P3 versus a Partnership with Mission

The $$$ Numbers

Summary:

Going with a Partnership with Mission would save the taxpayers just over $96 million dollars ($96,366,367).

The best plan the mayor, council and staff have stated they could devise will cost the taxpayers $96 million more than abandoning the P3 approach to continue in Partnership with Mission would have.

Given that Mission was to pay 33% and that the federal grant represents a recovery of only 22.5% one would think that one of: two retired school principals, a current school principal, a retired banker, a real estate agent would have recognized that 33% is higher than 22.5%.

There are no engineering plans drawn, no company (or companies) chosen to design and build the P3 project that mayor, council and staff are obsessed with using to the point they are using fear, intimidation, threats, statements that are so inaccurate that they fall apart with the most basic examination with logic, irrational statements and claims – not to forget $200,000 taxpayer dollars – to scare Abbotsford voters into approving using a P3 as they want – even though the P3 will be significantly more costly to use while delivering an inferior product compared to other methods available to accomplish the water system upgrade.

The one area in which the P3 clearly stands above other choices is that it requires no real effort or work of mayor, council and staff other than paying whatever it costs (with no regard to what it should cost) and raising the tax and water rates to whatever stratospheric levels will be required to cover the bloated final cost.

If voters elect new councillors who are competent and looking to the best interests of voters, the water system infrastructure can be upgraded at least as quickly, if not quicker, using a more cost effective and efficient approach. Numerous studies have shown that a well managed public project achieves significant cost savings over a P3.

 

P3:

• Project type: P3 – design build
• The cost:        $291 million
• Contribution: Government Grant¹ $65.7 million 23% (65.7/291)

Partnership with Mission:

• Project Type: Public managed – Project designed, then tendered to construct.²
• The cost:        $291 million³
• Contribution: Missions share of the cost 33% (1/3)

 

Cost to Taxpayers

 

Partnership with Mission:

Total cost – Mission share = Abbotsford’s Taxpayers share

$291,000,000 – $97,000,000 (291,000,000/3) = $194,000,000

 

P3:

Total Cost – Federal Grant + (-) I = interest costs (interest savings) + (-) A additional costs (savings) = Cost to Abbotsford Taxpayers

$291,000,000 – $65,700,000 + $35,066,367 + $30,000,000 = $290.366,367

 

Cost (Savings) to Abbotsford Taxpayers of using P3 instead of Mission Partnership  = Cost of P3 – Cost of Mission Partnership

$290,366,367 – 194,000,000 = $96,366,367

I – Interest cost:

Payment: Monthly; Amortization Period: 25 years; Interest Rate 7%

Principal borrowed: $31,300,000.00            Regular Payment amount: $221,221.89

Total Repaid: $66,366,567.00                             Total Interest Paid: $35,066,367.00

Total interest paid as a percentage of Principal: 112.034%

 

A – Additional Costs:

P X C = 30 X $1,000,000 = 30,000,000

P :       The project period of operation is 30 years

C:        The consultant’s report commissioned by the City noted that it would cost an additional $1,000,000 per year to operate the project as a P3 than it  would if the project were a public project.

 

It is Important to Note: Michael Maschek, PhD, from the University of the Fraser Valley’s department of economics stated in the local newspaper interview asking him about using a P3 for the water upgrade:

“Maschek believes the contract is the key to any successful P3 plan. “If you could write the perfect contract, there would be no problem.”But it is unlikely that every possible situation can be accounted for in the agreement and because of the lengthy term, the contract  is usually reworked.“Renegotiation is highly likely for two highly related reasons: One, the long duration of the contract period, and two, the fact that PPPs are prone to contractual incompleteness. The contract itself is very difficult to negotiate; economists refer to this as a high transaction cost,” he explained.”

Translated from economic speak Dr Maschek stated that it is highly likely any P3 contract will need to be renegotiated. This renegotiation results from the nature of P3s where the original contract is based upon words which results in renegotiation when the drawings/design/drafting plans emerge and what it is that will actually be built becomes tangible plans rather than imprecise words.

Which means the price is highly probable to rise when the ambiguity of words as the defining element are replaced with the precision of engineering plans.

If the cost rises above $291 million under a P3 there will be no additional federal funds forthcoming. Under a Partnership with Mission, if the costs rise Mission will cover 33% of the cost increases.

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¹ On October 25, 2011 Ed Fast was quoted in the local papers as saying the Abbotsford would qualify for up to $65.7 million dollars in federal P3 funding.

² From ‘Abbotsford’s Water Infrastructure Upgrade’ :  an examination of the type of project to use to upgrading the water infrastructure.

‘That we do not use current councils preferred method of design/build. Under this system the builder maximizes their profit by delivering the least project they can at the lowest cost they can at the highest price they can.

Water is far too important a resource to go with a design build. We need to be able to ensure the upgraded infrastructure meets not just current but future needs, is robust enough for the years of service it will need to deliver and delivers the highest quality water.

To do that council and the public need to have an opportunity and sufficient time to study the plans to discover and correct any errors and omissions.

It has been my experience that the skills, knowledge and insights a group of people such as the citizens of Abbotsford and Mission possess, can be surprising and serve to ensure nothing gets missed in the plans for the water infrastructure upgrade. Letting people share their thoughts and ideas can lead to valuable insights. At least for a council willing to actually listen with an open mind, accept and act on good ideas.

Going with this approach requires far more of council than simply saying build me one of these. But if the mayor and council are not willing to put in the time and effort required to ensure the needs and best interests of taxpayers are met – exactly why are they in or running for office?”

³  Reality does not care what you want to be fact, reality does not care what you believe to be fact, Reality simply is what IS fact. Tao of James

In their attempts to scare, intimidate, mislead voters into approving a P3 plan, mayor, council and staff have all inaccurately, falsely, claimed that using another approach than a P3 would be more expensive.

The use of P3s is part of  the ideology the federal Conservatives operate on in spite of the considerable differences between that ideology and the real world.  In order to serve their ideology and bring about the use of P3s the federal Conservatives had to make infrastructure grants available exclusively through the use of P3s.

Without a financial incentive large enough to offset the additional costs that arise from the very nature of P3s no competent municipal management would choose to use a P3. At a grant level covering 25% of the cost of the P3 the project will save a small amount, break even or cost a small amount more. As the percentage the federal grant contributes to the project falls below 25%, the extra costs the P3 inflicts on those who are mathematically and financially challenged to the point they do not comprehend that the P3 is, rather than reducing the cost, increasing the cost to those who must pay the bill.