In this report, we define P3 and conventional procurement methods for public infrastructure projects based on the features presented in Table 1. However, there are a number of qualifications to these definitions of P3s and conventional approaches. First, the distinction between P3s and conventional procurements is not as clear-cut as implied in the table: Some procurement approaches lie somewhere between the two models. These include design-build (DB) projects, which have P3 characteristics such as more than one project phase and output-based performance specifications. However, because such projects are publicly financed, we categorize them under the conventional approach.
| The distinction between P3s and conventional procurements is not clear-cut; some approaches lie between the two. |
Second, we recognize that the definition of P3s differs somewhat across the Canadian jurisdictions that are actively engaged in this type of procurement. For example, some jurisdictions do not require more than one project phase for a P3. This is the case for Ontario's build-finance (BF) hospital projects, which are procured as alternative financing and procurement (AFP) projects-a term for P3s used by the Ontario government. As another example, Quebec's definition of P3s does not necessarily entail private financing, although private financing has been used in all the projects that have reached financial close4 and have been managed or co-managed by PPP Québec to date. Since our objective in this report is to include in our assessment of P3s all of the transactions undertaken by P3 agencies or P3 offices within government departments in Canada, we have allowed for some ambiguity in the P3 definition.
| Table 1 Key Features of P3 and Conventional Procurement Methods | |||
| P3 projects | Conventional projects | ||
| Integration of two or more phases of a project from design and build through to a concession period, which can include providing the facilities maintenance services or even the core services that rely on the use of the newly built facility. This feature means that P3 contracts are usually long-term contracts covering a large part of the economic useful life of the asset, which may exceed 30 years. | Each phase procured separately through a succession of separate contracts. Facility design is completed before tendering of the construction phase, which is often accomplished through multiple contracts awarded to multiple contractors for separate pieces of work. This conventional approach is also known as "design-bid-build." Once the new facility has been built, facilities maintenance services and other aspects of operations are delivered through contracts that are separate from the design and build contracts. Conventional construction contracts usually take the form of stipulated price contracts,3 or construction management contracts, where an engineering firm is hired to manage the successive contract phases, including the procurement for each phase.4 | ||
| Output-based contracts, in which the deliverables are specified in terms of the outputs required, leaving the private sector partner to put forward the best solution for meeting the output specifications. Output-based specifications are particularly important for the operational phase of the contracts (i.e., after the facility opens for public use), but they are also used for the design and construction phases, where the public sector owner specifies the functional requirements for the facilities to be procured. | Input-based contracts, in which the public sector owner specifies the exact inputs required for the facility. In some cases, input-based contract provisions may be appropriate either because it is not possible to specify outputs that capture the contractor's performance in a satisfactory manner, or because the potential benefits from specifying such outputs may not justify the effort required to develop, monitor, and enforce them. | ||
| Payment upon delivery, whereby the private firm is paid only for defined assets or services once construction has been completed.1 When this feature is combined with output-based specifications, the result is a performance-based contract. | Monthly payments to contractors based on the percentage of the contract work completed. Up to 90 per cent of the stipulated contract price may be paid in monthly payments. Note: Payment on a percentage completion basis is not the same as payment initiated upon final delivery of the project.
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| Private financing, in which a substantial share of the project is financed through project-specific equity and debt. The private financing is usually provided on a non-recourse basis,2 with the equity provided by the consortium partners making up less than 20 per cent of the project financing. Third-party debt, bank loans, and contributions from governments provide the remaining finance requirements. In other words, private working capital is not enough to qualify a project as privately financed; it must have project-specific equity and debt. This kind of private financing is usually available only to projects that are at least $40 million in size, and often much larger. | Private financing limited to relatively modest levels of working capital. Because conventional contracts involve regular payments to the contractors, private financing is limited to a modest amount of working capital.
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| Private sector project stewardship, whereby overall control of project execution is transferred to the private sector partner. The completion of milestones is determined by an independent certifier and overseen by the private sector partner. The public sector owner must step back and allow the P3 consortium and its contractors the freedom to manage each phase of the project in a way that best meets the contractual obligations. However, the public sector owner ultimately retains ownership of the asset, including the right to make changes to the requirements or even to terminate the P3 agreement. | Project stewardship by the public sector or a contract management firm. Overall control of project execution rests with the public sector owner (or a contract management firm acting on behalf of the public sector owner). The public sector owner (or its contract management firm) would typically have engineers on site to supervise and direct the project and to inspect and approve the work at key completion milestones.
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| 1 In some cases, partial payments have been arranged at key milestones during the construction phase. 2 Financing is provided on a non-recourse basis when recourse to the equity investor for any claims resulting from the project is limited to the investor's equity contribution. 3 Stipulated price contracts, which are also known as Canadian Construction Documents Committee (CCDC) 2, require the contractor "to perform the required work for a single, pre-determined fixed price or lump sum, regardless of the contractor's actual costs." See www.ccdc.org/documents/index.html#CCDC2. 4 Construction management is sometimes referred to as an "engineering-procurement-construction-management" approach. In this case, the firm managing the contracts is the "managing contractor." See Grimsey and Lewis, "Public Private Partnerships," for a comparison of the advantages and disadvantages of traditional fixed-price contracts, managing contracts, and P3s. In addition, a matrix developed by the Canadian Design-Build Institute compares the performance criteria found in the design-bid-build approach with those in the construction management and the design-build approaches. See www.cdbi.org/documents/guides/matrix.pdf. | |||
| Source: The Conference Board of Canada. | |||
| One misconception that must be dispelled is that P3s in canada are about the privatization of public assets. |
We have also allowed for some ambiguity in our definition of the conventional procurement approach, which covers different types of contracts and procurement methods, ranging from multiple, small-value fixed-price contracts that are part of design-bid-build procurements through to contract management and even design-build contracts. In principle, conventional contracts could include some of the features of P3 contracts, such as integration of the design and construction phases and even some output-based performance requirements. However, they would not include private financing and the associated features of payment upon delivery and private sector project stewardship. This definition is consistent with the argument that effective risk transfer to the private sector consortium is much more difficult to achieve without private financing. According to this view, private financing is the glue that binds the key elements of a P3 approach to procurement, including output-based performance specifications, payment upon delivery, and private sector project stewardship.
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4 Financial close refers to the point in time when the contractual agreements, including all terms and conditions as well as the funding arrangements, between the winning consortium and the procurement authority are agreed to and signed.