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Bad news for P3: Economist - Metro US

Bad news for P3: Economist

The global credit crunch could bring about the end of public-private partnerships and cast serious doubt of the viability of existing projects like the Royal Ottawa Hospital, according to a report released yesterday.

“The business model that made P3 financing work is no longer viable. You cannot borrow as much money at as low a rate as you used to be able to,” said economist Hugh Mackenzie, who wrote the report titled Bad Before, Worse Now for Ontario Council of Hospital Unions. “For core public service like hospitals and schools, there is no way that a P3 can come close to the government doing it directly.”

The global financial crisis has created two problems for P3 projects, said Mackenzie.

The credit environment is much tighter than the “free-lending” days before 2008, he said.

Mackenzie said the P3 projects that have not yet started will have difficulty raising the capital to fund the projects.

“The problem will be just getting these things off the ground because the money is not available,” he said.

Even worse, existing projects are facing a double jeopardy.

Most P3s have to be refinanced every five years or so, and Mackenzie is predicting that many will end up paying much higher interest rates than before.

“They will find themselves suddenly having to pay significantly higher costs,” he said.

With the tighter credit conditions now, MacKenzie said stakeholders would be lucky to borrow even 60 per cent of the cost, when prior to 2008, they could get up to 90 per cent of the cost of the project. Which means that they will be scrambling to cover the difference when it’s time to refinance.

The Royal Ottawa Hospital P3 was designed to hold 284 beds at a cost of $95 million. It opened two years later as a 188-bed hospital costing $146 million — $51 million over the original target budget and significantly smaller than planned.

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