Privatization proponents seek new rationale for P3s in face of credit collapse

by mike_yvr | November 24, 2008 at 06:52 pm

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Federal finance minister Jim Flaherty told a national privatization lobby group on Monday that investments in public infrastructure are a key part of the government's plan to stimulate a flagging economy.

The government wants to deliver the projects through so-called public private partnerships (P3) where projects are built and financed by the private sector but according the government's requirements. But while the P3 model has gained acceptance in much of the world, there is rising concern that the credit crunch has made it almost impossible to finance new P3s.

Because of the financial crisis, finding willing lenders has become a lot more difficult and when they can be found the cost of capital for even triple-A borrowers is much higher than even a few months ago, said Alban de La Selle, a senior executive at Dexia Credit Local SA, a leading European bank.

In fact, Dexia and another European bank, Depfa -- both involved with high profile P3 projects in B.C. and elsewhere -- have been bailed out to the tune of $85 billion.

As the crisis has unfolded, Depfa Bank -- which is involved in financing the $800 million Golden Ears Bridge in the Fraser Valley, as well as projects at Royal Jubilee Hospital in Victoria and the Surrey Outpatient Hospital -- has been suffocated of the cash it needs to support its financing role in these major deals.

Dexia, a Belgian/French company with a stake in the Golden Ears project has also struggled, though hardly to the same degree.

Earlier this week, the German government and some of Europe's largest banks stepped in with about $76 billion to bail out the Depfa's parent company -- Germany's second-biggest mortgage provider, Hypo Real Estate.

In a separate deal, Dexia was given $9.6 billion. While the massive bailouts eased the pressure on these major lenders -- and allowed them to mostly resume activities -- it has led some in B.C. to ask pointed questions about the fate of financing for the billions of dollars committed to P3 projects throughout the province.

In the U.K., the credit crunch has put major infrastructure projects -- highways, subway improvements, hospitals, waste management -- at serious risk of delay or even collapse.

Britain's most expensive road improvement programme, the £5bn upgrade of the M25, is struggling to raise finance as a gathering cash crisis threatens the government's controversial £44bn private finance initiative (PFI).

The reluctance of banks to lend money is sparking delays in the delivery of new schools, hospitals, roads and other key facilities.

A 'funding competition' to pay for the M25 upgrade and widening, scheduled to begin next April and to be completed before the London 2012 Olympics, is in danger of failing to attract backers. Delays could mean improvements are not ready in time for the London games.

The financial crisis has now also embroiled a multi-billion programme to build new waste incinerator and recycling facilities, needed to meet waste reduction targets, in several local authorities. A £350m agreement in Manchester is understood to be close to collapse.

The cost of financing the waste programme has left local authorities questioning the value of procuring infrastructure via PFI.

There is also concern that the Tube Lines consortium modernising the Jubilee, Northern and Piccadilly lines could face difficulties. Tube Lines is backed by a complicated £2bn cash facility. It relies on Depfa, a Dublin-based subsidiary of Hypo Real Estate Group. Hypo last month received an emergency £40bn bail-out from the German government. If Depfa cannot pay the consortium, senior financiers believe it could mean Tube Lines will struggle for cash.

Separately, there are concerns that the crisis that has brought down Royal Bank of Scotland could cause delays to hospitals and other facilities. RBS is funding £10bn of PFI projects in the UK, ranging from roads, prisons, and mental health projects to schools and hospitals. On projects where the financial package has been signed off it is expected to sell equity stakes to recoup desperately needed revenue. On those which have yet to be finalised, there is a question mark over whether they will proceed.

Proponents of P3s have long argued that private financing of large infrastructure projects makes sense because there is a transfer of risk from taxpayers to the private sector. This risk transfer, so their argument goes, offsets the higher costs of borrowing for the private sector as compared to a traditionally procured, publicy-financed project.

Many have questioned these assumptions including prominent B.C. forensic accountant Ron Parks.

But back to Alban de La Selle, the Dexia senior executive quoted earlier in this post. On Monday he suggested that:

one way to overcome the problem would be for the government to provide the financing itself. Since governments are among the few players that can get the benefit of lower borrowing costs, that advantage could be brought into play in doing P3s, he said. For their part, the private sector partners would guarantee to repay the debt.

"It could make sense in this environment," he said.

Wouldn't it make more sense to cut out the middle man?