Public sector entities (federal, provincial, municipal, health,
etc.) are increasingly adopting public-private partnerships (P3s)
for the replacement, renewal and development of infrastructure.
With intense competition for public sector capital funding showing
no signs of letting up, a P3 is a proven vehicle for stretching
those resources further.
P3s are typically long-term, performance-based contracts involving
significant risk transfer to the private sector. Beginning a P3
relationship involves the selection of a single provider (generally
a consortium of companies) through a competitive procurement
process. The selected provider is responsible for delivering the
design, construction and financing elements of a project and may
also be required to deliver one or more of the maintenance and
operations needs of the project.
P3 projects are highly geared, with debt financing (loans, bonds)
amounting to approximately 85% to 90% of the project's capital
needs and equity financing (ordinary equity, subordinated debt) the
remaining 10% to 15%. The private sector provides both debt and
equity financing, with government financing generally limited to
milestone payments when the project reaches substantial
Public concerns are sometimes raised over the higher cost of
private financing compared to what governments can
achieve—the conclusion being that P3 contracts are more
expensive than traditionally procured projects and do not offer the
best value for the public purse. But this is simply a common
misconception that does not consider the true or total cost of a P3
project, which comprises many elements in addition to financing
that in fact reduce the total cost of the project.
Valuable Benefits of a P3
Lower Insurance Costs
To cite one example, an analysis of a P3 project based on
financing costs alone ignores the additional fees and taxes that
government may have to levy to repay lenders if a project is
unsuccessful. A P3 model provides an unstated insurance and
therefore lower risk premiums from lenders due to a lower risk of
default. Since the risk to the public sector for project investment
is the same as that of the private sector, this should be reflected
when calculating the project value for money.
Greater Risk Oversight
While private financing has a higher associated cost compared to
government financing, it introduces private lenders and equity
providers who are in turn motivated by having significant funds at
risk and therefore exercise a greater degree of active project
oversight. This results in a greater degree of true risk transfer
than would otherwise occur in a project that is traditionally
procured and managed by the public sector.
Innovative Design Solutions
In addition, the long-term nature of the project (typically 25+
years) and required financing creates an incentive for the asset to
be designed in a manner that considers its whole life cost; i.e.,
the private sector remains accountable for the consequences and
costs of a poor design as the financing for the project is
typically non-recourse, based instead upon a performance-monitored
revenue stream. This approach encourages innovative design
solutions and a high standard of ongoing maintenance management and
provides reassurance in regards to the completeness and accuracy of
project costs. In the event of failures that cause lenders to step
in, the public sector will benefit from organizations with the
experience and expertise to manage and remedy such circumstances
prior to project default.
Accelerated Project Delivery
Finally, when considered across a portfolio of projects, such as
multiple offices, schools, courthouses, etc., a P3 offers the
benefit of accelerating the delivery of required works, which
encourages solutions to consider the long-term well-being of the
portfolio as a whole and the efficiencies that can be achieved
across that portfolio. This would typically not be the case under a
traditionally procured project, which tends to consider a portfolio
as 10 individual projects that make up a whole.
As this post has outlined, a decision on whether or not to
pursue a P3 project based solely on the higher cost of private
financing does not consider the many non-financing-related benefits
of the P3 model, all of which have value. A comprehensive and more
accurate analysis of the total project cost to the public sector
needs to take these benefits into account.
My next blog post will look at the advantages and disadvantages of
milestone and substantial completion payments in more detail.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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