Minister Flaherty On P3 Financing
Development and Innovation The Honorable Jim Flaherty, Minister of Finance and advocate of the P3 model, shares his insights and expertise.
Mediaplanet: How do we decide which projects should and shouldn’t follow the P3 model?
Jim Flaherty: P3’s should be used when they can provide better value for taxpayers’ money than traditional procurement. This is mainly achieved by transferring risks to the private sector, such as design, construction, operating and maintenance risks that produce Value for Money. P3’s typically achieve greater value for money when projects are large, complex and where the value of the risk transferred is higher than the incremental financing costs.
That is why an in-depth Value for Money analysis is an important tool to determine if a P3 is the best viable procurement option for a given project, ensuring greater value for taxpayer’s dollars.
"P3’s typically achieve greater value for money when projects are large, complex and where the value of the risk transferred is higher than the incremental financing costs."
MP: How do long-term infrastructural investments rank in terms of risk?
JF: Risks inherent to infrastructure projects largely pertain to construction risks in the short-term, and to operating and maintenance requirements, over the longer-term.
From the perspective of governments, the overall risks of a given infrastructure investment through a P3 are low. P3 contracts are performance-based, meaning that the private sector typically does not receive payment until the asset is completed and operational and a large portion of the payment under a P3 arrangement is paid over the life of the asset. If the P3 consortium is not delivering the level and quality of infrastructure to agreed upon standards, governments can withhold payments or levy penalties.
From the perspective of the private sector, investors who provide financing to back P3 transactions must ensure that the P3 project is well-structured and priced, and that the P3 consortium is well-equipped to deliver on agreed upon standards, if their investments are to be repaid.
"P3 contracts provide better cost certainty for governments. The full cost of the asset is known up front and for the full lifecycle."
MP: How does Canada ensure the fiscal responsibility of P3 projects?
JF: P3 projects involve greater consideration of the whole lifecycle costs of a given asset (e.g. construction, operation, maintenance). By ensuring that private sector capital is at risk, P3s bring capital market discipline and incentives to minimize costs over the whole lifecycle of the asset (e.g. not only during the construction phase).
In addition, P3 contracts provide better cost certainty for governments. The full cost of the asset is known up front and for the full lifecycle.
PPP Canada, a federal Crown corporation, works with clients from all levels of government to ensure the use of best practices when procuring P3s. This includes in-depth upfront planning and requires a significant level of financial due diligence that ensures public funds are used to promote well-structured P3s.
MP: How do public-private partnerships benefit the everyday Canadian?
JF: P3’s offer three major benefits: on-time and on-budget delivery, transfer of much of the risks associated with public infrastructure away from the taxpayer and the provision of high-performing and well-maintained facilities, roads and bridges that improve the everyday lives of Canadians.
More specifically, P3’s deliver value by:
▣ Ensuring on-budget, on-time delivery of public infrastructure by leveraging the expertise and innovation of the private sector;
▣ Guaranteeing greater accountability and high performance standards by the private sector, which takes on the responsibility for any cost overruns, delays or performance issues over the asset’s life;
▣ Reducing taxpayer risks by transferring to the private partner those risks that it is better placed to manage; and
▣ Allowing governments to deliver capital projects faster, making use of the private partner’s increased flexibility, innovation and access to resources.
The Government of Canada is committed to supporting the adoption of P3 procurement where it can deliver better value for taxpayer money than traditional procurement.
"The P3 Canada Fund, along with other key measures, will be successful in leveraging private sector capital and expertise, and will complement public sector efforts to support our communities and improve our country’s infrastructure."
MP: As 2013 comes to a close, how has Canada positioned itself to benefit from P3 industry growth in 2014?
JF: Canada is becoming a leader in P3’s, with many projects underway. Indeed, the over $870 million in direct federal contributions for 19 P3 projects supported to date across Canada have leveraged $4.1 billion in additional investment.
Additional P3 projects are expected to come on stream as provinces, territories and municipalities are increasingly exploring the P3 model to deliver their infrastructure projects. In addition, the federal government continues to move forward on several potential federal P3 projects.
The P3 approach continues to be an essential part of our Government’s future plans. The P3 Canada Fund, along with other key measures, will be successful in leveraging private sector capital and expertise, and will complement public sector efforts to support our communities and improve our country’s infrastructure.