July 11, 2007

Backgrounder (2)

The Issue: Selling Government Infrastructure and Buying It Back

In February 2007 the Conservative government announced that it intended to sell valuable real estate owned by the people of Canada and then lease it back.  On May 1, nine buildings were advertised for sale as a pilot that may be expanded to include up to 40 more.  The initial nine buildings, located in Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal, are among the most up-to- date and well-maintained buildings that the government owns.  

The government's first step was to award a contract to BMO Capital Markets Real Estate Group and RBC Capital Markets Real Estate Group to determine if it made sense to sell the buildings and then to manage the sale if they determined that it did. Not surprisingly, they recommended selling the buildings and have since handled the sale.  June 12 was the closing day for bids and a recommendation to Cabinet on the sale is to be made within 60 days.

The sale of the buildings is being driven by the Conservative government's unwillingness to invest in maintaining its property and by an ideological belief by Conservatives that government should not be in the business of owning and maintaining infrastructure.

Why is it an issue?

The government's Sale-Lease Back plan is a clear example of a public-private partnership (P3) arrangement. Such arrangements have been proven not to benefit taxpayers.  Here's why this plan is a bad deal for Canadians.

There is no accountability in this Sale-Lease Back plan; no accountability to the Canadian public, to Parliament and to the public sector workers who currently manage and maintain the buildings. The government has refused to release details of the study that recommended their sale. The same group of companies who made the recommendation are also profiting from selling them. Without seeing the details of the initial study, it cannot be determined if a conflict of interest exists, but there is every chance that there may be.  Parliament has been denied access to all of the information that would allow it to review whether this initiative makes sense or not.

The Sale-Lease Back scheme lacks common sense.  Most Canadians could not easily be persuaded to sell houses that they own so that they could repair them. If they lacked the capital they would borrow the money based on their equity in the property and make the necessary repairs. Canadians own these government buildings.

According to international accounting standards the government would be obliged to record Sale-Lease Back deals as liabilities not assets. The sale ignores the Auditor General's 2006 status report which admonishes the government to ensure that funding methods support the selection of the most cost-effective option that meets long-term accommodation requirements. This should not be a problem for a government that is running surpluses.  In any event, the federal government is able to borrow at lower rates than any other organization or individual.  As a result, Canadians are well within their rights to ask why this sale is taking place.  It is not surprising that the initial announcement was met with incredulous skepticism by both the public and many politicians.

Public sector real estate managers agree that the Sale-Lease Back initiative will cost taxpayers more in the long run, and depending on the details of the sale, potentially a lot more. Indications are that the public will still be responsible for “flow through” costs like plumbing, windows, electricity, heating and ventilation and all other interior maintenance while the private owners will only be responsible for the shell of the buildings.  The government is also guaranteeing that it will remain a tenant for the total 25 year period of the lease, removing any private risk and ensuring a good return for the new owners.

The buildings in the initial offering are all in excellent shape. If maintenance costs were the real reason for the sale it doesn't make sense to sell superior buildings. Despite government assertions to the contrary, Public Works and Government Services Real Property staff are recognized experts in the work that they do. Inadequate maintenance is a result of a consistent lack of government funding, not expertise.  Instead, a committed ideological belief that the government should not own real estate seems to be supporting this initiative, as opposed to a long term analysis of the public interest.

Canadians are demanding that the federal government be a model for the public and private sectors in the retooling and ongoing provision of environmentally sustainable “green” buildings.  Unfortunately, the Sale-Lease Back initiative is likely to force the public to pay for refit costs for buildings they no longer own. If alterations to the shell of the building are required as environmental technologies evolve, there also could be additional contracting costs.

Although PSAC members' jobs don't appear to be immediately impacted by this initiative, this may change if more buildings are sold. The trend  in P3 arrangements has been for the private partners to maximize profits by undermining worker wages and benefits, a labour market decision that ultimately encourages overall increased economic inequality and insecurity.