This bulletin summarizes a report recently released by The Conference Board of Canada entitled Dispelling the Myths: A Pan-Canadian Assessment of Public- Private Partnerships for Infrastructure Investments. The report assesses the benefits and drawbacks of using public-private partnerships (P3s) for Canadian infrastructure investments by examining empirical and anecdotal data from the second wave of P3s in Canada. This wave includes P3 projects executed from 2004 onward under the guidance of Partnerships British Columbia, the Alternative Capital Financing Office of the Alberta Treasury Board, Infrastructure Ontario, Infrastructure Québec and PPP Canada Inc.
The report begins by presenting a framework for comparing the efficiency of P3s to conventional procurement methods for Canadian infrastructure projects. It then uses this framework to assess the efficiency of the second wave of P3 projects in Canada. Next, it analyzes the factors responsible for efficiency gains in P3 projects. Finally, it presents case studies from British Columbia, Alberta, Ontario and Québec to illustrate the differing outcomes of P3s and conventional procurement methods in these jurisdictions.
Measuring Efficiency Gains
P3 projects generate efficiency gains when they result in cost savings, time savings or higher quality outcomes relative to conventionally contracted projects. Canadian data on the efficiency of P3s comes from two sources, Value-for-Money (VfM) studies and studies of the ex post performance of P3s (ex post studies). VfM studies measure projected cost savings by comparing the total estimated costs of both P3 and conventional procurement options at the outset of each project. The report reviews the methodology of the VfM tests undertaken in each jurisdiction and makes recommendations for ensuring that they produce results that are as accurate as possible. Ex post studies measure cost and time certainty by comparing the performance of projects against their own initial time and budget targets.
P3 Efficiency Gains
The report finds that the second wave of P3s has delivered efficiency gains ranging from a few million dollars, in the case of Edmonton’s Anthony Henday Drive Southeast Leg Ring Road project, to over $750 million, in the case of Québec’s Autoroute 30 project. These gains translate into taxpayer savings of 0.8% to 61.2% per project.
While only 19 of the 55 second wave P3 projects have reached substantial completion, initial evidence on cost and time certainty also points to strong performance. Of the 19 projects that have reached substantial completion, 17 have been delivered either early or according to schedule, and the remaining two projects were delivered no later than two months behind schedule. These results are generally consistent with international evidence from the United Kingdom and Australia.
In addition to cost and time savings, the report points to whole life-cycle maintenance as one of the key benefits of P3s. The report suggests that P3 facilities enjoy superior long-term maintenance levels for the following reasons: contractual penalties for non-compliance provide a powerful motivator for the private partner to maintain specified service levels; the length of the contract forces governments to pre-commit to funding a specified level of maintenance for the life cycle of the project; and contracts are more diligently enforced since the government department responsible for monitoring operates at arm’s length from the private partner responsible for maintenance.
Factors Driving P3 Efficiency Gains
The efficiency gains generated by P3s are due to four main factors. First, P3s can provide for optimal risk allocation between the parties. At the outset of a P3 project, the parties undertake a detailed risk analysis and transfer from the public partner to the private partner those risks that the private partner can manage most cost-effectively. Second, P3s are privately financed. Since the private partner must take on sizeable debt obligations to finance the project, it has a powerful incentive to build the facility properly and efficiently. As well, the private debt providers have an incentive to exercise active project oversight. Third, P3s are performance or output-based contracts. This gives private contractors discretion over how to deliver the outcomes cost-effectively and encourages innovation. Finally, the private partners in P3s are typically responsible for more than one phase of the project. This encourages them to adopt innovations that can reduce total life-cycle costs. While the report considers the first two factors to be instrumental to the efficiency gains, it notes that the last two factors can also be present in conventional forms of contracting.
The report cautions that although P3s can lead to efficiency gains, they also entail additional project costs. For example, the public partner pays a "risk premium" to compensate the private partner for assuming risks additional to those associated with conventional contracts. As well, the private financing used for P3 projects is incrementally more expensive than the public financing used for conventional procurements. Finally, P3 contracts may cost more to develop and monitor than conventional infrastructure contracts. In light of these additional costs, the report stresses the necessity of conducting a vigorous VfM assessment at the outset of a project to determine whether a P3 procurement is the most efficient option. However, the report indicates that for appropriate projects, the additional costs detailed above are easily offset by the gains from transferring selected risks to the private partner. Furthermore, private financing can actually reduce overall project costs due to its inherent performance incentives including: (1) the detailed consideration of project requirements, associated costs and risk allocation upfront; (2) additional commercial and technical due diligence before financial close and subsequent monitoring; and (3) private sector stewardship with strong incentives to ensure timely delivery and adequate performance.
To illustrate the different outcomes of P3 and conventionally contracted (CC) projects, the report dedicates a chapter to presenting in-depth case studies from its four provinces of focus. It discusses the Southwest (CC) and Southeast (P3) Edmonton Ring Road projects in Alberta, the Vancouver Convention Centre expansion (CC) and the Abbotsford Regional Hospital and Cancer Centre (P3) projects in British Columbia, the Sudbury Regional Hospital (Phase 1) (CC) and the Quinte Health Care (AFP*) projects in Ontario, and the Autoroute 25 (P3) and the Montréal subway extension to Laval (CC) projects in Québec.
While P3s account for only 10 to 20% of total infrastructure spending in Canada, they are becoming an increasingly important part of the Canadian infrastructure landscape. Although P3s are sometimes accused of lower transparency and lower service levels than conventionally contracted projects, the report concludes that these are myths that must be dispelled. Among the report’s findings is that the P3 procurement process is considerably more transparent than that of conventionally contracted infrastructure projects of equivalent scale. Furthermore, the anecdotal evidence collected in the report suggests that there is little basis for the criticism that service standards suffer under P3s relative to conventional maintenance contracts or the inhouse provision of maintenance. The report resoundingly concludes that the second wave of P3s in Canada has delivered important efficiency gains relative to conventionally contracted projects.
*Infrastructure Ontario’s projects, which do not use conventional procurement processes, are referred to as alternative financing and procurement (AFP) projects.
To read the full text of The Conference Board of Canada's report, click here.