Public-Private Partnership

May-20-04

Public-Private Partnerships: How to make Them Work

Speaking Points for “Perform” Conference

May 20th, 2004

Montreal , Quebec

 

Introduction (French)

·     I am delighted to be with you for today’s forum.

·     I would like to thank Daniel Audet, the conference chairman, and all of the conference participants and organizers for the opportunity to speak with you today about public-private partnerships. 

·     By way of introduction, last December Prime Minister Paul Martin asked me to serve as Parliamentary Secretary to Finance Minister Ralph Goodale and also tasked me with studying Public Private Partnerships, also known as P3s.

·     Although the very notion of P3s was new to me, Mr. Martin had long been aware of them. 

- In 1997 when he was the Minister of Finance, he appeared before the Transport Committee and said, “Public private partnerships are not a panacea.  However, given the transportation needs of cash strapped governments and a tax weary public, P3 arrangements warrant serious examination and encouragement.” 

·     My work over the past several months in this area has been to further explore the P3 model with a view to investigating what further role it could play in relation to the activities of the federal government. 

- In this context, I would like to share with you what I have learned and some of my thoughts about P3s.

Q1 – What place do P3s have in the battery of solutions? (4 min)

·      I think it would be useful to preface my answer with some context.

- Across Canada , citizens are demanding that their governments provide new infrastructure and upgrade existing facilities.  Governments are under increasing pressure to improve and expand infrastructure such as local roads, water and wastewater, and urban transit.

- Fiscal constraints are encouraging many governments to look at alternatives to meet these needs.  These include demand management, borrowing to finance infrastructure investment, better capital planning, and P3 arrangements.

·     As well, many governments, both in Canada and in other countries, are examining ways to provide better quality public services and to do so more efficiently. 

- Through this process, one often finds a distinction made between the role of government in the “delivery” of public services and its role as the “provider” of public services, or for example as the facilitator and regulator of public services. 

- In some cases, governments are not always the best placed to deliver all public services.  The private sector may specialize in the delivery of these services and offer additional expertise and capacity.

·     Regarding P3s specifically, public-private partnerships clearly have potential as one option to address the challenges of delivering public services and managing infrastructure pressures within budget constraints.

- Generally, P3s exploit the “comparative advantage” of both the public sector and the private sector, allowing each partner to focus on its core strengths.

- In view of this relationship, I would venture to say that in many cases, governments owe it to their citizens to consider the P3 model as an option to deliver some government services.

·     Several provinces are leading the way in assessing the potential for P3 opportunities in their areas.

- British Columbia has set up Partnerships BC to help implement P3s and provide other useful resources to other levels of government.  Alberta has established a framework for P3s.

- More recently, Madame Jérome-Forget, the Chair of the Conseil du trésor and provincial Minister responsible for Government Administration, has called for the completion of a policy framework for P3s and the establishment of a new government P3 agency in Quebec .

·     The federal government is encouraged by the efforts of Quebec and other governments in Canada to assess and implement P3s.

·     W hile P3s do provide an additional option to governments in delivering services to the public, we must bear in mind that P3s are not always the best option and that implementing them could pose significant challenges. 

·     P3 opportunities should generally be assessed on a case-by-case basis to ensure the approach is best suited to a specific objective and that the model offers the best possible value.  

·     In other cases, P3s may not be compatible with other priorities.  For example, Prime Minister Martin recently made clear to me that P3s are not about privatizing health care, nor are they about replacing the public service.

·     Looking forward, I am confident that P3s will play an important role in meeting our infrastructure needs, and providing better services for the public.  


Q2 – What are the characteristics of a P3 and what distinguishes it from outsourcing? (8 mins)

·     P3s are best viewed as one type of arrangement along a broad spectrum, ranging between outright privatization and government funded and operated services, such as a traditional government program.

- As “outsourcing” by governments also lies along this spectrum, some also regard it as a form of public private partnership.

- This, however, is not necessarily correct. The most common definitions of P3s make important distinctions that differentiate private-public-partnerships from outsourcing. 

·     Outsourcing generally involves the outright transfer of control and ownership of a business process by an organization, government or otherwise, to another supplier of goods or services. 

- A simple example could involve purchasing printing services from an “outside” party in lieu of maintaining in-house printing capabilities. 

·     In the case of P3s, the government generally retains responsibility for some aspects of an asset or a service delivery capacity.

- Depending on the P3 model in question, the government remains a key partner in the arrangement, perhaps as owner, lender, client, regulator, etc. 

- In other words, “partnership” between government and private players is a key distinguishing factor.

·     It should also be noted that while outsourcing is usually associated with operating and maintenance, P3s are generally associated with capital projects.

·     Within the P3 domain, a range of partnership models exist which involve different degrees of private and public participation and risk sharing in projects. 

- Typical P3 models involve some or all aspects related to the design, construction, financing, and operation of a project.

- More complex arrangements also can include sale and leaseback arrangements, pooling and splitting common costs, facility expansion, and revenue generation.   

·     To crystallize P3 arrangements, contracts play an important role.

- In fact, from a legal perspective a P3 can be thought of as a legally binding contract between government and the private sector for the provision of assets and the delivery of services that allocates responsibilities and risks among the various parties.

- Like partnerships, the allocation of risks with responsibilities is fundamental to the P3 model.

·     With respect to the key characteristics of P3s, there are a number of important points.  

1.   As I stated previously, one of the most important characteristics of a P3 is the sharing of risks and responsibilities between the public and private sector partners.

Ÿ P3s are long-term relationships in nature, and a “true partnership” requires that both parties reach a mutually beneficial arrangement.  In other words, both parties need to share in the risks and the rewards. 

Ÿ This allocation of risks and responsibilities is directly tied to the notion of “comparative advantage” that I referred to earlier.  Aligning responsibilities in a P3 so that each partner can focus on its core competencies should realize efficiencies.

2.   A pre-condition for any successful long-term arrangement between two parties also means that the project must be viable at the outset. 

Ÿ The economics of a P3 project need to make sense and the business case needs to be feasible.  When we speak about the economics of a project, we generally mean that benefits and costs must be aligned to ensure the venture is viable.

3.   This leads to another important characteristic of P3s - having contractual arrangements that are built around clearly defined “output” specifications.

Ÿ Before that can happen, a government needs to have a good understanding of what it wants to achieve and be able to demonstrate a public commitment to a project. 

Ÿ As well, before a government is in a position to approach a private sector partner, it needs to have established a suitable P3 procurement process.

Ÿ Weaknesses in these areas can lead to project failures.

·     Later on in this session I will elaborate further on the elements that contribute to the success or failure of a P3, including the importance of an appropriate accountability regime.


Q3 – What positive benefits are likely to arise from setting up a P3, as much for the population as for the government? (6 mins)

·     As I touched on earlier, government alone is not always the best choice for delivering all public services.  In some cases, the private sector may have a comparative advantage vis-à-vis government interests.  Therefore, there can be significant benefits from partnering with the private sector.  

- Experience has shown that P3s can result in projects that are completed more often on time and on budget, yielding benefits in terms of lower costs and reduced delays in the provision of services.

- Higher quality services can result from involving specialized private sector expertise, which may not exist within government, in the design, construction and/or operation of a project.

- Benefits may also accrue from the exchange and transfer of expertise and capacities between P3 partners, such as in the areas of innovation, technology, financial planning and management.  All partners, including governments, private partners, labour, and suppliers can share these benefits.

·     Some of these benefits are highlighted in research conducted in the UK .  For instance, research carried out by Her Majesty’s Treasury on “Public Finance Initiatives” (PFIs or the UK term for P3s) has shown improvements in on-time delivery of projects, on-budget delivery and performance.  For example:

- 89 per cent of PFI projects analyzed were delivered on time or earlier versus 30 per cent for government led construction projects.

- There was also better on-budget delivery, with PFI projects delivering very high levels of “price certainty”, versus 70 per cent “price uncertainty” for government projects.

- As well, over 75 per cent of managers of PFI projects indicated that the performance of the projects for which they were responsible had met or exceeded targets.

·     Another aspect of P3s that can yield important benefits relates to the analysis and due diligence carried out to assess P3 options and competing bids. 

- To solicit P3 bids, public and political support must be in hand, the project scope and objectives are clearly established, and an analysis of the public sector “comparator” (or option) is complete. 

- This process encourages public sector partners to undertake very thorough due diligence of project options, to ensure the project’s viability, value-for-money, and its ultimate success.

- The standards of this initial work for P3 development are generally very rigorous and ensure an appropriate alignment between project costs and benefits. 

·     P3s can play an important role in the context of the competing demands of fiscal restraint and demands for greater public investment, especially when private participation can accelerate projects that would otherwise be delayed.  Timely investments in worthwhile projects can yield important economic benefits.

- From an economic standpoint, maintaining and expanding our capital stock can promote productivity and increased standards of living.

- For example, in the area of transportation, such investments can help to mitigate the negative economic impacts associated with congestion and time delays.

·     In some cases, such as when a new independent source of revenue is needed to finance a project, P3s may present an opportunity to introduce user fees.  Such fees can support public objectives related to the efficient consumption of public resources.  Areas that are often identified as good candidates for user pricing include road transportation, water services and public transit.

·     P3s may also work in other ways to promote economic growth and development, by promoting employment, training opportunities, innovation and expertise among partners.  In this context, a strong domestic P3 industry is more likely to be able participate effectively in offshore markets, further adding to its economic potential at home. 

· Turning to the question of who might benefit the most from P3s – the government or the population – I would suggest that both parties are winners.

- By increasing efficiencies and reducing costs, both governments and the population come out ahead, since governments benefit directly from reduced costs and these savings mean additional government funding is available for other public priorities, such as increased spending or reduced taxes.

- In terms of better quality services, timely investments, rigorous project selection, technology/skills development and transfer, in my view society as a whole is the beneficiary. These outcomes should translate into increased economic productivity and overall improvements in the standard of living.

Examples

·     Two examples of P3 arrangements at the federal level may help to illustrate some of the potential benefits related to P3s.

 

- The Confederation Bridge is one of the best-known P3s in Canada . 

Ÿ Under this “BOOT” arrangement (build-own-operate-transfer), the federal government entered into a 35-year agreement with a consortium of companies to design, build, finance and operate the bridge between New Brunswick and PEI . 

Ÿ For its part, the federal government agreed to pay the consortium about $40 million per year, the same cost it faced previously for maintaining “continuous access” by ferry to the Island . 

Ÿ The project was completed on schedule, using new technology making a fixed link viable. 

Ÿ The consortium assumed most construction risks, with the government sharing in limited delay risks.  At the end of the 35-year term, ownership of the bridge will revert to the Crown for $1.

- The transfer of management responsibility for the federal National Airport System is another example of one model on the P3 continuum. 

Ÿ In this case, the federal government has transferred full responsibility for the operation, maintenance and financing of Canada ’s largest airports to independent not-for-profit authorities. 

Ÿ This transfer arrangement is by way of a long-term lease.  The federal government remains the owner of the airport facilities.

Ÿ Under this arrangement, regional interests are able to manage their airport facilities as single-purpose entities, in support of local aviation needs and other economic development objectives. 

Ÿ On the federal side, the government has realized important economies.  These airports finance their capital projects through private borrowing and internal resources.  At the end of the lease, all airport assets, new and old, will revert to the federal government. 

- If Needed:  The federal Minister of Transport is in the process of reviewing the government’s lease policy involving Canada’s National Airport System.


Q4 – What are the main factors leading to the success or failure of a P3? (4 min)

·     In answer to this question, I would point out that a great strategy is only as good as its implementation, and in the world of P3s, this means that implementation is absolutely critical.

·     P3s may attract negative publicity in the media which, in turn can lead to public hesitation when the private sector gets involved in delivering services to the public.  This makes achieving a social consensus a key factor in the success or failure of a P3.

- It is important to gain public support for any new project, especially in the P3 environment where the private sector could be managing the operation of public assets or delivering services to the public.  So, the need for gaining public trust and confidence is crucial for the success of P3 initiatives. 

- A proactive communications and consultation strategy is also critical. This provides the opportunity to inform the public of the details of the project, convey the benefits and advantages, and justify why the private sector represents the appropriate choice for this particular project. 

- At the same time, it is important to overcome ideological resistance.  Only with heightened awareness can we overcome the stigma associated with private-sector participation and engage stakeholders in a constructive debate .

·     Another important factor leading to the success or failure of P3s is political leadership and commitment.

- A political champion and strong political support are important to get behind a project and convey the benefits to the public.  Ongoing commitment is also essential because P3s can take a lot of time to implement and the public does not always see the benefits right away.

- At the federal level, the creation of my position as Parliamentary Secretary to the Minister of Finance with special emphasis on public private partnerships is an important signal of the federal government’s interest in this area, as well as its general openness to new ways of doing things.

·     As I mentioned earlier, P3s need to be true partnerships to be successful and risk sharing is an important element.

- P3s are not about achieving public sector goals with private money, and the objective is not about ensuring that the private sector bears all of the risk.  It is about forming lasting partnerships, which share the risks and rewards between all parties.

- P3s are long-term arrangements and the relationship between the public sector and the private sector partner will be an ongoing one.  Therefore, goodwill and a good rapport with the partner will also be required to make the partnership successful over the long-term.

·     P3s are still relatively new in Canada , and in comparison to some other countries, our governments have been relatively slow in adopting P3s.  In this regard, external expertise is another key factor leading to the success or failure of P3s.

- The P3 process requires government to complete its due diligence, and it is important to have independent financial advisors with risk management capabilities to ensure the public receives value-for-money. 

- It is important to quantify the risks of the project and complete a market feasibility study.  External expertise can assist in providing an adequate rationale for a P3 and help address public concerns over private sector involvement.

·     One of the key roles of government is to protect the public interest.  This makes accountability an important factor in the success or failure of P3s.

- It is important to have an open, competitive and publicly defensible process for securing a private sector partner.  This process is an important vehicle to gather public support and reinforce the rationale for the decision makers.

- Moreover, it is important to have a suitable regulatory regime to provide appropriate governmental oversight.  For example, P3 enabling legislation in some provinces, such as the Municipal Act in Ontario , requires public consultations before proceeding with a P3.

·     Finally, we should be conscious that the legislative framework also plays an important role with respect to the facilitation of public private partnerships.

- P3 “enabling legislation” can provide public sector players the ability to borrow, set user fees, as well as establish special purpose corporations . 

- Such legislation is sometimes a necessity to facilitate P3s in some jurisdictions. 

·     Implementing P3s can be a significant challenge for governments, but with greater awareness, and better understanding of best practices, these challenges are not insurmountable.

 

2 Relevant Questions to be addressed to panel member Mark Holder:

·     In Canada , most of the opportunities for P3s are at the level of the provincial and municipal governments.  Moreover, while the UK takes a centralized approach to infrastructure, Canada must deal with important jurisdictional considerations.  What should the federal government be doing to promote the use of P3s in Canada and assist other levels of government?

·     What best practices or lessons learned from the UK experience could we put in place in Canada to promote P3s and streamline the process?