Angry in the Great White North

Durham Region is getting a new courthouse, consolidating in one location in Oshawa facilities that are spread across eight locatons:

June 28, 2007

Construction officially began on the Durham Consolidated Courthouse in Oshawa, Minister of Public Infrastructure Renewal David Caplan and Attorney General Michael Bryant announced today at a groundbreaking ceremony for the new courthouse.

"The Durham Consolidated Courthouse project is an example of our government's commitment to investing in infrastructure across the Province of Ontario," said Caplan. "Not only will this new courthouse improve access to justice services in the region, but it will also be one of the largest 'green' buildings in Ontario."

"The Durham Consolidated Courthouse will provide the people in Durham Region with modern courthouse facilities and meet the growing needs of the community," said Bryant. "This investment will help strengthen the justice system in this great region."

Over the next 20 years, the Region of Durham is forecasted to have one of Ontario's highest rates of population and caseload growth.

"I would like to thank the community for its continued support of this project," said Pickering-Ajax-Uxbridge MPP Wayne Arthurs. "The new justice facility will spur economic development that will benefit everyone in the region and we are looking forward to the project's completion."

This is a P3 project, a Public-Private Partnership. That means a private consortium builds and manages the facility, and the province pays rent.

The risk for overruns is taken on by the private consortium. In this case, the private consortium that won the contract was Access Justice Durham, made up of PCL (construction) and JCLP (operations). They'll run the courthouse through 2039.

Now who pays for the courthouse?

We do of course, but in a roundabout (and potentially expensive way).

The financial arm of the consortium is the Canadian branch of the Dutch bank ABN AMRO Bank N.V.

On March 2, 2007, the day Access Justice Durham was named the winner of the competition, a Confidential Memorandum was issued by Access Justice Durham outlining a $214,062.00 bond offering (it is not online but I find things). The interest paid on the bonds was 5.015% per year, compounded, and paid quarterly. The bonds mature in August 2039, in line with the completion of the service contract with the Province of Ontario.

Access Justice will not receive any of the proceeds of this offering. Access Justice will use the proceeds of the sale of the Bonds by it to ABN AMRO on the Closing Date as follows:

(a) CAD $20,000,000 into the Debt Service Account;
(b) CAD $154,000,000 into the Construction Account; and
(c) the remainder of the proceeds from the issuance were deposited into the General Account.

Now when they say Access Justice doesn't get any of the money, that requires a bit of clarification. Notice that $40,000,000 of the $214,000,000 offering goes into the General Account, which is itself a source of revenue:

Access Justice generates interest revenue on its Account balances based on the applicable deposit rate at the time. Interest earned on each Account is calculated daily and credited to that Account. The main sources of the interest revenues are as follows:

• the Debt Service Reserve Account;
• a minimum required balance of CAD $250,000 in the General Account;
• the interest earned on monthly-generated operating revenues prior to quarterly Bond Payments and Equity
• distributions; and
• the interest earned on monthly cash balances in the Lifecycle Account.

But here's the thing. When you look Appendix B of the Memorandum, the total payments over the 30 years of the bond comes out to over $445,000,000 in principal and interest. And who pays for that?

OIPC, as agent for the Province of Ontario, will pay Access Justice a Monthly Service Payment sufficient to cover payments to JCLP and the Bondholders. The Monthly Service Payment will be paid monthly. OIPC, as agent for the Province of Ontario, is Access Justice's sole credit counterparty. (See "Project Agreement - Payment Mechanism").

Are the taxpayers of Ontario getting value for their money?

Consider that if Ontario Savings Bonds were used to raise the money, the interest paid would be much lower:

Finance Minister Greg Sorbara announced interest rates for the 2006 issue of Ontario Savings Bonds (OSBs) that go on sale today, calling them a safe investment with competitive rates.

"Again, people throughout the province have the opportunity this year to make an investment that they can count on and one that contributes to Ontario's economic strength," Sorbara said. "By investing in Ontario Savings Bonds, purchasers are investing in a stronger Ontario."

The five-year Step-Up Bond interest rates are 3.70 per cent this year, 3.80 per cent in the second year, 3.90 per cent in the third year, 4.00 per cent in the fourth year and 4.25 per cent in the final year. The three-year Fixed-Rate Bond interest rate is 4.10 per cent, and the seven-year Variable-Rate Bond rate is 3.90 per cent for the first six months.

The interest rate for the next six months for the 2000-2005 Variable-Rate Bonds was also set today at 3.90 per cent.

That's the problem with the P3 model as I understand it. It's all well and good to say the private sector is paying for this and is taking on the risk, but really, it is a public building performing public work and being paid for out of public funds. It's not like the Durham Courthouse is in competition with all those other Durham Courthouses to drum up court business, forcing the consortium to drive down the ongoing costs, such as bond interest payments, as part of a plan maximize revenue.

Instead, on March 2, the Ontario government picks Access Justice Durham, and on the same day, Access Justice Durham offers bonds at 5.015% knowing that the attractive interest payments will be covered by the taxpayer.

A couple of hundred million dollars difference.

Well, there is one way for the Ontario taxpayer not to take a bath on this. Dalton McGuinty could direct the government to buy the bond offering. The government would pay the service contract costs for the courthouse, including the cost of the interest for the bond. The money would then end up being paid back to the government with the quarterly bond payment.

But then the government would be taking on all the risk as the bondholder. Moreover, since many of the risks to the project that could cause Access Justice to default on bond payments include such things as the government changing the terms of the contract or of the construction (through legislation or some other mechanism), the irony would that the government as bondholder would suffer from conflicting pressures if such a change was being considered. The government would be putting its own interest payment income at risk.

The real question is who is going to buy these bonds:

The Bonds will not be listed on any securities exchange or quoted in the automated quotation system of any registered securities association and purchasers may not be able to resell the Bonds purchased under this Confidential Offering Memorandum. There can be no assurance that a secondary market for trading in the Bonds will develop or, if a secondary market does develop, that it will provide Bondholders with liquidity or that it will continue for the life of the Bonds. Accordingly, this investment should be considered only by those persons who are able to bear the economic risk of the investment until the Maturity Date.

Despite the fact that this bond offering is for building a public building, neither the CDIC or the Province of Ontario provide any insurance for this investment. This bond is not qualified to be part of an RRSP, an RESP, and so on. Because the bonds are not offered through a bonds market, they are exempt from other rules that protect investors:

The Underwriters, as principal, conditionally offer the Bonds on a private placement basis in reliance upon exemptions from the prospectus requirements of applicable securities legislation, all at prices to be negotiated by the Underwriters with potential bondholders. Accordingly, the Bonds will only be offered to persons or entities to whom the Underwriters are entitled to sell such securities without the benefit of a prospectus qualified or filed under such securities laws. Any resale of the Bonds will be restricted in the manner provided by applicable provincial securities legislation, and accordingly, purchasers of the Bonds are advised to consult with a legal advisor before effecting any sale of the Bonds.

Sheesh, who would buy these things? It explains why the interest rate offered is so good. It would have to be.

That's what is so pointless about this. The P3 approach is supposed to protect the taxpayer by shifting the risk to the private portion of the partnership. But this is nonsense. No private enterprise would take on more risk without covering its investment. And this memorandum shows just how the private part of the partnership shifts the risk back to the public side, accomplishing nothing.

Well, other than making us pay a heck of a lot more than we would have before.

Am I just speaking in hypotheticals? Hardly. The Sarnia Hospital P3 project has exploded in costs:

Cost overruns in the tens of millions of dollars at a hospital project exemplify Liberal government waste of taxpayer dollars that require an audit or even a criminal probe, Progressive Conservative Leader John Tory suggested Saturday.

A day after Health Minister George Smitherman said the expansion at the Sarnia Blue Water Health Centre would cost a "guaranteed'' $214 million, the Sarnia Observer reported a leaked Health Ministry document shows the price tag could reach $319 million.

The project, for which ground has yet to be broken on, was supposed to cost $140 million.

The details came to light just hours after Health Minister George Smitherman made a campaign stop in the city in support of beleaguered incumbent Liberal Culture Minister Caroline Di Cocco, and downplayed suggestions of massive cost overruns.

Smitherman said construction would begin shortly at a "guaranteed'' price of $214 million under contract with London-based construction giant EllisDon.

Guaranteed? Nothing is guaranteed. I wonder just what interest rate will be offered up on a new Sarnia hospital bond to cover the overruns. It'll have to be good in order to attract investors. We ought to know because that cost is coming back to you and me.

At least we know how much the Durham Courthouse is going to cost us.

Addendum: Something was nagging me as I was writing this piece. Why wouldn't you offer the bonds up on the public markets? Why would this Offering Memorandum be marked "private" and "confidential" every which way from Sunday? Maybe this is all normal stuff, but then the taxpayers are on the hook for payments to the bondholders, so shouldn't we know all the details about how the bond offering is structured? And that's what was bugging me. Who wouldn't want the Ontario taxpayers to know? In a public and private partnership, who stands to be punished if the voters decide they don't like what they see?

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