The Construction Industry's Case Against Public Private Partnerships By Steve Weatherbe - Business Examiner/Vancouver Island - June 16/08

John Knappett is steaming.

And it’s not just the owner of Victoria’s Knappett Projects Inc., one of Vancouver Island’s leading builders of public projects, who’s highly aggravated with the deterioration of public procurement policies in general, and public private partnerships in particular.

Steaming on as well are the Vancouver Island Construction Association, the B.C. and Canadian Construction Associations and the Independent Contractors and Businesses Association—virtually the entire construction industry.

PPPs especially are hurting the province’s big builders and major employers, or so claims the industry, because the much–heralded approach to building and funding major projects has left them out in the cold, and delivered billions of dollars of infrastructure projects to American and European firms with an occasional Montreal or Toronto partner thrown in.

And the regional contractors are inclined to take it personally.

“I supported the Liberals personally,” says Knappett. “I spent a lot of cash around town to get this government elected. And the industry, which very strongly supported this government too, is waking up to what’s happening.”

What’s happening is that the provincial government has decreed that all major capital projects must be done as P3s or at least run through the P3 filter operated by the government’s free-standing procurement agency, Partnerships BC, to determine if a P3 process would be justified. And if they are over $20 million, Premier Gordon Campbell has decreed, it almost always would be.

Thus the Sea to Sky Highway is being built by Peter Kiewit Sons of Omaha, Nebraska. Vancouver’s Canada Line by a Quebec-British consortium, the Royal Jubilee Hospital by a Spanish-British consortium with a Surrey facility operator. And when Greater Victoria’s $1.2-billion sewage treatment plant contract is awarded, says Knappett, it will doubtless go to another such consortium.

“I won’t be bidding. Farmer Construction won’t be either. This is my bread and butter. I’ve built these plants here and on the mainland. But I only do $80 million in business a year. I don’t have the staff to do this and nobody else around here does either,” says Knappett. “We’re being dealt out of the major projects.”
It wasn’t supposed to be this way. The Liberal government’s argument for P3s was that private consortia contractors would put together competing design-build-operate proposals; the winner would find its own financing and operate the resulting hospital or bridge or rapid transit line for 30 years or so, making back its costs from fees. The profit motive would ensure lean, efficient operations and the bidding process would deliver the lowest, best project. Moreover, because of the savings, more projects could be built.

The impact on provincial contractors was never considered. “I’m sure this was an unintended consequence,” says Knappett. “They really had no idea.”

But if his industry were the only losers, he says, and the public benefited with more infrastructure built at lower costs, he’d be hard put to oppose P3s.

“But I don’t believe these projects are cheaper,” he says. The evidence for the claim always comes from those with a vested interest, he says. No objective proof exists. The provincial government rests its case on the value-for-money studies done on each project by Partnerships BC, says Knappett. But this agency negotiates the very deals it is then tasked with evaluating. “And then Partnership BC’s executives are paid on the basis of how much money they’ve saved, based on their own value-for-money evaluation.”

The Sea-to-Sky Highway, by Partnership BC’s own evaluation, cost $46 million more than a conventional approach. By the calculation of the left-wing Centre for Public Policy Alternatives, the P3 model cost the taxpayer $220 million more. But Partnership BC’s value-for-money study was seriously stacked to produce a number more favourable to P3s. Summarized its author, Martin Shaffer, “It was an ideological, not an economic, decision.”

Moreover, Knappett says, Partnership BC executives have told him that no projects have gone forward as P3s that wouldn’t have done so using conventional methods.

And what of conventional procurement methods? How would they tackle a $1.2-billion sewage treatment plant? Says he: it would have been designed first by the CRD and broken up into discrete phases each of which would have been tendered. “We are big enough to handle a pumping station or a pipeline and Farmer is big enough and companies on the Mainland could do other parts of the project.”
Moreover, there would be lots of bidders on each phase making for a very competitive process. On P3s the bidding is often reduced to two or three consortia. Sometimes there is only one, he says, as with the Abbotsford Hospital.

Then there is the whole public procurement picture in the province, formerly done according to the traditional open and transparent bidding process. This has gone by the boards, says Knappett, since the Liberals disbanded the Capital Division of the Finance Ministry, which had enforced these practices on various spending authorities such as school and hospital boards.

Now a method called “construction management” has replaced the traditional method where the projector commissions a design and puts out tenders based on it, awarding the low bid. Now the projector seeks a contract manager based an ad-hoc points system which according to Knappett is often tailored to favour a company already doing business with the projector. School boards, universities and hospital boards on Vancouver Island are now using this method for contracts too small for P3s.

Greg Baynton, president of the Vancouver Island Construction Association, says the industry has been trying for five years to get the Liberal government to discuss the issue. His view is that the government has hitched its fortune to the P3 star in reaction to the 100-per-cent cost overrun of the Vancouver convention centre.

But the overrun was not an indictment of the traditional tendering system, he says. “They had such a sense of urgency about the convention centre they removed the checks and balances.” The originally-projected cost of the centre, moreover, was concocted out of thin air. No design had been done first upon which to base an estimate.

Baynton complains too of a lack of any unbiased assessment of P3s.

Partnerships BC CEO Larry Blain says his agency has assisted at the birth of 23 projects worth $9 billion and has averaged savings of 10-12 percent, “while all the projects were on time and on budget.”

Moreover, the projects selected for P3s were those with greater than average risk because of , for example, uncertainty over the building site’s underlying geology or seismic stability, or because of the project’s greater size. “We handed that risk off to the private sector,” he says.

“P3s,” says Blain, “are a tool. They are appropriate in the right situations.” But 80 per cent of the provincial capital budget, including what is spent through school, health, and college boards, is procured outside the P3 process, he says, addressing the construction industry’s concern about being cut out of the action.

Blain notes that the new Pitt River bridge is being done through design-build and not Public Private Partnership, because a previous bridge on the site had revealed the geotechnical issues and reduced uncertainty and risk.

Blain concedes that no projects would have gone unbuilt without P3s, since all are vetted first for worthiness before being assessed for how fitting they are for a P3.

Blain also makes no bones about being remunerated on the basis of performance but notes that the value-for-money processes have been examined by the provincial auditor general and approved of. What’s more, the Partnerships BC board is independent of government and capable of assessing the executive’s performance.

As for the Sea-to-Sky Highway, though it came in over-budget by $47 million, the non-cash economic benefits of the project have been valued at $131 million. That is, the contractor provided this much in physical infrastructure and usage beyond what the government’s original proposal envisaged for the price tag.
For the Sea-to-Sky Highway, says Blain, Partnerships BC budgeted $600 million and asked bidders to compete in terms of how much infrastructure and service they could provide for that amount over 20 years.

Partnerships BC has found the optimum number of short-listed bidders to be three: beyond that, says Blain, there’s a disincentive to participate because the odds of success are too low.

With the Abbotsford Hospital, two bidders did drop out but one did so at the last minute, says Blain, “because it thought it was going to lose.” After Abbotsford, there have been no solo bids.
Maureen Bader of the Canadian Taxpayers Federation says the problem the federation sees with P3s is that the negotiators for the taxpayers are not risking or spending their own money, which puts them at a disadvantage vis-a-vis the bidders.
The sheer size of P3 contracts is itself a disadvantage, she adds, because there are fewer bidders and less competition. “They should be broken up into smaller projects to let in more bidders and competition.”
A report done for the Federation of Canadian Municipalities by Pierre J. Hamel suggests an ulterior motive for P3s but no advantage for local government. “To leave the responsibility of financing to the private partner is a poor solution to a non-existent problem, when traditional municipal financing is simple, relatively easy and, above all, much less costly than the private-sector equivalent,” wrote Hamel. “Nevertheless, the truth is that some people have in interest in making us think there is a problem, because they have a solution to sell.” Hamel’s point seems to be that the consultancy class advise in favour of P3s because the same consultants often play a big role in their delivery.

The New Democrats are entirely against P3s, says Esquimalt MLA Maureen Karagianis. She dismisses as “a bit of a myth” that P3s save money. “They cost more,” she says, partly because private builders can’t borrow at interest rates as low as government can, and partly because they have to work into the operating costs their own profit margin.
Moreover, private operators “aren’t accountable to the public, and are not subject to Freedom of Information legislation,” as public agencies and institutions are.

“What happens when contracts aren’t tendered openly and the results aren’t transparent?” asks Knappett. History provides the answer in one word, he says: “corruption.”

Knappett provides another historical note: a previous British Columbia Liberal government once decreed that big companies be favoured for major government projects to the detriment of home-grown operations. This, he says, was the tree farm system which saw vast tracts of Crown forests assigned to large lumber manufacturers. “They promised this would give us ‘forests forever’ and jobs forever.” As well, the tree farm system was to ensure the prosperity of big, integrated forest firms that could compete in the world market. A few companies did prosper under the tree farm system, but despite their decades-long hammerlock on the world’s best timber, none grew to be a major player. Free market critics suggest that the provision of a guaranteed supply for a cut rate created a whole breed of cosseted and uncompetitive firms, all of which have since foundered. “Fast forward 50 years and the timber is all gone, the mills are all gone and even the pulp mills teeter on bankruptcy,” says Knappett. It would have been better then to let the province’s home-grown business people do the job, he adds, and it would be better now.

But Finance Minister Carole Taylor told the Business Examiner that, local contractors are often let in on the big P3 projects as sub-contractors.

“They are a huge success,” she said. “There are over 20 now and all are on budget.” She cited the huge overrun with Vancouver’s convention centre as an example of what can happen without P3s.

“When we can transfer that kind of risk to P3s, we do.”

Taylor further contended that Partnerships BC is not necessarily involved in P3s: the independent spending authorities can negotiate these on their own.

As for procurement by these authorities of projects not destined for P3s, Taylor said the provincial government was looking into the construction industry’s complaints about inconsistency.

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