PPP Canada

INTRODUCTION TOPUBLIC-PRIVATE PARTNERSHIPS

Overview

• What is a P3?• When are they used?• Risk Transfer• Value for Money• P3 Project Team Structure• Summary

What is a P3?

Background

• Governments struggling to keep up– Aging infrastructure– Growing population– Budget constraints and deficits– Risk of project delays and cost overruns

• Roads, bridges, hospitals, schools, etc. need to be built so governments looking for innovative approaches

What is a P3?

“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 Canada

What is a P3?

“A cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.”

- The Canadian Council for Public-Private Partnerships

What is a P3?• Integration of roles (Design, Build, Finance, Operate,

Maintain)

• A long-term duration

• The provision of goods or services to meet a defined output specification (i.e., define what is required rather than how it is to be done)

• A transfer of risk to the private sector anchored with private sector capital at risk– Throughout the project life-cycle

• Entered into by a competitive process

What is a P3?

• Simply an additional way governments can deliver infrastructure

- P3 Canada

Strengths and Limitations of P3 Models

- P3 Canada

What is a P3?Traditional Procurement vs. P3 Procurement

Assets

Input terms (prescriptive)

Components of delivery are separated

Paid for during key construction milestones

Life-cycle risks are retained

Assets and services

Output terms (performance)

Components of delivery are bundled

Paid for once asset is delivered and over the life of the asset – payments linked with operational performance.

Life-cycle risks are transferred

- P3 Canada

Perceived Benefits

• Cost savings• Time savings• Projects begin sooner• Effective risk transfer• Value for money• Improved price and schedule certainty• Infrastructure funds attract investors

Source:Synthesis of Practices for Implementing Public-Private Partnerships in Transportation Related Projects - Transportation Association of Canada

Perceived Benefits

• User pay options (e.g. tolls)• Innovation through integrating phases• Redeployment of government resources• Improved asset maintenance• Improved quality• Lifecycle cost considerations

- Transportation Association of Canada

Perceived Concerns

• Additional costs– Risk premiums, higher financing costs for private

sector, higher procurement and monitoring costs for government

• Longer upfront procurement/negotiation process

• High cost to renegotiate long-term contracts when policy changes occur– Termination is costly and complex

- Transportation Association of Canada

Perceived Concerns

• Foreign control of domestics assets– Issue when foreign companies are involved

• Public may not accept private sector’s role• Risk of private partner bankruptcy

– Risk is low in today’s P3 domain• High level of government expertise required

– Skills in P3 procurement, negotiation, and project management

- Transportation Association of Canada

When are they used?

When are they used?

• P3 benefits do not always outweigh costs– Screening process is required to determine if the P3

method is appropriate• P3 method is suitable for a project when:

– It is feasible to develop output specifications and performance requirements

– Risks can be identified and transferred– Deal size is large enough to offset bidding costs– Project is highly complex– Competitive market exists (multiple bidders)

- Transportation Association of Canada

When are they used?

• TAC identified 16 common screening criteria• Canadian projects employed the P3 model

when it offered:– Value for money– Risk transfer to the private partner– Schedule certainty– Sufficient project size/scope– Sufficient private sector competition– Benefits for taxpayers

- Transportation Association of Canada

When are they used?– Lower total-life costs (capital, construction, operations and

maintenance, rehabilitation)– Private sector innovation– Measurable outputs– Public ownership of the infrastructure– Operation and maintenance components– No outstanding issue that would prevent project– No legislative or legal impediments– Clearly defined private partner’s responsibilities– The maintenance of public sector accountability– A transparent process

- Transportation Association of Canada

What sectors are employing P3s?• Total of 198 Canadian P3s

– Hospitals and healthcare (75)– Transportation (42)– Environmental (22)– Justice/Corrections (19)– Recreation and culture (17)– Education (10)– Government services (5)– Energy (4)– Real estate (3)– Defense (1)

http://projects.pppcouncil.ca/ccppp/src/public/search-project?pageid=3d067bedfe2f4677470dd6ccf64d05ed The Canadian Council for Public-Private Partnerships - July 25, 2013

Example: Highway 407Greater Toronto Area, Ontario

• Purpose: Reduce 401 congestion through City• World’s first all-electronic open-access toll

highway• 407 ETR (private sector entity)

– Construction and finance– Operation and maintenance– All other services (police, customer service, etc.)

• Built and operated based on toll revenue only (no tax dollars spent)

Example: Abbotsford HospitalAbbotsford, B.C.

• Fraser Health/BC Cancer Agency– 650,000 ft2 hospital– 300 bed acute care with

ambulatory facility– Regional cancer centre

• ABN Amro, PCL, Johnson• Design, build, finance, operate, maintain

• Built on time with $0 in change orders

Example: Water Treatment FacilityMoncton, N.B.

• Treatment facility built using P3 model– Serves approximately 125,000 residents– 102,000 m3/day with expansion up to 136,400– Uses local surface water reservoir

• State of the art clarification process• High water quality

– Subsequent location of Molson brewery in Moncton

P3 Success Factors

• Strong political and public sector leadership and support

• Clear legal and administrative framework• Active public involvement• Skilled government personnel• Well defined outcomes • Oversight of public interest, appeal processes• Rigorous analysis - objective technical and financial

analysis/value for money

P3 Success Factors

• Clear risk transfer • Whole-of-life costing• Performance-based contract, including non

performance penalties• Efficient and competitive procurement • Stable and predictable processes• Transparency, accountability and monitoring

systems (e.g. use of an independent fairness advisor)

What can go wrong in a P3?

• Contracts can fall through– Lack of public support– Lack of political support– Policy/government changes

• Delays can occur in starting work– Lengthy proposal/negotiation process– Inexperience in P3 contracts– No one will bid if contract/pricing isn’t done well

Saint John, NB - Peel Plaza

• New police headquarters to also integrate four other functions

• Started 2007 – Completed 2013• Delays caused by three issues:

– Not flexible on design– Lack of public support– City’s lack of P3 expertise

Costa Rica: San José - San Ramón Concession Road

• Termination of $524 million contract with OAS– Repair and expansion of road

• Lack of support from all sides– Business– Technical– Political

• Fierce public opposition to tolls– Social unrest was leading to violence

Risk Transfer

Risk Transfer

• What does it mean to transfer risk?

• What does the cost of risk mean?

• What does it mean to assume risk in a project?

• What is a risk premium?

Risk Transfer: Car Insurance Analogy

• Risk Transfer:– A person who drives a car is at risk of causing a collision– This person enters into a contract with an insurance

company to transfer that risk from the person to the insurance company

• Cost of Risk:– The person pays the insurance company a yearly fee for

this risk transfer, thus assigning a cost to the risk– This cost is calculated based on the type of risk and the

probability of a collision (driver history)

Risk Transfer: Car Insurance Analogy

• Assuming a risk:– The contract will stipulate which risks the

insurance company will assume and which risks the person is still responsible for (e.g. PLPD versus comprehensive)

• Risk Premiums:– Built into the yearly fee is a premium the

insurance company charges to make it worth their while to assume the risk

Project Risk Example

- Deloitte & Touche LLP

Value for Money

Value for Money

A VfM analysis compares these two

• Estimated costs to the public sector of delivering the project as a P3

• Estimated costs to the public sector of delivering the project based on the public sector’s traditional method of procuring public infrastructure.

Costs of Traditional Procurement

Costs of P3 Procurement

Consider the total cost of ownership over the life of the asset adjusted to consider total cost of risk and expressed in present value terms

Base Costs

•Direct costs of labour, materials, equipment rental and building systems and components that are required to construct the asset•Costs of design and engineering consultants, approvals and permitting

Construction Costs

•Items related to the ongoing operations and maintenance of the asset. Includes costs of providing services such as cleaning, waste management, building management and general maintenance

Operating and Maintenance Costs

•Costs of periodic , planned, major capital repair and/or replacement, typically at 5-15 year intervals. This could include replacement of boilers or elevator systems (accommodation facility), or road re-surfacing

Lifecycle Costs

- P3 Canada

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 using 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

- P3 Canada

Value for Money Example

P3 Project Team Structure

What does a P3 project team look like?

- P3 Canada

Summary

Summary

• What is a P3• Why/when P3s are used• What can go wrong in a P3• What a P3 project team looks like• Risk transfer/Cost of Risk• Value for Money

Curriculum Overview

Introduction to P3s

Engineering Business Administration

Public Administration and

Political Science

P3 Stream: Engineering

• Proposals• Agreements• Engineer’s role in a P3

– Public sector P3 governance– Private sector engineers

• Performance based project management• Public consultation and communication as an

Engineer

P3 Stream: Business Administration

• Screening a project for P3 viability• P3 business cases• Risk valuation and transfer• Proposals and agreements• Role of Business Admin.

– Public sector governance– Private sector equity partners

• P3 business and payment models• Communication with the public in a P3

P3 Stream: Public Admin/Poli Sci

• The role of government in a P3• Procurement strategies• Agreements• Business models• Payment models• Public consultation and communication as a

public servant

References/Links• PPP Canada

– http://www.p3canada.ca/home.php

• The Canadian Council for Public Private Partnerships– http://www.pppcouncil.ca/

• Synthesis of Practices for Implementing Public-Private Partnerships in Transportation Related Projects - Transportation Association of Canada– http://www.tac-atc.ca/english/bookstore/

• Disraeli Bridges Project Value for Money Report – Deloitte and Touche LLP– http://

www.winnipeg.ca/publicworks/majorprojects/disraelibridges/Disraeli-Bridges-Project-VFM-Report-Final.pdf

• Partnerships New Brunswick– http://www.gnb.ca/0113/PartnershipsNB/index-e.asp

• Partnerships BC– http://www.partnershipsbc.ca/index.php