The sheer size of infrastructure deficits and debt in Canada pretty much guarantees an increased role for the private sector in many aspects of municipal infrastructure. The public-private partnership model (PPPs) is becoming increasingly popular both in Europe and the U.S., and will likely move ahead in Canada as well. The debate over the merits of PPPs is ongoing in Canada, and at times it is difficult to sort out the full range of issues involved.
PPPs are essentially an arrangement between a government or some other public sector body and a private sector party that results in the private sector providing infrastructure or services that are traditionally delivered by the public sector. A key element of PPPs is a transfer of risk from the public partner to the private sector partner (AUMA 2002). PPPs include different combinations of the following: design, finance, build, operate, maintain, own, transfer, lease, develop, and buy (Allan 1999). The particular advantages and disadvantages of any PPP is highly dependent on which of the above factors are involved.
■ Advantages: PPPs have a number of advantages including improved service levels, increased operating efficiency, decreased implementation time, and access to a wider range of innovative financing tools such as revenue bonds, zero coupon bonds, and public lease revenue bonds. PPPs typically access previously unavailable credit that can be guaranteed only if the project goes ahead and results in the creation of a new revenue stream - one that would be unavailable if the project did not proceed. PPPs often result in improvements in assessing and allocating the risks of a project because the public sector may not always correctly assess risk. Most important, PPPs can attract industry expertise and innovative technology to infrastructure projects and services.
In short, PPPs allow cities to spread the benefits and risks of building their cities by employing private capital and expertise, which can result in savings, a lower public investment that frees up resources for investment elsewhere, and results in the completion of specific infrastructure projects that would simply not go ahead without private participation. The private sector benefits from a project backed by government and realizes a reasonable return on its investment.
■ Disadvantages: Taxpayer accountability can be compromised if PPP agreements are negotiated confidentially. Some PPPs have been noted to result not only in a lack of public consultation, but in corrupt contracting processes and misallocation of risk among the partners. Development spans that are longer than political terms of office have a particular downside for the private partner. More important, governments typically have access to better financing rates than the private sector, which can result in higher overall costs unless the efficiency gains in operations or maintenance offset the interest rate differential (Allan 1999). Because private capital will only flow to projects where the rate of return matches the relative risk, private involvement can result in higher user fees to ensure an appropriate return. While this presents an obvious opportunity for a move toward more rational pricing, it may also be a political liability. Cities have to be willing to make the compromises to attract private partners, and one is ending a preoccupation with subsidized services.
■ Moving Forward: Effective and useful partnerships are more than a consultative or collaborative effort. Whether or not the potential of private capital can be harnessed very much depends on creating the conditions that will attract the private sector, including elements of power-sharing and a strong sense of mutual benefit (Seidle 1995). In other words, cities need to be willing to delegate some authority and control to the private sector partner who needs at least some freedom to recoup its investment. In the Canadian context, it is often the private sector that approaches governments to explore a potential partnership, and it is the private interests who request government funding, borrowing, or a loan guarantee. All of this is backwards, and reflects the desire of governments to stay in control as well as their tendency to underestimate the return required by private capital relative to the risks involved.
Many of the potential negatives associated with PPPs can be alleviated with thorough research and organizational procedures. Transparency with the public and the public employment sector is critical, and all requests for proposals (RFPs) should be public. Every effort should be made to ensure that the RFP process is competitive, and where possible, also includes submissions from the public sector (CCPPP 1996). The use of impartial contract auditors throughout the process is one such step in enhancing accountability. Most important, quantitative and comprehensive cost-benefit analyses are imperative in determining feasibility. In the end, cities must ensure that any potential PPP is used to further the priorities of the city and that it results in a long-term financial advantage after considering all the costs. Ultimately, any PPP must serve and maintain the public interest.
| A TAXONOMY OF PPPs Operate and Maintain: These arrangements benefit from the private partner's expertise by offering the potential for lower operating costs. These PPPs do not transfer significant risk to the private sector partner. Lease and Operate: These PPPs also benefit from the prospect of lower operating costs, but they do require a guaranteed revenue stream for the private partner to realize a return. Service regulation and price caps may be necessary. Design and Build: These PPPs create room for innovation and savings via competition for construction and they do transfer some risk to the private partner. Operating costs, however, are less of a factor. Build and Transfer: These PPPs occur when a developer owns the land and provides infrastructure that is eventually transferred to the public partner. Design, Build, and Operate: These PPPS are often called turnkey operations and are the most complex. The intent is to minimize operating costs while still having access to lower municipal financing rates. Design, Build, Finance, Operate, and Transfer: These PPPs allocate significant risk to the private partner who transfers the project back to the public partner after a period in which a return has been earned on the initial investment. A guaranteed revenue stream in the form of tolls or user fees are imperative for these PPPS. Design, Build, Finance, and Lease: These types of PPPs involve the government leasing from the private partner that designs, builds, and finances a project. Such PPPs are helpful when a public partner does not have adequate access to financing. |
In many ways, the future is becoming more conducive to PPPs. Recent efforts at municipal legislative reform in some provinces are easing restrictions on the ability of cities to establish joint ventures (Lorinc 2001). With this barrier apparently weakening, the primary roadblock remains the desire to retain control within city hall. This approach needs to be reconsidered if only because joint development agreements through public-private partnerships are reinvesting in urban infrastructure, revitalizing downtown cores, and rebuilding harbour fronts the world over (Lorinc 2001). Further, PPPs may be able to better access a new and emerging source of capital in the form of pension funds. Recent turmoil in the financial markets has seen a number of pension funds losing billions of dollars, but their real estate and infrastructure holdings are earning a return. Some funds are reporting that they are exhausting their real estate options and are indeed looking to infrastructure as a reasonable and reliable alternative (Alexander 2002).