P3 privatization scheme runs late in Ottawa | National Union of Public and General Employees

P3 privatization scheme runs late in Ottawa

For governments, trying to transfer the risk of delays in construction or cost overruns to the private sector with a P3 privatization scheme is like gambling in a casino. You might come away a bit richer, but there’s a much, much better chance you’ll lose money.

Ottawa (08 Feb. 2018) — Yet again, the claim that P3 privatization schemes are on time and on budget was shown to be a myth. It was announced on February 6 that Ottawa’s light rail P3 will be 6 months late.

Under the contract for the Ottawa light rail P3, the private sector consortium was supposed to pay the City of Ottawa a $1 million penalty if the project was late. But instead, the private consortium was let off the hook.

Late P3 projects undermine justification for higher cost of privatization

P3 privatization schemes cost more than public procurement. Even the privatization industry admits that. But the privatization industry attempts to justify the higher cost by claiming it will be offset by the savings from projects being completed on time and from risks being transferred to the private sector.

The Ottawa light rail project is a good example of what happens in practice. Even though the project will be late, the private consortium is not going to have to pay a penalty. And the city will still be paying the higher cost of using a P3 privatization scheme instead of public procurement. The city will also have to absorb the higher operating costs of operating extra bus service for another 6 months before the light rail line opens.

Risk transfer with P3s a gamble that the public usually loses

For governments, trying to transfer the risk of delays in construction or cost overruns to the private sector with a P3 privatization scheme is like gambling in a casino. You might come away a bit richer, but there’s a much, much better chance you’ll lose money.

For starters, like gambling in a casino, the odds are with the private consortium in charge of building the project. Private consortiums will almost always spend far more on the lawyers and accountants negotiating contracts for P3 privatization schemes than governments can. That means that contracts are more likely to favour the private consortium.

Large corporations involved in consortiums bidding for P3s have usually been involved in a number of similar projects. That means that the bids consortiums submit will more than cover the cost of any likely problems. Similarly, the estimates for when projects will be completed usually factor in extra time to allow for problems the consortium expects to occur.

Governments paying for problems regardless of whether they occur

Because bids for P3 privatization schemes include the cost of problems that the private consortiums think may occur, governments using P3s are paying for delays and other problems regardless of whether they occur.

The only way governments can theoretically win at the P3 casino is if a project encounters serious problems and delays. But that’s only in theory. In practice, governments often find themselves paying for risks they thought had been transferred to the private sector.

Law suits or private consortiums walking away are both possibilities

When cost overruns or delays with P3 privatization schemes are significantly more than private consortiums expected, it’s safe to assume that governments will be having to cover some or all of costs overruns.

The private consortium in charge of the McGill University Health Centre P3 privatization scheme recently received $108 million from the hospital to cover cost overruns. This is in spite of significant problems such as sewage flooding the birthing centre and what the police labelled “the biggest case of corruption fraud in Canadian history.”

What should concern Ottawa residents is the lead company in the private consortium in charge of the McGill University Health Centre P3 — SNC Lavalin — is also involved in the private consortium building the Ottawa light rail line. While Ottawa's city manager believes they would have a weak case, he has refused to rule out the possibility that the private consortium in charge of the Ottawa light rail P3 privatization scheme will sue the city.

The City of Ottawa has also had to deal with the private company in charge of a P3 privatization scheme walking away and leaving the city to pick up the pieces. In 2007, the private company running the Ray Friel Centre P3 privatization scheme asked the city for $2 million per year more because costs were higher than expected. When the city refused, Serco walked away. The city had to take the centre over and cover the debts left behind.

Time to acknowledge P3 privatization schemes don’t live up to claims

The problem with the Ottawa light rail project isn’t that the project will be finished 6 months later than planned. With a major infrastructure project delays are always a possibility, whether the project is built using a P3 privatization scheme or using public procurement.

What is a problem is that Ottawa and many other places are paying extra for P3 privatization schemes because they are supposed to be on time and on budget. As the Ottawa light rail project and many other infrastructure projects show, that’s not the case. 


NUPGE

The National Union of Public and General Employees (NUPGE) is one of Canada's largest labour organizations with over 390,000 members. Our mission is to improve the lives of working families and to build a stronger Canada by ensuring our common wealth is used for the common good. — NUPGE

 

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