PPP promise doesn’t meet reality
Privately funded hospital projects have higher cost overruns: critics
Quebec’s health minister, notorious for his tough talk and his tight grip on hospital finances, was adamant he would not yield to the private consortium suing the government for $330 million.
Led by engineering firm SNCLavalin, the consortium claimed it was owed that sum (which it later hiked to $360 million), on top of the $1.3 billion it was to be paid under a contract to build the superhospital of the McGill University Health Centre. The contract — known as a public-private partnership — was supposed to guarantee that any cost overruns would be shouldered by the private partner and not taxpayers.
Yet less than two years later, on Jan. 8, the government announced it reached an out-of-court settlement with the consortium, agreeing to pay it an extra $108 million. That same day, Quebec declared an even bigger payout, $125 million, to settle a dispute with a different consortium that built the nearly $2-billion CHUM superhospital.
What the government did not reveal that day is that it concluded yet another financial settlement arising from the $939-million expansion of Ste-Justine Hospital. That project was not built as a publicprivate partnership, and instead the government assumed the full risk of all cost overruns.
So how much was that settlement? No more than $9 million, the Montreal Gazette has learned.
The irony of the settlements — a staggering total of $233 million for the private consortia tasked with keeping a lid on costs compared with a $9-million hit for the government in a project in which it took the full risk — is not lost on critics of public-private partnerships.
“Despite cost overruns, the government maintains better control over (construction) projects than the private consortia,” said Guillaume Hébert, an expert in publicprivate partnerships (PPPs).
Even Barrette, long before he was appointed health minister, railed against PPPs, especially for the construction of hospitals. In 2009, when Barrette was president of the Fédération des médecins spécialistes, he fulminated that PPPs were like the Antichrist.
“You cannot build a university hospital as a PPP, the formula is much too rigid,” Barrette was quoted as saying in La Presse. “A bridge, yes, a road, yes. We redo the asphalt every five years, period. PPPs fix things at the moment while a hospital (evolves). It’s like Christ and the Antichrist!”
“The amount they’re asking for is way, way, way over what is justified ... We, as a government, will not pay one dollar more than what was justified.” — Gaétan Barrette, April 1, 2016
Yet governments around the world — starting with England in the early 1990s — have been seduced by the promoters of PPPs. The allure is tempting, as heavily indebted governments don’t have to arrange the financing for the projects upfront; that’s up to the private consortium.
What’s more, the consortium designs, builds and maintains the hospital or any other public facility for at least 30 years. Because the consortium is eager to turn a profit, the thinking goes that it will build the hospital extremely well, otherwise it would lose money during the long-term upkeep.
In the final flourish of the sales pitch, PPP promoters insist that the risk of cost overruns during construction will be assumed by the private consortium. That’s the argument that Premier Philippe Couillard made when, during the mid-2000s as health minister, he approved of building Montreal’s two superhospitals as PPPs.
But there’s a catch. The consortium leases back the hospital to the government for 30 years, with the monthly payments covering not only the initial construction costs but the maintenance, too. In the case of the superhospital of the Centre hospitalier de l’Université de Montréal, officials have confirmed the monthly lease payment is at least $12 million. That works out to a minimum of $144 million a year.
Assuming those monthly payments are kept at that level for 30 years — the life of the CHUM lease — the final cost could rise to more than $4.3 billion. Add the MUHC lease, and should those lease payments be of a similar amount (although officials have not confirmed this), the combined total could soar to more than $8 billion.
Hébert, of the Institut de recherche et d’informations socioéconomiques, estimated in a 2014 study that the monthly payments for the two superhospitals would ultimately add up to $8.6 billion by the end of the leases.
It’s impossible, however, for the public to know the full costs of the two superhospitals because the contracts are being kept confidential at the insistence of the private partners to protect them from potential competitors. Innisfree Ltd., a British investment firm specializing in PPP financing, is a major partner in both the MUHC and CHUM consortia.
Innisfree has done well on its investments, with a reported profit margin of more than 40 per cent.
In the absence of full disclosure, conflicting numbers have trickled out about the two superhospitals.
The MUHC has often cited the figure of $1.3 billion, but that’s essentially for the construction. The CHUM, for its part, has repeatedly referred to a price tag of $1.97 billion, but that’s also mostly for the construction.
Meanwhile, the Quebec Treasury Board has estimated that the capital costs of the CHUM project will be $3.6 billion and $2.4 billion for the MUHC superhospital, for a combined tally of $6 billion. Those costs include the purchase and decontamination of land as well as the acquisition of medical equipment, among other expenses. (How much of that covers maintenance and leasing is not clear.)
In 2004, former prime minister Brian Mulroney and ex-premier Daniel Johnson endorsed the PPP model in a study, projecting the capital costs of the two projects would be nearly $2.9 billion — half the Treasury Board’s current estimates. Government officials today stress those figures were preliminary, noting that the plans for the CHUM project were changed to add more hospital beds and operating rooms, thus driving up costs.
Overseeing the two superhospital projects and the Sainte-Justine expansion is the Bureau de la modernisation des CHU, a provincial agency with an annual budget of $2 million and a staff of nine headed by Clermont Gignac, a former Bombardier executive. Martin Viau, a spokesperson for the Bureau, defended the PPP model, saying it was never intended to transfer fully all the financial risk of cost overruns to the consortium.
“No one who manages these projects seriously will tell you that we can transfer 100 per cent of the risk to the private sector,” Viau said. “That’s impossible.”
As an example, Viau explained that a strike is beyond the control of the consortium, and a brief labour disruption did occur during the CHUM construction. It’s also hard to argue that the consortium would be responsible for costly changes made midway through the job at the request of the government, he added.
But Hébert countered that his research into PPPs around the world has shown that the private partners will often sue governments for substantial sums after construction.
“The promoters of public-private partnerships always insist that everything is clear and everything is known in advance, everyone knows exactly the amounts that will be spent and if the costs are higher than foreseen, it’s the private partner that will pay,” he said.
But after the construction is over, “it’s the modus operandi of the PPPs to ... multiply the number of lawsuits.”
In Europe, the heady enthusiasm for PPPs in the 1990s has given way to wariness and regret following revelations of a British consortium charging more than $500 to replace a single electrical outlet. (In Quebec, the Journal de Montréal reported that the consortium of the McGill Healthcare Infrastructure Group billed the MUHC $409 to replace a soap dispenser.)
In France, the government in 2014 resigned itself to paying a large penalty to cancel its PPP contract for Centre Hospitalier Sud Francilien after realizing belatedly that it was too expensive. Even with the penalty, the French government determined that it would ultimately save up to $982 million over the long term.
Years earlier, Quebec’s auditor general produced a report concluding that the province would have saved more money had it built the two superhospitals in the conventional manner rather than proceeding with public-private partnerships.
For Hébert, it’s not too late for Quebec to follow France’s lead and cancel the superhospital contracts. Hébert and fellow economist Minh Nguyen have calculated that doing so could save taxpayers as much as $4 billion.
“According to the most recent data we obtained, it still makes economic sense to buy back the contracts,” he said. “And that, of course, does not include the savings from avoiding all the potential lawsuits that might arise over the years.”
Thus far, Couillard and Barrette have shown little interest in cancelling the PPP contracts. Although the cancellation fees are secret, if the U.K. experience is anything to go by, they might be too steep to even consider the idea.
No one who manages these projects seriously will tell you that we can transfer 100 per cent of the risk to the private sector. That’s impossible.