P3 Cocaine (Part 1)
Do you remember the Military/industrial complex? Here’s how it was described by President Eisenhower a few days before he left the White House:
- “This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.
In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the militaryindustrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”
We have a new complex today, one involving politicians/bureaucrats and the P3 companies.
Government officials are now hooked on a new narcotic: the money provided by P3 investors that will fix up all of their problems. Whether it is a school, a hospital, a highway, an airport, a bridge or transit line, P3 investors are there ready to provide the hundreds of millions and even billions of dollars needed to make the life of the Government official so much easier.
Read the literature about why P3s are so beneficial. One article by the former chief of staff to Prime Minister Paul Martin (whose Executive Assistant was a VP of Borealis in case you did not know) that I read that is typical claimed the following advantages:
- ‘‘Off-book’’ financing. What this means is that the government does not show on its books a debt for the amount of the project but rather shows only the payment each year to the P3 operator. Accordingly, the Government does not show that it is in debt for as much money as it really is since it has to make payments over time. They can try to demonstrate that they are fiscally responsible since the debt is not increasing.
- needed public infrastructure can be built faster under a P3 for debt-restricted governments
- public private partnerships also have a solid track record of completing construction on time or even ahead of schedule
- all the commercial risks, such as design risk, meeting standards of service delivery, cost overruns, market risks, etc., related to building and delivering the public good can be transferred to the private sector.
- P3 model can deliver costsavings to government. The argument from logic asserts that efficiency and cost-effectiveness are not hallmarks of public-sector service delivery
- private-sector participant has a strong incentive to provide high-quality customer service.
- Enabling the public sector to focus on outcomes and core business
Can it get any better than this! These are the so-called advantages of the P3 model.
There are some disadvantages but they are easily explained away. One of the issues is ensuring that there are proper contractual terms between the Government and the P3 operator. And this is what the apologists for P3s state must be undertaken.
- “Carefully crafted service and quality standards in a concessionary P3 contract, ombined with effective oversight, provide the public sector with the power to clearly define and control the levels of quality and service required of its private-sector partners. Penalty clauses and, in the extreme case, the right to terminate the contract, can be used by the public sector as a discipline on service quality.”
Another negative of P3 is
- “that P3s are more expensive because they face a ‘‘triple hurdle – the higher cost of private borrowing; the need tomake a profit and associated other potential inefficiencies; and higher procurements costs.”
That is dismissed however because
- “In a P3, however, the risks and potential costs are underwritten by the private sector, albeit compensated by an appropriate return. In other words, in a P3 procurement, the government is paying an insurance premium to protect against the risk of higher costs, rather than self-insuring at a zero premium cost but at a potentially high failure cost.
I would have thought that if a Government can enter into a massive and complex agreement that will protect its interests in a P3 then it ought to be able to enter into such a contract with a General Contractor that deals with one project. After all, a contract is a contract is a contract. I would have thought that it is much easier to write an agreement with a General than it is to write a contract with a P3 operator to cover every eventuality in an up to 99 year agreement.
Did you like how the word profit was transformed? It became “an appropriate return” and “an insurance premium.” I wonder if the author was embarrassed to discuss how much money a P3 operator can make on a project that effectively gives it a monopoly. That is what P3 operators want: no competition. I have Blogged this before but it is worth while repeating;
- “Jane Welsh, a senior investment consultant at Watson Wyatt, said infrastructure funds were typically aiming to make inflation-linked returns of about 12% a year after management fees of 1% to 1.5% and performance fees of 20%.
The riskiest opportunities, such as those involving the building of a tunnel for a tollroad, may aim to generate returns of more than 20% a year. "
For OMERS, as an example, its overall private equity rate of return in 2007 was 18.6%. Its rate of return for infrastructure was 12.4%.
Why would any P3 operator have any interest in the Windsor border unless they are going to make this kind of rate of return. There are so many other places that they could invest their money that they would be negligent if they did not do so but rather came into the Windsor area and only made a “borrowing rate” amount.
You think I am overstating and being dramatic with the use of the word “addict.” Here is one description about drug addiction and its effect on the brain. Just substitute P3 money and tell me I am wrong:
- “Addiction is a chronic, often relapsing brain disease that causes compulsive drug seeking and use despite harmful consequences to the individual who is addicted and to those around them. Drug addiction is a brain disease because the abuse of drugs leads to changes in the structure and function of the brain. Although it is true that for most people the initial decision to take drugs is voluntary, over time the changes in the brain caused by repeated drug abuse can affect a person’s self control and ability to make sound decisions, and at the same time send intense impulses to take drugs.”
Just read quotations over the past little while about how politicians are salivating about the use of infrastructure money to create jobs in this time of economic crisis. Is anyone talking about the possible adverse consequences of P3 deals? I don’t see any of it.
We are told that governments don’t have the money… how could they after spending $700 billion in United States and now $75 billion in Canada on the mortgage meltdown problem never mind the issues with the Automobile Industry. But the private sector is rolling in cash even though pension plans took a huge hit in the stock market. The Canada Pension Plan lost $10B in the last quarter but they still have $117.4B under their control with more coming in each month from compulsory taxpayer contributions.
We are dealing with so much money. And nothing makes politicians happier than dealing with money, especially other people’s money that they can spend. With a P3 deal, they can talk about private money and can pretend that it is not taxpayer money either so that they don’t have to raise taxes right away.
Of course, taxpayers are responsible for paying for the P3 either directly or indirectly as users or even more indirectly when the project fails because there is not enough revenue. But that doesn’t matter. By the time that people understand what has really hit them, those politicians and bureaucrats who were responsible for the project in the first place, will be off doing bigger and better things.
Who knows what positions or consultancies some of them will take or law firms they will join after they leave their Governmental jobs…just like the retired generals and admirals who took employment with defence contractors. It should not be too hard for you to grasp that idea.
Our Politicians love P3 operators. They are becoming completely dependent on them. Here are some examples that you may find interesting:
- “Building Canada, the $33 billion commitment to fund infrastructure projects through to 2014, requires all projects seeking $50 million or more in federal contributions to consider the P3 option. The February 2008 budget created PPP Canada Inc., a new Crown corporation that will work on P3s with the public and private sectors.”
- “Ontario ’s Finance Minister Greg Sorbara invited some of the province’s most powerful investors to consider helping to finance the rebuilding of the province's crumbling infrastructure. According to Sorbara, the province's pension funds have a central role to play in financing public-sector projects. "
Bureaucrats like P3 deals as well. They can have all of that money and deal with the P3 operators only and ignore the politicians. Who wants oversight anyway by a bunch of people who are merely elected by the public. As that Civil Servant in the Star wrote:
- “Civil servants have been trained to give politicians the best, most extensive and most complete analysis of just about any public policy issue thrown at them. Bureaucrats are initiated very early in their career in the art of communicating this kind of information to politicians, and by the time they reach the senior echelons of the civil service, they have learned to do this very well indeed. Throughout their careers they have been encouraged not to shy away from making recommendations and providing fearless advice to their political masters on the understanding that even if their advice is rejected, this is how the best possible decisions are taken.”
I will be much more specific in Part 2 about how the money dealers will work in Windsor and with DRIC in particular.