A whole-life approach to the procurement of public infrastructure assets generates three potential efficiency gains. Each of these is discussed below.
The main argument for integrating the three phases of a project is that it creates incentives for the consortium to minimize the total capital and facilities maintenance costs over the economic useful life of the asset. This is a challenging task that requires bringing together different disciplines (notably architects, builders, facilities managers, and commercial experts) to decide which changes are likely to improve financial performance and which are not. In a conventional procurement process, the public sector owner manages the synergies between the requirements of each stage of the project with a view to minimizing the whole life-cycle costs. However, it is far from clear that public sector managers are well equipped to deal with such a task, and in many cases it is not even part of the procurement strategy. But most importantly, public sector managers are not incented to take the risks that can lead to innovations. In other words, public sector managers are not incented to trade off higher costs in the design and/or construction stages for lower costs during the construction and operating period.
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A procurement approach that introduces incentives to innovate could lead to significant efficiencies. |
Operations, facilities maintenance, and rehabilitation spending over the lifetime of an asset can be as large as the original capital cost of the asset. Hence, a procurement approach that introduces incentives for the consortium to innovate could lead to significant efficiencies. If the consortium is already aware of some of these efficiencies, it is very likely to share them with the public sector partner through a lower bid price to increase its chances of winning the bid. After the start of the project, the consortium is strongly incented to identify and implement any potential innovations, to the extent that these reduce whole life-cycle costs, and the efficiency gains can be captured in the firm's bottom line. This is why it is important for the term of the P3 contract to include a substantial part of the economic useful life of the asset. Without this, the consortium cannot capture the benefits of innovation.
In practice, long-term P3 contracts tend to benchmark and market test facilities management services every five years, with the consortium taking the risk of any downward adjustment in service payments that is not fully offset by a reduction in the cost of providing the service.4 This means that as facilities management innovations become more widely adopted in the marketplace, a consortium that was an early adopter of an innovation eventually loses some of the benefits from early adoption.
And if a consortium has not already adopted the innovation, it is forced to do so as the benefits of the innovations become fully reflected in the going market rates for facilities management services.
A second benefit that comes with integrating construction and maintenance phases is that the public sector owner obtains the equivalent of a long-term warranty on the performance of the new asset, in contrast to the one- or two-year warranty typical under a conventional construction contract. This benefit is relevant to all build-finance-maintain (BFM) and DBFM projects such as the Anthony Henday Drive Southeast Leg Ring Road in Edmonton, the Durham Consolidated Courthouse just east of Toronto, or the Autoroute 25 project in the Montréal area. It depends, of course, on having the appropriate output-based performance measures in the partnership agreements.
The third benefit of whole life-cycle procurement is that future governments with responsibility for maintaining the new asset are essentially pre-committed to providing an appropriate level of maintenance and upgrade work, as discussed in Chapter 2. This ensures not only that the service levels stipulated in the partnership agreement are met by the P3 partner, but also that the asset is in good working order when it is returned to the public sector at the end of the term.
As a final observation, one could ask whether the benefits of a whole-life approach to procurement can be achieved through a conventional form of contracting. This is tantamount to asking about the role of private financing in P3s, since that is the main element-in addition to a design-build-maintain contract-required to form a P3 as defined in this report. We address this issue below.
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4 The consortium could also enjoy the benefit of an upward adjustment in service payments that is not fully offset by an increase in the cost of providing the service.