 would be a suitable way to go. But a screening process is a far cry from an actual requirement that all projects follow one specific model.

None of this is to say that BCF support would be a slam dunk for the city of Regina if the Yes side wins or that it’s even possible. But it does suggest there are options.

If the No side wins and we go ahead with the P3, was all this referendum hullabaloo a waste of time and money?

One of the more irritating arguments to emerge lately is that the Yes side has somehow damaged democracy by inflicting this referendum on all of us. We elected this council last October and gave them a mandate to represent us and make decisions in our interests, they argue, and this extra trip to the polls is being forced on all those thousands who didn’t sign Regina Water Watch’s bothersome petition.

As much as I suspect these jokers who condemn the referendum will breathe a sigh of relief if the No side wins and the wastewater P3 goes ahead, I shudder to think about the editorials and blog posts they’ll type in that event.

“Regina just paid a 15 per cent Hippy Tax,” they’ll chortle.

Well, they may begrudge the brain power they squandered thinking about P3s and the time they spent setting up fake Chad Novak Twitter accounts, but the thing is, this referendum isn’t some external thing being inflicted upon democracy, it’s actually something provided for within the regulations that govern how our democracy functions. Sure, elections and showing up at council to squawk into a microphone are the most common ways in which we influence our political institutions. Referendums don’t happen so often but they’re important enough that sections 105 through 112 of Saskatchewan’s Cities Act are devoted to them.

So, this isn’t an extra cost being forced on us, this is the way things are supposed to work. This is democracy.

And even if the Yes side fails and the P3 goes ahead, the end result of this eight week campaign will be that we have a far more educated electorate on the subjects of public-private partnerships and utility delivery. It’s safe to say that without the referendum, most people would barely be aware that the wastewater plant upgrade project was even happening. Thanks to the referendum, more people now not only know that the project is going ahead, they also know why it’s necessary, how it’s going to be completed and how much they’ll pay for it. And, they probably received a phone call from our new mayor and now know what he sounds like. Bonus!

Referendums make us better citizens because they shove democracy in our face when we least expect it. And that so many people are angry about the referendum is just more proof that they’re engaged.

In addition, the referendum has forced city hall to challenge their own decisions, defend their project and demonstrate that they’re actually doing their due diligence. Subjecting our public institutions to scrutiny when they’re on the verge of committing nearly a billion of our dollars and 30 years of our time to a single project is not a bad thing.

Regardless of how this referendum turns out, we’ll wake up to a better Regina the next morning because of it.

At least, I hope we will.

[hr]

Look for more coverage of Regina’s referendum on Dog Blog at www.prairiedogmag.com. Like, a lot of coverage. Like bananapants, OCD, daily coverage of debates and breaking news as written by a hyena-like pack of deranged journalists and know-it-alls. And don’t say we never did anything for you.

Don’t be a weenie, send us letters: [email protected] (300 words max)

[hr]

WHO’S WHAT SIDE AGAIN?

The Yes side is saying Yes to a traditional Design-Bid-Build (DBB) approach to building our wastewater plant. They are opposed to the P3 plan. The champion for the Yes side is Regina Water Watch.

The No side is saying No to doing a traditional Design-Bid-Build approach to the wastewater plant and — double-negative alert — saying No to not doing a P3… or, more simply, they’re saying Yes to doing a P3 even though they’re the No side. The No side’s champion is city hall.

[hr]

IS THIS SEWAGE OR WASTEWATER?

The No side has been adamant that this referendum is about a sewage P3. It’s just a facility for dealing with dirty, icky, faecal sewage. Some councillors have even gone so far as to suggest that those on the Yes side who claim this referendum is about control of water are being dishonest because, these councillors reiterate, this is about sewage. Not water.

“Waste water is water. It goes right back into the stream that provides our water. You can’t just separate it out,” says Maude Barlow of the Council of Canadians. “It’s as if it is some kind of disgusting dirty thing that we throw off into the sky or something and it never comes back here. It’s part of the ecosystem and it’s what we ingest again when we drink tap water. It’s all the same thing.  So that’s just a false and dishonest split that they’re making here. There is one ecosystem and if we hurt it we hurt all aspects of the water system.”

[hr]

TRANSPARENCY AND PUBLIC ACCOUNTABILITY

One of the key concerns about P3s is how they can interfere with the public’s ability to get information about facilities they supposedly still own and about the government processes that oversee them. Ironically, the Deloitte report about the Regina wastewater project is a perfect case in point — Huge swathes of that document have been deleted and redacted, making it very difficult for independent researchers to assess the credibility of the research.

Unfortunately, once a P3 is in place, blank pages in lieu of public documents are likely to become commonplace. If a media outlet or a citizen were to submit an access to information request about what’s going on at the wastewater plant, section 18 of the Freedom of Information and Protection of Privacy Act exempts all financial, commercial, scientific, technical or labour relations information that comes from a third party from such a request.

And seeing as the Sewage Consortium is one big third party, for 30 years it will be able to operate basically free of public scrutiny.

That’s going to make it very difficult for people years in the future to verify that the P3 they’ve been bequeathed is living up to the hype.

[hr]

DOESN’T THE MONCTON, NEW BRUNSWICK, WASTEWATER PLANT PROVE P3S WORK?

It’s true that the Conference Board of Canada recently released a report that was bullish on P3s and pointed to a P3 project from the late ’90s in Moncton as evidence. And it is true that the Moncton wastewater plant was built by a DBFOM P3 like ours is supposed to be, and that their plant was completed on time and on budget.

But this is one of those situations where how you look at a project determines whether it looks like a success story or a failure.

What the Conference Board report fails to highlight is that Moncton residents are paying significantly higher water rates than residents in other municipalities. Around Canada, water prices average around $0.31 per cubic metre of water used. But Moncton is paying $1.401 per cubic meter. That’s four and a half times the national average.

This tracks directly with economist John Loxley’s warning that P3s are more expensive over the long run because private financing is so much more expensive than public financing. The private sector can build a great wastewater treatment plant on time and on budget, one that works fantastically and discharges the finest in treated water.

But in the long run? It’s going to cost more to finance and maintain it.

And in Loxley’s book Public Service, Private Profits — The Political Economy of Public-Private Partnerships in Canada, he notes that Moncton is ultimately paying $31 million for a $23 million wastewater plant.

2013-09-19

2 thoughts on “P3 Or Not P3? These Are The Questions”

  1. Anyone who really cares about the issue and who can park their personal feelings towards private corporations and/or unions, should read this piece and try to make an informed decision.

Comments are closed.