Lansdowne: A Weak Public Private Partnership: Benn

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As a Public Private Partnership, the financial elements of the City of Ottawa’s Lansdowne investment are very disappointing.

As a city-building opportunity, it gets a passing grade.  It could have had an outstanding grade, but the decision to sole-source the redevelopment of the Lansdowne Park area rendered that impossible. 

Not all PPP’s are created equal.  There are some PPP’s that succeed, with the financial elements of the public’s investment being appropriately compensated.  There are some PPP’s that fail, either because the underlying business proposition was flawed or because the structure of the PPP failed to address the relative risk sharing.

Let’s start with a couple of examples of successful PPP’s.  

The Bell Sensplex in Kanata is a successful PPP.  Private owners put up the equity, but needed to supplement the land and construction costs with some appropriately priced debt.  The conventional mortgage market was leery of a privately funded recreational facility operating in an area where municipalities owned and operated similar facilities.  The role of the city was to agree to buy a large block of ice time at an agreed to (market) rate per hour for an agreed number of years.  This provided the lenders with a degree of confidence regarding the projected revenue stream from which the mortgage payments would be made.  

The City of Ottawa did not put up any risk capital, and it does not have any operational role.  Its risk is that if the Bell Sensplex failed to rent out 60 per cent (that is the amount I recall from this decade or so old transaction) of the available ice time, the city would cover the shortfall.  The Sensplex operations team is responsible for renting out the ice time to local hockey, ringette, figure skating and other local recreational sports associations, as well as to the beer leaguers.  To my knowledge, the city has never been called on to cover a shortfall.  The public has benefited by having four ice sheets and a half-field domed facility.  The city has benefited by not having to spend tax dollars to build, maintain and operate the facility.  Everyone wins.  Isn’t that what recreational sports are all about?

The federal government decided to get out of the business of owning and operating a key element of transportation infrastructure, notably a number of airports across Canada.  Airport authorities were created, with a mandate to upgrade, redevelop and operate air terminals.  The federal government’s role was to provide the airport authority with the existing land, in consideration of which the airport authority would pay a concessionary (below market) rent.  

The Ottawa Airport Authority is a glowing example of a successful implementation of the PPP model.  It raised the capital to build a new air terminal and a large parking garage, both of which it has expanded and it extended both main runways, all by demonstrating that it had a solid business model, albeit based on below-market land rent.  The users of the Ottawa airport are winners.  It is an excellent facility.  The airline companies are winners, as they get to use an expanded facility and therefore handle more passengers.  The federal government is a winner because instead of losing tens of millions of dollars a year operating the old airports, it receives rent with no offsetting operating costs.

Benn

Now we get to Lansdowne.  Who put up the risk capital?  The City of Ottawa, to the tune of $211 million, and possibly still counting on the city-owned infrastructure.  What does the City of Ottawa get in return for its risk capital?  Last year it was less than $1.5 million, and that was an accounting return, not a cash distribution, to be held by the operators (Ottawa Sports and Entertainment Group) for future maintenance of the city’s facilities.   What does Ottawa get for the land lease on the remainder of the land at Lansdowne?  What we have been told is that they receive concessionary (under-market) rent.  

In contrast to the Bell Sensplex example, where no risk capital was put up by the city and no operating costs were incurred by the city, in the Lansdowne PPP, the city put up north of $200 million, with absolutely no hope of ever getting a risk adjusted rate of return, and it gets to pay for the maintenance on the city-owned facilities.  And we thought Larry O’Brien, who was mayor at the time of the Lansdowne negotiations, was a business genius?

In contrast to the airport authorities, which pay concessionary rent to the land-owner, but put up the risk capital to build the infrastructure, the city receives the concessionary rent and puts up the risk capital.

Ultimately, this raises the fundamental question of why the Lansdowne PPP needed both risk capital from the public, and ongoing financial support from the public.  Is it because the underlying business proposition was so underwhelming that the OSEG partners could not justify using their own capital?  If so, why did the City of Ottawa enter into this PPP in the first place?  We already know that the structure of the PPP is a contributing factor to the failure of the city to even reasonably expect to get a risk-adjusted return on its $211-million capital contribution, what with a waterfall formula that no one in the city dares try to explain, but that is really just an ancillary problem to the pitiful underlying business proposition.  

An old friend from Texas was fond of saying: “You can’t make chicken salad out of chicken droppings, no matter how much mayonnaise you add.”

Ron Benn, a finance executive, has been a member of the Centrepointe Community Association executive for the better part of three decades.

 

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6 thoughts on “Lansdowne: A Weak Public Private Partnership: Benn

  1. Great article, Ron. I only have one small comment. You speak about “the city of Ottawa” as if it is a business entity. What you really mean is us poor “schmoos” the taxpayers, right?

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    1. The City of Ottawa is a business entity. Only some of its components try to work in the public interest, the rest just pretend to do so. We poor schmoos, under the force of law, just keep sending it money.

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  2. Ron, you don’t discuss the cost of debt. Does private debt not inevitably create a disadvantage of the public private partnership model? It would be interesting to calculate, using the Sensplex example, what this has cost extra.
    Another potential issue is transparency. Are Sensplex’ books open?

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    1. EajD, I am not sure I understand your concern.

      The owners of the Kanata SensPlex negotiated a mortgage, one that has likely been renewed a couple of times since inception, based in part by the support offered by the city (as described more fully above). The whole idea behind the city’s support was to either qualify for a mortgage that may not have otherwise been available, or to get more favourable terms, including a more favourable interest rate, than they might have without the city’s support. I am not privy to the details of the negotiations of a decade or more ago, so I cannot quantify the financial benefit.

      What I can say is that the residents of Ottawa have four more sheets of ice, and an indoor half soccer pitch available to them, which are used extensively throughout the year, and that it did not cost the city anything to build it, nor does it cost the city anything to operate it. The city does get property taxes, which is not something it pays itself on city owned recreational properties, so the city is actually ahead of the game, on a financial basis. Based on that, I am not sure why you think the privately owned Kanata SensPlex should open its books. It is, literally, none of our business.

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      1. What I would like to know, Ron, is how the city could put together such a good deal at the Sensplex and then get its eyes stolen when it wasn’t looking at Lansdowne.

        That’s something all Ottawans, I believe, should be asking as taxpayers and as voters and as citizens.

        Exactly what is going on at Ottawa City Hall? And who is going to look at it?

        Maybe the few dissident councillors on Laurier Avenue should be exploring a method to probe this situation in a unique way.

        Because the auditor general won’t do it.

        cheers

        kgray

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        1. Ken, I think the best way to describe the discrepancies between the Kanata Bell SensPlex and Lansdowne is that the city reacts to what the proponents present. In the case of the SensPlex, the owners wanted to own and operate a recreational facility. They needed a form of revenue “guarantee” from the city to make it happen, so that is all that they asked for. In contrast, the proponents of Lansdowne wanted to maximize their profits as property developers, so that is what they asked for. In both cases, they got what they asked for.

          As for getting to the bottom of the what, how, why of Lansdowne, it will take more than a couple of councillors who think for themselves to get any meaningful investigation of how the city handed its lunch and lunch money to OSEG. There are too many people who sit around the table in the council chamber (think of those who have been there for more than two terms) who want to bury that fiasco as deep as they can.

          However, this might be a useful line of questioning from a viable candidate for mayor. Imagine Jim Watson trying to explain the Lansdowne waterfall at an all candidates meeting/debate, where the other candidate merely responds with “does that make sense to you Jim?”. While it was not signed under Watson’s administration, he has appeared in more than a few photos extolling the wonders of the development.

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