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Privatized Sea-to-Sky Under Attack

Instead of a tunnel, taxpayers will get an expensive, highly risky 'P3' upgrade, warns West Vancouver's mayor and a union president.

By Claudia Cornwall 6 Aug 2004 | TheTyee.ca
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When Kevin Falcon, the Minister of Transportation, announced that the Sea to Sky Highway would be upgraded with a 4-lane overland route running across the Eagle Ridge Bluffs it drew an outcry from West Vancouver residents who argued a tunnel would preserve nature. But another line of attack against the highway upgrade is gaining ground.

The plan to build the highway as a public private partnership creates murky lines of accountability and may needlessly waste taxpapayers' money, argue people at both ends of the political spectrum, from BC CUPE president Barry O'Neill to West Vancouver mayor Ron Wood.

O'Neill says, "I'm not sure how they sell these public private partnerships to the taxpayers because they're not a good deal.  They sound pretty sexy--business and the community getting together for the betterment of British Columbia.  But this is an absolute and total misconception.  It's an ideology.  It has nothing to do with the best evidence of the day."

On July 12, Mayor Wood took the step of sending a letter to the Auditor General of B.C., Wayne Strelioff.  He asked him to look at the business case for the project and report on it.  In the conclusion of his letter, Wood invoked the dreaded F3, the Fast Ferry Fiasco.  He mentioned a 1999-2000 report the previous Auditor General, George Morfitt, wrote about the fast ferry project.  In it, Morfitt set out principles of governance to prevent another similar financial meltdown. Wood thinks that the province is not following these principles.

Three objections to P3

Wood has three main objections to the P3 aspect of the Sea to Sky upgrade.  The first is the high cost of borrowing money. The Ministry is planning $600 million worth of improvements on the highway. Two/thirds of the upgrade, including the by-pass, is supposed to be provided by a private partner under a design, build, finance and operate process.  (DBFO).  Wood told Tyee he became aware of how a P3 could affect costs during the GVRD discussions of RAV, another P3 project. His suspicions were aroused when the GVRD Board asked Frank Blasetti, the Assistant Deputy Minister of Transportation, about increased financing costs.  "He wouldn't answer.  He said it was proprietary information, a proprietary business plan.  We weren't entitled to see it.  He didn't deny it.  He just wouldn't answer."

Ron Wood points out in his letter to the Auditor, that when a private corporation raises the money for the project it will have pay 1 to 3 percent more than the government does.  Wood indicates that if a contractor raised the money and it was amortized over 25 years, interest payments would be somewhere between $150 and $450 million higher than if the government raised money in the usual way. These costs would be passed on the taxpayer.

Richard Fyfe, the director of the DBFO Sea to Sky project acknowledges that private contractors may pay more for their financing than the government would.  But he believes the arrangement will yield savings in other areas.  He said, "It is misleading to isolate one element--to pick out specific items out of the whole arrangement and say, 'This is bad, therefore, the whole thing is bad.'  We're not selecting on the cost of financing. We're selecting on the competitive process--who will give us the best improvement. We're not looking at their cost. The company that has the best overall offer  will win the competition."

Under a traditional arrangement, Fyfe says that the province would pay for the whole improvement up front.  There might be a warranty for a limited period.  "Beyond that, if pot holes appear, you fix them."  Under a P3, however, all this changes because of a concept called 'notional ownership.' The province owns the land, but Fyfe says that for the duration of the contract, say 25 years, the contractor would be the 'notional owner' of the highway.  The province pays a yearly fee and if anything goes wrong, even something quite unforeseen, the 'notional' just like a real owner, would have to pay for it. 

'Hiding' government debt?

Wood thinks that the real reason the government may like this way of doing things is because of its accounting implications.  Buying a highway up front means that a capital asset and a debt appears on the government books.  If instead, the government treats the costs as a long-term service agreement, the government incurs yearly expenses, but no debt.  Wood believes this is just "hiding government debt." He cites a warning issued by the International Monetary Fund in April 2004--public private partnership arrangements should be counted as government borrowing.

Partnerships BC, which is overseeing all P3's in the province, has made much of the fact that the higher costs of financing are justified because the private sector is assuming some of the risks of the project--a claim which Wood also rejects.  He point to a 1997 court case in which the Ministry of Highways hired a contractor to repair the Sea to Sky highway. The contractor was found to be negligent. When a driver sued the Crown for harm suffered while driving on the road, the Crown argued that the Ministry was not liable--the independent contractor was.  The Supreme Court of Canada disagreed and took the position that under the Ministry of Highways and Transportation Act, the Ministry was still on the hook.  Whether the idea of 'notional ownership' will be more successful in deflecting the province's liability in our courts remains to be seen.

International companies cloud authority

The liability issue is further complicated by the fact that many private partners will be international companies.  Partnerships BC has already selected the three Consortia that may bid on the project.  Their names contain B.C. references. Black Tusk Highway Group refers to a geographical feature in Garibaldi Park.  S2S Transportation Group contains an acronym for Sea to Sky.  Sound Highway Development is a pun on the body of water along side the highway. 

These entities are qualified to do business in B.C. but beyond that, the B.C content is more marketing than reality. Each of the Consortia is composed of several companies--a total of 32 are involved.  Thirteen have headquarters abroad--in France, the UK, the US, Germany, Australia, Hong Kong--only 8 are based in B.C. and 11 are elsewhere in Canada. Marc Lee, a Vancouver economist with the Canadian Centre for Policy Alternatives, warns that disputes, especially those with U.S. companies, could fall to an international commercial arbitration body to resolve. "It's not our judges who would be deciding the issue."

It is clear that auditors can have the power to derail or influence projects such as this Sea to Sky upgrade after we look at what happened recently in Nova Scotia.  In 1998, the government embarked on a P3 project to build new schools in the province.  A scathing report by the Nova Scotia Auditor showed that the province was paying at least a million dollars more for each school than if it had been built in the more conventional manner.  Renovating the schools would have resulted in even greater savings. The ensuing uproar helped to defeat the Liberal government.  The new Conservative government called for a moratorium on building more P3 schools but the province is still stuck with 39 of these arrangements says a report.

Mayor: 'They don't care what we think'

Barry O'Neill believes our auditor may not have sufficient resources to do a similar job. He says, "All of those ministries the Liberals made issue of when they were in opposition, they've cut."  Strelioff's funding was slashed by 5 percent in 2003, and by more, 10 percent, in 2004.  This February, he informed the Legislature that because of the cutbacks, he would have to modify his work program.  Among other things, he would be scaling back his examination of the government's approach to public-private partnership arrangements. 

Ron Wood vows "to oppose the overland route by any means possible." Victor Durman, a West Vancouver councilor and a developer, says, "The present government knows that the chances of West Van voting in an NDP MLA are pretty slim.  That's why they were able to do this. They can trample all over us.  They don't have to care what we think. If this was a marginal seat, they wouldn't be doing what they're doing."

On July 23, Premier Gordon Campbell rebuffed a request for a meeting about Sea to Sky from the West Vancouver council.

Claudia Cornwall is a frequent contributor to The Tyee.  [Tyee]

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