Ontario P3 program draws auditor’s fire – again

Public-private partnerships (P3s) are once again drawing the criticism of Ontario’s auditor general, in her 2017 annual report. In 2014, Auditor General Bonnie Lysyk’s wide-ranging report exposed major problems with Infrastructure Ontario’s entire P3 privatization program, known in the province as Alternative Financing and Procurement (AFP).

Her 2016 and 2017 reports continue to highlight systemic problems with P3s, including higher costs of private financing, significant conflicts over maintenance contracts, and no evidence to justify projects going ahead as P3s.

What’s equally disturbing is the refusal of public bodies like Infrastructure Ontario and regional transit agency Metrolinx to comply with Lysyk’s recommendations around accountability and transparency.

Flimsy P3 evidence

This year’s report finds that Ontario’s P3 agency, Infrastructure Ontario (IO), is refusing to implement one of the auditor’s key recommendations. In 2014, Lysyk called for IO’s value for money assessments that “can be and are fully supported and can sustain scrutiny.”

The 2014 report highlighted that IO was planning to inflate the cost of public projects by up to 13.3 per cent “to reflect value-added innovations that the private sector may be bringing to projects.” Lysyk questioned the change, and recommended that evidence be provided to back up changes like this. Infrastructure Ontario’s official response is that “it will not be undertaking any future work with regard to this recommendation.”

Governments use ‘value for money’ analyses, which are often done by private consultants, to justify using a P3 instead of public procurement. In order to end up with a cheaper P3 option, these ‘value for money’ reports often tack a lot of extra costs onto the public option through something called ‘risk transfer’ or in this case ‘value-added innovations.’

The 2014 auditor general report reviewed 74 P3 projects. Lysyk concluded the projects cost the province $8 billion more than if they had been procured publicly. The majority of this— $6.5 billion—was due to higher private-sector financing costs. Lysyk also questioned the assertion that P3s transferred risk to the private sector.

The P3 projects evaluated in the 2014 report used unrealistically high-risk transfer, averaging about 50% of the capital costs. Lysyk found that claims that P3s were less expensive than the public alternatives were based on assumptions that they transferred large amounts of risk to the private sector, but there was absolutely no evidence or factual information to support those claims.

Major problems with privatized hospital maintenance

According to the auditor’s 2017 report, hospitals are being gouged by P3 contractors on maintenance work that isn’t covered in the original contract. Several hospitals are in long-term disputes with P3 maintenance companies, using dispute resolution methods that are “time-consuming and ineffective.” And Infrastructure Ontario is still awarding lucrative maintenance contracts to companies with poor track records. The report highlights one corporation with a maintenance dispute that’s dragged on since 2013, and is still unresolved. The corporation has been awarded two new P3 hospital contracts valued at nearly $2 billion.

P3 contracts, which often last for 30 years, do not cover all hospital maintenance work, such as installing automatic door openers, window tinting or additional lighting. For any work beyond the original contract scope, Lysyk found that hospitals are paying rates that are higher than reasonable. Four hospitals with P3 maintenance contracts have either asked for additional funding from the Ministry of Health and Long-Term Care, or have experienced a funding shortfall due to the higher costs of P3 maintenance contracts.

The provincial government has provided $5.3 million in top-up funding to six hospitals, in part to offset the higher administrative costs needed to manage P3 maintenance contracts, such as the legal costs of disputes. However, this has not covered the entire shortfall and hospitals have been forced to reduce funding in other areas to make up these shortfalls.

Report questions transit agency P3

The 2017 report highlighted that Metrolinx, the Ontario agency that oversees transit in the Greater Toronto and Hamilton area, will not follow the recommendation to “publish the detailed risk assessments used to justify AFP [P3] procurement, as well as the methodology for assessing these risks, so that independent experts can verify the results.”

Lysyk also notes that Metrolinx is not using concrete data when it compares public projects to P3s, such as the actual performance of transit such as GO Transit or the TTC. Major system expansions managed by Metrolinx have been developed as P3s. It’s unclear what information is being used to rationalise P3s and whether it is accurate.

Conclusion

The 2017 results are not surprising. Auditors general across the country have questioned the financial rationale for using P3s to finance, build and operate public infrastructure.

A significant unanswered question is the growing long-term P3 obligations that Ontario has taken on, and their impact on the province’s budget and finances When the UK government added up all the liabilities and obligations associated with their P3 projects, known as PFI or private finance initiative, the final tally was over £300 billion. That’s almost C$500 billion, or C$20,000, per UK family.