P3 bridge costs ramp up

By Nick Rockel

The Golden Ears Bridge Project isn’t a B.C.-government project, but it sure sounds like one. Here are three eerie similarities. First, the proposed six-lane toll bridge in the Fraser Valley-scheduled to open in 2009 -is a public-private partnership, or P3. Second, like the province’s Sea-to-Sky Highway Improvement Project, it will be privately designed, built, financed, and operated. Third, taxpayers will purchase the bridge through a 30-odd-year lease with the private partner.

None of this is a coincidence. Project director Fred Cummings told the Georgia Straight that TransLink has been using the consulting services of Partnerships BC, a Crown corporation that brokers provincial P3 deals. Although it’s a TransLink project, the Golden Ears Bridge appears on Partnerships BC’s Web site along with the regional transportation authority’s other major P3, the Canada Line (formerly known as the Richmond/Airport/Vancouver Rapid Transit project, or RAV line).

The Golden Ears Bridge is also 30 percent over its original budget-and the deal isn’t signed yet. The TransLink Web site still gives $600 million as the estimated cost of the bridge, but TransLink’s board of directors has known since September that the final price tag will be about $800 million.

The bridge will cross the Fraser River at 200th Street in Maple Ridge and Langley Township. TransLink has signed an agreement with those two municipalities-plus the City of Surrey and the District of Pitt Meadows-and is assuming the entire revenue risk by collecting and enforcing the tolls, which it will use to pay back its private partner. When the bridge opens, a car with an electronic tolling device will pay about $2.85 to cross. TransLink will set toll prices.

The 12 Lower Mainland politicians on the TransLink board see their one-year appointments expire in January. At its final meeting on December 7, the current board awarded the Golden Ears P3 contract to Golden Crossing Group. Another private consortium, Fraser Valley Connector Group, was the lone competing bidder.

The provincial government gives two main justifications for design/build/finance/operate P3s: they transfer significant risk to the private sector, and they provide better “value for money” than traditional public projects. However, the Straight has published several stories showing there is almost no evidence for either claim.

Cummings said a DBFO P3 is the right choice for TransLink and the Greater Vancouver Regional District. “I couldn’t stand before the board and recommend it if it wasn’t providing good value to the region,” he explained.

Barry O’Neill, B.C. president of the Canadian Union of Public Employees, claimed that P3s are a big gamble for taxpayers. “It’s just so risky, and I just don’t for the life of me understand why people aren’t up in arms,” he told the Straight.

In 2002, CUPE released a report describing how a P3 plan to redevelop Maple Ridge’s downtown core was ruled illegal. CUPE hired accountants MacDonald Ng & Co. to examine the business case commissioned by Maple Ridge council. It turned out that going P3 was at least $20 million more expensive than a publicly financed deal: $77 million versus $56 million.

O’Neill also thinks the new toll bridge will clash with the GVRD’s Livable Region Strategic Plan by putting more vehicles on the road. When it opens, the Golden Ears Bridge will not have any high-occupancy-vehicle lanes. “If they’re not going to have HOV lanes on the bridge, they’re looking for more traffic, not less,” O’Neill said. He also speculated that if the Port Mann Bridge isn’t tolled, drivers will simply use it instead to escape paying tolls on Golden Ears.

The GVRD’s Transport 2021 plan recommends an HOV corridor at or near any new Fraser River crossing between Maple Ridge and Surrey. In July, the TransLink board approved a tolling bylaw for the Golden Ears Bridge. The bylaw states that TransLink will consider HOV lanes when congestion reaches a certain level. Another condition is that HOV lanes won’t adversely affect TransLink’s financial obligations to the bridge.

Cummings said it would be “human nature” for drivers to try avoiding the Golden Ears toll. However, he added, TransLink has analyzed the impact of transportation projects planned for the region in the province’s Gateway Program. These include twinning the Port Mann Bridge, expanding Highway 1, and improving the Pitt River Bridge. If all of them were free-access, Cummings said, there would be a “relatively small” 10- to 15-percent drop in toll revenue on the Golden Ears Bridge.

HOW DID THE Golden Ears Bridge become a P3? The TransLink board approved it on the advice of an October 2004 report from Cummings. The report described how staff had measured the DBFO P3 option against a hypothetical publicly bankrolled counterpart-a public-sector comparator in P3-speak. Cummings also presented a third “hybrid” option. After the bridge had been operating for two years, the province’s Municipal Finance Authority-which can borrow money at a cheaper rate than the private sector-would refinance it.

TransLink staff admitted that based on their financial analysis alone, the hybrid option was best. But because of several “qualitative” factors, they recommended wholesale private financing. According to the report, this model would commit the private partner and transfer complete financing risk. It was also easier, because it didn’t require borrowing approval from the GVRD or the Municipal Finance Authority.

Cummings told the Straight that TransLink went through “a very rigorous exercise” that showed the DBFO model transferred significant risks to the private partner. But risk transfer in transportation P3s can come at a steep price, according to a 2004 study from Britain by the Association of Chartered Certified Accountants.

In “Evaluating the Operation of PFI in Roads and Hospitals”, Prof. Pam Edwards and her three colleagues at the Manchester Business School looked at the first eight DBFO P3 roads built under the U.K.’s Private Finance Initiative. They found that the British Highways Agency paid ?618 million for the eight projects rather than the initial estimated capital cost of ?590 million. Over the life of the 30-year contracts, taxpayers will shell out ?6 billion for risk transfer, operation, and maintenance.

For each of its provincial P3s, Partnerships BC publishes a report claiming that the project offers good value for money. But it calculates this value using methods that Allyson Pollock, a University College London public-health professor, described as “economic sorcery” in a recent interview with the Straight.

Take the public-sector comparator. To show that the P3 option is cheaper, Partnerships BC applies a “discount rate” to capture the value of future lease payments in today’s dollars. Partnerships’ discount rate is sometimes as high as eight percent. The U.K. government, meanwhile, has dropped its discount rate to 3.5 percent-partly in response to criticism that its Private Finance Initiative is rigged in favour of P3s.

In several studies of P3 hospitals for the conservative British Medical Journal, Pollock has shown that P3s are sometimes 40 percent more expensive than their publicly financed equivalents. The U.K. government has never disproved Pollock’s findings. In 2001, a House of Commons health committee declared her research group’s P3 work unsound. Pollock and her colleagues later demanded a retraction, noting that the committee attributed quotes from interview subjects to the researchers and gave no evidence for its claims.

Cummings said TransLink used a discount rate of six percent for the Golden Ears Bridge. Like Partnerships BC, TransLink won’t publish a value-for-money report until it has finished negotiations with the private partner.

why has the cost of the Golden Ears Bridge jumped from $600 million to $800 million? It’s partly the result of a last-minute decision to reduce the burden on the private partner. In a September 12 memo, Cummings and Robin Stringer, TransLink’s director of public finance, recommended that TransLink directly finance up to $166 million in new costs.

Of that, $56 million would go toward acquiring the land at the approaches to the bridge and cover higher-than-expected development expenses and other costs. But the bulk of the increase was due to a proposed reduction in the licensing fee-payable to TransLink by the private partner-from $150 million to $50 million. TransLink would eat the difference and pay another $10 million in interest. Stringer and Cummings said there was no need to increase TransLink’s current credit limit. One source of wriggle room: $116 million expected from Infrastructure Canada’s New Deal for Cities and Communities. Derived from federal gas-tax revenues, the New Deal money is earmarked for environmentally friendly municipal infrastructure such as public transit and bike lanes.

At its September 21 meeting, the TransLink board approved the recommendation. A press release billed the restructuring as a cost reduction, claiming it would save TransLink between $35 million and $45 million in financing charges (in 2008 dollars) over the life of the contract.

Vancouver city councillor David Cadman told the Straight why he voted no. “I said, ‘Look, we’re spending this $166 million without any sort of analysis about what else we could do with this-namely to advance the purchase of buses, which are in desperate need for the [transit] system right now.’?”

Cadman added that TransLink is about 500 vehicles behind its 1999 plan to buy new buses. “Instead, the board voted to spend the $166 million of this newfound…borrowing capacity by virtue of this [New Deal] revenue to pay for the land acquisitions and take that onus off of the private-sector proponent,” he said.

Cummings told the Straight that TransLink had “underestimated the reaction from the private sector” to the size of the licensing fee and its associated risks. Also, if the private partner had to boost its equity upfront, it would seek a bigger return on its investment. “By reducing it [the fee], we actually reduce their potential return,” Cummings said.

Did the two shortlisted project proponents threaten to walk away from the deal? “No,” Cummings replied. “They just said it wasn’t providing good value to TransLink, and we agreed.”

New Maple Ridge Mayor Gordon Robson has misgivings about P3s. In 2002, Robson won a lawsuit against the District of Maple Ridge in the B.C. Court of Appeal, which ruled that the P3 agreements the district had signed for the redevelopment of its downtown core were illegal.

Contacted before the November civic election, Robson admitted he was unfamiliar with the Golden Ears Bridge deal. However, he said the fact that it’s a P3 makes him nervous. “If it’s just a way to build more debt without making the public conscious or aware or getting permission, that’s not a good thing,” he told the Straight.

One argument in favour of P3s is that they transfer risk by making the private partner liable for cost overruns. Robson said he doubted any private company would sign a P3 contract if it knew there was a chance it could lose money. “They would either stop construction or they’d renegotiate the deal,” claimed Robson, who worked with Bill Bennett’s Socred administration during the 1980s. “Every time I’ve watched a government get in business, it’s been a disaster.”

Pitt Meadows Mayor Don Mac?Lean said he has no problem with the P3 aspect of the Golden Ears Bridge. As a former TransLink director, Mac?Lean voted against the Canada Line P3 because he wasn’t convinced there would be enough riders to pay for it. But he said the bridge will have more than enough users, and that one of the benefits of P3s is cost “certainty”.

MacLean also told the Straight that publicly financed infrastructure sometimes comes in grossly over budget. He gave the example of the “Big Dig” in Boston, a highway-and-tunnel project that opened in 2003 after its costs had ballooned to US$16.4 billion from US$2.6 billion. “Once the bridge is built, assuming it comes in in that $800-million vicinity and the debt can be structured properly, I don’t have a concern with it,” MacLean said.

IN LATE OCTOBER, during several provincial budget-estimate meetings, NDP transportation critic David Chudnovsky debated B.C. Transportation Minister Kevin Falcon about the merits of P3s. According to Hansard, Falcon told Chudnovsky that his ministry had not decided if the Port Mann Bridge and Highway 1 expansions will be P3s. When Chudnovsky said it looked as if the B.C. Liberals’ enthusiasm for the deals was cooling, Falcon shot back that he was still “red-hot” on P3s.

At a separate meeting, Chudnovsky got Falcon to concede it was “difficult” for the B.C. government to assign a dollar value to P3 risk transfer. “It seems to me that the people of British Columbia have a right to know what we’re paying for this commodity. The transfer of risk is a commodity which is purchased,” Chudnovsky told the Straight.

Despite new projects like the Golden Ears Bridge, the Vancouver-Kensington MLA claimed that public scrutiny is making Victoria tone down its P3 rhetoric. In September, Chudnovsky attended the annual Union of B.C. Municipalities conference. One event was a panel discussion with Falcon and five other cabinet ministers who deal with economic development. According to Chudnovsky, nobody used the term P3. “Now think about that and compare it to what we were hearing from this government only a year or two ago,” he said. “Everything was ‘P3, P3, P3.’?”

At TransLink, it’s still an expression with currency-and lots of it.

Advertisements
Explore posts in the same categories: News

%d bloggers like this: