Stephen Rees's blog

An opinion piece by the SFU economist appeared in the Georgia Straight yesterday. It was prompted by the release, back in August, by Partnerships BC of a draft discussion paper, Methodology for Quantitative Procurement Options Analysis, for review and comment.

As Shaffer points out this paper comes “after more than six years in the business of assessing and promoting P3s” by Parnerships BC. This blog, of course has consistently exoriated P3s in general and BC’s process of analysis of them. In Britain, where this process was a centrepiece of Thatcherism there was at least the appearance of objective analysis. There every P3 was held up to a “public sector comparator” to determine if there really were benefits to be had from a private sector approach. In the early days of these projects, some savings were garnered simply by having the project conducted by one proponent. Often major public sector projects were developed in several stages or in multiple contracts, and simply bringing the whole thing together as an integrated whole produce efficiencies. Initially these were “turn key” projects, like the Docklands Light railway where the construction of the line, stations and trains as well as all of the supporting systems were the responsibility of one contractor and not several as has been common up to that time. Later, maintenance and operations were added to design build contracts. In some cases much of the savings of this type of contract came from not being obliged to employ public sector union labour. The great push for the privatisation of bus services, for example, was driven by Thatcher’s determination to end the practice, as she put it, of putting subsidies into bus drivers’ pockets. If anyone was going to get public sector largesse, it was going to be her friends and supporters. (Though, of course, she did not say that bit in public.)

The methodology – which is said to be “proposed” but has clearly been in use for some time – from Partnerships BC bends over backwards to ensure that P3s are to be the favoured procurement method. The assumption is made, says Shaffer, the the cost of capital is the same for both private and publicly finance projects. This of course is false, as governments pay lower interest rates for capital, as they cannot go bust and, as a last resort, always have access to the taxpayers’ pockets. The governments ability to raise taxes effectively underwrites the risk to the lenders. That is why government debt is referred to as “gilt edged”. Shaffer also draws attention to the fact that while risk is supposed to be transferred to the private sector in a P3, “Partnerships B.C. doesn’t explain why risks can’t be transferred under traditional fixed-price design-build contracts, and why long-term performance can’t be guaranteed with bonds or similar mechanisms as is commonly done in traditional (non-P3) contracts”. Indeed, the risk transfer was supposed to be the justification of higher cost of capital, which PBC actually does not acknowledge.

But what surprised me is that Shaffer does not talk about profits. When a company bids for a public sector contract, it includes in its bid an estimate of what it needs to stay in business. Public sector contracting can be very profitable, but competition is supposed to ensure that profits are not unreasonable. And in a fixed price contract, if there are cost overruns then the profit gets eaten away. Of course there are models of public sector procurement where the price is not fixed but “cost plus”. This is the sort of contracting that companies like Blackwater enjoy from the Pentagon. Indeed, there is now a long track record of companies making grossly excessive profits in the defence business. One of the most scandalous contracts in BC was the result of the privatisation of health care support services, where the public sector unions won an important court case over the government’s contemptuous action in ripping up contracts. That action may have cut costs but also greatly reduced the quality of services delivered and put patients’ health at risk through poor performance of essential tasks like cleaning.

The rush to sell off BC Rail certainly had a negative impact, if only due to the shocking safety record of CN after it took over operations, largely through irresponsible cost cutting measures such as the removal of locomotives with effective braking systems for the steep, winding route. The collapse of the P3 to build the PMH1 project was blamed on the financial crisis, but also saved significant sums in financing costs alone. In Britain, one of the greatest failures of privatisation was seen on British railways, where the companies that look after the track and now the one that operates the east coast mainline had to be taken back into public ownership. Costs of running the railway escalated as the interlocking contracts required scores of consultants and lawyers were brought into conduct negotiations that were never necessary in an integrated public sector corporation. The train drivers’ union also did very well since instead of dealing with one employer, there were now many, all competing for a shrinking pool of expertise. That was certainly not the Tories intention, but also neither was the appalling safety record – and on that they were most definitely warned, repeatedly, by the civil servants.

The ethos of privatisation is born from the belief that competition makes companies more efficient. It is a belief system that has not been supported by experience. There are certainly examples of companies that do well through innovation and improved customer service. But sadly those are not always the most successful companies. The pressure to perform well is often not directed towards satisfied customers but to the satisfaction of shareholders, which is not the same thing at all. Long term growth and stability is sacrificed to keeping up dividends or more often a rising share price. And there are companies that do really well out of providing really bad products and poor customer service – Microsoft being one of the worst offenders, but also these days nearly every airline. Competition is just as likely to produce a “race to the bottom” as in the fast food industry, which is actually killing off its customers (see “Supersize Me) or tobacco companies.

What the right wing ideologues misunderstood, or chose to ignore, was that in public services there is more than one objective. Profit – when it is the only objective – produces quite dreadful outcomes, such as the US “health” industry. Almost no other country follows that model. The health of the patient – or better the community as a whole – is a much better performance measure than the size of the CEO’s bonuses. Most public enterprises were created when former private sector operations failed to produce what society needed. Competition was seen to be wasteful: for example the free for for all grabbing for passengers on busy routes while off peak and low density areas were ignored. When bus service was privatised this was exactly the outcome that occurred. In Britain, the cost of bus services did fall, but the quality of services fell even faster, and lack of bus service and social isolation among the poor and those who cannot drive themselves became a huge problem. And all of that was predicted, and clearly spelled out, because it was what had been happening prior to taking bus service into the public sector.

If recent experience teaches us anything it is that the free market model has not worked. Just as socialism failed, so did capitalism. But the dogma supporting both lives on. Privatisation was the shibboleth of the Chicago school. It has had some successes, in some places, but only when subject to stringent state oversight, and very careful analysis of both proposals and  performance. Partnerships BC has shown that is is in a conflict of interest. It cannot both promote P3s and effectively manage them. Indeed, on the strength of this document alone I suggest that either the Comptroller General or the Auditor General be called in forthwith to ensure that the public interest is protected. For what we have seen in BC (BC Rail, BC Hydro, public health) is an extraordinary giveaway of public assets and well being simply for the benefit of a few corporations.