Public-Private Partnerships

Public-private partnerships were given a bad name when they were used for schools in the nineties. That happened because accounting treatments often affect the way governments make decisions.

A different example arose late last year as a result of needed reforms that had been made to the Public Service Pension Plan. The plan had a substantial funding shortfall which was being charged over several years. Because the reforms created a new start the accounting rules required all of the remaining balance of the shortfall to be reflected in last year’s books.

The change was good for taxpayers because it greatly reduced vulnerability to future market swings. But the accounting rules made it look like something bad was happening. That was easier for the Liberals because the needed reform had been done by the NDP.

The Liberals should have made similar reforms to the Teachers’ Pension Plan when the opportunity arose last year. The prospect of a similar accounting result may have contributed to their inadequate response.

Accounting treatments played a heavy role in determining how our schools would be financed. The Liberal government of the day wanted to build a total of 39 schools.  Instead of borrowing they hit upon the idea of having private sector operators own the schools and lease them back. In some cases the schools had already been built by the government.

Accountants don’t like half measures. If a lease obligation is really much the same as a loan it is deemed to be a “capital lease” and all of it is included in the recorded amount of provincial debt. If there is enough risk to the lessor the relationship is called an “operating lease” and none of it is counted in provincial debt.

In 1998 the government went back and forth with the Auditor General to find the minimum amount of risk transfer necessary to get the desired accounting treatment.

Agencies which rate the province’s credit worthiness are not fooled by this transparent chicanery. In the end the profession’s accounting standards were adjusted to insist that any lease on a school be treated as debt, thereby defeating the whole point of the exercise.

Using leases instead of borrowing also added to the total cost of having the schools. That’s what happens when you shop for accounting treatments rather than shopping for best prices.

The leases are for twenty years and the government has to decide whether to extend the leases, purchase the schools, or vacate them. This timetable for decisions, starting in 2016, is being dictated not by consideration of community needs but rather by the terms of the leases.

Many of these schools are in areas where fewer schools will be required. Government would much rather confront those choices shortly after the next election, not shortly before. The Department of Education and Early Childhood Development has been remarkably reluctant to share information about the leases, suggesting that there are other problems buried in the terms.

It can be safely concluded that this example of public-private partnerships (P3) was not a success, and it gave the whole concept a bad name.

At about the same time the schools were being launched a much more successful P3 project was begun. The twinning of highway 104 was completed by the contractor for an attractive fixed price and in record time. Federal and provincial governments together paid for about half the cost with the remainder being funded by debt.

Revenue from tolls is used for operations and maintenance with the balance being applied against the debt, which is scheduled to be retired no later than 2026. The road is much safer.

Likewise the government advises that the contract for the Convention Centre portion of the Nova Centre is being done at a fixed price with the debt portion of the financing being amortized by HRM and the province over 25 years.

The government is facing a decision about double tracking more of our 100 series highways. As recently as Oct 30th another fatality occurred on the 103 that likely would have been avoided if the highway was divided.

The federal government is likely to be a helpful partner to the province as part of its infrastructure commitment but there is a great deal of highway that should be twinned. A P3 arrangement including tolls, similar to that used for the Highway 104, would double the amount of road that could be twinned with the available government money.

Some stretches of 100 series road will be too short to merit tolling, and others will have in sufficient traffic to justify twinning. For the rest a P3 contract with tolls is the route we should take.


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