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Pro and Con: The P3 water debate

On Nov. 19, the City of Abbotsford will ask voters to pass a referendum allowing the borrowing of $230 million to undertake a public-private partnership (P3) project that will create a new water supply at Stave Lake, utilizing a federal grant of up to $65 million. The P3 concept is a controversial one, and the following is an exploration of the issue from the two differing perspectives.

PRO:

Written by John Hunter, P. Eng. He is a retired engineer and businessman who has led large and successful P3s in China, and Indonesia, and advised on P3s in Canada, Venezuela, and Mexico. In his advisory role, he has recommended in favour of and against the P3 option.

 

Why do some Canadians say “private sector” and “for profit” water is bad?

Don’t they buy food or medicines, or rely on the Canadian Standards Association, Canadian air traffic control, gas utilities, doctors, medical labs, and airlines?

Like drinking water, our lives depend on these private sector operations, too.  Perhaps it is not a question of facts or logic, but protection of union jobs, and uninformed ideology?

Let’s consider the misinformation spread by P3 opponents.

Opponents claim P3s are “privatization.” Nonsense! In a privatization (like CN Rail years ago), government-owned assets are sold to the private sector.  There is no contract between seller and buyer thereafter; the only control seller has over buyer is the laws and regulations of Canada and the province – this is no real control.

In a P3, a “performance contract” exists between the government host and the private partner (P3er).  A well-structured contract has specifications in terms of cost, schedule, quality, reporting, and operations/maintenance, enforced by serious financial penalties to the P3er.

Modern P3s are more accountable and better controlled than most public sector projects. Indeed, the 1999 P3 handbook by the B.C. NDP government states “it can be argued that local government has more control, in that it has well-defined contractual remedies in a P3 that it may not have with its own management and staff.”

Walkerton proved that, and turned to private sector operations after their disaster. Infamous Canadian drinking water disasters – Walkerton (seven dead), North Battleford (hundreds sick), Kelowna (10,000 sick), Princeton (88 per cent sick) – were all public sector operations.

I find no such incidents in Canadian P3 water treatment plants, including B.C.’s French Creek, Port Hardy, and Sooke, or Alberta’s Picture Butte, Okotoks, Strathmore, Chestermere, Wetaskiwin, Taber, Wood Buffalo, Canmore, and New Brunswick’s Moncton.

Opponents state that the public sector can borrow cheaper than the private sector. True, and it’s due to risk.

When the public sector overruns budget, governments simply raise taxes; banks have little risk, so borrowing is cheaper, but the taxpayer generally eats cost overruns.  If a P3 overruns, the P3er typically eats it; hence more risk and higher borrowing costs, but less risk to the public.

Did you rejoice at lower borrowing costs for our Expo ’86 (overrun $700 million), Fast Ferries (overrun $260 million, didn’t work), Langley Stadium (overrun 100 per cent), the fed’s Maple Reactors (600 per cent overrun, 14 years late, abandoned after $680 million)?  Taxpayers ate most of the overruns; higher P3 borrowing and profit components pale by comparison.

Opponents claim “P3s cost more.” On an “apples-for-apples” basis, it’s generally the reverse, because the profit motive drives the P3er to build and operate more efficiently than the public sector over the full lifecycle of a project.

I have found P3 opponents often misquote official sources; usually the source said only that specific items like borrowing or transactional costs were higher, not total lifecycle costs.

Critics claim lower service levels with P3s.  I know only four ways that this can happen: (1) host requests a lower service level; (2) host fails to define required service level in the contract or provides inadequate penalties for underperformance; (3) host fails to monitor or enforce contract requirements; or (4) host is the cause of the failures. All are avoidable.

Opponents claim that most P3s don’t transfer risk to the private sector because governments have to “pick up the pieces.”

I have been involved in P3s from $50 million to $1.2 billion. Had we failed to meet performance specifications, we would get hammered financially, and if we failed to clean up our act, the host could take over the plant under attractive terms, collect penalties backed by irrevocable performance bonds, and we would kiss our investment and business reputation goodbye.

The claim that a P3er treating your water will control it, own it, price it, sell it, and so on is nonsense, unless you sign a contract allowing that. Even then it may be impossible under Canadian or B.C. law.  It’s akin to claiming that the shop that services your car now controls it.   I could also write pages about what are, in my opinion, trade agreement myths by Maude Barlow and CUPE.

“But with a P3, taxpayers are tied into a 30-year contract they can’t get out of” said a CUPE representative.  Nonsense. Firstly, shorter term P3 contracts have often been used. Secondly, a typical P3 has provisions for public sector takeover of operations (or hiring another party) at the P3er’s expense, in cases of continuing bad performance, and ultimately, termination of the contract, with transition costs for the P3er’s account.

Termination also triggers for events such as bankruptcy, missed progress dates or quantity/quality requirements, failure to maintain insurance, and material breach of the agreement.  The taxpayer is only “tied in” if the private partner performs properly, presumably a desired situation.

Note that in a public sector project, the taxpayer is tied in for the life of the project, regardless of project performance.  Have you escaped your share of taxes for Fast Ferries?

Another ludicrous claim is “no information from a P3.” Freedom of information (“FOI”) acts normally don’t apply to the private sector, but that’s irrelevant.

In a “P3 FOI,” the public sector specifies in the contract the information to be provided to the public and to itself. This may include reports, on-site inspectors, and independent audits or product testing. Failure to provide agreed information is a breach of contract.

Put another way, in a P3, the sponsoring government writes its own FOI rules for the P3. They can’t demand proprietary information, but publication of performance data is normal in a properly structured P3.

Many projects are unsuited to P3s, and some governments are unsuited by knowledge, skills, and temperament for P3s.

Several failed P3s in B.C. occurred when political leaders ignored provincial law, business common sense, and the advice of P3 professionals.

Analogous failures occur frequently in non-P3 projects.

P3 is not a panacea, but it can deliver product “better-faster-cheaper,” particularly with tighter control, than with public sector operation.

 

CON:

Written by Water Watch Mission-Abbotsford

 

When you ask people about water, as Water Watch Mission-Abbotsford recently did at a public meeting in Abbotsford, you hear “water is a human right,” “water belongs to everyone” and “water is not a commodity.”

No one we spoke with suggested that the distribution of our drinking water supply should be controlled by a foreign consortium.

That’s because water is so central to our lives and this P3 deal would affect us for decades. Canada has historically been the envy of the world for our vast reserves of clean, fresh, free water.

So, how did we get from there to being on the verge of signing away control of our drinking water for private profit?

The city says that we need more water right now and that the only way to get it is to sign this P3 deal.

But there is evidence that Abbotsford’s water demand has actually dropped by 33 per cent and that present sources are nowhere near capacity.

Take the P3, the city says – it’s our only option. But originally, Abbotsford and Mission were working together on a regional water supply plan. We agreed to stick together, but when Mission didn’t like the looks of the P3, Abbotsford went on alone.

Resource privatization through P3s is a big target for this federal government. Federal trade minister Ed Fast is the sitting MP for Abbotsford and was front and centre when the P3 federal grant was officially announced. It is Fast’s government, through P3 Canada, that insists all federal funding for water projects go to P3s – despite growing calls from communities to fund other options, including public ownership.

The federal government is also in the final stages of negotiating the Comprehensive Economic and Trade Agreement (CETA) with Europe.

The talks are secret, but analysts say water privatization is high on the list. European negotiators want Canada’s municipalities and water utilities included, which will mark the first time Canada has let our drinking water be fully covered under an international trade treaty.

It will also mark the first time that a trade agreement covers municipal procurement of water services.

Coupled with the federal government’s ideological requirement on P3s, this will lock in existing private water contracts and restrict how municipalities can regulate private water companies.

Much of the P3 pressure is coming from Europe, where the largest private water operators in the world are based.

After cities like Paris cancelled their P3s, these companies are now looking to Canada for P3 profits. They are looking here because they have failed elsewhere. Water rates skyrocketed and service plummeted.

Perhaps we should try to learn from those experiences.

In Argentina in the 1990s, a deal with a consortium including the French Suez Group (the largest private water company in the world) constituted “the biggest transfer of a water service and watershed into private control in the world” encompassing a region with over 10 million inhabitants.

Residential water rates increased more than 88 per cent in less than a decade and the company reported net profits of 20 per cent.

In the first 10 years the company had failed to honour 45 per cent of its contractual commitments for improvement and expansion of services.

Our federal government wants to pave the way for those consortiums.

Ottawa wants to initiate a system of investor/state dispute settlement much like the rules under the North American Free Trade deal.

This would cut municipalities out of the loop in disputes – allowing companies to claim damages if their real or projected profits are adversely affected.

Even with the P3 grant money, there is plenty of evidence that the P3 will still be more expensive.

Cost estimates have already climbed from $160 million to $345 million, and the project isn’t even off the ground.

Private borrowing is also more expensive. The city can always borrow money more cheaply than the private sector, because of the risk that a corporation might go bankrupt and default on its debts.

Even the term of this deal is a problem. Why lock ourselves into any deal for 30 years? Many municipalities have rules against signing any deal this long and for good reason.

There would be little incentive for a private contractor to respond to the public if the contract isn’t up for renewal for 30 years.

Presumably the long term is meant to attract an operator, but at what cost to us?

Once we are locked in, we put ourselves in a poor bargaining position.

While most capital projects for drinking water in Canada are designed and built by private companies, the operation is virtually always public.

The advantage is accountability. With private operators, transparency can be an issue – they are private and they are operating for profit.

Liability can be an issue as well. There are plenty of examples of P3s that have refused to accept legal responsibility when things went horribly wrong.

That has left municipalities and cities across Europe and in Canada on the hook and scrambling to regain control of their water.

In Hamilton, Ontario, a P3 wastewater project ended up flooding 200 homes with raw sewage. It also dumped sewage into the harbour.

The P3 companies involved refused to take any legal responsibility – leaving the mess with the city and the residents of Hamilton to clean up.

Bottom line?

This P3 is a bad deal.

It is bad morally, ethically, logistically and economically.  It is not in the public interest.

We must keep our water public to keep our options open.

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