A RESOURCE GUIDE PUBLIC PRIVATE PARTNERSHIPS UNDERSTANDING THE CHALLENGE secOND editiON Public-Private Partnerships: Understanding the Challenge Second Edition Public-Private Partnerships: Understanding the Challenge Second Edition June 2009 WrittEn by Heather Fussell and Charley beresford ResearCH assiStanCE rachelle Mellanby AcknoWlEdgEMEntS the Centre for Civic governance would like to thank all the locally elected officials and experts who provided their advice and comments on earlier drafts of this guide. any errors and omissions are those of the authors. layoUt and design Working design The CEntrE For CiviC govErnance iS an initiativE oF tHE ColUMbia inStitUtE. Executive Summary Over the last few years public-private partnerships (P3s) have become an increasingly important topic for locally elected officials across Canada. Decades of underinvestment in infrastructure and tight operating budgets have forced local governments to constantly search for the best way to pro- vide the services their citizens expect at the lowest cost. P3s are offered as a solution to this challenge, though not everyone agrees that P3s can deliver infrastructure and services at the lowest cost. Many critics argue that P3s can end up costing governments more in the long run. The central ques- tion for locally elected officials when contemplating a P3 is, will it ultimately serve the public interest? This resource guide reviews a growing body of research about P3s. The record of P3s in Canada is decidedly mixed, and few P3s have been in oper- ation long enough for anyone to be able to evaluate whether or not they offer greater value than governments taking on the project themselves. The aim of this guide is to provide locally elected councillors and school board trustees with the information and tools they need to understand how P3s work and identify key questions. One point about P3s is clear: for locally elected officials and the staff they work with, P3s present a new set of challenges. At the heart of all P3s are intricate, complex contracts. Governments must hire outside consultants who have expertise in contract management, law and finance to help staff and locally elected officials evaluate proposals and negotiate final agree- ments. Even when a P3 has some chance of success, the long, complex and costly procurement process may outweigh any potential benefits. Public-Private PartnershiPs: understanding the challenge 5 Based on the available evidence we have identified eight points that locally elected officials may want to consider when deciding whether or not a P3 is right for their community: 1. Need. Could “on-time, on-budget” goals be reached through another procurement model, such as a design-build contract? 2. Resources. How long is the procurement process for a P3 expected to take? How much will it cost? Does the government have suf- ficient staff resources and in-house expertise to work on the pro- curement and negotiation of the P3 contract? If not, how much will hiring additional help cost? What happens if only one or two bidders respond? 3. Risk. What risks will the private sector take on? What risks will remain with the local government? Is it realistic to assume that the private partner will be able to manage the risks transferred to it at a lower cost than the government? 4. Responsibility. What will happen if the private partner fails to deliver on the agreed upon contract? Will the government still be on the hook to cover costs? 5. Accountability. How will the government monitor the contract? Can the government afford the additional monitoring costs? What will happen if service quality declines? 6. Jobs. How will the job security of current employees affected by the introduction of a P3 be protected? 7. Flexibility. If future public policy requires a change in the P3, will the government have the flexibility it needs to meet its goals? 8. Exit Strategy. If during the procurement or operation of a P3 it becomes evident that the P3 no longer serves the public interest, what is the government’s exit strategy? 6 Public-Private PartnershiPs: understanding the challenge On balance, the research indicates that P3s can have significant down- sides for the public interest. Money borrowed by the private sector is more expensive than money borrowed by governments, and those costs are passed along to the public. In addition to cost considerations, P3s present substan- tive issues for transparency and government oversight. Commercial considerations can limit public oversight in procurement, and contract provisions may limit changes that may be necessary to safe- guard public interest as new public policy imperatives evolve. Lengthy contracts require that the local government be able to predict public policy considerations decades down the road and effectively remove the service from public control. Although quality public service is the goal for local governments, pri- vate enterprises must show a profit for shareholders, and the public sector remains on the hook for provision of services. If local governments proceed down the P3 path, they are wise to do so only after a thorough review of the options. Charley Beresford Public-Private PartnershiPs: understanding the challenge 7 executive summary –––––––––––––––––––––––––––––– 5 table of contents –––––––––––––––––––––––––––––– 9 introduction ––––––––––––––––––––––––––––––––– 12 1. The emergence and evolution of Public-Private PartnershiPs ____________________ 15 1.1 What are Public-Private Partnerships? _______________ 15 1.2 The United kingdom: the birthplace of Canadian P3s ______ 17 1.3 P3s and new Public Management __________________ 17 1.4 P3s in Canada ______________________________ 18 1.5 P3s as Stimulus _____________________________24 1.6 Conclusion _______________________________25 2. Private finance and the credit crisis An uneasy future ––––––––––––––––––––––––––– 27 2.1 Public Sector accounting and Private Finance –––––––––– 27 Off-book financing –––––––––––––––––––––––––– 28 2.2 New rationales for Private Finance ––––––––––––––––– 30 2.3 Private Finance and tight Credit –––––––––––––––––– 32 2.4 Conclusion ––––––––––––––––––––––––––––––– 35 3. Understanding P3s –––––––––––––––––––––––––– 36 3.1 Definitions ––––––––––––––––––––––––––––––– 37 Who are the ‘ partners’ that governments deal with in P3s? –– 39 Thinking critically about P3 definitions –––––––––––––– 40 3.2 The P3 Procurement Process ––––––––––––––––––––– 42 P3 procurement framework ––––––––––––––––––––– 42 Length and cost –––––––––––––––––––––––––––– 44 3.3 Risk transfer –––––––––––––––––––––––––––––– 48 Types of risk –––––––––––––––––––––––––––––– 51 Public-Private PartnershiPs: understanding the challenge 9 Identifying and allocating risk –––––––––––––––––––– 53 Issues with risk transfer –––––––––––––––––––––––– 55 3.4 Comparing P3s to Public Procurement ––––––––––––––– 58 Value for money reports ––––––––––––––––––––––– 58 Public sector comparator –––––––––––––––––––––– 59 Discount rates ––––––––––––––––––––––––––––– 61 3.5 Contracts and Costs –––––––––––––––––––––––––– 64 The P3 contract –––––––––––––––––––––––––––– 64 Transaction and monitoring costs –––––––––––––––––– 65 3.6 Trade agreements ––––––––––––––––––––––––––– 68 4. P3s in different sectors ––––––––––––––––––––––– 70 4.1 Health –––––––––––––––––––––––––––––––––– 70 4.2 K-12 Education ––––––––––––––––––––––––––––– 72 4.3 Recreation Centres –––––––––––––––––––––––––– 74 4.4 Water and Sewage ––––––––––––––––––––––––––– 75 4.5 Transportation ––––––––––––––––––––––––––––– 77 4.6 Conclusion ––––––––––––––––––––––––––––––– 78 5. Discussion ––––––––––––––––––––––––––––––––– 79 5.1 P3s: theory and Practice ––––––––––––––––––––––– 79 5.2 Accountability ––––––––––––––––––––––––––––– 82 5.3 Benefits and disadvantages ––––––––––––––––––––– 83 6. Protecting the Public interest –––––––––––––––––– 85 Endnotes –––––––––––––––––––––––––––––––––––––– 90 Further reading ––––––––––––––––––––––––––––––––– 102 10 Public-Private PartnershiPs: understanding the challenge aPPendix a - MUniCiPal, rEgional and |SCHool diStriCt P3 ProJECtS in Canada ––––––––––––– 106 aPPendix b - ResoUrces –––––––––––––––––––––––––– 115 list of boxes and tables boxes 1.1 Local Contractors left behind by P3s? ––––––––––––––– 25 2.1 City of vancouver olympic village and Whistler olympic village ––––––––––––––––––––––– 31 2.2 A return to Public Financing in british Columbia ––––––––– 33 3.1 Architecture and P3s ––––––––––––––––––––––––– 38 3.2 Abbotsford Hospital and Cancer Centre: One Partner, Many owners ––––––––––––––––––––– 40 3.3 Recreation Centre bail outs: ottawa and Cranbrook –––––– 49 3.4 Canada line and golden Ears bridge: User risk Stays with the transit authority –––––––––––––––––––––– 56 3.5 The impact of transaction Costs on the Success of P3s: Findings from a UbC P3 Project Study ––––––––––––––– 67 6.1 Discussion Points ––––––––––––––––––––––––––– 88 tables 1.1 Summary of Federal and Provincial P3 initiatives ––––––––– 22 3.1 Costs associated with dbo Process for Whistler’s Sewage treatment Plant ––––––––––––––––––––––– 46 3.2 Potential risks in infrastructure Projects and Services –––––– 52 5.1 Difference between initial Estimate and Actual Cost of P3 Projects –––––––––––––––––––––– 81 5.2 Benefits and disadvantages of P3s ––––––––––––––––– 84 Public-Private PartnershiPs: understanding the challenge 11 Introduction The Columbia Institute’s Centre for Civic Governance works to provide support to community leaders as they meet today’s social, economic and environmental challenges.