Creative financing

How does a $65 million courthouse bear a $270 million price tag for Ontario taxpayers? (see story here)  Forgive me, readers, for I stray off the County this week in an attempt to understand how the province is spending your tax dollars and mine across the bridge.

Let’s first describe the problem we are trying to fix. Currently, four courthouses are scattered across Belleville and Trenton. According to a release from Infrastructure Ontario, consolidating local courthouses into a single location will “provide a new, modern and accessible courthouse to the community.” Of course it will also boast some green features including better indoor air quality, energy efficiencies and plenty of glass for natural lighting.

Better access and improved efficiency for the folks who spend their days in our justice system is a good thing, I guess, but is it really worth $270 million? What else could we do over the next 30 years with $270 million?

Perhaps we could help feed and educate the kids less well off in our community. Perhaps we could take a few million of these tax dollars and put them to work to ensure these kids received a good start in life. Perhaps, if we did this job better, we might help these kids avoid the justice system altogether and just maybe reduce our need for grand and magnificent courthouses. But I digress.

Let’s get back to the $270 million—let’s try and understand the math behind the province’s design, build, finance and maintain (DBFM) project procurement method.

My sources say that a building of this size, scope and quality should cost in the neighbourhood of $65 million to construct; to be generous let’s round this up to $75 million. First, however, we have to design it— let’s say five per cent of construction value— adding another $3.75 million to the total. Now we have to finance this $79 million over 30 years, which at an interest rate of five per cent would add another $70 million to the cost of the project. (Of course TD Bank is one of the consortium partners and they currently pay about one or two per cent on deposits, so their real financing costs are likely to be much lower—but let’s not quibble, a million here a million there, who’s counting?)

Now we are three letters into the DBFM and we have accounted for about $150 million. A rough back-of-the-napkin estimate of property management fees might be in the order of $100,000 per year or about $3 million over the course of the 30 years. The contractor also agrees to replace any major systems if they fail during the first 30 years—so, for fun, let’s add another $5 million for a new roof and another $5 million for a rework of the heating and ventilation system. Tack on another $10 million to cover inflation on maintenance items over the next 30 years.

Add this all up and one gets to about $175 million—still about $100 million short of the projected cost of the project. Of course this can’t be right. Surely I have missed something big in my estimate.

But isn’t that the problem? Shouldn’t this calculation be easier? Shouldn’t the average person be able to look at what its government is doing and understand how it is spending our money?

This process, however, is utterly opaque. The spokesperson for Infrastructure Ontario couldn’t even offer a rough breakdown of the cost of the pieces that go into the $270 million price tag for the new Quinte Consolidated Courthouse.

“We don’t separate the components out,” explained spokesperson Paulette den Elzen.

She assured this reporter that the taxpayer was indeed getting value for money—the proof of which will be available for all to see in a matter of weeks.We eagerly await this report.

Somewhere deep in this analysis, however, will be a calculation of risk and a dollar amount will be assigned. Judging by the information provided on the Infrastructure Ontario website, the risk component is equal to about a fifth of the overall value. For this project that means about $54 million the McGuinty government is paying the consortium for a measure of certainty.

I suspect most Ontarians might prefer to take on that risk, keep the $54 million and insist that Infrastructure Ontario do a better job of managing its projects.

Currently the province is building at least another five courthouses that look very similar to the one proposed in Belleville.All are being developed using the DBFM method. In fact, more than $6 billion on new hospitals, courthouses and other provincial installations are being built this way.

The key advantage for the McGuinty government is that these projects don’t show up as debt on the province’s balance sheet. The problem for taxpayers who fret about our government’s growing debt is that we can’t even see or measure the billions of dollars this government is adding to the burden of future generations. It is hidden behind this creative financing technique.

In 30 years our children will crawl out from under this burden and will inherit these buildings—our very expensive risk insurance will have run out by then—just in time, I suspect, to replace the roof.

rick@wellingtontimes.ca