Public-Private Partnership Potential
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The future of P3s in Canada is up for debate. At a high level, a public-private partnership is any transaction structure including both private and public parties working together towards a common goal.
In essence, the goal is to deliver “value for money” – maximizing value for Canadians when all factors, including asset life, risk, and the time value of capital, are considered. Most commonly used for large non-routine infrastructure projects at the federal, provincial, and municipal levels, some of the perceived benefits of P3s include:
- on-time, on budget delivery,
- risk transfer from public to private entities, and
- whole life cycle cost certainty and cost minimization – insulating the public sector from any errors made by the private sector.
The most practical application of P3s might be in relation to maintenance services, particularly as it relates to public safety – things like snow removal and ice control as well as traffic accommodation at accident sites. These crews operate based on 24/7/365 manpower coverage. Typically the Design Build contractor will attempt to optimize the construction phase with long term performance, future maintenance, and operating cost all being the responsibility of the Owner. However; Design Build Finance Maintain (with or without Operations) incorporates a long-term arrangement (typically 25-35 years) whereby the P3 contractor accepts full contractual responsibility for design and construction as well as maintenance and capital asset preservation. The public entity is then able to mandate based on the contract seemingly ridiculous service level agreements for things like winter maintenance (plows on the road within 15 minutes of receiving a call from the public sector organization is not unheard of, for example).
But you don’t have to look far to find examples of systemic problems across P3 programs and methodologies. Many experts have coined the phrase 2Ts relating to P3s…terrific and terrible.
- Over-inflated initial cost estimates and little competition among large P3 contractors,
- Lack of evidence or empirical data to support the risk transfer from the public sector to the private sector, and
- Long-term liabilities and outstanding commitments to private corporations – totaling tens of billions of dollars in Ontario alone.
To dig into the concept of risk further, in Canada P3s are setup as Special Purpose Vehicles (SPVs) or “bankruptcy-remote entities”. An entity is created by a consortium solely for a single transaction meaning that the larger companies behind P3 projects can walk away at any time, risking only the equity they have put into the project. The ultimate responsibility for delivering a project or service rests with the government or another public entity, and most P3s are setup such that the entity is guaranteed payments directly from the government, again lowering the risk for companies involved.
Common sense (and basic behavioural psychology) suggests that pay for performance (P4P) should work – using pay(ment) as leverage to secure a desired outcome. In fact, it is among many candidates’ top 3 most important criteria for making a move and in many cases represents the fulfillment of “the American Dream” – the harder you work, the more money you make. However, the evidence is overwhelming that P4P doesn’t work – moving the focus from the task to the reward, inducing executives to take company-killing risks, and often causing people to act unethically.
P4P or “value-based purchasing” in healthcare probably gets the most attention, and rightfully so – rewarding physicians and hospitals for meeting performance measures for quality and efficiency and penalizing caregivers for poor outcomes, medical errors, and increased costs. But, when it comes to P3 hospitals, most experts will caution you that hospitals that operate as P3s are a form of private for-profit “care” that erodes Canada’s universal health care system – profit becomes the focus of the service instead of health care. This raises the argument that P3s are perhaps best used when it is possible to separate the funding and operating models or for large infrastructure projects where the cost of the infrastructure itself far exceeds the cost of maintenance.
Nevertheless, P3s continue to gain traction in Canada and if you are a public entity are a great tool to have in your toolkit and, so long as we are making informed (p3canada.ca) and transparent decisions, have the potential to deliver the best value for Canadian taxpayers, particularly on non-routine infrastructure projects.