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In the news
Down the Drain Goes a P3
Why
Whistler flushed a sewage public-private partnership.
Guy
Warrington
June
23, 2006
TheTyee.ca
Whistler is a town full of wealthy citizens. You
wouldn't usually expect them to oppose the private sector. But on Monday,
Whistler dealt a decisive blow to the public-private partnership (P3) model in
B.C.
In B.C., as well as other provinces, P3s are
increasingly being used as a tool to meet municipal infrastructure needs, and
Partnerships B.C. has stated that P3s are expected to meet 10 to 20 per cent of
B.C.'s capital infrastructure needs.
Which means that what can seem at first glance
like a narrow discussion about how to treat sewage in a world-class resort
community is actually a debate with much broader significance.
No P3 in B.C. may have received more community
scrutiny and input. Indeed, the story of how this particular project was
rejected, re-sold, then rejected again, says much about how hard people are
willing to fight on both sides on the province-wide issue of P3s.
Latest chapter
The most recent round of the debate that's been
running since 2001 happened on Monday night when Whistler council met to decide
whether to take the proposed P3 to a referendum or cancel the project entirely.
The supporters and opponents raised now-familiar
P3 issues. Proponents said a P3 would save considerable money (15 per cent -- or
about $11 to 16 million -- over the term of the 12-year contract), increase
environmental accountability and speed up the construction process. Opponents of
the project, spearheaded by the Whistler Water Watch, were concerned about cost
overruns, lack of control in the event of a spill, and risk to the environment.
As part of the "alternative approval process," which just concluded on June 12,
Whistler Water Watch gathered over 1,800 signatures.
On Monday night, Whistler Water Watch presented
the ballots to council. The mayor, Ken Malamed, said was surprised at the
number, and suggested council extend the vote by two weeks to give the P3
supporters more time to make their case. In the end, however, in a 4-3 decision,
the council voted against the extension and also voted against continuing to a
referendum. This effectively killed the P3 project.
But while there's dispute about the method, no
one in the community disputes that Whistler needs a new sewage treatment plant.
Even though in September 2004, the Sierra Legal Defense Fund awarded Whistler
second place amongst 22 cities across Canada for its tertiary sewage treatment
system -- the highest level possible -- and while the publicly owned and
operated treatment plant boasts a highly efficient operation, with an operating
cost per unit treated that is less than the average of 17 other Canadian waste
water treatment plants, it's an aging facility. With complaints about odour, 150
discharges into the Cheakamus River over the past eight years, and a need to
prepare for the influx of people during the Olympics, an upgrade is in order. So
while few residents would argue that the treatment plant is in need of an
upgrade, the privatization plan has become a point of contention.
In fact, the community didn't begin with the
privatization option. At the beginning of the debate about how to proceed, in
2001, Mayor Melamed and council rejected a P3 solution entirely. But on May 30,
2002, the B.C. Liberal government announced the creation of a new policy -- the
Capital Asset Management Framework -- which requires that public sector agencies
investigate alternatives for capital development, including the P3 option.
So after rejecting the P3 option, the province
asked Whistler to revisit its decision. And on January 10, 2005, in a 5-2
decision, Whistler announced its support of the P3 option to "design, build and
operate" the upgrade to the existing wastewater treatment plant. If the project
were to go ahead, design, construction and daily operation would be handed over
to a private company.
Risky business
Why did the municipality change its mind in
favour of the P3? One of the driving considerations, says Melamed, was the
approach of the Olympics. "Not only [is] a certain percentage of the risk
transferred to the private sector, but also they were suggesting an accelerated
construction schedule." For the mayor, the potential cost savings were also an
important factor; the contract was to be for a fixed price, with any cost
overruns to be picked up by the company. The mayor has also said that the
environmental compliance potential of the P3 option was better than that of the
public sector.
Melamed says he had reservations about the P3,
but going through the process made him more confident that P3s could deliver on
their promises. For him, it came down to having faith in the consultants and
professionals, as well as listening to the community's concerns. "I have heard
both sides of the argument," said the mayor, "and...I have said to the community
that I am prepared to accept [that] in both cases there are risks. I am prepared
to accept the risks of the P3 model."
From the time council voted in favour, two main
issues came up: the privatization of drinking water and the protection of public
sector employees. In response, council passed a resolution ensuring drinking
water would not be privatized, and created a bridging agreement to protect plant
workers for the first two years. But despite these assurances, the community of
Whistler remained divided on the issue and the P3 option started to meet with
increasingly significant opposition.
Boil water?
For Pina Belperio, a co-founder of Whistler Water
Watch who helped to lead the fight against the P3, none of the mayor's or
council's assurances held any water. Belperio says that Whistler Water Watch had
no objection to a private company coming in to build the plant; what they
objected to is the "design, build, operate" approach -- or privatization -- of a
public facility. Belperio says there were issues of economics, water security,
environment, accountability and transparency.
"We have seen in other communities that where a
company comes in, prices start going up and services start going down," she
argues, and points to what happened in places like Africa and South America.
This past January, in the city of Cordoba, Argentina (which handed over the
management of its water to the French company Suez in 1997), the residents faced
a 500 per cent tariff increase on their water bills.
Closer to home, privatization has also led to
problems. In 2005, the Indianapolis Star reported problems after Veolia Water --
the largest water company in the world -- was hired to run the city's water
utility. "In January," says the article, "thousands of gallons of untreated
water slipped into the system and prompted a boil water advisory that shut down
some companies and sent home about 40,000 public school children." The paper
further reported that supply shortages led Veolia to ask customers to limit
their water usage during peak hours. Additionally, the U.S. Attorney's Office
issued subpoenas in an investigation regarding allegations of falsified water
quality reports.
In 2000, the Delaware Department of Natural
Resources and Environmental Control issued a statement announcing that U.S.
Filter (now Veolia Water North America), was assessed a $91,000 penalty for
pollution violations. The press release stated that, "The penalty action we are
taking today is the result of an ongoing series of violations that involved
exceedances with respect to the facility's discharge standards, as well as a
one-time 13-million gallon discharge from the pump station that in our opinion
easily could have been prevented."
Shipping sewage to Squamish?
Belpario was also concerned about environmental
issues. On March 2, 2004, Partnerships B.C. (PBC) submitted a report to Whistler
entitled "Partnerships BC Business Case: Whistler Water Treatment Plant Upgrade
Project, Final Draft." According to Belperio, this report was never made public.
Dayton & Knight Ltd., the engineering firm that has been advising Whistler on
water and waste water issues for much of the life of the town, reviewed the
proposal and said the Partnerships B.C. proposal is based on "unrealistic and
erroneous assumptions."
The Dayton & Knight report (released under the
Freedom of Information Act) revealed that the P3 plan included trucking
untreated sewage to Squamish in order to reduce costs. But "trucking of
untreated solids to a composting plant in Squamish," says the Dayton & Knight
report, "is a high risk solution from a financial, environmental and political
perspective."
In addition, the Dayton & Knight report suggests
that Partnerships B.C. had underestimated the cost of trucking the waste to
Squamish by a significant margin. For some, this option raises serious questions
with respect to the commitment of both the province and Partnerships B.C. to the
environment -- particularly as Whistler is committed to the Natural Step.
Furthermore, the proposal downplayed the legal liability and risk to the
environment in the case of a spill.
Some people had concerns that trucking the waste
would contribute to global warming. It also raises questions about Partnership
B.C.'s purported desire to save taxpayers' money, in that it also exposes
taxpayers to the possibility of an increased project cost due to the upward
trend in fuel prices.
The Dayton & Knight report reveals that many key
aspects of the sewage treatment plant are omitted, "specifically or by
implication of cost reduction," from the PBC "shadow bid," including odour
upgrades at WBS and dewatering buildings, and overall odour control for
digesters. Also, the PBC makes no mention of the costs associated with covering
the bio-filter with a roof that can support snow loads. Belpario says she was
concerned the cost of the project would actually be much higher, since many key
aspects of the sewage treatment plant were deleted in order to improve the case
for Partnerships B.C.'s arguments.
Belperio says, "The other concern we have is that
wastewater is a way in for...drinking water [privatization] and we don't want to
give that over." While Belperio notes the council's resolution that drinking
water will not be privatized, she says the next municipal government is free to
change this.
The conclusion of Dayton & Knight's report is
that, "Support for the DBO can be made only for political or self-serving
reasons. Its selection over the current traditional approach lacks or excludes
common sense, ethics, imagination, history and reason."
False promises?
Proponents of P3s argue that they allow cash-poor
communities and governments to complete projects faster, defer payments and
transfer risk from the public sector to the private sector. Those who support
P3s further suggest that the private sector brings innovation and efficiency,
which in turn can reduce construction costs.
Stuart Murray, the public interest researcher at
the Canadian Centre for Policy Alternatives, has completed a major study on P3s.
According to Murray, the promise of risk transfer and savings produced through
innovation and efficiency is overstated. While Murray is quick to point out that
he does not believe that governments are deliberately out to increase cost, the
fact remains that P3s are considerably more expensive.
While proponents of the P3 model often argue that
innovation and efficiency will save the public money, Murray states that this
is, in fact, a false premise. Unlike the public sector capital projects, P3s
have three barriers that they must overcome: first, there are more expensive
procurement costs, which on a large project can be several millions of dollars;
second, there is the issue of profit margins, from which investors expect at
least a 10 per cent return. And third, interest rates can run much higher than
when borrowing from government. In the case of projects that are financed by the
business or consortium doing the project, interest rates run much higher than
when borrowing from government -- with private sector borrowing rates being a
minimum of one per cent more. While one per cent may not seem like much, it can
add millions of dollars to a project over the life of the contract.
It takes a village...of lawyers
Moreover, says Murray, once the P3 is up and
running, it is still not able to operate more cheaply than the public sector.
Often, says Murray, the most expensive line items in the procurement process for
governments and the contractor are the hiring of lawyers, accountants and
consulting firms to provide advice as to how to design the bids and structure
the contracts.
Murray says that, "These cost barriers are high
enough and the returns on private sector innovation are low enough that the
private sector is not able to overcome the cost barrier." He also says that with
respect to risk transfer, such as fixed-price contracts, corporations carefully
calculate and weigh the potential cost to the company and invariably pass this
along in the form of an increased cost to the government. "Again," says Murray,
"the private sector is carefully calculating what the risks are...and how much
additional money they have to charge the government." In essence then,
governments are able give the illusion of meeting fixed price contracts while
corporations are given pre-packaged profits.
The issue of profitability should not be
overestimated. In an August 2002 report by the United States General Accounting
Office (now the Government Accountability Office), on the issue of privatization
of water infrastructure, companies cited profit potential as a key issue when
considering whether to take over a public utility. Respondent companies cited
several areas that they look at when assessing profit potential: potential to
improve efficiency, proximity to other utilities, potential of companies for
system growth, and the terms of the proposed contract.
Interestingly, the report also cites two examples
of "deal breakers" with respect to profitability. One is restrictive contract
provisions with regard to maintenance, the other is the desire for unlimited
liability guarantees being placed on the companies by the community.
So are there any successful P3s? Many P3
advocates point to the Moncton water treatment plant as a success. In a January
2006 letter from the Moncton director of special projects to the municipality of
Whistler, Ronald H. LeBlanc outlined the supposed benefits. In 1998, Violia and
Moncton entered into a 20-year agreement to design, build, finance, and operate
its water treatment facility. The arrangement was completed on the basis that
the community would save $9 million in capital costs and $12 million in
operation and management costs over the 20-year contract. According to CBC, the
city has been happy with the quality of the water. The union in Moncton,
however, has suggested that the plant could have been built for $14 million less
if the project had been done in the traditional manner.
One of the key problems in evaluating the success
of P3s is that the proponents have virtually no projects that they can point to
which have met the stated goals of ultimately saving money and being more
efficient. To counter this, proponents point to projects that are under way or
being proposed. As an example, Murray pointed to the Canadian Council for
Public-Private Partnerships, which recently gave the Abbotsford Hospital an
award for project of the year. The important thing to note, says Murray, is that
the project is not yet built and that there are no audited statements looking
backwards to see if the project was indeed cost effective.
Problems and profits
Given these issues, many people are wondering why
the provincial government is pursuing the privatization course. Some experts
suggest it's because the current B.C. government is aggressively
neo-conservative and pro-business. They think that the way that government can
be made more effective is to hand over as many aspects of it as possible to the
private sector. Blair Redlin, a researcher at CUPE, suggests that the long-term
contracts on which most P3s are based, coupled with increased costs, effectively
"ties the hands of government."
As many people have pointed out, the goals of
private contractors and public agencies are often very different. Perhaps this
is why Adam Smith, arguably the grandfather of free market economics, suggested
that one of the key duties of government is "erecting and maintaining certain
public works and certain public institutions which it can never be for the
interest of any individual, or small number of individuals, to erect and
maintain; because the profit could never repay the expense to any individual or
small number of individuals, though it may frequently do much more than repay it
to a great society."
For Pina Belperio and Whistler Water Watch,
problems with P3s are obvious: "I don't see how they can save money when
ultimately they have to make a profit."
Guy Warrington is a freelance photojournalist
and reporter. He lives and works in Vancouver.
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