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Marvin Shaffer: Flawed analysis props up B.C. public-private partnerships

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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.

Written by Stephen Rees

November 21, 2009 at 11:20 am

Posted in privatisation

Writing off Burrard Thermal

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I saw the story in the Vancouver Sun this morning and thought about blogging it. It quite an extra-ordinary event. The Premier has decided to “write off” a gas fired power station to encourage generation of cleaner electricity and an environmental group publishes a press release deploring it. The press release is copied untouched below.

Burrard Thermal was not used very much but it did provide a standby. Not that firing up a thermal station, which uses gas to raise steam which then drives turbines, is all that fast. Not as fast as “turning on the tap” at a dam – or lighting a jet engine, which is what a gas turbine is and which are used around the world for their efficiency and fast response. Proposals to replace the steam turbines with gas turbines at Burrard never went very far. Despite being one of the bigger polluters in the region, the air downwind of the chimneys was actually cleaner than upwind, thanks to the NOx paradox. The station was originally connected to the oil refinery – which closed years ago. It reflected a time when power stations were sited close to the users to reduce transmission losses. That no longer applies either.

The politics of power in BC are complex – and so are the issues around Burrard Thermal. And it really has nothing to do with the environment – but a lot to do with spin and optics and who your friends are and what you think is really important – making money or saving the place we live in to make it inhabitable for the future.

So now I am going to turn this over to Ben West.

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The Wilderness Committee

For immediate release – Thursday, October 29, 2009

BC Government Overrules Independent Regulator
and Lines Pockets of Private Power Producers

Vancouver, BC – The Wilderness Committee today condemned the BC government’s decision to order BC Hydro to buy an additional 6,000 gigawatt hours of electrical power from private power producers, in direct opposition to what the BC Utilities Commission (BCUC) has recommended.

“Requiring BC Hydro to purchase power that it doesn’t need is an idiotic decision and a gift to the private power industry. Three months ago, the BCUC said buying this power was not in the public interest, and yet the BC government is ignoring their own regulatory watchdog and ordering BC Hydro to spend billions of dollars on power we don’t need. This decision won’t reduce greenhouse gas emissions in BC by one iota, but it will damage a lot of streams and rivers in the process,” said Gwen Barlee, policy director with the Wilderness Committee.

“Private power coming from so-called ‘run of river’ projects comes mostly at the wrong time of year for British Columbians, is costing us far above market rates, and threatens our rivers and streams. Ratepayers are already on the hook for $31 billion in energy agreements to the likes of General Electric. The BC government’s decision to order Hydro to buy even more of this power is irrational and unacceptable,” said Wilderness Committee campaign director Joe Foy.

The BC government justified the decision to purchase more expensive private power by over-ruling the BCUC and reducing the “planning” capacity of Burrard Thermal, a gas-powered plant in Port Moody. Since 2002, Burrard Thermal has run at about five per cent of capacity, being used almost exclusively to provide firm emergency peak power backup in winter months. Ironically, Burrard Thermal will continue to operate in the same manner it has for the last seven years despite the government’s recent announcement.

The BC government has come under intense criticism since the introduction of the BC Energy Plan in 2002 which prohibited BC Hydro from producing new sources of hydroelectricity. The Energy Plan resulted in a gold rush which has seen over 800 water bodies, including lakes, staked by private power corporations. Private hydro projects have been heavily criticized for low environmental standards, lack of public input, and a lack of provincial or regional planning process.

“It is sadly ironic that while the BC government is bailing out the private power industry under the ruse of addressing climate change it is blasting ahead with contradictory plans to promote carbon-producing coal mines such as Klappan and Groundhog in northern BC, axing Live Smart BC, radically increasing subsidies to the oil and gas sector, and promoting massive highway expansion. People recognize hypocrisy when they see it and are aware that this gift to the private power sector has nothing to do with addressing global warming,” said Barlee.

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The Wilderness Committee is Canada’s largest membership-based, citizen-funded wilderness preservation organization. We work for the preservation of Canadian and international wilderness through research and grassroots education. The Wilderness Committee works on the ground to achieve ecologically sustainable communities. We work only through lawful means.

Thank you for supporting wilderness.

Written by Stephen Rees

October 29, 2009 at 6:22 pm

Private firms cry piracy as BC Ferries tows away work – and even workers

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Globe and Mail

Carrier Princess Richmond BC 2007_1205

BC Ferries is in deep trouble. The financial model on which the “privatisation” was based had a number of assumptions that have proved to be faulty. You can download the pdf version of the analysis from Island Tides.

That traffic is down – in fact it is now less than it was in 2003 – is in part due to the shrinking economy but also due to rising fares. So the ferries now have spare capacity – and need revenue. In order to fill that space, they have been taking traffic away from other operators. They have been offering a service which carries trailers – without the tractor or driver – between the Island and the mainland. They are transferred using “hostlers” – drivers who run small tugs to pull the trailers on and off the barges and former rail ferries (like the one in my picture above).

This is a new service for BC Ferries but has been bread and butter for the companies for over forty years. What really causes them concern is that BC Ferries tempted away their drivers by offering them higher wages.  Not only that but the frequency of sailing is higher, so the service is faster and cheaper. What the companies are complaining about is that BC Ferries gets a subsidy from the province, so they feel they are being undercut by unfair competition.

Of course, BC Ferries doesn’t see it that way, and neither does Martin Crilly the provincially appointed Ferry Commissioner. They argue that the subsidy only covers the smaller, money losing ferry services “minor routes – links to the smaller islands and in the north” while the main routes between the mainland and the Island make money and in fact provide some cross subsidy.

“We’d need a SWAT team of forensic accountants to get into what the commissioner sees as what is subsidized or not subsidized. The simple reality is, we’re losing customers on rates,” Mr. Irvine [president of the marine division for the Washington Marine Group] said.

Pardonable exagerration. BC Ferries counter that they have offered to give up the small islands services – and their associated subsidies – but no other firm has expressed interest.

At one time, it was fairly common to experience one or two sailing waits on the main ferry routes – which is why BC Ferries can get away with charging a non refundable advance booking fee which replaced old books of guaranteed loading tickets. I do not travel those routes frequently enough now to judge, but I have noticed lately that the dot matrix signs on the highway now show “no waits” more often – as do the traffic broadcasts.

In good times, unaccompanied trailers were not desirable traffic – they take up a lot of space and do not add to sales in the cafe or shop. I think if the “self loading cargo” found themselves denied boarding but saw trailers being loaded instead they would be complaining.

Competition is tough – but then that is what the private sector keeps saying they are good at.  Although I notice as well, back in Britain, that at least one train operator has given back its franchise, now the expected profits are not there any more. BC Ferries accounting should be transparent enough to allow taxpayers to see where the subsidies are going: it should not need teams of forensic accountants. The barge operators can only complain if the subsidy BC Ferries gets exceeds the losses that accrue from operating the lesser routes. If there is in fact cross subsidy from the major ferry routes to the minor ones, then it is in the general interest that spare capacity on ships already operating be utilised. Of course, what that may mean is that the barge operators are no longer in business if the ferries passenger traffic returns. (Note the use of the conditional not future tense.)

Princess Superior Richmond BC 2009_0611

Written by Stephen Rees

July 10, 2009 at 10:03 am

Posted in ferries, privatisation

Ron Parks finds P3 projects have higher costs, bias and secrecy

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CUPE Press Release

VANCOUVER-In a report released today, B.C.’s most respected forensic accountant, Ron Parks, along with his colleague Rosanne Terhart, find that public private partnerships (P3s) are costly for taxpayers.

They also find a consistent pro-privatization bias in the way that the B.C. government (through Partnerships BC) compares costs when assessing major projects. On top of this, the B.C. government is routinely denying access to critical information, which limits the public’s ability to know that its interests are protected on P3 projects.

Parks and Terhart evaluated four P3 projects: the Abbotsford Regional Hospital and Cancer Centre, the Sea-to-Sky Highway Improvement, the Academic Ambulatory Care Centre (Diamond Centre) and the Canada Line. Based on this review, they find that developing the projects as P3s is more expensive than if they were done publicly.

In the case of the Diamond Centre – they report that the actual nominal cost of a P3 was more than double that of a publicly procured project.

Barry O’Neill, president of the B.C. division of the Canadian Union of Public Employees, says that this report is clear evidence that the B.C. Liberals have stacked the deck in favour of privatizing the services people count on. “It’s a taxpayer rip-off, plain and simple. The hundreds of millions of extra dollars we pay in what amounts to ‘privatization premiums’ should be used to improve roads, transit, schools and health care,” says O’Neill.

O’Neill says that P3 problems around the world, including the current problems faced by the Macquarie Group to secure financing for the Port Mann Bridge, underscores the fact that privatization is plagued by no shortage of instability and risk to taxpayers. “Add to this the report’s finding that private projects actually cost more and I ask why we would keep going down this road.”

O’Neill says that this should give pause for major projects, like sewage treatment in Greater Victoria, where the Campbell government is advocating a P3.

Parks’ report was commissioned by CUPE BC. Ron Parks and Rosanne Terhart are with the firm Blair Mackay Mynett Valuations Inc.

The full report and a backgrounder can be found at www.keepitpublic.ca

COPE 491

Written by Stephen Rees

January 29, 2009 at 9:06 pm

Posted in privatisation

B.C.’s P3 projects not immune to world financial meltdown

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I have been poking around this evening looking for the announcement that Kevin “done deal” Falcon was supposed to have made this afternoon. It got no coverage on the CBC Vancouver at 6 News – there was nothing in my inboxes or on Twitter. So it was something of a surprise to find the answer at the Vancouver Sun

But on Friday, Transportation Minister Kevin Falcon was poised to make a sudden, late-day announcement about the Port Mann. Then, 18 minutes before the press conference, it was cancelled with little explanation.

Even more surprising it comes in the middle of a substantial story posted at 6pm this evening examining how BC’s P3 model is faring. And the Sun looks like, at long last, it has rediscovered how to be a newspaper. The shakiness of the P3 deals was becoming more and more apparent as more and more banks were showing that they were not at all interested in taking on risk. It has taken the Asper’s organ a while to catch up but give them credit for a thorough piece of work – with another nice quote from my friend Eric.

Note too that on the Golden Ears Bridge risk was not transferred in terms of usage. The operator gets paid the same no matter how many cars go over it. So, just like the Canada Line if the traffic forecasts are wrong then we the taxpayers are once again on the hook. And after spending far too many years around transportation forecasts I think it is not an exaggeration to say that the ones that are right are the exceptions. Most forecasts are wildly optimistic – because they are produced very early on in the process, are used to get approval – and then are not usually revisited even though their assumptions may be proved to be questionable long before the project is delivered.

Friday afternoon is also the time that is typically used to bury items that have to be announced but that it is hoped no-one will notice. So to plan to have one then – and then cancel it is most unusual.

Written by Stephen Rees

January 23, 2009 at 7:23 pm

Was the ‘Credit Crunch’ a Myth?

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By Joshua Holland, AlterNet. Posted December 29, 2008.

This is an important story and has quite a significant impact on what I have been writing about recently. If  there is a  “credit crunch” it means that qualified borrowers could not get credit. The banks – and other lenders – would not be lending to anyone, and this would have a very significant drag on the economy. Now no-one is arguing that the economy has tanked – it is more about why, because that then determines what should be done about it.

Economist Dean Baker … explains the situation in simple terms: The media, he argues, “are blaming the economic collapse on a ‘credit crunch’ instead of the more obvious problem that consumers just lost $6 trillion of housing wealth and another $8 trillion of stock wealth.” It’s a commonsense argument: much of the economic growth of the Bush era existed on paper only, built on the rise of a massive bubble in real estate values rather than growth in productive industries. When all that ephemeral wealth vaporized — and with the economy shedding jobs like a dog with dermatitis — consumers stopped buying, and businesses, anticipating a long slowdown, stopped seeking the loans that they might have otherwise tapped to expand their operations.

This is the first time I have seen this argument. There has been quite a bit of controversy over the bailout. Most of it is anger that the banks seem to have been rewarded for their irresponsibility, that the public sector now has to bear the brunt of the bad mortgage loans and bankers continue to enjoy their private jets and huge bonuses. Mneanhwile the automakers – who actually build things – were treated to very much closer scrutiny and are expected to report back on how they use the money. This was not the case for Wall Street.

If good projects cannot get regular financing then P3s become unfinanceable even if they are backed with taxpayer’s money. But it now seems the banks not only have money – they are also willing to lend it but no one has been asking to borrow. Furthermore banks need to lend – since that is how they make most of their money – gouging customers with transaction fees being only a small share of their highly profitable business. The amounts they are now paying depositors are negligible but the interest rates they levy on loans are fabulous. Especially credit cards.

But I have been so far taken in by the “credit crunch” story – and believed that this would make getting P3 financing both difficult and expensive. Well it now seems that it will be easier than I thought. Though still expensive compared to what governments can borrow at – since the credit ratings of those who can dip at will into the taxpayers’ pocktes are much better than any private sector consortium. P3s have proved to be much less rewarding for taxpayers than their promoters like to pretend, and many of the supposed benefits – particularly greater efficiencies and risk transfer – failed to appear.

There is now a marked shift in governments’ willingness to incur indebtedness. Even Stephen Harper concedes that deficit spending will be necessary to fight the current recession. And most economists now agree that the reason FDR did not cure the Great Depression with his New Deal was that he did not spend enough, and his deficits prior to the war were at about the same level as his ineffective predecessor, Herbert Hoover.

But increasing public spending only boosts the economy in the construction phase. The project itself has to be worthwhile for there to be continuing benefits. If the project does not meet a real need, and provide genuine benefits to the community as whole then paying of the loans (whoever took them out) just becomes a drag – as the benefits have to exceed the costs for the project to be considered worthwhile. This is why cost benefit analysis remains central to project appraisal, and why it must be done properly and objectively.

Whatever else anyone says about the Gateway project, the CBA was certainly not objective – and it is very difficult to take any of the claims made for it seriously. It is based on a series of  assertions and projections which seemed dubious at the time they were made but now seem wildly improbable. So the fact that the government will probably be able to build  these projects may seem a good idea now, but won’t for very long. Not only will we be paying for this mistake for a very long time – but we will also have lost, once again, the opportunity to invest in a sensible measures to improve transit in this region. Which always should have been the first priority but has always fallen behind the mega-project ribbon cutting opportunities which so obsess our politicians.

So I will concede that I was probably wrong to state that the P3s will not get funded by the banks. But that does not mean I was wrong about anything else about this daft idea. Pointless public works – like digging  holes and the filling them up again in earlier government make work projects – are bad enough. Willfully wrong headed projects which encourage the use of private cars and the further sprawl of the suburbs are much, much worse.  And frankly, the current projections of increasingly rapid climate change and the coming crunch of peak oil mean that the Gateway is going to be seen around here as a disaster. Unless some cataclysmic nature event overtakes it.

Written by Stephen Rees

December 29, 2008 at 10:42 am

ICBC paying severance to staff fired in chop-shop scandal

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CBC

This is bizarre. What was happening: ” formerly written-off cars were being resold after their repair histories were altered.” So eight staff members were – let me use the euphemism to cover a variety of issues – ‘let go’.

What happened was clearly wrong, certainly a tort for the people who got cars with fraudulent records, probably criminal. Certainly due cause for dismissal. But it now appears that the action was more about PR than good sense. The whole thing was quickly hushed up – so the scandal would “go away”, preferably quickly.

If people are dismissed – or allowed to resign – to avoid other penalties they deserve no severance at all. Indeed those who profitted from this scheme should make restitution. But that would require an investigation, which might well turn up other related issues – who knows? – and all that it seems was to be avoided at all costs. Which is something you might be able to do with a closely held private company. But not with a crown coporation.

The more one knows about ICBC, the less one feels comfortable about it. I have been sitting on some material for some time now on distance based inssurance. This is an idea that Tod Littmann has been promoting for some time – and I did not really want to move onto his turf. But the main  concern I have is that ICBC has not – so far as I can determine – ever even considered the  idea. It certianly has given no credible reason why it should not be tried.  And my question is why should this be? Why is ICBC so reluctant to being open and letting its owners – us – know what it is doing and why.

It is something of  a cultural issue in crown corporations – and it is noticeable that the present government is getting increasingly ham fisted at dealing with these government owned and directed operations. BC Ferries and BC Transit are the two I am most familiar with – and neither are any longer examples to be proud of. The way BC Hydro is being chopped up and forced into a corner is even worse.  And at least part of the problem is that the right wing does not think public enterprises should be successful. They must be made to fail in order to promote the ideology (there’s a word I havebeen reaching for a lot lately) that private is good public is bad.

Written by Stephen Rees

December 5, 2008 at 10:10 am

Posted in politics, privatisation

Tagged with

Crunch puts M25 revamp in jeopardy

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Last weekend I was reporting that the head of Partnerships BC Larry Blain was “comfortable” with the prospects of raising private sector funds for the SFPR and the PM2/H1 projects. He shouldn’t be.

The Observer (The Guardian’s Sunday paper) reveals that a similar scheme to the PM2/H1 is proving difficult to finance. The M25 is the ring road around outer London. The day war broke out, in 1939, was the day that sprawl was stopped in London. There was too much of immediate need to deal with, so London stopped spreading out and the planners took the opportunity to draw a line to stop London coalescing with any more of the towns on its fringe. It was called The Green Belt – and is much bigger than anything that uses that name here. Development of course restarted after the war, and just leap-frogged over the Green Belt. But other powers ensured that “ribbon development” along the major roads was also stopped, and new towns (“complete communities” in the words of the LRSP) were established.

The Green Belt became the only possible route for one of a series of motorways proposed to ring around London. The other, inner rings were never completed because they went through established areas where protests were loud and effective. But the M25 was not big enough almost from day 1. People drove out of London, drove along it and then re-entered from another angle – routes which looked like slices of a pie when mapped. Grotesquely indirect, but with the bonus of a few miles of speed. Over time the M25 has been widened, and every time the traffic just gets worse, not better. The futility of road building to cure congestion has no better model in my experience. But as usual, the traffic engineers and politicians think that the next time will be different.

Britain’s most expensive road improvement programme, the £5bn upgrade of the M25, is struggling to raise finance as a gathering cash crisis threatens the government’s controversial £44bn private finance initiative (PFI).

The reluctance of banks to lend money is sparking delays in the delivery of new schools, hospitals, roads and other key facilities.

A ‘funding competition’ to pay for the M25 upgrade and widening, scheduled to begin next April and to be completed before the London 2012 Olympics, is in danger of failing to attract backers. Delays could mean improvements are not ready in time for the London games.

Bizarre really. £5bn is being sought for a project which will almost certainly not work but is thought to be needed for a few weeks of a sports festival. The Brits are as blinded by Olympic bling as we are. It seems to me that if it cannot be financed that may well turn out to be a Good Thing. £5bn would buy a lot of public transport – the only thing known to cure traffic congestion when combined with road user pricing.

‘The current state of chaos in the market is definitely having an impact on the PFI market,’ said Richard Tierney, corporate finance partner at BDO Stoy Hayward. ‘Firstly, the problems in the banks mean that PFI project funders are now restricting the amount they will lend on individual projects.

‘There is an increasing tendency for banks to club together to fund even quite small projects which is delaying some projects. The problem is even more acute on bigger projects such as waste PFI schemes. And banks are now charging higher rates of interest on PFI deals. The credit crunch could become a real issue for PFI projects.’

Britain’s PFI is fishing in the same pond as Partnerships BC. I think Larry Blain is either misinformed or overly optimistic. At the very least the current mood in the market means that current timetables will NOT be achieved, and I will be very surprised if anyone from the private sector will be willing to sign anything until they can see how to raise the funds. Becuase right now – despite every G8 government pumping in funds as fast as they can, banks are not lending. That is what term “credit crunch” means. Not higher interest rates or more difficulty putting together funding packages. Just no money until … well until the banks start to believe they may have a chance of getting it back, and not just swallowed up in the current mess

Written by Stephen Rees

October 18, 2008 at 10:16 pm

Global credit crisis spells uncertain future for B.C. infrastructure

with 19 comments

Sun

It looks like Jeff Nagel’s original story now has “legs”. Larry Blain is still “comfortable”, but won’t talk about the PM/H1 project becuase they are still negotiating. The SFPR will not be ready to go to contract until the New Year

“Hopefully things will have stabilized by then and we won’t be facing higher debt charges,” he said.

“I expect that as things stabilize, money will continue to move towards quality,” he added, predicting lenders will be attracted to the stability of B.C.’s triple-A credit rating.

Now that last sentence is a bit of a puzzle to me. Why is our credit rating an issue? The whole notion of a P3 was that it was the private partners who would raise most of the money – if not all of it. While the ostensible reason for P3s was the supposed efficiency of the private sector, that related to the people designing, building and operating the thing. (Whatever that might be – road, bridge, railway, hospital). Now some things do not have streams of revenue to hand over to the private sector operator – for example, untolled roads, so in that case there is a “shadow toll” – a revenue stream that is related to use. Of course, shadow tolls do nto have any impact on users so all of the real benefits of road pricing in terms of reducing congestion are lost.

The idea of the P3 is sold on the “transfer of risk”. If the project does not work out as promised the private sector partner is the one who has to make up the shortfall. But of course, to no-one’s surprise, when most P3s go sideways the “special purpose vehicle” (usually a limited liability company created just for the project) can go broke, leaving its creators in the clear (usually after pocketing their fees and bonuses) and the government in the lurch. So again, the private sector should be indifferent to the credit worthiness of the government since it is not supposed to be government funds they are working with but money directly from us, the users.

Indeed this is where the shell game gets exposed. In the end, there is only one person who pays. And it doesn’t matter where the project is a P3 or not. We pay, they profit. It si called “late capitalism” and it is supposed to collapse under the weight of its own contradictions any day now. But then Karl Marx never imagined W in the White House.

Written by Stephen Rees

October 10, 2008 at 8:29 am

Financing fears grow over P3 projects

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Jeff Nagel

The world’s financial house of cards is tumbling down, but “Partnerships BC CEO Larry Blain said he is “pretty relaxed” “. So that’s alright then. There is no contract yet signed for the Highway #1/Port Mann twinning or the SFPR

Blain said the financial market upheaval may affect the P3 business moving forward.

He expects a continuing active market for smaller projects, but said that may not be the case for large ones on the scale of the Port Mann where many firms and banks must join forces.

“There’s some evidence around the world those types of projects are difficult to do,” he said.

The South Fraser Perimeter Road is one project that is still early in the procurement process, with bidders not yet identified.

The situation will stabilize at some point, Blain said, and at that time banks will be attracted to infrastructure projects that can count on B.C. taxpayers as long-term stable customers.

You know, at this stage it is not the banks and their future need for stable customers that is my greatest concern. The BC Liberals have decided to tie their fate to freeway expansions and road building – even though these two schemes alone will pretty much offset any benefit that might reasonably be attributed to the carbon tax. Though that effect is in fact very small, and is far overshadowed by the effect of a period of very high gas prices, the expectation of higher gas prices in future – oh and the little blip of a major world wide recession.

Because they are still committed to P3s there is actually no money freed up by the potential cancellation of both projects. And certainly there is not enough money to proceed with the transit projects that have been needed in the region for years and which the BC Liberals regard as a much lower priority. Or rather, that could be the case, but given the way the government has already started work on both road projects the reliance on private financing may well turn out to be as mythical as the promised environmental mitigation.  And we cannot know because all of this is wrapped up in commercial confidentiality. So we will not actually know how much we are on the hook for until it is far too late to do anything about it other than pay up.

UPDATE On October 9 the Sun ran a story on its front page headed “Local large-scale projects feel shock of global credit crisis” which pointed to funding problems experienced by some of the P3 partners of the Golden Ears Bridge

Written by Stephen Rees

October 8, 2008 at 1:57 pm

Posted in Gateway, privatisation

Tagged with , ,