How To Use Public-Private Partnerships To Develop A Winning Infrastructure Strategy
Development and Innovation Infrastructure experts breakdown how P3s are being used to shape Canada’s future infrastructure.
How does the P3 system facilitate innovation and establish long-lasting infrastructure, and how are developers making this long-term approach a priority?
Government agencies use P3s to transfer construction, operations, major maintenance, and financing risks to the private sector in exchange for a predetermined fixed price. The bidding processes for P3 projects in Canada are highly competitive, and bidders are constantly innovating to reduce construction, operations, major maintenance, and financing costs in an effort to win.
Government agencies typically specify the outputs required for a project during the procurement process. For example, for a hospital, the bidders would know the required square footage, number of floors, LEED requirements, and number of beds. Bidders are required to submit a proposal that meets or exceeds these output specifications at the lowest cost, which encourages innovation.
The operations and major maintenance period for P3 projects is typically 30 years. The private sector is required to ensure the asset is maintained to a specified standard during this period, as well as at the end of the period. Failure to meet these standards results in financial penalties. Developers, who provide the equity for these projects, do not want to suffer these financial penalties; as a result, they work hard to ensure the performance standards are met and take a long-term approach to these investments. Lenders, who provide the debt for the projects, provide another layer of oversight. They require the equity providers and operators maintain these standards and provide regular reports on the status of the performance standards.
Public-private partnerships allow government agencies to transfer risk, retain ownership, and procure projects using a reliable and market-tested approach, compared to the alternative delivery methods. This method also allows the procurement of many projects at the same time, using limited government resources while stimulating the economy and investing in the quality of life of Canadians.
The public sponsor defines the performance specification of the asset without defining the manner in which the private partner is to meet such performance. The private partner has the flexibility to seek innovative solutions in meeting the asset’s performance through creative design, use of efficient construction techniques and materials, and operations and maintenance planning. The private partner designs the asset with the objective of reducing the asset’s whole life costs (i.e., construction, operations, and maintenance) over the P3 service contract term. Maximum innovation is found via P3 service contracts with terms of 20–30 years. A long-term service contract allows the private partner to consider major maintenance, asset rehabilitation, and asset handback in the asset’s design (i.e., selection of construction materials and equipment).
In a competitive bid process, which is typical for P3 projects, experienced P3 developers focus on seeking a competitive advantage via innovation in an effort to lower their pricing proposal to the public sector. Performance-based asset procurement under long-term service contracts creates tremendous value to the public sector that is difficult to replicate in traditional procurement, where design, construction, operations, and asset rehabilitation are procured under separate contracts with different parties. Moreover, the handback requirements of an asset under a P3 contract ensures the asset is transferred back to the public sector in good condition. Private capital is at risk to ensure the asset performance and handback requirements are met, making long-term performance of the asset a developer’s priority in P3s.