Pondering the P3 School Problem

Nova Scotia’s mania for public-private-partnership (P3) school construction was brief—more of an episode than an illness—but what an expensive episode it was.

Sherwood Park Education Centre, CBRM, NS

Photo by Catherine Campbell

It started in 1997 and ended in 2000 officially, but the 39 schools built under the P3 banner were the subject of 20-year leases, so the P3 program has really been with us ever since. The subject is especially topical now  because the deadline for deciding the future of our Cape Breton P3 schools is 30 November 2016—that is, a little over a month after this fall’s school board elections. The province must decide whether to buy the schools, renew the leases (for 5 or 10 years), or walk away and leave the schools in the possession of the developers. A choice, in other words, between a rock and two hard places.

If you’d like to peer over your glasses and ask informed questions of your school board candidates on the P3 issue this fall, you should read the June 2016 report on the subject by The Canadian Centre for Policy Alternatives (CCPA). If you who don’t have time to read Private Profit at a Public Price: Deciding the Future of the Public-Private Partnership Schools in Nova Scotia because you have, say, a life, I will attempt a Cape Breton-centric summary for you.

 

What is a Public-Private-Partnership?

The authors, with admirable concision, define public-private partnerships and find them wanting in a single paragraph:

A public-private partnership varies from the traditional design-bid-build approach as the company builds, manages or otherwise provides a public service, such as a large building, and the government pays the private company for the service over several years. The basic problem with P3s is that they are typically used to conceal government expenditures and provide guaranteed long-term profits for contractors. To survive, private companies must make a profit. This motivation is fundamentally in opposition to the public interest across a variety of domains, including environmental and community factors.

Nova Scotia’s plunge into the P3 pool was a textbook case, inspired by the need to build new schools combined with a 1993 change in accounting standards that required the government to record the costs of new schools on the province’s balance sheet rather than transferring them to the accounts of individual school boards. The change added $217 million to the province’s net debt and meant that any new construction would add further to that total, which, the report notes, was “politically unpalatable” to John Savage’s Liberal government.

What to do? Why, announce that the government cannot afford to build new schools, talk up the benefits of public-private-partnerships (particularly in terms of cost-savings), provide no evidence to back any of this up and engage four developers—Scotia Learning, Nova Learning, Ashford Investments and Hardman Group—to build 39 new schools.

 

‘Very Bad Management’

While the profit-motive was a factor in what went wrong with Nova Scotia’s P3 schools program, the real problem was a lack of government oversight—a failure to keep the profit-motive in check, if you like. The government negotiated bad contracts then failed to adequately monitor those bad contracts. According to the CCPA report, developers were allowed to build schools near their own housing developments, charge school boards for placing portables on school property, buy land at above-market value, saddle government with the bulk of the risk associated with the projects—and more.

(Another factor was what the Cape Breton Post called “the temptation of governments to overbuild when money seems easy and customary constraints are removed,” not to mention when they’re facing an election, as was the case for Premier Russell MacLellan who succeeded Savage as Liberal leader).

Here’s everyone’s favorite example of P3 run amuck from the 2010 Auditor General’s Report by then-Nova Scotia AG Jacques Lapointe:

Regional school boards, under subcontract arrangements, are delivering contracted
services at a lower cost than that paid by the Department to the developers. Over
the 20 year life of the contracts the estimated difference in payments between the developers and regional school boards would be approximately $52 million.

Think about that—$52 million. That’s two second cruise ship berths and a new library. That’s a bunch of new schools. That’s a harbor dredge and then another, smaller, harbor dredge. That’s a big chunk of change.

Department of education bureaucrats claimed at the time that this particular assertion by the auditor general was misleading:

“What we’re paying from the province to the developer includes more than just the caretaking and the day-to-day maintenance,” one told the CBC in February 2010. “There’s the long-term maintenance, there’s completion of payment for the building itself.”

But Lapointe was having none of it:

“It’s very bad management. We don’t know what that consists of—how much of it is operating cost, how much of it is rent, how much of it is profit, and just inflation factors.”

A 2000 analysis conducted for Rodney MacDonald’s Conservative government, which pulled the plug on the P3 program, estimated it had cost $32 million more than the $350 million originally estimated by the Liberals.

The AG himself, in that 2010 report, put the price tag over 20 years at a spectacular $830 million. (The CCPA report puts the price at a less expensive but still substantial $736 million.) I have a strong feeling that is more than it would have cost to build those 39 schools in the traditional design-bid-build way but I cannot say for sure because—be still, my data-loving heart—there is not enough available information to do a proper comparison. A problem the AG noted in his very first—that is, 1997—report on the P3 program:

“The government failed to compare the relative costs and benefit of P3s with traditional procurement methods.”

The OECD, which has outlined best practices with regard to P3s “from the outset to post-completion,” recommends that a public service comparator (PSC), including a value-for-money (VfM) analysis be conducted “well before the initiation of a project considered for P3.”

The Nova Scotia government, according to both the AG and KPMG, did nothing like this.

And as Martin Blaiklock, in a paper for the European Institute of Public Administration entitled Public Sector Comparators and Value for Money in PPP, says:

“The decision…as to which procurement option to adopt and the basis upon which such decision is taken is critical and has long-term implications.”

To which I can only say, “Amen, Martin. Amen.”

 

The Local Angle

All of the schools built in Cape Breton were built by Ashford Investments, which is listed in the Nova Scotia Registry of Joint Stock Companies as an extra-provincial real estate management corporation based in New Brunswick.

Here, courtesy of the fine people at the Canadian Centre for Policy Alternatives (Halifax branch) is a summary of the costs associated with each school:

Cape Breton-Victoria Regional School Board

SchoolTotal Contract PaymentsTotal Principal PaymentsTotal Interest PaymentsDeveloperBuy-out PriceLease ExpiryDecision Date
Cape Smokey Elementary School$8,061,556.00$4,413,837.01$3,647,718.99Ashford Investments$2,010,659.0011/30/202011/30/2016
Greenfield Elementary School$14,871,876.19$8,204,288.51$6,667,587.68Ashford Investments$3,825,306.0011/30/202011/30/2016
Harbourside Elementary School$19,549,372.74$10,733,681.87$8,815,690.87Ashford Investments$5,100,544.0011/30/202011/30/2016
Jubilee Elementary School$11,333,273.00$6,205,159.25$5,128,113.75Ashford Investments$3,588,338.0011/30/202011/30/2016
North Highland Elementary School$8,013,610.00$4,389,370.10$3,624,239.90Ashford Investments$1,993,340.0011/30/202011/30/2016
Riverside Elementary School$11,685,169.03$6,467,585.48$5,217,583.55Ashford Investments$3,042,885.0011/30/202011/30/2016
Sherwood Park Education Centre-Sydney$23,715,486.00$12,897,884.28$10,817,601.72Ashford Investments$6,600,000.0011/30/202011/30/2016

Strait Regional School Board

SchoolTotal Contract PaymentsTotal Principal PaymentsTotal Interest Payments DeveloperBuy-Out Price Lease Expiry Decision Date
Antigonish Education Centre$22,961,874.84$12,689,106.09$10,272,768.75Ashford Investments
$5,899,606.0011/30/202011/30/2016
Bayview Education Centre$18,414,753.03$10,158,765.49$10,158,765.49Ashford Investments$4,819,494.0011/30/202011/30/2016
Cape Breton Highlands Academy$23,477,056.00$13,030,296.48$10,446,759.52Ashford Investments$6,061,083.0011/30/202011/30/2016
Dalbrae Academy$20,473,077.35$11,312,048.61$9,161,028.74Ashford Investments$5,377,555.0011/30/202011/30/2016
East Antigonish Academy/Education Centre$26,503,880.48$14,645,798.07$11,858,082.41Ashford Investments$11,858,082.4111/30/202011/30/2016
Richmond Academy$21,144,849.29$11,688,674.67$9,456,174.62Ashford Investments$5,457,355.0011/30/202011/30/2016
Tamarac Education Centre$22,267,646.97$12,309,346.05$9,958,300.92Ashford Investments$5,762,940.0011/30/202011/30/2016

There may have been additional expenses after the signing of the initial contracts but, according to the report’s authors, the Nova Scotia department of education claims to have no record of any such expenditures.

 

AG in the (School) House

The auditor general issued not one but four reports on the province’s P3 program and the report from the Canadian Centre for Policy Alternatives draws heavily upon his work and also on a KPMG report on the same subject.

Why, you might ask, was there not more of a fuss about the AG’s findings at the time? Why weren’t Nova Scotians up in arms at the high cost of the P3 schools?

Well, I’ll tell you: it was a little thing called the MLA expenses scandal and as luck would have it, it was contained in the same report as some of the AG’s most damning discoveries about the P3 program. As Tim Bousquet (now of the Halifax Examiner, then of The Coast) put it in February 2010:

In this context, the MLA expense scandal is small potatoes. That’s not to dismiss it; clearly, the scandal reflects an unbridled sense of entitlement and absolutely horrid judgment among our elected representatives. But, for the items detailed as improper or problematic in the MLA expense portion of auditor Jacques Lapointe’s report, we’re talking about “just” $73,527.

Compare [the MLA expense scandal] to another section in Lapointe’s report, his audit of $830 million in public-private partnership school arrangements entered into in 1998 and 1999. Lapointe suggests that taxpayers are losing as much as $52 million in value through the contracts, which went to three companies* owned by a collection of politically connected developers: Ashford Investments, Nova Learning and Scotia Learning. That’s 723 times as much as was misspent by MLAs.

Yes, folks, it’s like getting so upset about your car stereo being stolen you don’t notice they’ve also taken your car.

For better or worse (I’m voting “worse”), the P3 program is now mostly water under the bridge, except, as mentioned at the outset of this article, we now have to decide the fate of the P3 schools.

The CCPA thinks the government of Nova Scotia should buy all 39 of them.

Wait, it’s not as crazy as it sounds: the province has the option to buy at a discounted rate (estimated at 43% of fair market value). This is one-time offer. “If the province renews the leases for any length of time, then any future purchase of the schools would be at full market value.”

I’ll let the CCPA give you its reasons:

1. While the costs of the buy-outs is considerable (estimated at $230 million), this figure is far less than the estimated costs of another series of leases.

2. Even though the schools are perceived as satisfactory and well-maintained, this has come at a high cost both for the schools themselves and for other schools that have gone without necessary renovations because of the requirement of diverting funds to the P3 schools sinking funds. [This was beyond the scope of my article, but you can read all about it in the CCPA report.]

3. Purchasing the buildings will give the school districts the necessary control over the decision-making process. The lack of control over the schools has been problematic throughout the leases, from the lack of community access to power over school usage.

This seems like a good time to mention another reason why the history of the P3 schools matter: we’re talking about P3 highways and a highway-twinning budget would dwarf that for 39 schools.

The AG was very clear in 2010 that the Nova Scotia government did not have enough qualified staff people overseeing the P3 schools project — negotiating then monitoring such contracts requires serious expertise. The P3 schools program was supposed to allow the government of Nova Scotia to cultivate that expertise. It hadn’t done so by 2010, has it somehow managed to do so in the past five years?

 

Private_Profit_at_a_Public_Price

*The fourth company, the Hardman Group, built only one school, Horton High in the Annapolis school district.

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