Municipal P3s: Exploring the Success Factors
John McBride, PPP Canada
As published in the April 2014 edition of Public Sector Digest.
While Public-private partnerships (P3s) are no longer new on the Canadian infrastructure scene, they remain an under-utilized tool by many jurisdictions. Alberta, BC, Ontario, and Quebec have used the model extensively to procure complex infrastructure projects and have saved money over the long run. In fact, over one hundred Canadian assets, including roads, schools, and hospitals, have been procured as P3s to date. Municipalities are also moving into the P3 space, but are still learning the full potential of the model. As PPP Canada continues to look for new and innovative ways for Canadian governments to unlock the benefits of the model, we are pleased to share some of the success factors behind Canada’s best P3s.
How do P3s Deliver Better Results?
P3s deliver better results by transferring risk to the private sector and by enabling the private sector to be more innovative. They transfer risk by:
- Adopting a whole life-cycle approach: the private sector assumes responsibility for all or many of the phases of an asset’s life-cycle. In doing so, the private sector assumes the interface risk between the phases, is fully accountable for whether the asset delivers, and is incented to produce the most effective result over the lifespan of the asset. The all-too-familiar problems of poor design, sub-standard construction or inadequate or deferred maintenance become the responsibility of the private sector.
- Paying based on performance: the private sector is paid only on performance; in the majority of our projects no payment is made until substantial completion, and a significant portion is paid only over the life of the asset based on clear performance criteria. This aligns financial incentives for on-time, on-budget delivery and for the achievement of performance standards during the useful life of the asset. Moreover, since payments are made only on performance the private sector partner must raise significant financing for the construction of the asset. Lenders and equity participants provide a level of due diligence and oversight that brings enormous discipline to the process.
- Specifying the what, not the how: in a P3, the public sector specifies what it wants and leaves as much scope as possible to the private sector to develop the best solution to deliver results. This focus on the what -- rather than the how -- enables the private sector to develop the most innovative solutions.
The potential of the P3 model is being demonstrated across the country. In Winnipeg, the Chief Peguis Trail Extension project achieved 17.6% ($31 M) savings, when compared against the design-bid-build approach. The road extension also opened to the public a year ahead of the estimated design-bid-build construction schedule. In Alberta, the Northeast segment of Anthony Henday Drive in Edmonton also achieved 17% ($371 M) savings for the residents of that province. Results like these beg the question -- if P3s can deliver assets faster and cheaper, why aren’t all infrastructure projects procured this way?
P3s – A Tool in the Tool Box
P3s are a tool in the tool box. They are the right solution in about 15%-20% of projects. They work better for riskier projects, as the transfer of risk to the private sector is a key benefit of P3s. In general, this means projects which are larger, more complex, and/or undertaken infrequently. In addition, P3 projects require the private sector to incur significant costs to bid as they are required to undertake significant design work and arrange financing. As a result, the private sector is generally interested in larger projects where these costs can be recovered in a successful bid. Finally, P3s work better in circumstances where the performance output is relatively clear and stable. Since P3s are long-term and are predicated on defining the what, not the how. An excellent example is a wastewater treatment plant where the expected result (treated effluent) can be specified clearly and over time.
Key Success Factors
There are a number of factors that influence the success of a P3 project.
- Leadership and governance
Senior-level leadership is critical to the success of P3s. A senior level champion can ensure that when obstacles arise (as they do in every significant undertaking), the team remains focused on the objective – delivering an asset that produces value for money. Champions can help communicate the benefits of the P3 approach to others.
Project governance must also be firmly structured and dependable, with appropriate resources available when necessary. Because P3s require extensive and accurate upfront planning, all of the appropriate stakeholders must have a seat at the table and an equal voice in the discussion. The City of Edmonton has opted to appoint a Governance Board, comprised of government and private sector experts, to oversee its upcoming light rail transit P3. Reporting directly to City Council, the board works to ensure the application of best practices and oversees management decisions.
Procuring via P3 has many advantages, but a significant amount of work is required to unlock these benefits. This type of complex procurement cannot be done off the side of a staff person’s desk, and external resources are often required. A full-time, dedicated Project Manager is a necessity, as are legal advisors and specialists in risk quantification. Most jurisdictions that lack significant experience with P3s will also bring on a procurement advisor to support them as they develop their internal capacity to execute P3s. PPP Canada has seen even small municipalities proceed successfully through the planning process – we are working with communities such as the RCM of Haute-Yamaska in Quebec and Lac La Biche County in Alberta in the areas of wastewater and solid waste management.
- Enabling policy environment
An increasing number of Canadian municipalities have adopted P3 policies and frameworks that provide the policy coverage necessary to veer outside of a traditional design-bid-build procurement approach. Regina, Calgary, Edmonton, St. Albert, Ottawa, and the Province of Manitoba have all enacted policies or legislation outlining a set of best practices meant to reinforce the integrity of their P3 procurements. In our experience, jurisdictions can benefit from working with others who have already completed this type of work, and we would recommend connecting with a provincial or municipal counterpart to develop a similar framework.
Recent high-profile P3 projects have very clearly demonstrated that the most important factor in maintaining public support for a project is properly communicating the need for the asset, as well as the benefits of the P3 model. Regina’s Wastewater Treatment project was subject to a public referendum, which ultimately supported the project. The City’s firm adherence to this approach reinforced the value of identifying and clearly articulating the specific ways in which a new asset fulfills the community’s needs.
Adaptive Strategies for Municipalities
PPP Canada promotes a number of adaptive strategies that can assist municipalities in structuring infrastructure projects to unlock the benefits of a P3.
- Optimal sectors: The water / wastewater, solid waste management, and public transit sectors have proven precedents in the Canadian marketplace.
- Bundling: Smaller-sized, similar assets may be bundled into a larger contract to generate efficiencies and attract market interest.
- Shared assets: Some jurisdictions have opted to work together to procure a single, larger asset (e.g., a wastewater treatment facility) that responds to the needs of all stakeholders, instead of several smaller facilities.
- Resources and capacity: PPP Canada combines its 25% P3 Canada Fund support with its own expert advisory services, separate Project Development Funding, and access to its roster of qualified consultants to ensure that inexperienced jurisdictions are enabled to succeed.
PPP Canada is also continuously developing new tools and resources for governments at all levels. Access to template procurement documents and project agreements, as well as business case development guides and other similar resources, can contribute significantly to the efficiency and success of a first-time P3 procurement.
John McBride was appointed as the inaugural CEO of PPP Canada in February 2009. Mr. McBride has over 25 years of experience working with the public and private sectors in infrastructure development and finance in Canada and abroad. PPP Canada leads the federal government’s efforts to create value for taxpayers through the successful use of P3s.