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 Vice-President of Finance, Risk, and Administration and CFO
Definition 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. 2
P3s Improving Resource and Project Management Thorough Analysis: qualitative assessment and quantitative assessment Benefits outweigh the costs Value-for-money on whole-of-life costs Competitive selection process drives value while achieving innovation Risk transfer through development of robust and detailed performance specifications Defined and measurable asset performance specifications for O&M Clear regime of asset renewal and repair based on condition and performance of assets 3
PPP Canada: Leading the Federal Government s P3 Agenda Acts as a Source of Expertise Developing and sharing knowledge to provide PPP leadership Advances Federal P3 Projects Advises federal clients on the identification, development, and execution of federal PPPs Supports Other Levels of Government Advises on, and invests in P3 projects being considered by provinces, territories, municipalities and First Nations 4
Traditional Procurement vs. P3 Procurement Assets Assets and services Input terms Components of delivery are separated Paid during or in full upon construction completion Output terms Components of delivery are bundled Partially paid over the life of asset - linked to operational performance. Risks are mainly retained Risks are mainly transferred 5
P3s: A different approach to infrastructure delivery P3s are about delivery: not funding, ownership or asset/service need P3s address three weaknesses in traditional delivery: risk: by linking payment to performance and employing discipline of private capital at risk whole life-cycle optimization: by integrating design, build, operate and maintain into single contract innovation: by specifying deliverable in terms of what service is expected not how to achieve it Benefits of P3s need to be assessed in relation to cost of private sector capital and procurement 6
P3 Characteristics Integration A P3 contract, or Project Agreement, typically includes all of the phases of an asset: from design & construction to operations and maintenance and how it will be financed In a P3 contract, the public sector retains the ownership of the asset A P3 contract is not a joint venture with the private sector, a coownership, a divesture of an asset or a lease contract 7
P3 Characteristics Performance The public sector includes performance specifications that define what is required rather than how it is done Encourages innovation in the private sector Includes powerful financial incentives and a strong monitoring regime to promote compliance through each phase of the project The public sector transfers risks that the private sector is best able to manage, such as: Risk of cost overruns, design deficiencies, early deterioration, construction delay, etc. 8
P3 Characteristics Financing Most P3s are financed by debt and equity, and rely on performance-based payments to be repaid. As a result: The financiers exercise a great deal of due diligence and oversight on the project The financing anchors the risk transfer to Project Co, and provides strong incentives for compliance with terms of the Project Agreement 9
P3 Benefits and Costs 10
Value-for-Money (VFM) Value for money compares the cost of traditional procurement vs. the cost of P3 procurement taking into consideration: Whole-of-life costs: total cost of ownership over the life of the asset Risk: total cost of risk retained by the public sector Discounting: present value of costs over the life of the asset 11
VFM Assessment VfM ensures projects are suitable for a P3 VfM will also support decision-making and rationale for the P3. Screening Tool Decision Support Tool Authorization to Proceed Disclosure and Transparency Only projects which clearly demonstrate positive VfM should be selected for procurement as a P3 Supports negotiations with bidders Evaluation of impact of capital markets conditions Serves as a check on quality of proposals from bidders Ensures that you have received good value proposals Can be used to demonstrate value to the public 12
Value for Money Construction Costs 2,500.0 Operations and Maintenance Costs 2,000.0 11.8% VfM Risk Adjustment Transaction Cost Lifecycle Costs 1,500.0 Competitive Neutrality Financing Costs Financing Costs Competitive Neutrality Transaction Costs 1,000.0 500.0 Lifecycle Costs Operating and Maintenance Costs Construction Costs Risk Adjustment - PSC PPP 13
Risk Adjustment Most jurisdictions have developed standard risk matrices for public infrastructure projects (50-150 common risks) Risk workshops are typically used to identify which risks apply to a given project Risk workshops or research on historic projects are used to estimate the likelihood that risks will occur and their impacts under different procurement options Transferred and Retained Risks are modeled through a Monte Carlo simulation Typically the total amount of estimated risk is lower under a P3, reflecting a better allocation of risk between public and private sector 14
Risk Transfer Comparison Project Risks Traditional P3 Public Sector Private Sector Public Sector Private Sector Approvals and Permits Land use approvals Environmental permits Development & Design Design Error Design Omissions Unforeseen site conditions Construction Cost Overruns Schedule Overruns Material inflation Labour disputes Operations & Maintenance Performance Changes in legislation Increased maintenance costs Finance Interest Rates after closure Sourcing of capital construction
Risk Transfer Comparison Design Build Finance & Maintain Model Traditional Model Risk Category Cost Base Probability Impact Probability Impact Portion of DBFM % 10th perct Typical 90th perct % 10th perct Typical 90th perct 4.00 Construction 4.01 Weather Design & Construction 5.00% 0.00% 0.25% 0.50% 5.00% 0.00% 0.25% 0.50% 4.02 Construction Delays Design & Construction 50.00% 0.00% 0.25% 1.00% 90.00% 1.00% 2.00% 5.00% 4.03 Failure to build to design. Design & Construction 1.00% 1.00% 2.50% 5.00% 1.00% 1.00% 2.50% 5.00% 4.04 Acceleration to maintain schedule - Construction Impact Design & Construction 50.00% 1.00% 2.00% 5.00% 75.00% 0.00% 0.25% 1.00% 4.05 Acceleration to maintain schedule - Labour Impact Design & Construction 2.00% 1.00% 10.00% 15.00% 2.00% 1.00% 3.00% 5.00% 4.06 Construction safety obligations Design & Construction 5.00% 0.00% 0.25% 2.00% 5.00% 0.00% 0.25% 2.00% 4.07 Force Majeure Design & Construction 1.00% 3.00% 5.00% 10.00% 1.00% 3.00% 5.00% 10.00% 4.08 Adequacy of Insurance Design & Construction 1.00% 5.00% 10.00% 15.00% 1.00% 5.00% 10.00% 15.00% 4.09 Acute Market Conditions Design & Construction 25.00% 1.00% 3.00% 4.00% 25.00% 1.00% 3.00% 4.00% 4.10 Deficiencies as Work Progresses Design & Construction 25.00% 0.00% 0.25% 5.00% 50.00% 0.00% 0.25% 5.00% 4.11 Latent Defects Design & Construction 5.00% 1.00% 3.00% 5.00% 5.00% 1.00% 3.00% 5.00% 4.12 Resource Availability; equipment Design & Construction 5.00% 0.25% 0.50% 0.75% 5.00% 0.25% 0.50% 0.75% 4.13 Resource Availability; materials, cement, steel, etc. Design & Construction 5.00% 0.25% 0.50% 0.75% 5.00% 0.25% 0.50% 0.75% 4.14 Resource Availability; Labour Design & Construction 10.00% 0.25% 0.50% 0.75% 10.00% 0.25% 0.50% 0.75% 16
PPP Canada Risk Analysis: Top 10 Transferred Risks Name % of Total Transferred Risk % of Total Transferred Risk (Cumulative) 1. Project schedule 30% 30% 2. Asset residual 18% 48% 3. Construction management efficiency/coordination 4. Due diligence in preparation of the tender/rfp specifications 10% 58% 7% 65% 5. Latent defects 6% 71% Top 3 Risks Represent 58% of Total Risk Transfer 6. Innovation 4% 75% 7. Quality management 3% 78% 8. Traffic management 3% 81% 9. Tendering competition 2% 83% 10. Scope changes initiated by the Sponsor 2% 85% 17
Interpreting VFM Results Sample Output Net Present value ($M) Public Sector Comparator (PSC) PPP (Shadow Bid) DBFM Difference Base Costs Base Costs Construction Costs 750 Construction Costs 750 Operating and Maintenance Costs 500 Operating and Maintenance Costs 500 Lifecycle Costs 154 Lifecycle Costs 154 Sub-Total 1,404 Sub-Total 1,404-0.0% Financing Costs 0* Financing Costs 226 Sub-Total 1,404 Sub-Total 1,630 (226) -16.1% Competitive Neutrality 120 Competitive Neutrality 0 Transaction Costs 25 Transaction Costs 34 Sub-Total 1,549 Sub-Total 1,664 (115) -7.4% Risk Adjustment 440 Risk Adjustment 90 Total 1,989 Total 1,754 235 11.8% * Discounting the payments made by the public sector in the PSC model explicitly accounts for the implied public sector financing cost. VfM Savings are typically expressed as a percentage of the traditional cost 18
VFM Methodologies Jurisdictions analyze the same project elements and essentially yield the same conclusion, although there are differences in methodologies: Different discount rates (risk-free vs. risk-adjusted) Quantify risks differently (research vs. workshops) Risk Adjustment approaches vary Different treatments of innovation and efficiencies 19
P3s Improving Resource and Project Management Thorough Analysis: qualitative assessment and quantitative assessment Benefits outweigh the costs Value-for-money on whole-of-life costs Competitive selection process drives value while achieving innovation Risk transfer through development of robust and detailed performance specifications Defined and measurable asset performance specifications for O&M Clear regime of asset renewal and repair based on condition and performance of assets 20
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