One of the central features of a P3 procurement process is that both the public sector and the private sector partners conduct a detailed identification and assessment of all risk exposure for each stage of the project, from design and construction through to operations. The procurement authority then determines, after consultations with the three short-listed bidders, which risks are retained by the public sector, which risks are transferred, and which ones are shared between the private partner and the public sector owner and how they are shared.30
As an example of how the economics of risk transfer works in a P3 procurement, we can go back to the Durham Consolidated Courthouse project discussed earlier in this chapter. In that design-build-finance-maintain (DBFM) project, the total risk exposure retained by the public sector (i.e., taxpayers) under the conventional procurement approach was estimated at $157 million in 2007 dollars. The partnership agreement transferred 84 per cent of that risk exposure in value terms (i.e., $132 million) to the P3 partner. Based on the price of the winning bid, the transferred risks cost the public sector $74 million. This is the gross estimate of the cost to the public sector of the transferred risks (or risk premium), including the incremental cost of private financing, any incremental transaction costs borne by the private consortium, less the value of any other efficiencies resulting from the AFP procurement approach. The resulting gain is therefore $58 million ($132 million less $74 million) or 44 per cent of the original value of the retained risks.31 This gain arises because the P3 partner is in a better position than the public sector to manage the transferred risks. In this case, the transferred risks consisted of:32
◆ construction price certainty;
◆ scheduling risk (e.g., delays);
◆ building design, including coordination with the construction phase;
◆ benchmarking and market testing of the cost of providing soft facilities management services (e.g., cleaning and food services) every five years against prevailing market costs for such services;
◆ energy and environmental design obligations; and
◆ facilities maintenance risks.
Given the magnitude of the efficiency gains-44 per cent of the retained risks-it is clear why the risk transfer process is at the heart of the P3 procurement process. Further examples of the positive effects of risk transfer may be seen in the case studies at the end of this report.
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30 The allocation of risks in a P3 procurement process starts with the allocation based on the standard language in the draft project agreement. This draft agreement is shared with the three proponents before they submit their final proposals. There are then collaborative discussions with all three bidders, under competitive pressure, in order to fine tune the risk allocation, after which the procurement authority issues the revised draft agreement. Final bids are based on the revised draft agreement.
31 Note that the net savings to the public purse (or the VfM savings) are obtained by subtracting the incremental transaction costs incurred by the public sector as a result of the P3 procurement method (i.e., $58 million less $9 million of incremental transaction costs borne by the public sector gives the VfM savings of $49 million).
32 Infrastructure Ontario, Value for Money Assessment: Durham Consolidated Courthouse.