Water Industry News


Public or private financing: Which is really least expensive?

Public infrastructure project costs ‘underestimated,’ report

Pierre Hamel, professor of local public finance at INRS, speaks during a Regina Water Watch organized forum at the University of Regina on Wednesday, September 11, 2013. The forum was discussing the public vs P3 funding for the wastewater treatment plant.

Photograph by: TROY FLEECE , Regina Leader-Post

A study by a Toronto-based think tank is pouring cold water on the contention by Regina Water Watch that public-sector financed infrastructure projects are cheaper than projects financed by the private sector.

“The argument that government funding is less expensive than private funding is not only wrong but also, unfortunately, ubiquitous in debates on public investment, especially for large infrastructure projects,” said the 20-page report by the C.D. Howe Institute released Thursday.

“We find there is no significant difference in the cost of capital for a given project between the public and private sector, once the risk borne by taxpayers is taken into account,” the report said.

The study debunks the argument that publicly financed projects are cheaper than privately financed projects because the government pays a lower interest rate than the private sector does. “We often hear that it is more expensive for private companies than governments to finance a project, because government can borrow at lower interest rates. However, this statement is only half true, as it ignores the costs resulting from government authority to levy, when required, additional fees and taxes to repay lenders if one or several funded projects prove unprofitable.”

In fact, the study concludes the costs of public sector investments in infrastructure projects are underestimated and fail to account for the increased risks borne by taxpayers. By contrast, public-private partnership (P3) projects transfer much of that risk to the private sector partner through fixed-cost, performance-based contracts, which leave the private sector contractor, not the taxpayer, on the hook for cost-overruns.

“The value of a PPP formula actually lies in the sharing and more effective management of risk, along with the more rigorous management of costs and schedules made possible by a better alignment of incentives, but not because of the public or private nature of the partners,” the report said.

The study authors Marcel Boyer, Eric Gravel and Sandy Mokbel say current evaluations of public projects suffer from serious flaws, exposing taxpayers to unaccounted-for risks and bad investment decisions. “While there may be good reasons for government investments, we should account for the costs properly,” Boyer, professor emeritus of economics at University of Montreal, said in a press release.

Boyer said public-sector financed projects are regarded as “essentially risk-free” because of ‘the virtually unlimited taxing power of the Crown.” But the discount for publicly financed projects is an “analytical illusion’’ because of the real risk to taxpayers of cost-overruns, missed deadlines and performance failures. “The project appears risk-free to lenders, but it is obviously not risk-free for taxpaying citizens,” said Boyer.

One of the central questions in the current debate over the proposed P3 project to build, design, finance, maintain and operate the city’s new waste water treatment plant is the cost of financing the $224-million plant. The city claims the P3 project will save taxpayers $79.6 million, including the $58.5-million grant for the P3 Canada fund. Regina Water Watch claims the P3 will cost $37.4 million to $77.2 million more because of higher private sector borrowing costs, even with the federal grant.