P3’s – Better well hung than ill wed

Ontario’s Auditor General is calling attention to the general failure of public private partnerships.  Intuitively we’ve known about this for a long time.

Every P3 mega deal seems to go awry.  The MaRS bailout is only the latest and by no means the most embarrassing.  Highway 407 is Ontario’s favourite example.

Developed first  by Liberal and NDP governments, then inherited by the Harris Conservatives, this $106 billion public investment was parlayed into a $3.1 billion transfer to a private, mostly foreign, consortium.  Proceeds from the sale were deceitfully applied against the annual operating deficit in time for the next election.  The Tories claimed to have unloaded a costly obligation and balanced its books at the same time.  The truth took years to become apparent because the deal was done in secret and the accounting was unfathomable.

Even in this egregious case, the P3 concept may have been valid.  Segments of the highway, budgeted at $20 million per kilometre back in 1995, were completed at relatively little public expense.  In principle, it appears that the benefits of partnership, as a whole, could have been more favourable to the taxpayer.

Most P3’s make sense, on paper, to someone.  The optimism they’re born of is never entirely unfounded.

So, if the concept is valid and the numbers make sense at the outset, then the failure must be in execution.  This is interesting to NetGainers because there is something important to be learned from repeated failures, and clients of ours are frequently trapped in the netherworld between the private and public sectors where P3’s occur.  Understanding the problems with these deals could help lessen the waste and heartbreak underlying the AG’s findings.

Sometimes P3’s start with unrealistic expectations.  In these cases, the desired result is beyond reach even if the terms of the final deal fulfill the hopes raised at the outset.

This may prove true in the case of John Tory’s transit plans for the GTA.  The intention is to add private sector funds to the government’s allocation for transit construction.  However the inducements on offer to real estate developers today, including reduced development charges and tax increment financing, will create unfunded liabilities for the future.   When the induced private sector development is complete, and the new buildings are inhabited, the costs for municipal services along the new transit corridors will come due.  By then, the money will already be gone however.  It will have been spent on tunnels and trains, so there’ll be less to meet heightened demand for water, sewers, policing, parks, etc.  Instead of raising taxes or borrowing now to pay for transit, future mayors will pay the political price.  In the meantime, Tory will assure us, as Ford assured us four years ago, that he will hold the line on taxes while the private sector pays for transit.

As unrealistic expectations go, this is probably the most common one.  It originates in the belief that private sector participation will, in whole or part, relieve the government of expense.  A more realistic expectation would be for private sector participation to enhance the value of a public good to which the government is already committed.  To say that we can’t have a road, a subway, or a bridge that costs taxpayers money, is to deny a primary function of government.  Yet it has become a mantra of leadership in Toronto since David Miller left office, and has proven irresistible to provincial politicians, as evidenced by the AG’s report.

To quote Bonnie Lysyk, from her media remarks in early December, “Nothing is free.”  This echoes former Ontario Transport Minister, Rob Sampson, an architect of the disastrous Highway 407 privatization 15 years earlier: “There is no such thing as a free highway.”

It’s hard to imagine how the belief in free money persists while the infrastructure deficit continues to mount.  If a project or program held the prospect of full cost recovery or profit, why would a government need private sector financing?  Conversely, if little or no probability of cost recovery or profit exists, why would the private sector participate?  Private sector financing can require such rich inducements that the net result leaves little value for the public.

But even when the underlying rationale for a P3 is sound and the expectations are realistic, both sides must contend with their incompatible cultures.  If politics make strange bedfellows, P3’s can turn into sado-masochistic orgies of conflict and misunderstanding.  Here are just a few reasons why:

  • In the private sector, time is money.  Not necessarily so in the public sector.
  • For the government, risk is abhorrent.  Risk is a fact of life in the private sector.
  • Profit is a valid and important motive in the private sector.  Profit is still a dirty word in much of the public sector.
  • In corporations, approvals are required from a relatively small number of individuals.  In the public sector, bureaucrats, legislatures, media, special interest groups, and the general public can exert influence on a proposal or plan.

As we argued after the collapse of our Guild Inn project back in 2011, P3’s would benefit from mediation.  Instead of waiting for the inevitable confusion and conflict to arise, an intermediary should be assigned to safeguard the envisaged benefits of the partnership.

It just makes sense.  The private sector is looking after its shareholders.  The public sector is looking after its taxpayers.  With these two parties pulling in different directions on key terms, someone has to look after the deal itself.  Otherwise the outcome can become so deeply compromised that only a fraction of the intended benefits materialize.  Or worse, the deal can tip disastrously to the benefit of one side and the detriment of the other.  Or, worse still, time runs out and both sides give up on what everyone agreed was a good idea.

Another P3 trap is the habit of adversarial negotiating.  Negotiating teams are comprised of specialists, each of whom demonstrates his or her worth by finding something objectionable in a proposed deal.  On the private side, this can include extremely aggressive and expensive counsellors in law and finance.  On the public side, there is an obligation to seek advice and approvals from a much broader range of internal and external stakeholders, some with the power of veto.

In the case of Centennial College’s bid to revitalize Guild Inn Park on the Scarborough Bluffs, the City was represented by a couple of people from the Economic Development and Culture Division, the legal office, the finance department, the Forestry and Parks division, Facilities and Real Estate, the regional conservation authority, and the councillor from the affected ward.  On the College side, there was a project manager, an architect advocate, a real estate lawyer, and an occasional Vice President or Dean.

When City Council directed staff to draft a letter of intent with the College, it took most of a year and resulted in a 27-page document.  The rationale for taking so long to produce such a hefty “letter” was that it would expedite the ensuing lease negotiation.  Unsurprisingly, in retrospect, the final draft of the lease document took another year and was running more than 120 pages when the local Councillor pulled the plug on the project. Everyone around the table was alert to potential threats in their discrete areas of expertise, making them all capable detractors.  There was no counterbalancing advocate for the partnership’s general intention.

Adversarial negotiations possess a false virtue, perhaps borrowed from our adversarial court system, where justice demands an all out assault of prosecution on defense.  Or perhaps it originates in a neo-Darwinian belief that a proposition should run the gauntlet of detractors to prove its viability.  Either way, all that’s really proven is that it’s easier to kill a good deal than to consummate one.

The starting premise of a P3 is that the complementary needs and abilities of the two parties make it possible for the deal to be more than the sum of its parts.  This should allow for more strategic latitude than in a purely commercial deal.  Regrettably, the possibility is spoiled when either party drags negotiations down into a zero-sum game.

Instead of treating the connection between negotiating parties as a void, to be filled by eventual agreement, it would be better to start by recognizing that the distance between them  is already occupied by the envisaged partnership they both desire.  The possibility of success, as imagined at the outset, must be kept at the centre of negotiations throughout the process.  Unless someone answers for the wellbeing of this vision, the exclusive self-interests of the other two parties will tear it apart.

Isn’t that what happens with P3’s?  Politicians and business executives see the possibility in broad terms and announce their intentions.  All the possible benefits are listed as a rationale for trying to unite public and private resources.  Then the bureaucrats and corporate managers are directed to work out the details and, pitted against one another, problems grow and possibilities shrink.

Of course there are exceptions.  I can’t think of one at the moment, but I’m sure that there have been huge successes resulting from P3’s.  Still I suspect they are vastly outnumbered by failures.  The public may not be conscious of the frequency with which P3 possibilities are pursued to negligible result, only those that end in a negative result.

If the detailed terms of a P3 address the highest objectives of the partnership, rather than being negotiated in a way that seizes on conflict, fewer good deals would die on the bargaining table and fewer bad deals would survive to embarrass government.

But in a typical P3 negotiation, no one is in a position to ensure that this happens.  Appointing a mediator at the outset, with responsibility to deliver a fair, wise, and enduring deal for both parties,  seems like a reasonable way to protect the envisaged benefits throughout the negotiating process.  By maintaining the agenda, facilitating the meetings, setting the pace, and holding both parties to incremental agreements, this mediating role could help avoid many of the 3P traps.

It doesn’t matter whether this results in the consummation of more deals or fewer.  What’s important is that the parties engage constructively in pursuit of more realistic 3P prospects, and that there are fewer failures to demoralize and impoverish us.

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