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Down the Drain Goes a P3

Why Whistler flushed a sewage public-private partnership. A special report.

By Guy Warrington 23 Jun 2006 | TheTyee.ca

Guy Warrington is a freelance photojournalist and reporter. He lives and works in Vancouver.

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Showdown in paradise.

Whistler is a town full of wealthy citizens. You wouldn't usually expect them to oppose the private sector. But on Monday, Whistler dealt a decisive blow to the public-private partnership (P3) model in B.C.

In B.C., as well as other provinces, P3s are increasingly being used as a tool to meet municipal infrastructure needs, and Partnerships B.C. has stated that P3s are expected to meet 10 to 20 per cent of B.C.'s capital infrastructure needs.

Which means that what can seem at first glance like a narrow discussion about how to treat sewage in a world-class resort community is actually a debate with much broader significance.

The P3 project in Whistler received significant time, community scrutiny and input. Indeed, the story of how this particular project was rejected, re-sold, then rejected again, says much about how hard people are willing to fight on both sides on the province-wide issue of P3s.

Latest chapter

The most recent round of the debate that's been running since 2001 happened on Monday night when Whistler council met to decide whether to take the proposed P3 to a referendum or cancel the project entirely.

The supporters and opponents raised now-familiar P3 issues. Proponents said a P3 would save considerable money (15 per cent -- or about $11 to 16 million -- over the term of the 12-year contract), increase environmental accountability and speed up the construction process. Opponents of the project, spearheaded by the Whistler Water Watch, were concerned about cost overruns, lack of control in the event of a spill, and risk to the environment. As part of the "alternative approval process," which just concluded on June 12, Whistler Water Watch gathered over 1,800 signatures.

On Monday night, Whistler Water Watch presented the ballots to council. The mayor, Ken Malamed, said was surprised at the number, and suggested council extend the vote by two weeks to give the P3 supporters more time to make their case. In the end, however, in a 4-3 decision, the council voted against the extension and also voted against continuing to a referendum. This effectively killed the P3 project.

But while there's dispute about the method, no one in the community disputes that Whistler needs a new sewage treatment plant. Even though in September 2004, the Sierra Legal Defense Fund awarded Whistler second place amongst 22 cities across Canada for its tertiary sewage treatment system -- the highest level possible -- and while the publicly owned and operated treatment plant boasts a highly efficient operation, with an operating cost per unit treated that is less than the average of 17 other Canadian waste water treatment plants, it's an aging facility. With complaints about odour, 150 discharges into the Cheakamus River over the past eight years, and a need to prepare for the influx of people during the Olympics, an upgrade is in order. So while few residents would argue that the treatment plant is in need of an upgrade, the privatization plan has become a point of contention.

In fact, the community didn't begin with the privatization option. At the beginning of the debate about how to proceed, in 2001, Mayor Melamed and council rejected a P3 solution entirely. But on May 30, 2002, the B.C. Liberal government announced the creation of a new policy -- the Capital Asset Management Framework -- which requires that public sector agencies investigate alternatives for capital development, including the P3 option.

So after rejecting the P3 option, the province asked Whistler to revisit its decision. And on January 10, 2005, in a 5-2 decision, Whistler announced its support of the P3 option to "design, build and operate" the upgrade to the existing wastewater treatment plant. If the project were to go ahead, design, construction and daily operation would be handed over to a private company.

Risky business

Why did the municipality change its mind in favour of the P3? One of the driving considerations, says Melamed, was the approach of the Olympics. "Not only [is] a certain percentage of the risk transferred to the private sector, but also they were suggesting an accelerated construction schedule." For the mayor, the potential cost savings were also an important factor; the contract was to be for a fixed price, with any cost overruns to be picked up by the company. The mayor has also said that the environmental compliance potential of the P3 option was better than that of the public sector.

Melamed says he had reservations about the P3, but going through the process made him more confident that P3s could deliver on their promises. For him, it came down to having faith in the consultants and professionals, as well as listening to the community's concerns. "I have heard both sides of the argument," said the mayor, "and...I have said to the community that I am prepared to accept [that] in both cases there are risks. I am prepared to accept the risks of the P3 model."

From the time council voted in favour, two main issues came up: the privatization of drinking water and the protection of public sector employees. In response, council passed a resolution ensuring drinking water would not be privatized, and created a bridging agreement to protect plant workers for the first two years. But despite these assurances, the community of Whistler remained divided on the issue and the P3 option started to meet with increasingly significant opposition.

Boil water?

For Pina Belperio, a co-founder of Whistler Water Watch who helped to lead the fight against the P3, none of the mayor's or council's assurances held any water. Belperio says that Whistler Water Watch had no objection to a private company coming in to build the plant; what they objected to is the "design, build, operate" approach -- or privatization -- of a public facility. Belperio says there were issues of economics, water security, environment, accountability and transparency.

"We have seen in other communities that where a company comes in, prices start going up and services start going down," she argues, and points to what happened in places like Africa and South America. This past January, in the city of Cordoba, Argentina (which handed over the management of its water to the French company Suez in 1997), the residents faced a 500 per cent tariff increase on their water bills.

Closer to home, privatization has also led to problems. In 2005, the Indianapolis Star reported problems after Veolia Water -- the largest water company in the world -- was hired to run the city's water utility. "In January," says the article, "thousands of gallons of untreated water slipped into the system and prompted a boil water advisory that shut down some companies and sent home about 40,000 public school children." The paper further reported that supply shortages led Veolia to ask customers to limit their water usage during peak hours. Additionally, the U.S. Attorney's Office issued subpoenas in an investigation regarding allegations of falsified water quality reports.

In 2000, the Delaware Department of Natural Resources and Environmental Control issued a statement announcing that U.S. Filter (now Veolia Water North America), was assessed a $91,000 penalty for pollution violations. The press release stated that, "The penalty action we are taking today is the result of an ongoing series of violations that involved exceedances with respect to the facility's discharge standards, as well as a one-time 13-million gallon discharge from the pump station that in our opinion easily could have been prevented."

Shipping sewage to Squamish?

Belpario was also concerned about environmental issues. On March 2, 2004, Partnerships B.C. (PBC) submitted a report to Whistler entitled "Partnerships BC Business Case: Whistler Water Treatment Plant Upgrade Project, Final Draft." According to Belperio, this report was never made public. Dayton & Knight Ltd., the engineering firm that has been advising Whistler on water and waste water issues for much of the life of the town, reviewed the proposal and said the Partnerships B.C. proposal is based on "unrealistic and erroneous assumptions."

The Dayton & Knight report (released under the Freedom of Information Act) revealed that the P3 plan included trucking untreated sewage to Squamish in order to reduce costs. But "trucking of untreated solids to a composting plant in Squamish," says the Dayton & Knight report, "is a high risk solution from a financial, environmental and political perspective."

In addition, the Dayton & Knight report suggests that Partnerships B.C. had underestimated the cost of trucking the waste to Squamish by a significant margin. For some, this option raises serious questions with respect to the commitment of both the province and Partnerships B.C. to the environment -- particularly as Whistler is committed to the Natural Step. Furthermore, the proposal downplayed the legal liability and risk to the environment in the case of a spill.

Some people had concerns that trucking the waste would contribute to global warming. It also raises questions about Partnership B.C.'s purported desire to save taxpayers' money, in that it also exposes taxpayers to the possibility of an increased project cost due to the upward trend in fuel prices.

The Dayton & Knight report reveals that many key aspects of the sewage treatment plant are omitted, "specifically or by implication of cost reduction," from the PBC "shadow bid," including odour upgrades at WBS and dewatering buildings, and overall odour control for digesters. Also, the PBC makes no mention of the costs associated with covering the bio-filter with a roof that can support snow loads. Belpario says she was concerned the cost of the project would actually be much higher, since many key aspects of the sewage treatment plant were deleted in order to improve the case for Partnerships B.C.'s arguments.

Belperio says, "The other concern we have is that wastewater is a way in for...drinking water [privatization] and we don't want to give that over." While Belperio notes the council's resolution that drinking water will not be privatized, she says the next municipal government is free to change this.

The conclusion of Dayton & Knight's report is that, "Support for the DBO can be made only for political or self-serving reasons. Its selection over the current traditional approach lacks or excludes common sense, ethics, imagination, history and reason."

False promises?

Proponents of P3s argue that they allow cash-poor communities and governments to complete projects faster, defer payments and transfer risk from the public sector to the private sector. Those who support P3s further suggest that the private sector brings innovation and efficiency, which in turn can reduce construction costs.

Stuart Murray, the public interest researcher at the Canadian Centre for Policy Alternatives, has completed a major study on P3s. According to Murray, the promise of risk transfer and savings produced through innovation and efficiency is overstated. While Murray is quick to point out that he does not believe that governments are deliberately out to increase cost, the fact remains that P3s are considerably more expensive.

While proponents of the P3 model often argue that innovation and efficiency will save the public money, Murray states that this is, in fact, a false premise. Unlike the public sector capital projects, P3s have three barriers that they must overcome: first, there are more expensive procurement costs, which on a large project can be several millions of dollars; second, there is the issue of profit margins, from which investors expect at least a 10 per cent return. And third, interest rates can run much higher than when borrowing from government. In the case of projects that are financed by the business or consortium doing the project, interest rates run much higher than when borrowing from government -- with private sector borrowing rates being a minimum of one per cent more. While one per cent may not seem like much, it can add millions of dollars to a project over the life of the contract.

It takes a village...of lawyers

Moreover, says Murray, once the P3 is up and running, it is still not able to operate more cheaply than the public sector. Often, says Murray, the most expensive line items in the procurement process for governments and the contractor are the hiring of lawyers, accountants and consulting firms to provide advice as to how to design the bids and structure the contracts.

Murray says that, "These cost barriers are high enough and the returns on private sector innovation are low enough that the private sector is not able to overcome the cost barrier." He also says that with respect to risk transfer, such as fixed-price contracts, corporations carefully calculate and weigh the potential cost to the company and invariably pass this along in the form of an increased cost to the government. "Again," says Murray, "the private sector is carefully calculating what the risks are...and how much additional money they have to charge the government." In essence then, governments are able give the illusion of meeting fixed price contracts while corporations are given pre-packaged profits.

The issue of profitability should not be overestimated. In an August 2002 report by the United States General Accounting Office (now the Government Accountability Office), on the issue of privatization of water infrastructure, companies cited profit potential as a key issue when considering whether to take over a public utility. Respondent companies cited several areas that they look at when assessing profit potential: potential to improve efficiency, proximity to other utilities, potential of companies for system growth, and the terms of the proposed contract.

Interestingly, the report also cites two examples of "deal breakers" with respect to profitability. One is restrictive contract provisions with regard to maintenance, the other is the desire for unlimited liability guarantees being placed on the companies by the community.

So are there any successful P3s? Many P3 advocates point to the Moncton water treatment plant as a success. In a January 2006 letter from the Moncton director of special projects to the municipality of Whistler, Ronald H. LeBlanc outlined the supposed benefits. In 1998, Violia and Moncton entered into a 20-year agreement to design, build, finance, and operate its water treatment facility. The arrangement was completed on the basis that the community would save $9 million in capital costs and $12 million in operation and management costs over the 20-year contract. According to CBC, the city has been happy with the quality of the water. The union in Moncton, however, has suggested that the plant could have been built for $14 million less if the project had been done in the traditional manner.

One of the key problems in evaluating the success of P3s is that the proponents have virtually no projects that they can point to which have met the stated goals of ultimately saving money and being more efficient. To counter this, proponents point to projects that are under way or being proposed. As an example, Murray pointed to the Canadian Council for Public-Private Partnerships, which recently gave the Abbotsford Hospital an award for project of the year. The important thing to note, says Murray, is that the project is not yet built and that there are no audited statements looking backwards to see if the project was indeed cost effective.

Problems and profits

Given these issues, many people are wondering why the provincial government is pursuing the privatization course. Some experts suggest it's because the current B.C. government is aggressively neo-conservative and pro-business. They think that the way that government can be made more effective is to hand over as many aspects of it as possible to the private sector. Blair Redlin, a researcher at CUPE, suggests that the long-term contracts on which most P3s are based, coupled with increased costs, effectively "ties the hands of government."

As many people have pointed out, the goals of private contractors and public agencies are often very different. Perhaps this is why Adam Smith, arguably the grandfather of free market economics, suggested that one of the key duties of government is "erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society."

For Pina Belperio and Whistler Water Watch, problems with P3s are obvious: "I don't see how they can save money when ultimately they have to make a profit."

Guy Warrington is a freelance photojournalist and reporter. He lives and works in Vancouver.  [Tyee]

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