Monday, May 8, 2017

You Get a P3! And You Get a P3! Everybody Gets a P3!

SOURCE: CBC News: Sask. Spending Millions on Companies that Bid on Work and Lose
SOURCE: Leader Post: Sask. Government Gave $5.6 Million to Companies for Failed P3 Bids

When it was announced earlier today that Brad Wall had sent off another prodding letter to the Federal Government to saber-rattle over the looming Carbon Tax; my first though was what other information could possibly be coming out later today that Wall wanted to distract from.

At first, there was a strong contender in the information that Saskatoon was selected as the new headquarters for Saskatchewan's amalgamated health region; foresaking Regina and cities such as Moose Jaw and Prince Albert that seemed to pose interest in hosting the new HQ. (We'll probably talk more about this at another point.)

But what seemed more in need of a diversion was the story of millions of dollars being paid out to companies who produced failing bids on some of the province's P3 projects.

In the 2015 - 2016 Budgetary year, as cited in the Leader Post source, the province paid out $5.6 million to companies who were not selected as the successful bidder in the project. I'm going to expand on that point, and it's worth noting, that in the Request for Proposal (RFP) that went out for these P3 projects a section was included for the payment of 'honorariums' to unsuccessful bidders.

In the case of the Swift Current Care Home, the honorarium was marked at $300,000; of which two payments were made to unsuccessful bidders for a total of $600,000.

For the Regina Bypass, the honorarium was $1.5 million; of which three payments were made for a total of $4.5 million.

For the North Battleford Hospital, the honorarium was $500,000; of which two payments were made for a total of $1 million.

That accounts for the $5.6 million paid out reported by the Leader Post. What's unaccounted for is any payments made as a result of any of the 18 P3 schools to be built in the province.

Project 1, which covers six schools in Regina, offers a honorarium of $300,000; with no reporting of whether any honorariums have been paid out, or how many. Project 2, which covers twelve schools in Saskatoon, Martensville, and Warman, offers a honorarium of $500,000; with no reporting of whether any honorariums have been paid out, or how many.

Needless to say, Brad Wall and Minister for SaskBuilds Gordon Wyant have been quick to defend the use of these honorarium payments to unsuccessful bidders. Both have held up the defence of "Standard Practice", when it comes to these payments

To be fair, they do seem to be telling the truth on that matter. A cursory Google search of P3 honorariums will show you several different jurisdictions throughout Canada that talk about the honorarium incentive. What's interesting, and unclear in Saskatchewan, is how the honorarium is determined.

For example, the Consulting Architects of Alberta have suggested the following formula for determining an appropriate honorarium:

Honorarium = (CAA suggested fee for basic services X 15%) X 75%

Now, that is just a suggested formula; but it at least provides a baseline for what should be a simple and public question: How are the honorarium for P3 bidders determined, and what percentage of return is there on an honorarium?

The worry, which invokes similarities to the plot of Mel Brooks' The Producers, is the concern that a company could make money off an unsuccessful bid. Regardless of that potential, I think there is a very valid concern in knowing the how the province is determining the level of reimbursement to an unsuccessful P3 bidder.

Wyant is on record, in the CBC article, stating that companies receive "about 30%" of the cost of the designs. What's unclear is whether this is standard, below average, or above average for the design work performed.

Further complicating things is that word "About". Does about 30% mean 29%? 28% 25%, generously rounded up? 31%? Without knowing more specifics about how the rate of honorariums are determined, we can't honestly say whether taxpayers are getting a good deal on these payments or if they're grossly inflated.

But there's a problem we haven't addressed yet; are design costs actually being paid prior to the bid?

As per the Consulting Architects of Alberta, again:
Design firms are often expected to perform design services for free or at heavily discounted rates; they are commonly expected to take on the risk of providing free services as their contribution to their team's pursuit of the project.
So, in Alberta at least (which let's be honest, often serves as operating model for a lot of stuff the Saskatchewan Party does...or at least, it did.) there is an expectation that design teams work on a project for either free or a heavily discounted rate of their normal service as "their part" of the risk in the project.
Which makes one worried that we're reimbursing design costs that didn't actually cost a thing. Again, images of Max Bialystock pop into one's brain, and concern that a corporation could use a P3 honorarium as a form of taxpayer funded subsidizing to avoid paying their own workers, or subcontractors, for work rendered.

Of course, I imagine most companies would hide behind "market interests" or "competitive reasons"  and other buzzwords to forego explaining the direct cost of their design services on a P3 RFP bid. So, we'll just have to go with Wyant's "About 30%" and try to determine whether or not that's a good value or a fleecing on our own.

Which brings us to the next defence, uttered by Wall and Wyant, that honorariums are common in both P3 models and in the traditional "design-build" model (how government generally builds infrastructure projects). Add in the additional, "The NDP paid out honorariums when they were in office" defence, and you have the standard SK Party defence uttered since 2007.

So, is there any truth to those statements?

Right now, not a lot. There is a case of a skyscraper being built in Alberta in 2004, under a traditional design-build method, where a $500,000 honorarium was paid out to two unsuccessful bidders. In that case, the payout was considered unprecedented; and further Googling suggests that honorarium for design-build projects are outliers, not the norm. As opposed to P3s, which seem to require the honorarium to move forward.
I'm failing to find any such example in Saskatchewan; nor am I finding any from when the NDP was in power. I welcome readers who have such information to fire it into the comments section, with links please, so we can update this section as needed. 

As such, on the face of it, this defence doesn't hold water.

Which brings us to Wyant's last defence of the honorarium payment. Wyant admitted that without the honorarium, it's possible there would be no interest in the bid. 

The problem is, there's historical record that rejects this. We cast our eyes, yet again, on Alberta and their experiment with P3 schools. Alberta's PC Government originally made a P3 deal for 19 new schools, with a $750,000 honorarium, before the government scrapped the program. And the reason they scrapped it: Lack of interest from private business.

Saskatchewan's school honorariums, as noted above, ranged from $200,000 to $450,000 below the Alberta one; for one less school overall. Which throws some cold water on the notion that the honorarium produces incentive; if Alberta's more generous offer only attracted one bidder, how did Saskatchewan get away with less incentive for a similar project?

Which brings us to a fundamental question that must be asked: If incentives are needed to convince businesses to sign on to P3 bids, and these incentives are nothing more than taxpayer provided subsidy, why are we pursuing this model?

The best answer to this question, and one I sadly can't provide, is to compare interest and responses to RFPs under the design-build model compared to the P3 model. When the government handled the design work did we have more contractors bid on the project?

Part of me says, without evidence, that it's possible; after all, smaller firms would be able to bid on a project if they had the capacity to build a project but perhaps not the capacity needed to completely design one from scratch.

A defence of P3s that I've heard bandied about by SK Party supporters is that government guidelines require so much work to be done up front on an RFP that some form of compensation is needed for the unsuccessful bidders. And while there is some merit in that argument, the problem is it is undercut by a clearer answer: traditional design-build projects would remove that upfront design cost and need for a honorarium to unsuccessful bidders.

So, we can have a system where the design work is handled and smaller firms are capable of bidding on a project...OR we can have a system where only larger companies, or a hodge-podge mixture of several, can afford to put up upfront costs but want some form of reimbursement regardless of how the competition pans out.

When it's phrased like that, at least to me, the answer seems fairly obvious as to which of those two systems is better over the long haul.

Finally, we would be remiss if we didn't talk about the notion of standard operating practice (SOP). SOP is often cited as the reason why something was done the way it was done. As mentioned above, SOP is for honorariums to be paid out to unsuccessful bidders in a P3 model. From BC to Nova Scotia, P3 projects have used honorariums.

But the question, and one that must be asked in light of the most recent budget, is what does the SOP cost us in the long haul?

As mentioned previously, this government has made a myriad of cuts to various programs in the name of austerity and chase of a balanced budget. What could that $5.6 million paid out to unsuccessful bidders have paid for in other aspects of the budget?

How many hearing aids for kids could that have bought? How many graduates could have gone through NORTEP/NORPAC? How many funerals for the homeless could have been paid for, to provide one last shred of dignity in death? How many EAs could that have put into classrooms?

There's dozens of more examples, but I think that gets the point across. We shouldn't accept "Standard Operating Practice" as an answer for why this money was spent in the manner it was. How a government spends money in our name highlights the priorities that they are pursuing. Regardless of what is said, or not said, in an election; a budget shows you the true colours of those in charge.

And what we've seen, time and time again, is that the average Saskatchewan resident is nothing more than a piggy-bank to be exploited at every turn to ensure an effective transfer of wealth from us to corporate interests. And while that may sound like a teenager rattling off a tenant of Communism, and it does, in this case it is a very real and fundamental truth.

Follow the money and you'll see that our current government has always gone out of their way to ensure corporations were well looked after in this province; from these SOP honorariums to corporate tax cuts in a time of austerity to an idea to clean-up oil wells so companies wouldn't have to...

Wall and Co. have never turned away a thought on how they can benefit business. Conversely, they haven't seen a way to drag more out of the average citizen (resistance to minimum wage increases, SAID funding slashes, increases in cost of living [utilities, university education, etc], etc.)

Look at who Wall has stood up for and gone to bat for the most over the last decade. I'll give you a hint: It wasn't the general public.

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