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Private Sector, Maybe?

Noticeable by its absence from the grand transit funding announcement, MoveOntario, last Friday was any mention of public-private partnerships.  Making up for lost ground, Premier McGuinty was quoted in today’s Metro as saying:

There will be public ownership, and public control, and public accountability.  But in order for us to move aggressively, we will be using private sector partners — where that makes sense to do so.

Those who read this blog know that I am not a fan of PPP arrangements as they tend to overwhelmingly favour the private partner who would not undertake most risks associated with transit systems on their own.  PPPs are also notoriously difficult to manage as many in Great Britain have found.  Our own Highway 407 is a sterling example of a sweetheart deal with a private company who bought a public asset at fire-sale prices with a guarantee of constantly increasing returns whenever they decided to jack up the tolls.  A fine example of Tory stewardship of public assets.

There are various ways the private sector could be involved in MoveOntario.  Most obviously, they will do most of the design under contract to agencies like the TTC who maintain only a small inhouse engineering department, and they will do all of the construction.  Vehicles, too, will come from the private sector. 

The oft-heralded expertise of the private sector should be manifest in competitive pricing, and the ongoing series of contracts will quickly reveal those who bid low and produce shoddy, untrustworthy products.

Another area of private sector involvement lies in finance, although it’s odd to think of my pension fund (one of the large public sector employee funds) as the “private sector”.  Whether the return on “MoveOntario Bonds” will be adequate to attract investors from these funds remains to be seen.

Finally, the private sector is sometimes touted for design/build contracts with either a long term lease or operating agreement.  The argument is, in essence, that the private sector can manage the design and construction process better than the public sector and deliver a superior price/performance to us, the client.  Well, maybe.  If they skimp around the edges, this may not be visible for years after a line opens and our recourse may be limited.

I have no problem with the private sector bidding on design, construction and supply contracts for MoveOntario.  With any luck, they should make a decent profit and happily bid on more work.  However, the assets must stay in public hands.  We’re paying for them.

15 thoughts on “Private Sector, Maybe?”

  1. I knew SNC-Lavalin hadn’t left the building… maybe they won’t run B22 but I expect they’ll run something.

    Steve: We will see whether they can come up with a business plan that will actually attract lots of riders and no subsidy. Otherwise, this goes into the trash barrel with the other PPP schemes where the private partner doesn’t want to risk a loss.

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  2. I never hear anybody complaining that vehicles are supplied by the private sector. Nobody argues that the TTC can build a better vehicle from scratch. So why should it be any different when it comes to other capital projects?

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  3. Kent

    there’s a difference between a capital expenditure and a current service. You could for instance request Veolia or another concern to build a turnkey LRT to run TTC services with a separate (or no) union with a no-strike contract and so on. This is exactly what was done in Dublin with the LUAS LRT.

    How long do you think before ATU et al would start agitating against it? Eventually the private operator could be bought out of their (20 year? 30 year?) contract at huge cost to the City in order to keep industrial “peace”.

    Look at the outsourced garbage contract in the old city of York – this contract is being broken (without first establishing a break fee) having been extended in *2006*, so that it can be insourced. Tell me that wouldn’t happen in a PPP transit project – or at least one in which the City of Toronto is a participant. This stuff seems to be more palatable in York Region.

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  4. “Nobody argues that the TTC can build a better vehicle from scratch.”

    This has been suggested in the past, possibly by Adam Giambrone or Howard Moscoe. Seeing as the TTC had so much trouble getting buses built with the quality that they are looking for, there was talk of setting up a production line at Hillcrest.

    I remember reading that for one of the PCC rebuild programs they sent one out to the private sector to be rebuilt and did one at Hillcrest and found that they could do it themselves cheaper.

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  5. The outsourced PCC rebuild product had to have a high quote to cover any unexpected cost overruns and still make a profit. When the TTC did the rebuild the cost was the actual cost of the materials and labour with no profit included in. The additional requirement to make a profit can affect the final price considerably.

    Steve: The private partner wanted no risk and a profit? What is the world coming to?

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  6. Hi Steve and Darwin:-

    I understood through the grapevine that that private sector PCC rebuild was a joke. As parts were removed from the car (was it 4512, becoming 4601?), they returned to Hillcrest for remanufacture by the TTC. So much for a private partner doing the refurbishment and giving the TTC a realistic estimate of costs.

    I had the opportunity to supervise and assist with the loading of this car onto a truck at Hillcrest. The loading ramp was jerry rigged out of ties, shims and blocks. We used the ramp rails which were dug out of the mud in the old pole yard and some lenghts of 80# rail. (Could this have been the first time these ramp rails were used since the Yonge Suway construction required Yonge cars to divert down side streets?). The TTC did all this loading, the private partner did not!

    Dennis Rankin

    Steve: Hmmm. Let’s see, the private sector farms out work it cannot do to the public sector. I wonder what their markup was?

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  7. My apologies for not being clear earlier, and subsequently misunderstood. I was talking specifically about capital projects, not day-to-day operations.

    No private construction or design company could do a worse job than the city did, for example, on St. Clair’s recent track work.

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  8. Dennis Rankin said:

    I understood through the grapevine that that private sector PCC rebuild was a joke. As parts were removed from the car (was it 4512, becoming 4601?), they returned to Hillcrest for remanufacture by the TTC. So much for a private partner doing the refurbishment and giving the TTC a realistic estimate of costs.

    Well, the so-called “private sector partner” was none other than UTDC, while it was still a public corporation, ie. pre-Lavalin. The car went to the UTDC facility in Kingston for its rebuild. If the rebuild was inept, why were we surprised when the ALRVs arrived in 1987-89 and were nothing but trouble?

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  9. While we’re slagging the private sector, lets not forget the other two words, public and partnership. Both parties entered into an contract most likely produced by the public partner. When these arrangements run into difficulty, it’s not usually the private sector partner who’s solely to blame. Projects that go wrong are usually wrong from the inception and it’s unfair to blame one party. From the consulting side, you get a very very different perspective than the one voiced here.

    Steve: I know that sometimes consultants are put in place as people who can be blamed when things go wrong, and they often must contend with clients who simply cannot make up their minds and bring proper discipline to a project. However, the public sector does not have a monopoly on indecisive, incompetent project management, and there are huge variations in the competence of private sector consultants.

    The big issue for me is that “the private sector” is usually someone’s friend, well-connected to the agency or government who are promoting a project. Contracts are not bargained with sufficient rigour at times because the private partner complains to their government friends about how the public sector staff are giving them a hard time. Arms are twisted.

    The argument that the private sector will always do things better because they bring rigour and experience to projects applies to specific parts of that sector in specific circumstances, not to the private sector as a whole.

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  11. I know the 407 is often offered up as an example of “how not to” with respect to public private partnerships. I agree that the Tory government put too much on the table and that it wasn’t a great deal for Ontario taxpayers and motorists, but still one has to consider that over the life of the 99 year contract, the 407 won’t cost the Ontario taxpayer (especially the non car driving, transit using ones) a penny.

    Any major expressway, once built, costs an enormous amount of money to maintain, and then rebuild every 30 to 40 years; how many public dollars has the 401 absorbed since it was built in the 1950s? The 407 concession owner will be obliged to spend this money to maintain a state of good repair, and expand the highway as necessary, over the next 90 odd years, thus freeing up precious public dollars for other areas, such as public transit.

    I do agree that PPP isn’t a good model for public transit, for a whole bunch of reasons, but it is for highways, especially in the Kyoto age where drivers should pay more of the costs to drive at 120 km/h through urban areas.

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  12. One word about public-private partnerships:

    Skydome.

    And surely the point about buying streetcars from private companies is that, as Steve recommends, the assets are owned by the people.

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  13. First, be happy, you guys are getting some money for your LRT. Our province doesn’t seem to think LRT is useful. For some odd reason they refuse to fund the two new legs to Calgary’s LRT. Maybe I should be happy that we actually have LRT.

    In Alberta, P3s generally have not worked too well. Our province constantly toys with them. When you really dig down, you just realise that P3s are just glorified public debt. A great example is the province announced a handful of new freeways in Fort Mac, but they will built using a P3. There are no road tolls, so that means there are no way for the private partner to get any income from the users. So instead the province will simply give them a portion of the tax revenue from tax payers. They stylize it as P3 but a lot of Albertans are catching on to the fact that it’s just glorified public debt.

    Steve: The Ministry of Public Infrastructure Renewal (MPIR or “empire” as it is known in some circles) is really big on P3’s that have the same pseudo public debt character to them. What is bothersome, of course, is that if we just sold bonds, they would be at X-percent interest, but when we get into situations where the private partner is trying to juice profits (see Highway 407), they get to control their profit margins. Pension plans must love arrangements where they can structure investments to have any rate of return they can get away with.

    One P3, which I have seen work well, is the one used to build Vancouver’s Canada Line. That P3 seems to be designed to shield the public from cost overruns. The province designed it so that it would encourage the private sector to give an accurate cost description of the project. The province has also assured that the company will pay for maintenance costs, but TRANSLINK will have over sight over maintenance.

    P3 might work in this situation. The City of Calgary has found that the LRT is actually profitable. Despite the free fare zone, the city makes about 1.95 from every adult rider. 250,000 people ride the system daily. The busses however do not run profitably they tend cost a lot more (so for all you anti-LRT/Streetcar Advocates, this is something to keep in mind). So in this case, it is possible for the private sector to be involved in the construction of the LRT and operation of the LRT. They could reap some profits from the system, but the city must have control over fares, reliability and service (much like the one in Vancouver). But there needs to be a cap on private ownership, the Canada Line will be handed back to TRANSLINK in 30 years. At that time the region gets to decide what on renewing the contract or giving ownership to the city.

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  14. Steve your not suggesting that there may be some element of collusion in the tendering processes used are you? Gosh, golly, gee that can’t be. I mean the current provincial government got it’s hands slapped by the auditor for handing out grants to “cultural” groups without even an application process!

    And the awarding of the subway contract without tenders, I mean that just made good business sense, didn’t it?

    Sadly you can word specifications to make it so the preferred supplier is the only supplier. I’ve experienced that with consulting contracts where the requirement was to have experience with in-house developed software, which was developed by one of the consulting firms bidding on the contract.

    I read just yesterday that debacle over the London Underground PPP maintenance and upgrade contract with Metronet in turning even uglier with calls for arbitration. Metronet is in part owned by… Bombardier!

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