Monday, May 28, 2007

Sewage Solutions Now

A new group has come in existence - Sewage Solutions Now.

The group is pro sewage treatment for this region, but it is looking to counter some of the hyperbole that is coming from CUPE about how the plant should be built and operated.

Clearly a P3 is a legitimate option for the sewage treatment plant, but CUPE is blindly saying no to this option. The approach they are taking is foolhardy and counter productive.

When one is going into a project and looking at spending over one billion dollars, it is crucial to ensure that the most cost effective solution is found. P3s are not perfect, but as we all know, neither are public operations.

The CRD needs to consider the P3 option. The important thing to do with a P3 is to have a set of parameters that protects government from increased costs and guarantees timelines. Government needs to express their needs in any contract in full detail. Consideration has to be given to what sort of penalties there are if the P3 partner does not deliver what is expected. This is where I see the Victoria arena P3 fell down - the contract did not penalize RG properties harshly enough for not meeting deadlines. That P3 also has problems with public use of the building for recreation - something that should have been more defined in the contract.

With a well written contract, a P3 is the best way to go. With a poor contract, a P3 can be a nightmare.

If the CRD puts out a tender for a P3 and finds no one willing to bid on it, then clearly it should be a public built project.

The opposition to P3s has claimed that they do not save money - that they can not save money because they need to make a profit. This simply not the case. In project construction, P3s save some money up front in the budget, but where they really benefit is as a project goes along. P3s come in on budget and on time almost all of the time. Public built capital projects almost always come in over budget and over time.

Part of the problem with public projects seems to relate to over optimistic budgeting assumptions. Politicians and civil servants are not lieing when they underestimate the time an cost for a project; they are simply hoping, against all evidence, that nothing will go wrong. Public projects have the luxury of starting and then coming back for more money. P3s do not normally have this. If as an owner of company working on a P3, I have huge incentive to get the costs and timing correct at the start. If something goes wrong, I either lose a lot of money or I have to find ways to cut the costs. Every dollar I can save is a dollar of profit. On a public project, every dollar saved gets lost back in the government coffers.

Based on some of the work of Bent Flyvbjerg, I would estimate that the Victoria Sewage Treatment plant will cost as much as $300 000 000 more than budgeted - roughly $1000 per person in the CRD. The cost overruns of public projects are so regular and consistent that you can predict it. A fixed price P3 would protect us from this risk.

BC has seen enough examples of public project cost over runs that we should expect a public building of hte sewage treatment plant to go over.
  • BC Ferries - not just the fast ferries, but the two spirit class ships were over budget
  • Island Highway
  • Coquihalla
  • Venues for the Olympics
There are always reasons why - not enough skilled workers, new technology, rising costs of materials etc...... It happens every time. It is crucial for government to get out of this risk and give to the private sector.

As to operation, the simple question has to be "Can we do it as cheaply as the P3 operator?" If the answer is no, then why operate it? I would argue that unless government can see that they have a significant cost savings versus a P3, they should go P3. Even if a P3 is slightly more than in house, the increased cost can be justified through the reduction of risk. A P3 operator is a very effective insurance against rising costs.

Check out Sewage Solutions Now and help support their work.
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