Public-private partnerships introduce significant efficiency and reliability, perhaps the most compelling argument for their use. They are also intrinsically transparent. As such, they have earned a strong reputation for the ability to deliver projects on time and without the typical cost overruns that plague many multiyear infrastructure projects-especially when multiple administrations, each with their own priorities, come and go during the lifespan of a project.
In a 2009 study of 114 PPPs, the UK's National Audit Office found that 69 percent were delivered on time and 65 percent came in within budget.15 In Australia, the financial advantage of PPPs has been well documented. The University of Melbourne conducted a study of 42 traditional procurement projects and 25 PPPs and concluded that PPPs provide far greater cost certainty. The researchers found that once the contract had been signed, PPPs had an average cost escalation of 4 percent, while traditional procurement projects had a much higher average cost escalation of 18 percent.16 In related research with the University of Melbourne, The Allen Consulting Group studied 21 PPPs and 33 traditional Australian projects and found the PPP cost advantage to be "economically and statistically significant." On a contracted $4.5 billion of PPP projects, the firm said, the net cost overrun totaled only $53 million. But for $4.1 billion of traditional procurement projects, the net cost overrun amounted to $618 million.17
To understand the benefits more clearly, consider the PPP project for Canada Line, a 12-mile regional rapid-transit rail line connecting downtown Vancouver, the Vancouver International Airport, and Central Richmond in British Columbia. Completed several months ahead of schedule in August 2009, Canada Line is the achievement of a private consortium that won a 35-year contract to design, build, partially finance, operate, and maintain the rapid-transit system.18 It is the first transit project in North America to be developed as a PPP. The net present value of the transaction in 2003-when the deal closed-was $1.47 billion.
Before deciding to proceed with a PPP, officials studied such partnerships in Australia and the UK and conducted a "value for money" (VfM) analysis (see page 9 for more on VfM analysis). That type of analysis evaluates future cash flows to determine whether a capital project is best suited for a traditional public-procurement option or for a PPP. A VfM analysis can address efficiency by permitting transparency with accurate, full-cost pricing early in a project; encouraging competition from bidders; and clarifying project requirements and risk allocation, as well as the attendant rewards. It sometimes reveals, however, that a PPP is not always the right option.
In the case of Canada Line, the largest PPP transit project in North America, the VfM analysis found that the PPP option offered significantly higher value for money than public sector procurement. "We had a robust competitive process and an extensive evaluation process conducted by a number of professionals," says Jane Bird, CEO of Canada Line Rapid Transit Inc., an independently governed subsidiary of the regional transportation authority. "We were confident at the end of the day that our partner had the necessary experience to manage the risks we assigned." She touts the PPP project as "the right model for this project at this time."
The key value factors in the winning PPP proposal were significantly lower construction costs and similar operating and maintenance costs, along with enhanced service and higher projected ridership and revenue. The consortium's proposed construction cost savings were equal to $85 million in net present value. Lower costs were achieved partly through innovative tunnel design and a service plan that will generate more revenue from higher midday ridership. A combination of public and private monies funded construction. Over the life of the concession, operating revenues are expected to exceed operating costs to achieve agreed-upon return on investment (ROI). Both the public and private sector are satisfied that-given the transfer of risk to the private sector, the level of innovation introduced, and the overall efficiencies realized-ROI is warranted and attainable.
What lessons did Bird learn along the long road to the Canada Line's completion? "It's all about education; I can't overstate the need to continue to communicate and educate on both the government side and the public side" about PPPs, she says. "No issue is too
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15 National Audit Office (UK), Performance of PFI Construction, October 2009.
16 Infrastructure Australia, National PPP Forum: Benchmarking Study, Phase II, December 17, 2008.
17 The Allen Consulting Group, Performance of PPPs and Traditional Procurement in Australia, 2007.
18 Jane Bird, Metropolis Financing Urban Infrastructure, June 15, 2006.