Premier Dalton McGuinty announced in March that Ontario would spend $27.5 billion on roads, schools and transit over the next two years in an effort to create 300,000 new jobs, a significant investment in public infrastructure to reduce the increasing lifecycle gap.
Undoubtedly many will be delivered through public private partnerships (P3s) or alternative financing and procurement (AFP) processes. In the U.K. typically ten percent of public capital spending is through P3s. Projects with a long lifecycle, where the public sector is seeking innovative approaches and a partner willing to share the risks and rewards, seem best suited.
The P3 model is different from traditional procurement: it transfers significant risk from the public sector, focuses on on-time, on-budget delivery, and long term building maintenance tied to the performance of the partner. By combining the design, construction and operations activities, the private sector partner is given the opportunity to implement a long-term strategy that may, for example, include investing in better equipment upfront to save on future maintenance and operating costs.
The private sector partner requires financing over the term of the agreement. This provides added levers, since the lender takes an active role in ensuring that the private sector constructor or operator performs so that the lender’s payment stream is not affected. During this economic crisis, the public sector is exploring different structures, including joint financing, that provide the leverage without driving up the costs.
While firms have been contracted to build public projects for decades, the P3 model alters the terms of involvement, articulating penalties and creating incentives to preserve quality, protect public interest and transfer the cost of delivery failures. Through a consortium, the private sector partner unites design, construction, operations and financing participants in an end-to-end solution that provides a single source of accountability – the partner is fully responsible for the performance of the building.
Since the term of a P3 project is typically 30 years, it is important to structure the agreement so it will achieve the desired results and yet be flexible. The P3 model offers the advantage of integrating design and maintenance processes so that they are aligned from the outset, and both teams contribute to a cohesive final design and maintenance plan. Within the long-term building maintenance plan, it is paramount to articulate the appropriate conditions that will drive the desired behaviour from the service provider – a mechanism which is both a method for payment and a method of providing an incentive to high performance. To do this, the payment mechanism needs to be linked to the service outputs defined in the output specification; deductions are applied when output specification standards are not achieved.
Establishing the weights of the payment mechanism allows the public partner to articulate the unique requirements of an individual project and tie them to high-quality service for the best value from the service provider. It communicates the building requirements to the service provider, aligning the service objectives from the outset, an important consideration as the relationship between the service provider and the public sector is long and collaborative.
Another necessary element is the implementation of a strong, qualified service management team. All partners need to communicate on deliverables and performance to demonstrate that value for money continues to be achieved.
Equally important is selecting the right partner through a fair, open and transparent competitive bidding process. The procurement process must balance the outcome risk (achieving the desired solution with the best possible partner at the right price), with the process risk (encouraging a quantity of qualified respondents). To ensure that the process is consistent and fair, an evaluation framework should be developed prior to the submission of bids that eliminates subjectivity from the evaluation teams. Adequate training must be supplied to the members of the public side of the procurement, including a review of objectives, practices and rules of engagement, in addition to signing conflict of interest forms. A fairness commissioner should be present at all interactions between the two sides, and should be consulted on any event that may not seem clearly defined in the established framework. Commercially confidential meetings may be held with the bidder during the RFP procurement phase to clarify and align objectives and delivery approaches and remove ambiguity.
The P3 process is improved with each project, and has proven useful in guiding a successful partnership. Public-private partnership processes are innovative ways for government to deliver on its commitment to maintaining and expanding public infrastructure, and ensuring that projects are delivered on time, on budget, with public interest as a top priority.
Louise Panneton and Jill Newsome are with Ottawa-based P1 Consulting.