What is a P3?
Public – Private Partnerships (P3s) are a long-term performance-based approach to procuring public infrastructure where the private sector assumes a major share of the risks in terms of financing and construction and ensuring effective performance of the infrastructure, from design and planning, to long-term maintenance.
In practical terms, this means that:
- Governments do not pay for the asset until it is built;
- A substantial portion of the cost is paid over the life of the asset and only if it is properly maintained and performs according to specifications; and
- The costs are known upfront and span the life-cycle of the asset, meaning that taxpayers are not on the financial hook for cost overruns, delays or any performance issues over the asset’s life.
See how P3s work and what PPP Canada does
How do P3s work?
- Adopting a whole life-cycle approach: the private sector assumes responsibility for all or many of the phases of an asset’s life-cycle. In doing so, the private sector assumes the interface risk between the phases, is fully accountable for whether the asset delivers, and is incented to produc e the most effective result over the lifespan of the asset. The all-too-familiar problems of poor design, sub-standard construction or inadequate or deferred maintenance become the responsibility of the private sector.
- Paying based on performance: the private sector is paid only on performance; in the the majority of our projects no payment is made until substantial completion, and a significant portion is paid only over the life of the asset based on clear performance criteria. This aligns financial incentives for on-time, on-budget delivery and for the achievement of performance standards during the useful life of the asset. Moreover, since payments are made only on performance the private sector partner must raise significant financing for the construction of the asset. Lenders and equity participants provide a level of due diligence and oversight that brings enormous discipline to the process.
- Specifying the what, not the how: in a P3, the public sector specifies what it wants and leaves as much scope as possible to the private sector to develop the best solution to deliver results. This focus on the what -- rather than the how -- enables the private sector to develop the most innovative solutions.
Why do P3s work?
Public- Private Partnerships (P3s) are a tool in the toolbox to deliver the public infrastructure investments Canadians need. They are not the right solution in every case, but when applied to the right projects, can provide many benefits. P3s work because they engage the expertise and innovation of the private sector and the discipline and incentives of capital markets to deliver public infrastructure projects.
Watch how P3s benefit communities.
- P3 projects consider the whole life cycle of the asset
- P3 projects engage the expertise of the private sector
- P3 projects ensure private sector capital is at risk, bringing capital market discipline and incentives
When is a P3 the right choice?
- Public-Private Partnerships (P3s) are the right solution when the benefits exceed the costs. This requires thorough Value for Money analysis. Our experience demonstrates that this upfront work produces better projects even if a P3 approach is not the preferred option, as it requires a more systematic consideration of costs, risks, and performance expectations.
- Successful P3s tend to be large, complex projects that transfer the risks of some, or all, of the components of the project (design, build, finance, operation and/or maintenance) to the private sector and deliver positive Value for Money.
- Value for Money is assessed by comparing the estimated total costs of delivering a public infrastructure project using a P3 delivery method to the costs of delivering the project using a traditional delivery method.
What is a "traditional" procurement?
A traditional procurement is the status quo for a government seeking to build new infrastructure. While not always the same for each government, the most common method of traditional procurement is the Design-Bid-Build. In this method, the government prepares detailed asset design specifications and tenders its construction to a contractor. In doing so, the government is responsible for any design flaws, cost over-runs, and has little control over the scheduled completion date. During operations, the performance of the asset is the responsibility of the government or any third party operator hired to carry out operations.
What is a Value-for-Money Analysis?
A value for money analysis is the comparison between the total project costs (capital base costs, financing costs, retained risks and ancillary costs), at the same point in time, for traditionally delivered project (known as the public sector comparator or PSC) and delivery of the same project using the P3 model (known as the shadow bid). The incremental difference between the public sector comparator and the shadow bid is referred to as the value for money. If the shadow bid costs are lower than the public sector comparator, the P3 project is found to deliver positive value for money to the taxpayer.
Read one of our Value-For-Money reports
What projects make successful P3s?
The P3 model is appropriate when the following conditions apply:
- You have a major project, requiring effective risk management throughout the lifecycle;
- There is an opportunity to leverage private sector expertise;
- The structure of the project could allow the public sector to define its performance needs as outputs/outcomes that can be contracted for in a way that ensures the delivery of the infrastructure in the long term;
- The risk allocation between the public and private sectors can be clearly identified and contractually assigned;
- The value of the project is sufficiently large to ensure that procurement costs are not disproportionate;
The technology and other aspects of the project are proven and not susceptible to short-term obsolescence; and
- The planning horizons are long-term, with assets intended to be used over long periods and are capable of being financed on a lifecycle basis.
What is "risk transfer" in a P3?
Risks arise in all projects, regardless of the procurement approach. In a P3, project risks are transferred to the party best able to manage them. By making the private sector responsible for managing more risk, governments reduce their own financial burden. The private sector bids a fixed price for the bundled contract, and must pay out of pocket should any unforeseen expenses arise e.g.) cost escalation, construction defects, unexpected maintenance requirements, etc.
Why is the private sector interested in P3s?
As compared to traditional procurement, P3 projects provide the private sector with a greater role in the design, building, financing, and/or operation of public infrastructure and offer a unique business opportunity, allowing private companies to deliver a broad range of services in different industrial sectors over a long term concession period (typically 20 to 30 years). The private sector is interested in P3s because they provide an opportunity to work with stable, bankable partners in governments, and they provide a long-term revenue stream, among other reasons.