The Benefits of P3s. Why do P3s work?

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Alaina Nicholson
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1 The Benefits of P3s Why do P3s work? P3s are a long-term performance-based approach for procuring public infrastructure where the private sector assumes a major share of the responsibility in terms of risk and financing for the delivery and the performance of the infrastructure, from design and structural planning, to long-term maintenance. P3 projects involve greater consideration of whole life cycle: P3s put into an integrated contract the entire life-cycle -- design, build and operate and maintain; this ensures that overall cost and risk is considered; for example, design takes into account of cost to build, maintain and operate and avoid white elephants. P3 projects engage the expertise of the private sector: The private sector has the experience and expertise to deliver large projects. They bring innovation and learnings from other projects. Many Canadian and international firms have developed significant expertise developing and executing P3s, which can be employed for the benefit of taxpayers. P3 projects ensure private sector capital is at risk, bringing capital market discipline and incentives: Most importantly, P3 projects require private sector capital to be at risk. The public sector pays only when the infrastructure is available and performs. This generally means that no payments are made until the infrastructure is built and a substantial portion is paid over the life of the asset, if it is properly maintained and performs. This skin in the game means that taxpayers are not on the financial hook for cost overruns, delays or any performance issues over the assets life. It also means that the profit motive is harnessed to ensure effective results. Finally, this requires the private sector to raise both equity and debt capital, meaning that there is substantial oversight by lenders and investors in both the upfront due diligence and project execution. This is a discipline that the public sector cannot match. P3 projects allow the public sector to focus on its core business: The public sector s core focus should be on the defining the output it wants (i.e., x litres of clean water, y traffic capacity). Leave it to the private sector to provide the most effective solution to deliver on those outputs. 1

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3 Canada A Global Leader in P3s Factors contributing to Canada s Emergence as a P3 Infrastructure Leader Dedicated P3/Infrastructure Procurement Agencies Sustained Pipeline of Projects Application to Greater Number of Asset Classes Government Support & Potential Application of P3s by Other Public Sector Sponsors (Municipalities, First Nations) Highly Competitive Market P3 Friendly Legislative and Policy Frameworks Development and Application of Market Accepted Methodologies and Contracts The creation of dedicated P3 agencies in a variety of Canadian jurisdictions has hastened the maturity of the Canadian P3 market. These agencies have aggregated project pipelines to stage and deliver consistent and sustainable deal flow and have imposed the application of accepted project methodologies, deal structures and documentation which reduce bidding costs and reinforce success, which in turn strengthen deal flow. The Canadian market has learnt that in order to position itself above its global competitors for infrastructure providers, it needs to capture the private sector s attention through a sustained and consistent pipeline of projects. The existance of the provincial organizations has aggregated project pipelines to stage and deliver consistent and sustainable deal flow. As we have identified in our analysis below, 57 P3 projects have been in procurement since 2009 covering almost every sector. The overwhelming acceptance of the P3 delivery model in Canada has led to its application beyond simple vertical infrastructure and into transport, information technology and communications, water, recreation and culture and other sectors. Provincial governments and the federal government in Canada remain supportive of P3s as a means of replacing critical outdated infrastructure on-time and on-budget. The federal government s support for municipal and First Nation P3s also demonstrates the active support and efforts to expand the use of P3s into relatively new infrastructure spaces. The Canadian private sector has been actively participating in P3 projects across the country. Competitive tension between bidders has remained high, with very few P3 projects failing due to lack of private sector interest. Competition in the Canadian P3 infrastructure space has also increased over the last 5 6 years due to the arrival of a significant number of large foreign multinational corporations bidding P3 opportunities. The procurement processes (RFQ, RFP) adopted by the dedicated agencies continue to ensure sufficient levels of high quality competition. Legislative and policy frameworks are an international best practice adopted by many of Canada s leading P3 jurisdictions (e.g. BC, Ontario, Quebec) and are the foundation for a robust P3 program and market because they ensure that all infrastructure investments are at least considered for a P3 delivery approach. In addition, these frameworks: Ensure policy alignment across government departments; Send positive signals to the market; Provide transparency and clarity for stakeholders and the public; Provide solid procurement principles; and Create market confidence in tender and contracting law practices that are supportive of P3 projects. In Canada, P3 agencies have been responsible for crafting deal methodologies and structures accepted by the market, including: Fair and rigorous procurement processes; Well defined deal structures with market tested risk allocation; Comprehensive value for money methodologies; Tested and financeable payment mechanisms; and Standard contractual documentation. Well established methodologies and deal structures have been important for two reasons: a) they have imposed discipline on public sector project sponsors, ensuring careful consideration of project suitability to a P3 delivery approach and a high degree of planning and development; and b) P3s can be expensive for both the public and private sectors. Standardized methodologies and accepted deal structures have helped to template transactions and reduce costs for both the public and private sectors. This has been accomplished through workshops, standardized contracts, and using financial, legal and technical advisors conversant with the P3 methodology. 3

4 Average Procurement Timelines Distribution of P3 Projects in Procurement by Sector ( ) Sector Number of Projects Percentage of Total Projects Hospitals & Healthcare 23 40% Transportation 12 21% Justice & Corrections 11 19% Recreation & Culture 4 7% Education 2 4% Communication 1 2% Defence 1 2% Energy 1 2% Real Estate 1 2% Government Services 1 2% 4

5 Distribution of P3 Projects in Procurement by Jurisdiction and Procurement Method ( ) Procurement Method AB BC MB NB NS ON PEI QC Alternative Service Delivery 1 Build Finance 4 Design Build Finance 1 5 Design Build Finance Operate 2 1 Design Build Finance Maintain Design Build Finance Operate Maintain To be decided 1 1* 1* 1* Distribution of P3 Projects in Procurement by Procurement Method ( ) Procurement Method Number of transactions Type of Transaction Alternative Service Delivery (ASD)* 1 1 Government Services Build Finance (BF)* 4 4 Hospitals & Healthcare Design Build Finance (DBF) 6 4 Recreation & Culture 2 Transportation Design Build Finance Operate (DBFO) 3 3 Transportation Design Build Finance Maintain (DBFM) 37 Design Build Finance Operate Maintain (DBFOM) 4 To be decided (TBD)/Other 2 *Note: These models are not considered P3s by all Canadian jurisdictions, including PPP Canada. 1 Defense 2 Education 18 Hospitals & Healthcare 11 Justice & Corrections 1 Real Estate 4 Transportation 3 Transportation 1 Hospitals & Healthcare 1 Communication* 1 Energy 5

taxpayers, through public-private partnerships (P3s).

6 PPP Canada Achieving better value, timeliness and accountability to taxpayers through public-private partnerships. Who We Are PPP Canada was created as a Crown Corporation by the Government of Canada to improve the delivery of public infrastructure by achieving better value, timeliness and accountability to taxpayers, through public-private partnerships (P3s). PPP Canada s operations focus on building P3 procurement knowledge and capacity amongst federal departments, and leveraging greater value for money from federal investments in provincial, territorial, municipal and First Nations infrastructure with the P3 Canada Fund. Advancing Provincial, Territorial, Municipal and First Nation P3s: The P3 Canada Fund The P3 Canada Fund is the first infrastructure program, anywhere in Canada, which directly targets P3 projects. The $1.2 billion Fund is a meritbased program with the objective of supporting P3 infrastructure projects that achieve value for Canadians, develop the Canadian P3 market and generate significant public benefits. PPP Canada has to date announced over $109 million in funding commitments to seven P3 projects; examples include: 6

7 Advancing Federal P3s In addition to our work under the Fund, PPP Canada has been given the mandate to support federal P3 procurements by providing expertise and advice through the mandatory P3 screen. The Federal Screen will assess the potential for large federal capital projects as P3s. On a go forward basis, infrastructure projects with a life span of 20 years or more and having capital costs of $100 million or more will be subject to the screen. If it is determined that there is P3 potential for the project, the procuring department will then be required to develop a procurement proposal that includes a P3 among the possibilities. There is high potential for a reasonable flow of P3 projects at the federal level, as shown by the departments exploring P3s. Ultimately, the P3 procurement of services, and other non-traditional P3 arrangements, may present the largest opportunity in the federal market. Prospective clients for PPP Canada services among the federal market segments will largely come from Departments and agencies that are only periodic or intermittent procurers of major capital assets with the latter group requiring greater efforts and support from PPP Canada. In addition to supporting procuring departments, PPP Canada s federal business line strategy focuses on creating strategic partnerships with key federal policy leaders to create clarity and consistency in decision-making and P3 procurement practices. 7

P3 Fundamentals and Best Practices in Resource and Project Management

Achieving better value, timeliness and accountability through public-private partnerships P3 Fundamentals and Best Practices in Resource and Project Management Ottawa, Ontario November 26, 2015 Greg Smith