Public-Private Partnerships

Posted November 6, 2015

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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Most Recent Comments

  • It’s perhaps simpler than all this tax gobbly-gook. Our governments have gotten too large. With all the largemess (not a typo) has come intrigue-filled complexity, including exactly who is to pay for all this government (taxationified accounting??) including schools and roads, both necessities – even as we have attempted to ‘operate’ them via what should be an efficient arrangement, rather than the ole model. Should we go the whole way; by privatizing certain schools (tolls?).

    Gordon a.... | November 8, 2015

  • The referred to accounting rules are intended to insure that the full debt obligations of the government / taxpayers are fully disclosed. They are there to protect us and inform us. The rules are not the villains. The villains are those who spend significant time , as they did in 1998, trying to construct a deal that avoids the intent of the rules. The intent of their efforts was to avoid disclosing to taxpayers that we in fact “owe” money to those we “lease” property, schools, highways from. Who cares if we call it debt or a lease we, the taxpayers are on the hook!!!!!!!!!!!!!
    Given all the bad things associated with leases, that are reflected in the article, I am surprised with the conclusion that a P3 contract is the way to go in order to construct highways. P3 contracts are bound to cost more. There is only one issue, in my mind, how do we pay— tolls , income taxes, or highway/ gas tax.
    Comment

    Barry H | November 8, 2015

  • Schools: The Strait Regional School board did a review last year of it’s schools,including several which were these new P3 schools. Most if not all are now way below their capacity as enrolment has benefiting about 10% a year . Think by 2017 most will below the 50% capacity level . Now, remember , that vacated schools get turned over to municipalities . Also that vacant space in schools is not accounted for or is offered as rental space to the market . Also some of the P3 have space and contents that are part of a deal to provide community facilities as is the Strathesbay Concert Hall in Mabou . This is a looming mess as they need the schools but only 50% of the space . In the meantime, they house government staff in other locations just down the road and pay more rent .
    The finances of this province are far too secret and not transparent . Look at the Nova Star accounting and financial data that was made public . Look at Tourism and the NSTA ; a crown corporation with a website that has no financial data of their budget ,revenues and expenses , let alone what they /tourism produces as tax revenues .
    Even worse , it appears that Ministers /Crown Corporations like NSTA can make decisions affecting millions or even billions of dollars , or hundreds of business owners ,and do not even have to talk to the Minister of Finance about what they are doing . And then they can also walk away from what the Auditor General recommends and never have to tell anyone . Who is managing this place anyway ??

    peter s | November 6, 2015

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