What are P3s and how do they affect public infrastructure development in Canada?

Dec 6, 2019

As humans, we seek to innovate. We push the bounds of what technology can accomplish in order to improve our quality of living. This can happen as a result of the development of new technologies and procedures, or as a result of improvements to existing technologies and procedures. Either way, the end goal is the same: being better off than we once were.

The same principle applies to the development of public infrastructures, such as highways, hospitals, and schools. These all have to be designed, built, financed, maintained, and operated by someone at some point.

In the case of public infrastructure, that “someone” is the public, and we’re represented in this regard by our elected government officials. But the government can only take on so much work before inefficiencies begin to cast a shadow on the intended benefits of government action.

The introduction of P3s to the Canadian economy

The Introduction of P3s to the Canadian Economy

To overcome this issue (among others), a new method of procurement for the design and construction of public infrastructure called Private-Public Partnerships (P3s) entered the scene in the 1990s and is still in place today.

While there’s no universal definition for P3s in Canada, there are common criteria that must be in place for a project to be considered a P3.

Essentially, P3s necessitate the existence of two key criteria. First, the infrastructure (or services) in question must be publicly owned. Second, there must be some transfer of risk between parties (i.e. public and private sectors).

If both of these criteria are not met, the project in question is not considered a P3 in the Canadian context.

Before P3s, the general procedure was that the design and construction of public infrastructure were funded by public debt. With P3s, however, this would no longer be such a straightforward equation.

Wave One: 1990-2000

When P3s were first introduced to the Canadian economy, the inaugural rationale was to be able to design and build high-quality public infrastructure while minimizing the amount of debt directly incurred by the public sector.

This “first wave” of P3 projects consisted largely of water treatment plants and sports complexes across the country. All sorts of groups criticized the outcome of these projects — including scholars, auditors, stakeholders, and the media — claiming the projects didn’t meet the public interest.

First and foremost, the lack of transparency throughout these P3 projects spurred fear that public interest was highly susceptible to the profit motive of private companies. Other criticisms that lead to the second wave of P3s in Canada revolved around the potential loss of accountability, labor relations issues, and the government’s lack of expertise in negotiating contracts with private-sector companies.

Wave Two: 2000-present

By the time the second wave of P3 projects began in the early 2000s, the rationale for P3s had evolved and new measures (such as contracts that incentivize timely delivery of projects and the development of PPP agencies in six of the ten Canadian provinces) were implemented in response to public criticisms, as well to changes in the political and economic landscapes.

These are P3s as we know them today. The contemporary rationale is that P3s can serve as an alternative means to traditional public service and infrastructure delivery because they leverage the ability of the private sector to deliver efficiencies, innovation, and expertise that cannot be matched by the government.

Design-builds versus conventional builds — what's the difference?

Design-Builds vs Conventional Builds

While the exact structure of a P3 in Canada varies from project to project based on the unique context of any given project, P3s are typically a variation of what’s known as a “design-build”.

Design-build is a project delivery system in which the design and construction of an asset are both contracted to a single entity (in the case of P3s, this entity would be a private-sector contractor).

The design-build approach contrasts the traditional design-bid-build project delivery process — commonly referred to as the “conventional” construction methodology, wherein the public owner engages a design team to come up with the initial project design and prepare the bid details before inviting construction companies to bid on the project.

In the conventional design-bid-build approach, the design team represents the interests of the owner. This is not the case with the design-build project procurement methodology. With design-builds, the design and construction teams both represent the interests of the contractor.

Thus, when it comes to P3s — whose structures are variations of design-builds — the public owner of the asset in question will engage a team of professionals called a “compliance team” to ensure the owner’s interests are represented throughout the life of the project.

One of the more common cradle-to-grave P3 structures in Canada is the Design-Build Finance Maintain Operate (DBFMO) approach.

In a DBFMO P3, the public owner of the asset in question enters into a project agreement with a “consortium” — that is, a legal entity created specifically for the purposes of the project, which will be responsible for the design, build, finance, maintenance, and operation of the asset throughout the term of the project agreement (this can be 25 to 35 years or more).

The consortium usually consists of a robust team of specialists, such as financiers, project managers, engineers, and builders. Since the consortium represents the interests of the private sector, the public owner will engage a compliance team as an advisor.

In the DBFMO model, the public owner (usually with the help of their legal and/or compliance teams) provides output specifications and performance criteria. The consortium is responsible for upholding these standards as they pertain to the maintenance and operation of the asset over the term of the project agreement. The consortium must also ensure the asset meets the conditions specified in the project agreement at the time the asset gets handed over to the public owner at the end of the contract. (In DBFMO P3s, the asset is publicly owned throughout the project agreement — it’s just the responsibility of maintaining and operating it that are transferred between parties)

A popular alternative to DBFMO P3s in Canada is the Design-Build Finance Maintain (DBFM) model. The main difference between DBFMO P3s and DBFM P3s is that, in the latter, the operation of the asset remains the responsibility of the public owner throughout the life of the project. This is relatively risky for the consortium because operating decisions can significantly impact the cost of maintaining the asset.

Other, less popular P3 models in Canada include Design Build Finance (DBF), Build Finance (BF), and Build Finance Maintain (BFM).

Challenges of P3s vs Conventional Builds

P3s require significantly more resources than conventional projects. Not surprisingly, the legal efforts required to govern the various P3 parties (i.e. the public sector owner and private sector consortium, among others) are unparalleled in the conventional execution of projects. Furthermore, the public sector owner must obtain specialized expertise to manage the process. Whether this expertise is obtained in-house or contracted out, it comes at a price.

These inherent complexities of P3s mean the process is often much more costly and time-consuming than conventional alternatives. This is why there are usually minimum cost thresholds that a public infrastructure project must meet for a P3 to even be considered a viable option.

The future of P3s in Canada

The Future of P3s in Canada

A massive amount of literature evaluating the merits (or lack thereof) of P3s in Canada has been published over the past decade. And although critics and supporters are unlikely to reach a consensus on whether or not P3s are a worthwhile endeavor, it raises important points of discussion for the procurement of both public and private infrastructure projects.

First and foremost, the debate about P3s and protecting the public interest translates clearly to private sector procurement. It highlights the importance of ensuring owners and contractors/bidders have the same understanding of what project success looks like. We often hear owners evaluating bids and being drawn to the less costly options, especially in these tough economic conditions.

These owners are oftentimes unaware that the bids they evaluate are not always apples-to-apples. Seeking the least costly option versus the most valuable option is a trade-off that will always have to be taken into consideration.

Even in our personal lives, this is a decision most of us make almost every day. Should you invest in the expensive laptop that promises to maintain a pristine operating condition for at least five years or would you rather save some money upfront by buying a cheaper model that’s likely to maintain a decent operating condition for a year or two, after which time you’ll likely find yourself in the electronics department once again, shopping for a replacement?

And the thing is, you have to ask the right questions to even be able to understand what type of life you can expect from that laptop. Rarely does it come with a label stating outright its expected lifespan?

The same can be said for infrastructure. Communicating your expectations and definition of success, as well as asking the right questions to potential contractors early on in the process, will help ensure you’re getting the most value from your investment.

The issue with this is that reality makes this easier said than done. At the end of the day, individuals are evaluating these choices on behalf of a company, and their priorities aren’t always in line with the long-term vision of the company or organization they represent. If you perceive your employer to have a small risk appetite, or if you’re worried about job security (as many people are in these trying economic conditions), you’re much more likely to invest in the option you’ve used before rather than considering the upside of innovations offered by the private sector.

A similar storyline exists in all levels of government. Remember how the contemporary rationale of P3s is to leverage private sector innovation while getting the best value for a project in terms of public interest? Well, actually applying these concepts can be difficult when the people responsible for infrastructure decisions (which should span 25 to 35 years, at least) operate in four-year mindsets.

Although there might not be a perfect solution to these points (yet), what we can do in the meantime is have open, respectful, and constructive discussions about such topics and practice seeking out perspectives that challenge our pre-existing notions. The safest choice isn’t always the best choice — nor the most informed. As Peter Drucker, one of the world’s most widely known and influential thought leaders in management and business, once said: “If you want something new, you have to stop doing something old.”

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