Public-private partnerships for infrastructure are saving time and money for
governments

OTTAWA, Jan. 28 /CNW Telbec/ - Public-private partnerships (P3s) for infrastructure projects are delivering savings in costs and time compared to conventional procurement approaches used by Canadian governments. But P3s are not appropriate for all public infrastructure projects, according to the conclusions of a Conference Board report that assesses the performance of projects in the so-called "second wave" of P3s, those executed by specialized government procurement agencies.

"Early results of the 'second wave' indicate that most P3 projects are being delivered on or ahead of schedule. P3s are also providing cost certainty to the public sector, in that governments have not been compelled to channel additional funds midway through a project," said Gilles Rhéaume, Vice-President, Public Policy, at the Conference Board.

"The two major benefits of P3s are cost-savings and time-savings. When all the project risks that the public sector bears are fully costed and included in the total cost of the project-and transferred in part to the private sector partners-cost and time savings can be achieved."

The study, Dispelling the Myths: A Pan-Canadian Assessment of Public-Private Partnerships for Infrastructure Investments, assesses the benefits and drawbacks of P3 procurements based on recent Canadian evidence.

Efficiency gains-lower costs, quicker completion, higher service levels-are due to a number of factors: performance-based contracts, risk transfer to private-sector providers, integration of the various phases of a project, and the requirement that the private partners finance most of the costs of the project. The efficiency gains achieved in P3 projects studied ranged from a low of less than one per cent to a high of 61.2 per cent, compared to conventional methods. In dollar terms, savings ranged between a few million dollars for some projects and more than $750 million in the case of the Autoroute 30 project south of Montreal.

The benefits, however, come with additional costs compared to conventional procurements. According to the study:

    
    -   Private partners charge a risk premium for assuming project risks
        that are borne by the public sector under conventional projects;
    -   Private financing costs are higher than the financing available to
        governments; and,
    -   The transaction costs of developing and monitoring P3 contracts are
        higher than for conventional procurements.
    

Public spending on P3s is usually between 10 per cent and 20 per cent of total spending on public infrastructure. P3s are not appropriate for some infrastructure projects, such as renovations or extensions to existing facilities where it is difficult to distinguish defects in the new work from latent defects in the existing structure.

"In some cases, the risk premium demanded by private partners, combined with the incremental transaction costs and the additional private financing costs, may more than offset the efficiency gains. For this reason, each infrastructure project should undergo a rigourous value for money assessment beforehand, to determine if a P3 offers better value than conventional procurement," said Rhéaume.

"Some of the myths surrounding public-private partnerships for infrastructure appear to be just that. P3s are not the privatization of public assets, and there is no evidence that service standards suffer under P3s. Contrary to a widely-circulated view, the transparency of P3 procurements is considerably better than for conventional procurements, because an abbreviated form of the P3 project agreements is made available to the public, which is seldom the case for conventional contracts."

The report was funded by the Alberta Treasury Board, Infrastructure Ontario, Infrastructure Québec (formerly the Agence des partenariats public-privé Québec), Partnerships British Columbia, PPP Canada, and The Canadian Council for Public-Private Partnerships. The scope, methodology, and findings in this report were determined solely by The Conference Board of Canada.

The methodology for the report included a review of the Canadian literature and publicly available documentation on P3s, interviews with P3 practitioners and academic experts, compilation of a database identifying key points in the procurement process and outcomes for the second wave of P3 projects, and four pairs of case studies comparing P3 projects with those done by conventional procurement processes.

More information is available in a backgrounder (http://www.conferenceboard.ca/press/newsrelease/10-66backgrounder.aspx).

Backgrounder: Dispelling the Myths: A Pan-Canadian Assessment of Public-Private Partnerships for Infrastructure Investments

Background

    
    -   Public-private partnerships (P3s) have become an increasingly
        important procurement vehicle for Canadian governments seeking to
        build new or to upgrade infrastructure assets, ranging from
        hospitals, bridges, and highways through to courthouses, wastewater
        facilities, and concert halls.
    -   Over 100 transactions have been concluded with private sector
        consortia in Canada since the early 1990s.

    This Study

    -   The Conference Board of Canada was asked to undertake an assessment
        of the benefits and drawbacks of P3s for Canadian infrastructure
        investments.
    -   The report was by funded by the Alberta Treasury Board,
        Infrastructure Ontario, Infrastructure Québec (formerly the Agence
        des partenariats public-privé Québec), Partnerships British Columbia,
        PPP Canada, and The Canadian Council for Public-Private Partnerships.
    -   In keeping with guidelines for financed research, the scope,
        methodology, and findings in this report were determined solely by
        The Conference Board of Canada.

    Scope of the Report

    -   This report assesses Canadian P3 projects executed under the
        direction or guidance of the P3 agencies established in the early
        part of this decade, starting with Partnerships BC and followed by
        Infrastructure Ontario, the Alternative Capital Financing Office of
        the Alberta Treasury Board, the Agence des partenariats public-privé
        Québec (recently renamed Infrastructure Québec), and PPP Canada.
    -   The period under review begins when Partnerships BC began advising on
        the procurement process for P3 projects such as the Sierra Yoyo Desan
        Resource Road Upgrade Project, the agreement for which was signed in
        June 2004. These projects are referred to as the second wave of
        Canadian P3s, most of which were executed under the direction or
        guidance of P3 agencies established in the early part of this decade.
    -   The report focuses on the P3 projects initiated by British Columbia,
        Alberta, Ontario, and Quebec, because these jurisdictions have
        specialized infrastructure agencies (or equivalent offices within the
        central agencies of the respective provincial governments) and
        because their projects are relatively similar in structure and
        thereby provide a meaningful basis for evaluation.
    -   The methodology supporting the results of this research project
        consisted of the following four elements:
        -  a review of the Canadian literature and publicly available
           documentation on P3s as well as notable studies from other
           jurisdictions with extensive experience with this type of
           procurement, such as the United Kingdom and Australia;
        -  approximately 20 interviews with P3 practitioners from the private
           and public sectors, as well as with academic experts in the field;
        -  the compilation of a database identifying key points in the
           procurement process and outcomes for the second wave of
           P3 projects that reached financial close by November 2009; and
        -  four case study pairs, with each pair consisting of a P3 project
           and a conventional project from each of the four provincial
           jurisdictions that have been most active in the second wave of P3s
           in Canada. They are:
           -  Alberta: The Southwest (conventional) and Southeast (P3)
              Edmonton Ring Roads
           -  British Columbia: The Vancouver Convention Centre Expansion
              (conventional) and the Abbotsford Regional Hospital and Cancer
              Centre (P3)
           -  Ontario: The Sudbury Regional Hospital (Phase 1) (conventional)
              and the Quinte Health Care AFP (P3)
           -  Quebec: the Montréal Subway Extension to Laval (conventional)
              and Autoroute 25 (P3)

    Definition of P3s

    -   P3 projects tend to feature characteristics such as the integration
        of two or more project phases, output-based contract specifications,
        payment upon delivery, private financing, and private sector project
        stewardship.
    -   Conventional projects are usually characterized by separate
        procurements for each project phase, input-based contract
        specifications, monthly payments to contractors, public financing,
        and public sector project stewardship.

    Performance of P3 projects

    -   The Canadian evidence on the cost and time performance of P3s comes
        from two sources: (1) value-for-money (VfM) studies, which compare
        the total costs of P3 and conventional procurement methods for each
        P3 project, and (2) studies comparing the performance of projects
        against their own time and budget targets, which are set either when
        a project is first announced or when the project agreement is signed.
    -   The VfM study results indicate that the second wave of Canadian P3
        projects is delivering important efficiency gains for the public
        sector (i.e., taxpayers) relative to conventional procurement
        approaches.
    -   The estimated value of these gains varies from just a few million
        dollars per project to over $750 million in the case of the Autoroute
        30 project south of the Montréal area. When these savings are
        expressed as a proportion of what it would have cost the public
        sector to procure the projects through conventional contracting
        methods, the savings range from 0.8 per cent through to 61.2 per cent
        per project.

    Outcomes of P3 Projects

    -   The Canadian evidence on the cost and time certainty of P3 projects
        is incomplete, because only 19 of the 55 second-wave P3 projects have
        reached substantial completion.
    -   Early results point to a very strong performance. Most of the 19
        projects have been delivered either early or on schedule, with only
        two projects delivered up to two months late.
    -   The interim results for the P3 projects that remain in the
        construction phase provide little reason to expect substantial cost
        or time overruns, based on the information regarding contract
        variations and claims against the public sector.
    -   Therefore, the preliminary evidence indicates that the second wave of
        Canadian P3 projects is providing a high degree of cost and time
        certainty for the period from financial close through to completion
        of construction.

    Assessment of P3 Projects by Province

    -   Alberta-two of the four projects were completed on schedule and are
        now in the service phase, and the two other projects are under
        construction. Three of the four projects have had contract variations
        either for changes requested by the public sector or in order to
        address items for which the public sector retained the risks under
        the project agreement. All four projects remain within their public
        sector P3 budgets.
    -   Of the 16 projects assessed in British Columbia, 11 have reached
        substantial completion, and in six cases the project (or a component
        thereof) reached substantial completion earlier than the date
        specified in the project agreement (the other five projects were
        delivered on time). Substantial completion refers to the date by
        which the new facility should be built and soon available to be put
        in service as stipulated in the P3 partnership agreement.
    -   In Ontario, 30 AFP projects have reached financial close under the
        auspices of Infrastructure Ontario as the procurement authority. Most
        of these are build-finance hospital projects, and many are currently
        under construction. Six projects had reached substantial completion
        as of the end of November 2009, four of them early or on schedule.
        All six projects reached substantial completion within the approved
        public sector budgets.
    -   Quebec -the five projects listed in the report are expected to reach
        substantial completion beginning in 2010. One of these projects-the
        Autoroute 25 project-has experienced contract variations and claims
        against the public sector. The variations were due to soil
        contamination levels greater than those the private partner had
        agreed to cover. The cost impact of these variations remains within
        the limits of the approved P3 budget.
    

Myths about P3s in Canada

(1) P3s in Canada are not about the privatization of public assets. Ownership of the new infrastructure facilities either remains with the public sector or is transferred back to the public sector at the end of the contract term.

(2) long-term P3 projects (i.e., those with a maintenance phase) help ensure a satisfactory level of maintenance and upgrade work during the life of the facility. The anecdotal evidence collected in this report suggests that there is little basis for the criticism that service standards suffer under a P3 relative to a conventional maintenance contract or even relative to in-house provision.

SOURCE Conference Board of Canada

For further information: For further information: Brent Dowdall, Media Relations, Tel.: (613) 526-3090 ext. 448, E-mail: corpcomm@conferenceboard.ca


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