Cities and the P3 Model: Seeing obstacles and opportunities

Photo courtesy Perkins + Will Canada
Photo courtesy Perkins + Will Canada

By Kasim Salim and Yves J. Ménard
Public-private partnerships (P3s) have gained widespread acceptance over the last number of years as an effective option for procuring and delivering public infrastructure. The Canadian federal and provincial P3 marketplaces have, broadly speaking, become mature and now boast numerous sophisticated and experienced public-sector and private-sector players. Despite this maturation, observers have noted many Canadian municipalities have been reluctant to fully embrace the P3 model with the same interest as their federal and provincial counterparts. This article explores some of the reasons for this reluctance and offers potential alternative approaches available to municipalities for approaching P3s.

Why is this an important issue?
The challenge facing municipalities in respect of the renewal and construction of public infrastructure is daunting. In a March 2009 interview with the Canadian Council for Public-Private Partnerships (CCPPP), Professor Saeed Mirza of McGill University (Montréal) noted that the Canadian municipal infrastructure deficit was approximately $238 billion as of November 2007, composed of $123 billion to renew existing municipal infrastructure and
$115 billion for necessary new construction.

Citing other sources, Mirza explained there had been a “major shift in infrastructure responsibility to municipal governments” with the share between federal, provincial/territorial, and municipal governments in 1961 being 39 per cent, 36 per cent, and 25 per cent, respectively, to about 18 per cent, 36 per cent, and 49 per cent, at that time. He concluded by noting that with the federal, provincial/territorial, and municipal share of taxes at that time being 50 per cent, 42 per cent, and eight per cent, respectively, “[c]learly the municipal governments have the least resources to fulfill the needs of the largest share of Canada’s infrastructure.”

The public’s view of the importance of the public sector effectively delivering local infrastructure also cannot be underestimated. In a January 2010 report to the Federation of Canadian Municipalities (FCM) entitled “Cities, Communities, and the Federal Budget Deficit,” it was found that while Canadians want the federal government to balance its budget, local infrastructure funding should not be postponed. The report found 96 per cent of Canadians want the federal government to maintain or increase local infrastructure funding, adding that “Canadians regard infrastructure (69 per cent) as being on par with healthcare (75 per cent) as the most important priority
for spending as the deficit is dealt with.”

The potential benefits of P3s
The primary benefits of the P3 structure are well known, but certain ones relevant to this discussion do bear mention.

Public-private partnerships (P3s) may be a suitable means for financing infrastructure projects, including healthcare facilities. Photo © BigStockPhoto/Anton Folti
Public-private partnerships (P3s) may be a suitable means for financing infrastructure projects, including healthcare facilities.
Photo © BigStockPhoto/Anton Folti

Foremost, P3 procurements are often described as being more likely than conventional government procurement methods to be on time and on budget. These views have recently been validated by the Conference Board of Canada in its 2010 report, “Dispelling the Myths: A Pan-Canadian Assessment of Public-Private Partnerships for Infrastructure Investments.” The Conference Board of Canada found the 55 ‘second-wave’ Canadian P3 projects (i.e. those delivered by provincial agencies starting in the early 2000s) examined had delivered savings measured at the outset of the project of between 0.8 to 61.2 per cent versus conventional procurement; of the 19 second-wave projects substantially completed, 17 were delivered on or ahead of schedule.

Another key component to an effective P3 structure is the appropriate allocation of project-related risks between the public-sector and the private-sector. These include matters such as design and construction problems, delays in the project schedule, cost overruns, and operation/maintenance expenses. Appropriate allocation occurs by ensuring the party which is best able to manage and mitigate risks has responsibility for them.

Finally, P3 projects involving maintenance by the private sector provide an opportunity to ensure the public infrastructure asset is well-kept: firstly, by obligating the public sector to make maintenance payments and, secondly, by imposing penalties on the private sector where maintenance is not properly attended to.

The potential challenges of P3s
Notwithstanding the foregoing potential benefits, there are numerous limitations to the P3 structure. Critics often point to various ways this model can increase costs to the public sector. The counterpoint to transferring risk to the private sector is it comes at a cost. As well, owing to the complexity of P3 projects, transaction costs can be higher and timelines longer than in conventional projects. Finally, the private sector typically borrows at higher interest rates than does the public sector—this can call into question the rationale for incurring the added cost of private financing in P3 projects with a substantial financing element.

P3s are also sometimes criticized as being less transparent and accountable to the public as compared to conventional project delivery by the public-sector, in large part owing to the involvement of the private-sector. This criticism can, however, be mitigated by identifying relevant project information and then ensuring it is made available to the public.

A final challenge to increasing P3 use that must be mentioned is it is not appropriate for all infrastructure projects. As was discussed by the Conference Board of Canada in its report, P3 procurements account for 20 per cent or less of total capital spending on public infrastructure in many of the jurisdictions with active P3 procurement programs. The reasons, the Conference Board of Canada notes, rest with P3 evaluation tools that consider the value-for-money of a project and screening tools such as:

  • project size;
  • whether clear output specifications and performance requirements can be developed; and
  • if a project will permit a cost-effective transfer of risk to the private sector.

Municipal-specific issues
In addition to the challenges generally applicable to P3 projects, many believe municipal P3 projects face additional hurdles. It is sometimes explained the relative smaller size of municipal infrastructure projects, as compared to those of the senior levels of government, are not conducive to P3 procurement. There are numerous reasons why this view might be reconsidered.

PPP Canada is a federal Crown corporation created to promote usage of the P3 structure. In its “Annual Report for 2010-2011,” the group noted that municipal infrastructure is viewed as the “next frontier” for Canadian P3s:

[M]unicipalities have jurisdictional responsibility for delivering a large proportion of Canada’s infrastructure needs…not only do these infrastructure responsibilities represent a large investment for municipalities, but they also lend themselves well to P3 procurement, in many cases, given their size, complexity, or long-term maintenance risk characteristics.

Similar reasoning in respect of jurisdictional responsibility and limited financial resources was echoed by Mirza.

Vancouver’s Canada Line (also on page 32) is a P3. Transit infrastructure can benefit from this model. Photo courtesy Perkins + Will Canada
Vancouver’s Canada Line (also on page 32) is a P3. Transit infrastructure can benefit from this model.
Photo courtesy Perkins + Will Canada

Evidence also suggests municipalities do, in fact, have projects suitable for the P3 model. In September 2011, 36 of the 158 total projects described in the CCPPP’s Web-based Canadian PPP Project Database were categorized as being municipal projects, with additional recently announced projects potentially being added to the municipal project pipeline. Moreover, even in the case of smaller municipal infrastructure projects not necessarily suitable to the P3 model alone, it may be possible to access the P3 model by bundling such projects together.

Relative inexperience with implementing P3 projects can also be considered as a challenge inhibiting municipal involvement in the P3 sector. We have, however, seen an increase in resources available to assist municipalities with the learning curve. For example, the creation by the federal government of PPP Canada in 2008 has provided municipalities with both a source of funding and a knowledge centre to support P3 projects.

Additionally, certain provincial procurement agencies have taken on advisory roles in respect of the municipal P3 procurement process and documentation. Moreover, some municipalities have developed institutional expertise, fostered by adopting formal policies in respect of evaluating and implementing public-private partnership opportunities and identifying organizational resources to manage the P3 process.

Kasim Salim is a partner in the Ottawa office of Borden Ladner Gervais LLP (BLG), and a member of the Private-Public Infrastructure Projects Practice Group. He can be reached at ksalim@blg.com.

Yves J. Ménard is also a partner in BLG’s Ottawa office. He is the regional leader of the Commercial Real Estate Practice Group. Ménard can be contacted via e-mail at ymenard@blg.com.

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