Opinion: Canadian Governments Embrace P3s

By W. Thomas Barlow

Partner

Fasken Martineau

This Opinion piece appears in the May 31 print edition of Transport Topics. Click here to subscribe today.

Infrastructure projects boost productivity and economic activity when countries need it most. Canadian governments have been increasingly comfortable executing new investments that merge private enterprise with the public sector.

Tough times often lead to a new way of viewing common problems, and the American Recovery and Reinvestment Act of 2009 is just one of several indicators suggesting the U.S. government is seriously considering some novel programs both to update crumbling infrastructure and to stimulate the economy. These alternatives may be even more attractive when the public sector faces increasing debt and competing priorities for borrowing capacity.

In Canada, we’ve “been there and done that,” having already embraced public-private partnerships (P3s) or alternative financing and procurements (AFPs) as fiscally responsible ways to deliver infrastructure and services while getting value for money and keeping government spending lower by combining the resources available to public entities and private corporations.

P3s arose in central Canada in the early 1990s, when our own recession demanded a reconfigured approach to developing infrastructure and providing public services. By 1995, increased government spending and higher taxes in Ontario led to a new government willing to consider the P3 option. The results included a major all-electronic toll road project.

Why use P3s for infrastructure? In traditional models, governments manage or bear the risk of the bulk of construction and maintenance activities. In a P3 or AFP arrangement, however, one or more private-sector companies generally fund capital investment and operate the service with (or for) the government according to that government’s outcome specifications and contractual requirements, often over decades.

In Canada, the government’s role in such infrastructure has shifted from project management to supervising and enforcing the public interest and ensuring that the quality of work, materials, design and other services continually meets predetermined markers.

After more than a decade of successful P3-type projects in Canada and elsewhere, it appears that:

• P3s in general cost less than traditional models. A study commissioned by the United Kingdom Treasury found an average savings of 17%.

• The P3 model effectively transfers from taxpayers to the private sector some of the risk inherent in any project, which the private sector is better equipped to handle.

• P3s provide greater leverage for public money and large projects by combining public resources with private dollars, allowing governments to launch more projects and create more jobs.

• P3 best practices have been established, with examples of successful projects available from Canada and other jurisdictions for a wide range of infrastructure, including roads, bridges, utilities, runways, seaports and railways. Best practices and document templates have been developed for procurement, contracts and project delivery.

Canada in the past decade has emerged as a leader in P3 expertise, and its provincial governments have become incubators for P3 and AFP modernization. Several provinces and Canada’s national government have established central agencies for public-private project delivery.

Here are some basic lessons from our firm’s experience across Canada that we offer to any entity wishing to undertake a P3 project successfully:

1. A firm project timeline is critical. The P3 model eliminates project delays and cost overruns, but to realize these benefits, the project timeline must be fixed and predictable. Sponsors and their advisers must establish efficient evaluation teams and proactively identify policy decisions that must be made before issuing any request for proposals. Questions to ask include: Will a new road be tolled? Will a new toll road have open access or a tollgate? What is the scope of services that the project company will or will not provide, and how does this affect employees?

2. P3s work best for brand-new infrastructure. The public perceives more value for taxpayer money when something new is built, making it much easier to attract and maintain support for new-build projects or expansions than for financing existing infrastructure. New projects also create jobs more visibly — a key justification for engaging in infrastructure activity.

3. Partnerships offer flexibility and risk transfer for infrastructure projects. The goal in any construction project is to allocate risk to the party best able to manage it. In traditional delivery models, governments assume most or all risk. In a P3 or AFP, risk is shared by private-sector parties that are better equipped to manage it and assume the risk for a reasonable return on investment.

4. P3s promote public accountability. A P3 contract clearly defines performance standards and outcomes for the project’s life cycle, binding the private-sector parties to service obligations and setting out what the public can expect. These expectations also give those who submit development proposals in response to a request for quotes or proposals the incentive to complete and manage projects on time and on budget.

U.S. government entities still dealing with the recession’s fallout and the public demand for jobs and infrastructure improvements would do well to study Canada’s use of P3-type projects and their ability to combine fiscal realism with good public works.

Based in Toronto, the author is director of the infrastructure and public-private partnerships group of international law firm Fasken Martineau.