Why Do P3s Work?
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.
P3 projects involve greater consideration of whole life cycle: P3s put into an integrated contract the entire life-cycle -- design, build and operate and maintain; this ensures that overall cost and risk is considered; for example, design takes into account of cost to build, maintain and operate and avoid white elephants.
P3 projects engage the expertise of the private sector: The private sector has the experience and expertise to deliver large projects. They bring innovation and learnings from other projects. Many Canadian and international firms have developed significant expertise developing and executing P3s, which can be employed for the benefit of taxpayers.
P3 projects ensure private sector capital is at risk, bringing capital market discipline and incentives: Most importantly, P3 projects require private sector capital to be at risk. The public sector pays only when the infrastructure is available and performs. This generally means that no payments are made until the infrastructure is built and a substantial portion is paid over the life of the asset, if it is properly maintained and performs. This “skin in the game” means that taxpayers are not on the financial hook for cost overruns, delays or any performance issues over the assets life. It also means that the profit motive is harnessed to ensure effective results. Finally, this requires the private sector to raise both equity and debt capital, meaning that there is substantial oversight by lenders and investors in both the upfront due diligence and project execution. This is a discipline that the public sector cannot match.
P3 projects allow the public sector to focus on its core business: The public sector’s core focus should be on the defining the output it wants (i.e., x litres of clean water, y traffic capacity). Leave it to the private sector to provide the most effective solution to deliver on those outputs.