Public-private partnerships in Canada

There is a semantic debate pertaining to whether P3s constitute privatization or not. Some argue that it isn't "privatization" because the government retains ownership of the facility and remains responsible for public service delivery. Others argue that they exist on a continuum of privatization; P3s being a more limited form of privatization than the outright sale of public assets, but more extensive than simply contracting-out government services.[6]^{:chapter 1}

Supporters of P3s, such as former finance minister Jim Flaherty, generally take the position that P3s do not constitute privatization, while P3 opponents argue that they are. The Canadian Union of Public Employees, a major institutional opponent of P3s, describes them as "privatization by stealth".[6]^{:chapter 1}

The P3 projects can be categorized by breaking them up into sections; wave one and wave two of P3s. The first wave of P3s in Canada were initiated and launched between the 1990s and early 2000s.[3] The most notable projects from this time include the Highway 407 in the Greater Toronto Area, the Royal Ottawa Hospital in Ontario, the Brampton Civic Hospital in Ontario, and the Confederation Bridge linking Prince Edward Island and New Brunswick.[3] The development of a significant number of schools in Nova Scotia and New Brunswick were also under the P3 BOOT model.[4] At the end of the first wave, a lot of the new P3 projects included water treatment plants and municipal sport complexes across Canada.[3]

The outcomes of first wave as a whole did not meet the public interest and was scrutinized by several groups including scholars, stakeholders, the media, and auditors.[3] Several complaints revolved around topics such as complex concessions, lack of transparency and accountability, and high private cost of capital.[3]

The Second wave of P3s can be categorized between the early 2000s till present day.[3] The heavy scrutiny of the first wave of P3s lead to shaping this wave with a higher importance on meeting expectations and making P3s more politically acceptable with main stakeholder groups (especially the public).[3] The main argument used in the second phase to promote P3s in Canada is that they provide better value for money that a traditional government procurement project.[9]

In 2002, British Columbia created the “Capital Asset Management” policy, with a framework that was adopted by other provincial governments, and spread across the country.[3] The framework can be simply be stated as "P3 first" policies where the government should always consider using P3s for infrastructure projects when the cost reaches a specific threshold.[3] It also states that a special PPP agencies should be created to advocate as well as deliver PPP projects in Canada.[3] The provincial governments lead the P3 initiative in the second wave, using it to initiate projects such as healthcare facilities, justice facilities, roads, and bridges.[3]

In 2009, Stephen Harper initiated the commitment of the federal government to P3 infrastructure by creating a crown corporation (PPP Canada Inc.).[4] PPP Canada wishes to invest in public infrastructure though P3s to contribute to long-term economic benefits, and maximum value to appeal to public interest.[4] This corporation also has a “P3 Canada fund” where provinces, territories, and municipalities can apply for funding from the federal government.[4] Since then, P3 projects have been more commonly used in areas such as Local road Infrastructure, public transit infrastructure and wastewater infrastructure.[4] P3s have also been recently used in projects such as Brownfield Redevelopment Infrastructure, Core National Highway system infrastructure, Green Energy Infrastructure, regional and local airport infrastructure, water infrastructure, and solid waste management infrastructure.[4]

In 2014, the Government of Alberta cancelled plans to construct an additional 19 P3 schools, after discorevering they would cost $14 million more than regular schools.[9]

Justin Trudeau is in favor of Public-private partnerships. However, during his premiership, the federal government removed the P3 screen as a condition for federal funding for infrastructure project in order speed up funding approvals for .strategic and trade-enabling" projects. This does not mean that infrastructure projects cannot be funded by P3s; it only means that projects don't have to consider the P3 route.[6]

In 2017, the government of Canada created the Canada Infrastructure Bank, a federal Crown Corporation tasked with financially supporting revenue-generating infrastructure projects that are in the public interest through public-private partnerships.[10]

In 2018, the government of Canada dissolved PPP Canada. Minister of Infrastructure and Communities Amarjeet Sohi justified this decision by claiming that it had achieved its mandate of making P3s common practice across Canada, and was no longer needed.[11]

While in practice there are many types or models of PPPs, the following is a non-exhaustive list of some of the most common designs in Canada:

• Operation & Maintenance Contract (O & M): A private economic agent, under a government contract, operates a publicly-owned asset for a specific period of time. Formal, ownership of the asset remains with the public entity. In terms of private-sector risk and involvement, this model is on the lower end of the spectrum for both involvement and risk.[12]
• Build-Finance Model: The private actor builds the asset and finances the cost during the construction period, afterwards the responsibility is handed over to the public entity. In terms of private-sector risk and involvement, this model is again on the lower end of the spectrum for both measures.[12]
• Design-Build-Finance-Maintain Model: "The private sector designs, builds and finances an asset and provides hard facility management (hard fm) or maintenance services under a long-term agreement." This model is in the middle of the spectrum for private sector risk and involvement.[12]
• Design-Build-Finance-Maintain-Operate (DBFMO): In this model, the private partner is responsible for the entire project ranging from design to construction, operation and maintenance of the infrastructure, including fundraising.[13] This model is in the higher end for private sector risk and involvement.[12]
• Concession: "A private sector concessionaire undertakes investments and operates the facility for a fixed period of time after which the ownership reverts back to the public sector." In terms of private sector risk and involvement, this model is very high risk and high involvement.[12]

Highway 407 shield in Oshawa

The Ontario Highway 407 is a tolled 400-series highway that spans the entire Greater Toronto Area (GTA) in Ontario. When the Ontario government started planning the project, their normal process for highway construction was not possible given the financial constraints of the recession of the early 1990s. The Peterson government sought out public-private partnerships. Two firms bid on the project, with the Canadian Highways International Corporation being selected as the operator of the highway.[14] Financing for the highway was to be paid by user tolls lasting 35 years, after which it would return to the provincial system as a toll-free 400-series highway.[15]

The Highways was then privatized by Premier Mike Harris in the year leading up to the 1999 provincial elections. The highway was leased to a conglomerate of private companies called 407 International Inc., which was initially owned by the Spanish multinational Cintra Infraestructuras (43.23%), as well as various subsidiaries of the Canada Pension Plan Investment Board (40%) and the Montreal-based engineering firm SNC-Lavalin (16.77%).[16] The deal included a 99-year lease agreement with unlimited control over the highway and its tolls, dependent on traffic volume; however, the government maintains the right to build a transport system within the highway right-of-way.[15] It is today described as a "value generating monster" and "cash cow" for SNC-Lavalin,[17] and one of the "worst financial missteps" from any government in Ontario's history.[18][19]

Although the original plan was for the tolls to end after the construction cost was paid off, probably after about 35 years; there is no indication that the private owners will eliminate the tolls.[20] Although Premier Mike Harris promised that tolls would not rise by more than 30 percent, they have risen by over 200 percent by 2015, from about 10 cents to over 30 cents per kilometre.[21] Another criticism is that, a part of the contractual agreement with the government, the MTO is required to deny licence plate validation stickers to drivers who have an outstanding 407 ETR bill over 125 days past due.[22]

In 2002, just three years after the original sale for C$3.1 billion, Macquarie Infrastructure Group, an Australian investment firm, estimated that the highway was worth four times the original price.[23] By 2019, the estimated value had risen to C$30 billion.[24][25] Both the length of the lease, and the fact that the road is controlled by private corporations, mean that decisions about the road and the tolls are less accountable to the public.[26]^{:Chapter 2} The Harris government failed to put any restrictions on toll increases (as long as the road attracted a certain volume of cars). As a result, commuters in the densely-populated Toronto area will have no protection against ever-rising tolls on this key highway during the entire 99-year span of the lease.[26]^{:pp. 53–57} The public has accused the 407 ETR of predatory billing practices, including false billing and continued plate denial after bankruptcy.[27][28] In 2016, after a 4-year legal battle, consumers won an $8 million class action lawsuit.[29]

In the 1990s, the cash-strapped governments of Nova Scotia and New Brunswick decided to use P3s to finance the construction of new much-needed schools for the province, including 39 in Nova Scotia. These governments were ideologically inclined to support expanding the private sector. P3s also allowed them to pay for these schools "off-balance-sheet", as the private sector would initially finance the project while he public sector would pay for it every year through the operation phase. This allowed these governments to avoid counting these projects immediately in their public debts and made them look more fiscally responsible. However, Auditor General reports from the end of the decade revealed that these funding arrangements made the projects more expensive overall, and barred future governments of using such accounting fallacies to fund infrastructure projects.[6]

On top of being more expensive for taxpayers, P3 school projects had significant negative consequences. Contractors cutting corners lead to leaky roofs and unusable sports fields. Community needs were not incorporated into school designs, and community groups were charged exorbitant fees to rent the facilities after hours. In Halifax, P3 school facilities were 10x the rate of public school facilities. School grass and walls were designated as private assets, and artworks could not be hanged on school walls without the approval of the owners. The owners would also demand a share of the proceeds from fundraising events on school property.[9]

Similar issues were found in Alberta P3 schools build in the 2000s, forcing the government to cancel the development of an additional 19 P3 schools in 2014.[9]

Royal Ottawa Hospital

The Royal Ottawa Hospital (re-opened 2006) and the Brampton Civic Hospital (opened 2007) are some of Canada's first public hospitals to be designed, built, financed, and maintained under a private-public partnership. The were built by a joint venture of Carillion and EllisDon.[30] The Brampton Civic Hospital is one of Canada's first public hospitals to be designed, built, financed, and maintained under a private-public partnership.[31] The Government of Ontario decided to built them and to fund them through P3s in November 2001. These projects were "highly politicized, offered poor value for money, and came in much later and at a higher price than originally promised".[6]^:134

Public service unions and public healthcare advocates contested these projects from the start, their fight culminating in a 2003 judgement that saw the courts decide to uphold the government's decision to fund these projects by a P3. This was followed by another 4-year legal to force the government to publish financial details of these P3 projects. The Supreme court ordered their release, but they came out heavily redacted.[6]

First of all, there is the argument that P3s bring new money for infrastructure. By granting a concession to the private investor in an infrastructure project, they bring the funding required to complete the project in the first place, and get a return on investment when the structure is operational. These returns on investments can either come from user fees or government payments.[33] Toll roads and bridges had been uncommon in Canada until the advent of P3s. Critics of P3s have also pointed out that, for projects where user fees cannot be charged, P3s do not alleviate financial pressures on governments.[34]

A second rationale is that P3s enable off balance sheet accounting of infrastructure. They allow governments to continue investing in infrastructure without adding to the public dept.[35] This practice has been seriously criticized by auditor generals as an accounting fallacy, as the costs of the projects must still be paid in full by the government, but with deferred payments. These schemes can misallocate the risk between partners or increase projects costs for governments in the long run.[36] In the second wave, P3s were all crafted on-balance-sheet.

A third argument is that P3s restructure the provision of public service. They decentralize infrastructure planning away from elected officials and toward independent agencies and consultants.[37] This has been touted as a negative by critics, who point out that overreliance on these consultants leads to a privatization of public policy development.[38] P3 advocates, however, see the introduction of market forces in infrastructure planning in a positive light, which bring about more innovation and better risk management.[3] Critics disagree that these goals are achieved, as there is little competition in the P3 marketplace.[39]

The final and nowadays most common rationale for P3s is that they provide better value for money than a public delivery method. "Value for money" does not mean that the project is of better quality or lower costs. According to its advocates, drivers of Value for money in P3s are "stimulating innovation during the project planning process, encouraging lifecycle asset management, and transferring construction and operations risk to the private sector".[3]

Of these, the transfer of risk is the most important driver of value-for-money in P3s. However, not all the risk of the project is transferred to the private sector; only the ones they can muster, as outlined in the contract. Auditor Generals of Quebec, Ontario and New Brunswick have publicly questioned P3 rationales based on a transfer of risk, the latter stating he was "unable to develop any substantive evidence supporting risk transfer decisions".[1]^{:chapter 4} Furthermore, many PPP concessions proved to be unstable and required to be renegotiated that favour the contractor.[40]