CHAPTER 6 Conclusions

This pan Canadian assessment of public-private partnerships for the procurement of public infrastructure has found that the second wave of P3s initiated under the guidance of specialized infrastructure procurement agencies (or offices within central government agencies) have to date delivered important efficiency gains relative to conventional procurement approaches. These efficiency gains take the form of cost savings and time savings. The expected value of these savings is well documented before the start of each project based on value-for-money assessments undertaken as part of the procurement process. They can also be verified on an ex post basis-that is, after project completion-as in the case of the construction of the southeast and southwest legs of the Edmonton Ring Road. These two projects were broadly comparable, but the P3-procured project took two years less to deliver than the conventionally procured project.

The time and cost performance of P3 projects can also be evaluated against the targets set within each of the respective projects, that is, for their time and cost certainty. Although most of the second wave of Canadian P3 projects have not completed the construction phase, the 19 projects that have passed this milestone have mostly been delivered either early or on schedule, with only two projects delivered up to two months late (with financial penalties resulting from the delays borne by the private partner or by the public sector partner in the case where delays were due to risks retained by the public sector). With regard to cost certainty, none of these 19 projects (or others that are being completed) has experienced construction cost overruns that were borne by the public sector (unless the cost overruns were related to items where the public sector retained the risks).

These Canadian results are also broadly consistent with international evidence from the United Kingdom and Australia-the jurisdictions that have the most experience with P3s. Finally, it is worth noting that cost certainty in a project is vital from a public interest perspective, because it enables public decision makers to allocate public funds to the right projects. Without cost certainty, the public sector is often compelled to channel additional funds midway through a project regardless of any value-for-money considerations. This occurred in the Vancouver Convention Centre Extension Project, the Sudbury Regional Hospital (Phase I) project, and the Montréal subway extension to Laval, all of which were conventional procurements.

Despite the successes to date, not all P3 infrastructure projects generate efficiency gains, because in some cases the gains can be more than offset by a combination of the incremental cost of private financing, any additional costs arising from transferring the risks to the private consortium (i.e., the risk premium), and the incremental transaction costs. This is why each infrastructure project requires a rigorous VfM assessment to ensure that a P3 procurement option delivers value relative to a conventional procurement method, as is standard practice for all second-wave P3s.

VfM tests are designed to ensure that the risk transfer effected in a P3 agreement is cost-effective for the public sector owner of the infrastructure. Our review of the available VfM studies and guidance documents suggests that each of the four jurisdictions under consideration-British Columbia, Alberta, Ontario, and Quebec-has developed a rigorous VfM methodology for comparing the costs of P3s and traditional procurements. The VfM test is not undertaken as an afterthought. Rather, a first pass of the test is done before the start of the procurement process (i.e., before the RFQ stage), and the test is then finalized after the financial close. We also believe there is value in updating the VfM studies ex post at key milestones, such as at completion of construction and periodically thereafter. Interestingly, conventional infrastructure procurements are normally not subject to any VfM-type tests to inform procurement strategy.

Several factors drive the efficiency gains that arise from P3s. The first is the optimal risk allocation process, which is at the heart of the P3 procurement process adopted by the P3 agencies and offices across Canada. The optimal risk allocation process involves identifying and valuing project risk exposure upfront and transferring to private consortia those risks for which these firms have the requisite risk management and mitigation experience. This risk transfer process also has the considerable advantage of forcing an upfront consideration (i.e., before or during procurement) of all the project requirements and associated costs. Without such upfront assessments, there is a much higher risk of cost overruns, as evidenced in several of our case studies of conventional infrastructure procurement.

Performance-based contract provisions, which specify desired outputs rather than prescribed inputs, are another driver of efficiencies in P3 contracts. These contract provisions encourage private consortia to consider the most cost-effective delivery practices. The integration of the design, construction, operation, and maintenance phases of a project is yet another potential driver of efficiencies, because it allows private firms to adopt innovations that can reduce whole life-cycle costs, even if they involve more investment in the design or construction stages. However, there is little empirical evidence of the relative importance of these two efficiency drivers. Moreover, both these efficiency drivers can be adopted in conventional forms of contracting, provided that care is taken to specify the desired outputs and to design an appropriate contract over a substantial part of the expected useful life of the infrastructure asset.

Private finance is the fourth efficiency driver in P3 projects. By virtue of this feature of P3s, the public sector pays the private consortium only upon delivery of the facility (although some milestone payments are sometimes made before completion of construction). This provides a powerful incentive to ensure that the facility is built in a timely manner and in a way that meets the contractual requirements. This payment by results forces consortia to carry most of the financing requirements for the project, which includes sizable debt obligations. Without these financing requirements, some private firms would have little incentive to complete their contractual obligations should they encounter significant cost overruns that they cannot pass on to the public sector. Therefore, private financing can be considered the glue that binds together the other efficiency drivers mentioned above, particularly the optimal risk allocation process and the performance-based contract provisions.

It is also worth noting that private financing provides some of the discipline that ensures that the public sector owners consider all the project requirements and associated costs upfront. Bidders already have an obvious interest in doing this, particularly with respect to the risks being transferred to them in the contract. However, it appears that private financing may also encourage public sector owners to do the same, because these contracts can be more difficult and expensive to modify than conventional contracts. Part of this procurement discipline is due to the fact that the process is managed by specialized infrastructure agencies that attempt to ensure that the public sector owners do all the required planning upfront. But the private financing provides these agencies with additional leverage to ensure a disciplined and efficient procurement process.

Competitive procurement is also an important driver of efficiency gains in P3s. However, we have not discussed this feature at length, because it is not specific to P3s and is arguably important in all types of procurement.

We also found that the procurement process for the second wave of P3s has been considerably more transparent than that for conventional infrastructure projects of equivalent scale. This is because the key procurement documentation, including a redacted form of the partnership contract, is publicly available and a fairness advisor provides an opinion on the fairness and transparency of the process for all bidders. Neither of these features are typically characteristic of conventional public infrastructure procurements.

We also take this opportunity to dispel a few myths about P3s in Canada. First, P3s in Canada are not about the privatization of public assets. Ownership of the new infrastructure facilities either remains with the public sector or is transferred back to the public sector at the end of the contract term. Second, the anecdotal evidence in this report suggests that there is little basis to the criticism that service standards suffer under a P3 relative to conventional maintenance contracts or even relative to in-house provision.