On the same day that Dalton McGuinty government handed the Durham Region Courthouse project to Access Justice Durham (March 2, 2007), the Australian investment firm of Babcock & Brown bought 100% equity in AJD.

Now be clear on this. The courthouse is going to cost $214 million, assuming no overruns. To gain 100% control though, BBPP only had to invest $15 million, since in this "partnership" the private side is only putting up enough equity to cover 6% of the cost of the project. The Ontario government (meaning us taxpayers) will be footing the bill for a 5.015% bond that is raising the other 94% of the cost.

Still, BBPP is reported over and over again as have 100% equity interest. Technically true, but rarely is it mentioned just how little that actually amounts to in terms of exposure (which can be a measure of just how careful and cost-conscious the project management will be). With this "100%" equity in major overseas projects, BBPP stock goes up and up, no doubt already making the $15 million back and then some.

Meanwhile, the courthouse is still two years from being completed.

You'd think the government partnership agreement would include a requirement for enough equity to be invested that would not so easily be recovered, just to keep the private partners keenly interested in the success of the project.

Posted by: Steve Janke at 01:35 PM | Comments (2) | Add Comment
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More on the Durham Region courthouse project. In this post, I'm considering something else I've noticed. The private partnership building this courthouse in Oshawa for the Ontario government has kicked in just over 6% of the cost of the project. As it happens, this is a extremely low contribution, and a study I've found states the obvious.

When you don't have much at stake, you have little reason to work too hard to be successful. Even less reason when your partner is likely to go to extraordinary lengths to make sure the project succeeds for political reasons.

In other words, did Dalton McGuinty's government make the mistake of letting the private partners sign on with virtually no skin in the game? Is that is what happening in Sarnia, where another P3 project for the construction of a hospital has been revealed to have more than doubled in cost.

Posted by: Steve Janke at 11:37 PM | Comments (14) | Add Comment
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When in March the private consortium awarded the contract by Dalton McGuinty's Liberal Ontario government to build the Durham Region courthouse issued a bond offering to raise the $214 million needed, I noted that the interest rate offered was significantly higher than the rate offered by government savings bonds that have traditionally been used to raise cash for public projects.

Since the cost to pay investors the principal and interest is passed back to the Ontario government and so back to us, the taxpayers, the interest rate mattered. Compounded over thirty years, it could matter a lot.

But what is really spooky is that back in March, a media report quoted a Moody's analyst who characterized this deal as a template. That means this plan to pay a premium to raise funds for Private-Public Partnerships (P3) is the norm.

Posted by: Steve Janke at 10:05 PM | Comments (7) | Add Comment
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The Sarnia Hospital is in the news. A P3 project designed to save the taxpayers money, it has been hit with huge cost overruns. Guess what? No matter what Premier Dalton McGuinty tells you about the risk of overruns being taken by the private partners, the fact is that the costs are going to be borne by the taxpayers. Indeed, the increased cost paid by us is likely designed into the contract at the outset, protecting the private partners from an overruns.

I know because I've been studying a bond offering to pay for another P3 contract, the Durham Region Courthouse.

We'll be paying a half-billion dollars over 30 years to pay for a 5% bond offered up by the private partners to pay for the courthouse. The Ontario government can raise funds on the bond market at 3% to 4% interest.

You do the math.

[Actually, I should do the math more carefully myself. This piece was originally titled "half-trillion" instead of the correct "half-billion", and the mistake was repeated in one place in the text. If the link you are following still says "trillion", I apologize. In any case, the feed has been republished, and the correction should propagate out to any links using the feed.]

Posted by: Steve Janke at 11:26 AM | Comments (12) | Add Comment
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