The Uncertain Costs Of A P3: Guest Blog Post By Morina Rennie

Morina Rennie is a professor of accounting in the University of Regina’s Faculty of Business Administration. She researches public sector accounting, risk management, and private company auditing.

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Regina Water War - Referendum 2013There has been a lot of posturing on both sides of the Waste Water Treatment Plant (WWTP) upgrade issue with much contradictory information being bandied about. People I have talked to are having trouble knowing what and who to believe. I have been studying the publicly available information on this issue (from an accounting prof’s perspective) and I’m hoping I might be able to say a few helpful things in relatively plain language in this commentary.

The City relies primarily on a consultant’s report prepared by Deloitte LLP which carried out a Value for Money analysis on various approaches to upgrading the WWTP. The three finalists were the traditional public sector procurement model (Design-Bid-Build or DBB); the P3 model (Design-Build-Finance-Operate-Maintain or DBFOM); and a third hybrid option that is not on the referendum ballet. On the other side, Water Watch is relying on another consulting report, written by economist Hugh Mackenzie.

It seems that there are two main issues that have caused confusion:

Financing costs
Water Watch says that the P3 will be more costly than the traditional public sector option (even with the federal government grant) primarily because the borrowing (i.e., financing) costs will be higher under the P3 option. Under the P3 arrangement, the private partner must initially pay for a portion of the WWTP construction costs. The City must then pay the private partner back over a 30 year period at a higher interest rate than it would have to pay if it were borrowing the money from its usual lenders. The City acknowledges the greater financing costs in its website Q & A on P3s: “Financing costs will be higher with a P3 because the City will pay a premium for the financing costs and the risk assumed by the contractor.”

It appears that the Deloitte Report has not incorporated the financing cost differential into its analysis. The Mackenzie report includes an estimation of the extra financing costs for the P3 option and the figures that Water Watch is publicizing are based on Mackenzie’s calculations. While I believe the Water Watch estimate of the extra financing cost may be on the high side, the extra financing cost is a substantial real cost that will be paid by taxpayers over the next 30 years.

The $79.6 million cost saving
The City uses a figure of $79.6M as our savings under the P3 approach (and the City’s $276 annual taxpayer saving is computed as each household’s share of this $79.6M, divided over the next 4 years). The City presents the $79.6M to the public as if it were a hard and fast number. But it is actually a very soft number.

The $79.6 comes from Deloitte’s Value for Money (VFM) estimates. It is the difference between Deloitte’s cost estimates for the traditional public sector (DBB) approach and the P3 approach. The P3’s estimated cost in this calculation has been adjusted downward for the federal grant money, but does not incorporate the net present value of the extra financing costs mentioned above. Also the $79.6M is significantly influenced by what is referred to as “retained risk” estimates that ultimately swing the VFM in favour of the P3 option. The Deloitte calculations include $60.9M of retained risk in the estimated cost of the traditional (DBB) public sector approach and include just $12.7M of retained risk in the P3 estimated cost. Retained risk assessments are not without controversy. Concerns have been expressed that the risk amounts assigned to the traditional public sector option may be too large in many VFM calculations and it is not uncommon to find this issue raised in academic research articles on the VFM methodology. The retained risk issue has also been addressed by Ontario’s Auditor General in an audit the Brampton Civic Hospital P3 project. The AG was concerned that the risk amount in the VFM calculation was inflated for the public sector option (as were other cost estimates for this option). The Auditor General concludes, “the all-in cost could well have been lower had the hospital and the related non-clinical services been procured under the traditional approach, rather than the P3 approach implemented in this case” (2008 Annual Report of the Office of the Auditor General of Ontario, p. 104).

If one thing is certain, it is that the various estimated costs that we are presented with are, on the whole, very uncertain. Perhaps it would be useful to keep in mind recommendation #2 from the Deloitte Report which points out that this issue is not just about the money: “The City should determine whether transfer of operating responsibility to a contractor under a DBFOM contract [the P3 option] is acceptable as this is a key determinant in the final selection of delivery model.” It seems to me that a democratic process such as a referendum is exactly the means by which such a key determination should be made.

Please contact me at morina.rennie{at}uregina{at}ca if you would like information on assumptions or calculations underlying my comments.

Morina Rennie, PhD, FCA, FCMA
Faculty of Business Administration
University of Regina

Author: Paul Dechene

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15 thoughts on “The Uncertain Costs Of A P3: Guest Blog Post By Morina Rennie”

  1. EXCELLENT post and I couldn’t agree more!!! I am glad to see that my Accounting classes certainly haven’t failed me and my recollection of a lot of what this great professor above mentions. I think she is pretty bang on, and the public certainly needs to pay attention. If not to a “wild and crazy guy” like me, maybe a UofR Accounting Professor, saying pretty much the same things I’ve been saying for months, can be taken more seriously?

    Thank you, Prairie Dog, for allowing this professor the opportunity to put this in here. MANY KUDOS!!!

  2. I wish I’d read this before voting “No” at the advance polls.

    No, just kidding, I voted “Yes”, for a bunch of reasons including that I think essential public infrastructure should be run by a public entity, that sewage, aka waste water, is water and I don’t want a for-profit corp controlling that, and I don’t trust (most of) our elected officials one bit.

    I wish we got to vote on the stadium. That’s something I’d be quite happy having the private sector finance and run.

    The advance poll I went to was buzzing with activity.

  3. Morina, appreciate that you dissected Deloitte’s report.

    But isn’t the cost of construction just a red herring, and the real deal killer is that a P3 will set us up to start having to pay a profit premium on our water bills?

    The way I understand it:
    Vote Yes –> water stays non-profit, thus lower bills
    Vote Yes –> private corporation takes profit, thus higher bills

    And won’t the total be something like $780 million or more?

  4. I would hope that people who vote in this referendum do so on its issues, not as a proxy for the failed stadium referendum. Just saying.

  5. Morina, the last water budget for 2012 shows the city charges $44 million per year for waste water, drainage and sewage.

    The city isn’t revealing how much profit margin they will let the private corporation take, but Deloitte and others estimate it’s somewhere between 12.5% and and 60%.

    Even if we take the lowest possible estimate (12.5%) and indexing at 9% for 3 years, and 3% following that, the loss to the public due to profits for the P3 operator is around $318 million.

    Obviously that’s much more relevant than the $58.5 million the Mayor is trying to emphasize.

    Wouldn’t even a junior level accounting student know this?

    Is it possible the city hasn’t even done this kind of basic analysis, and they are simply going off what P3 Deloitte corporation is selling them?

  6. Just as an FYI for everyone reading this. No matter the turnout of this referendum, ANYONE can file a Court Injunction to immediately stop the development of the Stadium until City Council satisfies the public desire to have their input on the project. I’m not saying I want to see another referendum, the City has made it quite evident how they would approach such a thing (unethically and borderline illegal activity), but I do know that I have heard many, many folks state that they’d have rather had a referendum on the Stadium, and can’t believe that the City wouldn’t do it anyways on this ballot.

    Keep in mind – The referendum you are voting on is NOT the result of Regina Water Watch’s petitioning. As great and amazing as they had been in their efforts, the City of Regina deliberately ignored the true intention of the Provincial Legislation (Cities Act and Local Government Elections Act) and deemed “just enough” signatures to be “invalid” to consider the petition invalid. Thus, when the Regina City Council decided to pursue the referendum anyways, “on their own accord”, they had the opportunity to word the question however they wanted, include as many questions as they wanted, and have as many options as they wanted.

    Public opinion is that they “gave in” to public pressure and worded the question EXACTLY as the petition, because if they didn’t, well, they’d have faced a pretty angry electorate and they’d guarantee themselves no re-election in 2016. However, the reality is that because they chose to pursue the referendum on their own accord, the results are NOT BINDING, at least as far as those that wrote the legislation are telling me. It would be absolutely ludicrous for the City to deny the electorate if a Vote Yes wins, but unfortunately, nothing would surprise me anymore with this group of self-entitled blowhards.

    Regarding the Stadium issue, I DID request that the City of Regina put this question on this referendum, since they were going to incur the costs of a referendum anyways, and that seemed to be a big argument against the petition drive during the election. (Reality is they just didn’t want to hear the true opinions of an informed electorate) They outright refused, with the explanation that “we believe people gave us the mandate by voting us all in – in the 2012 Municipal Election”. Translation: “Nah, nah, nah we won – you didn’t – too bad, go cry in a corner.”

    The reality is the Regina City Council DID HAVE THE OPTION to include the Stadium in this Referendum, but outright refused. This leaves only one other option. That of legal means. And, considering I’ve already begun legal action against the City of Regina, as has Mr. Keith Peterson for a completely separate matter, this would not be too difficult to add to the case in a motion, if we so chose. (FEDERAL COURT for those who want to search the publicly available documents)

  7. Chad – I think that you’re mistaken about referendum rules. A yes vote result would be binding on the city, a no vote doesn’t bind them to anything – technically.

    You say the referendum is not the result of the petition. However the city would not be in the position of considering a referendum were it not for the petition and the flood of backlash that came when the clerk and mayor tried to discredit it on reasons that even their own support base knew were bogus. That, and their polling which told them they had blown it.

    You do address something that is too bad and that is the lost opportunity to have included other questions such as the stadium plan.

  8. Reader – I couldn’t agree more with your assertion that the referendum should be legally binding, but I’ve spoken with those that interpret and write that legislation and they specifically stated that, “technically”, the City of Regina doesn’t have to abide by any result of this referndum. The technicality here being that the City of Regina put forward the Referendum on their own accord. Granted, it would be absolutely ludicrous for them to go to all this trouble, and then if the YES side wins, still ignore the will of the electorate and go with a P3 anyways, but apparently the legislation does allow for that possibility. And, we all know how the City of Regina likes to interpret the legislation to cater to their own causes, hoping that no one dares challenge them in a Court of Law. I didn’t get the specific clause that would allow the City of Regina to ignore the will of the electorate on this, but I’m confident it would have something to do with the “risk to the public” clause, being that they’ve already generously put this idea out there, saying it’s vital to get it done NOW. (As opposed to waiting simply a few months for other federal monies)

    Again, another technicality, but the Referendum isn’t actually a direct result of the petition. The City of Regina deemed the petition invalid, and thus “technically” the City of Regina didn’t have to do anything further. Of course, this would have been grounds for massive uprising of the electorate and massive court challenges. BUT, as we’ve seen, the City of Regina knows no bounds in terms of stupidity.

    In the end, if the City of Regina DOES actually uphold the will of the electorate and allow the results of a YES vote to be legally binding, then everyone can be happy and go along their merry way. But, if a NO vote wins, as I brought up at the Gyro Club debate, “technically” this doesn’t give the City of Regina any authorization to pursue a P3, it simply says they shouldn’t go with a traditional Design, Bid, Build. There are other variations that would be available to the City of Regina and they honestly should pursue them in the event a NO vote wins. I know they won’t, but they could. Technically. Mayor Fougere stated that “it’s by default that a NO vote would result in a P3”, but I would definitely have no problems arguing against that, and in fact, battling that in a court of law, if need be.

  9. Chad, I could be wrong, but I think you’re mistaken.

    If you check here:

    municipal.gov.sk.ca/Elections-General/Petitions

    It states:

    “A referendum is the submission of a proposed public measure which will be outlined within a municipal bylaw or a resolution to a vote of municipal electors. A referendum may be initiated by council, or citizens may petition council to place a municipal matter before the voters. The Act refers to a non-binding referendum as a plebiscite, whereas a referendum binds the municipal council to a specific course of action and therefore the rules regarding petitions for a referendum are explicitly set out in the Act.”

  10. The health and safety clause you speak of is addressed in the excerpt below:

    “The referendum vote is decided by the majority of those voters who cast ballots. If the majority approves the proposed bylaw or resolution, council shall pass the bylaw or resolution at the first meeting following the vote. The bylaw or resolution will remain in effect for at least 3 years. Within that time period, council may amend or repeal the bylaw or resolution only if it holds another vote or the action is necessary to avert an imminent danger to the health or safety of municipal residents. ”

    It’s hard to say whether the shockingly unethical behavior at City Hall would continue to the point of pretending that keeping water public is “imminent danger to the health and safety of residents”, so reversing a Yes vote would require another election (and presumably another dump truck full of money to US-based political dirty trick organizers)

  11. I think it’s more likely the city would go full weasel on this loophole:

    “As well, the subject matter cannot involve the adoption of an operating budget or a capital budget, or the authorization of the municipal tax levy. For example, a referendum regarding upgrades to the water treatment plant may be considered as part of the capital budget and therefore beyond the reach of a referendum petition, whereas citizens might petition for a referendum to pass a new bylaw respecting management of the waterworks system.”

    Given the City’s shameful conduct through this whole scandal, it’s entirely possible they already know and plan to exploit this loophole, and that’s why they even agreed to have a referendum, knowing they could squirm out of it if they lose, or claim they have ‘divine right’ if they win.

  12. So Hey Reader ;

    You’re last post basically sez the the CoR spent a shitload, of cash promoting a NO vote,
    already knowing there is a loophole.
    This whole referendum vote is a complete waste of time & fuel to bother to go vote.. IS The Joke is on all of us , or just the people that voted to re-elect, most of “council” & a new Ringleader.

    Cirque du YQR

  13. You hit the nail on the head with that last statement Reader. That loophole I noticed a while ago, and I didn’t pay much attention to it after they actually went ahead with the Referendum, because I think it refers more to the petitioning itself, rather than the referendum. I think by this point, considering that City Hall accepted the petition (even though they invalidated it) and are going ahead with the Referendum, they’d be very hard pressed to use that loophole. I did have to laugh, though, when I saw that statement originally because of how it specifically mentions a water treatment plant. (I know, I know, this is a wastewater/sewage treatment plant)

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