With private financing at stake and most cost-escalation risks borne by the P3 partner, all bidders have an obvious interest in considering upfront all the costs and risks associated with delivering on each stage of the project. However, this also has the beneficial effect of forcing the public sector owner to do the same-that is, to consider upfront all its requirements for the facility and the associated services. This is because the public sector owner is committing to a long-term contract in which major changes in project requirements can be costly to implement.5
In contrast, in conventional procurements it is not uncommon for difficult parts of a project to be postponed for future consideration or for a project to kick off even before the full requirements have been specified. Nor is it uncommon for private firms to undertake projects where budgets have been underestimated by the public sector, as was the case with the extension of the Montréal metro to the City of Laval (reviewed as one of our case studies in Chapter 5). It is very unlikely that a private sector consortium would bid on, let alone commit to, a P3 project to deliver a facility at a grossly underestimated budget6 if the consortium also bore the risk for the majority of project financing. In other words, it is the presence of substantial private financing, and the risk that entails, that forces both parties in a P3 procurement to take full account upfront of all the requirements and risks entailed by the project. By "upfront" we mean before going out to the market with a request for expressions of interest (RFEOI) or a request for qualifications (RFQ) and certainly no later than the proposal submission stage.
The establishment in the last five years of the P3 agencies (or equivalent units in a central government agency) that specialize in the procurement of infrastructure has also contributed to a disciplined procurement process. These agencies advise the public sector owner (e.g., the hospital authority or provincial ministry) as it prepares for a potential P3 procurement, and in some cases they are also responsible for managing the procurement process and construction. The agencies have also sought to ensure a clear, predictable procurement process beginning with the RFQ/RFEOI through to proposal stage (including workshops with short-listed bidders to discuss various aspects of the draft partnership agreements) and on to preferred bidder selection and financial close. This kind of disciplined procurement process is necessary to attract international bidders and to ensure that the P3 market remains competitive.7
Therefore, the question arises as to whether these P3 agencies could achieve the same discipline in the procurement process without the private financing. It is difficult to answer this question with certainty, but there is reason to believe that private financing-even before it is committed to a project-raises the stakes for all parties in a transaction. Potential bidders have more reason to concentrate their bid resources in jurisdictions that have a reputation for delivering on project procurements, in part because P3 procurements are more costly than conventional ones. Public sector owners are compelled to consider the full project requirements and costing upfront, because the projects are unlikely to reach the starting point otherwise. In this context, P3 agencies have stronger incentives to ensure a clear and predictable procurement process, but they also have greater leverage with the public sector infrastructure owners during the procurement process.
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Potential bidders have more reason to concentrate their bid resources in jurisdictions that have a reputation for delivering on project procurements, as P3 procurements are more costly than conventional ones. |
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5 Modest changes in contractual requirements can usually be accommodated in P3 contracts through the process for contract variations, as noted in Chapter 2. In fact, there is often a more stringent process for undertaking contract variations in P3s than in a conventional contract (e.g., not all changes require contract variations). As a result, some participants argue that there tend to be fewer contract variations in a P3 project than in a conventional project. However, it has not been possible to verify this argument using the evidence base collected for this report.
6 Or the equivalent, such as an incomplete functional specification for a facility.
7 There is reason to believe that Canadian jurisdictions active in P3s have had a better track record than their U.S. counterparts in achieving consistent and predictable procurement processes. This is because there have been a number of failed or extended procurements in the U.S., including the BART Oakland Airport Connector, Texas State Highway 121 (taken from Cintra and given to NTTA), Pennsylvania Turnpike Lease, Oregon Bridge Program, Jacksonville Outer Beltway, and Port of Miami Tunnel (which closed in October 2009 after a first failed attempt). According to Bob French of Flatiron Constructors Canada, the U.S. P3 market is characterized by "owners doing one-off projects (i.e. not a long-term P3 interest), a lack of knowledge and expertise, and procurement processes that are not well defined at the outset." See French, "Public-Private Partnerships." In contrast, the few failed procurements in Canada in recent years (e.g., the Union Station revitalization project in 2003) were projects where there was no specialized infrastructure procurement agency to advise the public sector clients.