January 27, 2010

Public-private partnerships for infrastructure save time, money: Conference Board report

OTTAWA

Public-private partnerships (P3s) for infrastructure projects are delivering savings in costs and time compared to conventional procurement approaches used by Canadian governments.

But P3s are not appropriate for all public infrastructure projects, according to the conclusions of a Conference Board report that assesses the performance of projects in the so-called “second wave” of P3s, those executed by specialized government procurement agencies.

“Early results of the ‘second wave’ indicate that most P3 projects are being delivered on or ahead of schedule. P3s are also providing cost certainty to the public sector, in that governments have not been compelled to channel additional funds midway through a project,” said Gilles Rheaume, vice-president, public policy, at the Conference Board.

“The two major benefits of P3s are cost-savings and time-savings. When all the project risks that the public sector bears are fully costed and included in the total cost of the project — and transferred in part to the private sector partners — cost and time savings can be achieved.”

The study, Dispelling the Myths: A Pan-Canadian Assessment of Public-Private Partnerships for Infrastructure Investments, assesses the benefits and drawbacks of P3 procurements based on recent Canadian evidence.

Efficiency gains—lower costs, quicker completion, higher service levels—are due to a number of factors: performance-based contracts, risk transfer to private-sector providers, integration of the various phases of a project, and the requirement that the private partners finance most of the costs of the project.

The efficiency gains achieved in P3 projects studied ranged from a low of less than one per cent to a high of 61.2 per cent, compared to conventional methods.

In dollar terms, savings ranged between a few million dollars for some projects and more than $750 million in the case of the Autoroute 30 project south of Montreal.

The benefits, however, come with additional costs compared to conventional procurements. According to the study:

• Private partners charge a risk premium for assuming project risks that are borne by the public sector under conventional projects;
• Private financing costs are higher than the financing available to governments;
• The transaction costs of developing and monitoring P3 contracts are higher than for conventional procurements.

Public spending on P3s is usually between 10 per cent and 20 per cent of total spending on public infrastructure.

P3s are not appropriate for some infrastructure projects, such as renovations or extensions to existing facilities where it is difficult to distinguish defects in the new work from latent defects in the existing structure.

“In some cases, the risk premium demanded by private partners, combined with the incremental transaction costs and the additional private financing costs, may more than offset the efficiency gains.

For this reason, each infrastructure project should undergo a rigourous value for money assessment beforehand, to determine if a P3 offers better value than conventional procurement,” said Rheaume.

“Some of the myths surrounding public-private partnerships for infrastructure appear to be just that.

P3s are not the privatization of public assets, and there is no evidence that service standards suffer under P3s.

Contrary to a widely-circulated view, the transparency of P3 procurements is considerably better than for conventional procurements, because an abbreviated form of the P3 project agreements is made available to the public, which is seldom the case for conventional contracts.”

The report was funded by the Alberta Treasury Board, Infrastructure Ontario, Infrastructure Québec (formerly the Agence des partenariats public-private Québec), Partnerships British Columbia, PPP Canada, and The Canadian Council for Public-Private Partnerships.

The scope, methodology, and findings in this report were determined solely by The Conference Board of Canada.

The methodology for the report included a review of the Canadian literature and publicly available documentation on P3s, interviews with P3 practitioners and academic experts, compilation of a database identifying key points in the procurement process and outcomes for the second wave of P3 projects, and four pairs of case studies comparing P3 projects with those done by conventional procurement processes.

-JOC News Services

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