Public Private Partnerships

Public-private partnerships often referred to as P3’s have reemerged and been in vogue since the early 1980s. As the directing minds of public, private, and not-for-profit organizations, managers are exploring the opportunity to consider participating in such ventures.  Indeed, I would be surprised if many of you listening to this podcast have not already encountered a P3 in your endeavours. Accordingly, I thought it might be helpful to share at a very high level a few key concepts, notions, and thoughts I have acquired as a practitioner in this field over the years.

As we get underway, let me underscore that the decision whether or not to adopt a Public-Private Partnership (P3’s) Model must be based solely on evidence and not rhetoric.

Slide 2 – So, what is a P3?

Public-private partnerships are legal agreements that train government and private or not-for-profit entities to provide public infrastructure, community facilities, and related services collectively.  As we have noted, typically, the partners share the risks, responsibilities and rewards of mutually shared investment. The question and challenge is the division of risk between the partners.

Slide 3- The Canadian Council for Public-Private Partnerships

The national champion for P3’s is the Canadian Council on Public-Private Partnerships.  For over a decade, this Association has been a leading proponent for many of the world’s largest private sector entities in promoting the synergies of P3’s.

Council provides a formal definition of a P3 as a “cooperative venture between the public and private sectors, built on the expertise of each partner that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.”

Slide 4. – Are P3’s of this nature something new?

P3’s were not new even when re-introduced by Prime Minister Margaret Thatcher and President Ronald Reagan in the early ’80s.  The combinations and permutations of the partnership arrangements possible between government and the private sector numbers in the dozens.  They evolved around some component(s) of the private sector asked to design, build, finance, and operate or to own the facility.  The crafting of the appropriate partnership entails assigning risks and costs on an equitable basis.  The private sector requires, among other things, a return on investment, while the public sector’s paramount concern tends to be transparency, and the P3 must not bring the government into disrepute.

Slide 5- Broadly adopted.

A variety of T3 models have been widely adopted globally to undertake primarily investment infrastructure. Search engines (Google) will provide you almost 3 ½ million sites on this topic.

Here are some examples:

In Britain, the private sector has invested to date $47 billion in P3’s as a result of partnering over 500 projects. Two hundred of these ventures are operational, with another 300 P3’s in progress.

In British Columbia, there are several recent projects to include the Fraser Health Authority adopting the P3 model to build, finance, and operate the Health Center in Abbotsford at a cost above $200 million. The 2010 Olympic Games in Vancouver used P3’s to provide a 20-kilometre rapid transit line from Richmond-Airport-Vancouver, costing $1.7 billion.

Slide 6– Global leaders – Public-Private Partnerships?

Suppose you are considering their successes and failures. In that case, three countries stand out as world leaders in the number and scale of PPP’s – the United Kingdom, Australia, and the United States (primarily in water & wastewater). However, many other countries have successfully implemented PPP projects and are benefiting from the results.

What tends to distinguish the leader countries (the U.K. and Australia) is that PPP activity is conducted through a comprehensive government program rather than on a one-off basis, as we have tended to do in Canada and the USA. However, I sense we are increasingly moving towards similar comprehensive government programs in some areas.

Slide 7 – Hybrid:  P3s are a Contract and Partnership

P3s are a hybrid between a traditional legal contract and a partnership. In crafting your P3 agreement, you must undertake a stakeholder analysis to classify the four types of stakeholders and develop strategies for dealing with each classification.  How will you get them involved to support the initiative or not impede the initiative?

In crafting this hybrid model, you will identify several points of tension between the stakeholders.  Each group will have a different agenda.  For example, the public sector partner will be heavily concerned, and rightfully so about return on investment.  While concerned about the financial questions, the public sector partner will be more concerned about the optics and outcomes. The project as a whole does not bring the public sector entity into disrepute.  Above all, the Minister cannot be embarrassed. The stakeholders, such as unions, etc., will also have concerns that will be addressed collaboratively.  A challenge? Yes, but P3’s are being undertaken daily with success.

Unlike a fixed contract, the P3 partnership encourages almost a Japanese kaizen model for improvements on the project. For example, the private sector partner in building the project identifies significant cost savings in materials or design. If the public sector partner approves the change, it would increase profits and accelerate delivery dates.  Unlike the contract model, the partners in a P3 would encourage each other to adopt the new adjustments and work out some incentive for both parties.

The key is to create a cooperative coalition with positive results for all partners. One is to adopt the mental model – What do I need to do to help you achieve your outcomes? Here’s what you need to do for me to achieve my positive outcomes. It is a matter of making sure everybody wins and that no one is forgotten. It must result in a win-win outcome rather than a win-lose mental model.

Finally, make sure you establish in your P3 what positive indicators (outcomes) will demonstrate your venture’s success?

Slide 8 – Negotiating a Public-private Partnership

Negotiating a public-private partnership as a result of a request for proposals is a significant task. As noted earlier, the critical tension in these negotiations will be between the private sector’s financial focus and the public sector’s intense focus not bringing the ministry into disrepute.   Remember to view the contract from the lens of your partner. You will need to know a wide range of risk strategies if you’re participating in this aspect of a P3. In addition to risk management, several legal elements will also require clarification. The least of which is to ensure your contract provides an exit plan-a prenup.

In most cases, dissolution is triggered by failing to achieve one or more performance requirements.  The failure to fulfill these performance requirements (milestones) provides for the dissolution of the partnership. Further P3 upon such dissolution must provide how the research and development and assets are divided among partners.

I propose the fullness of time to prepare separate papers and podcasts on these items.

Slides 9 and 10- What projects?

As a P3 consultant, I believe that P3’s have limited application.  A strong case can be made about adopting P3’s for highways, hotels, hospitals, bridges, sky trains, and other ventures.  There is evidence to support successful ventures globally in these areas. P3’s are not suitable in different experiences, e.g. the general application for health care delivery.  Britain adopted P3’s in support of their acute care system with disastrous results.  However, evidence supports the notion that small boutique components of healthcare are effectively served by P3’s.

The underlying rationale, it seems to me, for P3’s primarily results from governments being asked to provide more services with less money. If that is true, then it would seem to follow that the public sector money is better used to provide goods and services to those citizens who cannot access these goods and services in rural communities. For example, consider Canada’s CBC. Half a century ago, it made sense to unite the nation and to share national stories. Today with the Internet and the proliferation of media in urban centers, one might question whether or not the CBC could operate on a reduced budget and focus on providing services only to Canada’s North and other outback regions rather than to compete ‘toe to toe’ in well-served urban centers? It is expenditures such as this that Canada’s decision-makers must be focused upon as we move forward with less public-sector/not-for-profit money.

Some projects we might consider are: Hospitals, Healthcare, Schools, Transportation, Water and Waste Water, Prisons, the Military (for example, the USA’s Black Water organization in the Middle East), and even RRU. Whatever the project, the adoption or lack of adoption of P3 cannot be solely based on ideology.

Slide 11 -Seven primary functions of P3s:

These are the primary functions and a few initial thoughts that can be considered in a public-private partnership. Those with the asterisk (*) are functions where P3’s, in my opinion, work best. They are:

• Design – Often, the private sector has currency and the depths to provide state-of-the-art designs.
• Building – Building infrastructure and projects generally favour public-sector contractors.
• Financing- P3s are a way to borrow money for public capital projects. The issue here, of course, is who can borrow the money on the market cheaper.  In some jurisdictions, contractors can borrow cheaper than public-sector entities.
• Operation and maintenance *– Certainly, the public sector can provide firm control and sanctions are maintained by the private sector.
• Leaseback-leaseback* is an excellent model to help secure financing*. If the public sector were to build a building, for example, that was substantially rented by the public sector; financing would quickly be established.
• Transfer*– After the agreed-upon return on investment has been achieved, over the years is generally desirable for the assets to be transferred back to the public sector.
• Ownership*– This requires transparency and reflective thought the public sector will divest public assets to the private sector.

Slide 12 – Suggested Core principles

In negotiating, it is vital to observe the following core principles:

1. Protection of the public interest;
2. Value for money;
3. Appropriate Public Control/ Ownership;
4. Accountability;
5. Fair, transparent and efficient processes.

Slide 13 – Structuring the deal

Your imagination only limits you in structuring the deal.  You might consider joint ventures, licensing, management contracts that may or may not include a turnkey operation, user-pays models, some part of the costs borne all or in part by the government, consider the form of the government contributions does not necessarily have to be in cash. The public sector proposed a very innovative approach to putting a new bridge across the Vancouver harbour. The developer suggested that if they were allowed to fill in several acres of water, they would build the much-needed bridge free of costs to the government as they would derive the funds to pay for the bridge and make return investment from the sale of the newly created waterfront real estate. Consider another example, that every time there’s an overpass cloverleaf constructed on a major highway, it develops four very attractive corners highly prized by developers. This sale of these corners can be used to offset the costs of the highway interchange. It requires reflective and creative thought.  Governments might also give a one-time grant to attract private investors to assist in funding the project.  There may be revenue subsidies provided to meet the necessary price points of the operation.  For example, setting bridge fares.  Tax breaks are often considered and a guarantee given by the public sector on the annual revenue the private sector operator will receive. As I commented earlier, you are only limited by your imagination.

Slide 14- More Rational as to why do it?

What is clear is that British Columbia finds its ministries have to do more with less.  A quick examination of the following bar chart indicates the “Budget Twin Towers” and projection of diminishing government services. When I get a moment, I’ll update the bar chart, but I’m comfortable suggesting that the ratios remain relatively the same—if anything, possibly greater weight to health and education. As you can see, education and health consumption of public-sector funds leaves little for all other ministries. British Columbia has had years of cost cuts, wage freezes combined with significant increases in “user fees” and still have grown these towers. Tax fatigue has set in. Accordingly, its comes as no big surprise that B.C. Ministries are seeking ways to attract private sector funding in support of much-needed infrastructure.

But this new fiscal reality is not just within the province of British Columbia is global. Indeed the global meltdown of 2008 has accelerated the increased reliance on P3’s. Take a look at the U.S. debt clock for a moment, and I am confident you will agree that they must rely on other options to fund infrastructure projects… there just is no more money—several U.S. states, in particular California, are in a similar position.

Slide 15 – U.S. Debt clock Link (on blog site). (Note that day it is double this figure!)_

Over $14 trillion—just over 95% of America’s GNP and rising! Crazy! Little choice but to consider a new approach to building infrastructure and providing goods and services.

Slide 16 –Can the ‘line’ hold?

As a result of globalization, all nations, to some degree or another had developed economic interdependence on other countries. Like mountaineers, they are tied at the waist. When one falls into the financial crevasse… The question becomes, and the others on the line hold. It is a global spider web where one tug on any part of the Web distorts the relationship to others in the Web. Not just Canada and the United States—Consider the European Union save and except Germany do not have the funds to provide goods and services demanded. They, too, are required increasingly to consider P3 models.

Slide -17 – In budgetary terms

So governments, as we have just discussed, given their financial condition, attempt to portray the nation’s financial affairs in the most favourable light.

P3s allow the opportunity to expand capital spending when there is an infrastructure crisis without appearing to be spending more.

P3s play the same role as “off book” accounting and other mechanisms have played in the past in keeping capital spending out of annual spending budgets —  And off the debt clocks!.

Slides 18 and 19 – Continuing our discussions of why do it…

• As we have stated, governments worldwide are focusing on new ways to finance projects, build infrastructure, and deliver demanded services. P3s can provide much-needed capital to finance government programs and projects, thereby freeing public funds for core economic and social programs.
• Cost of borrowing ‘shifting.’
• The P3 approach provides creative ways to build that may not be affordable by the public sector alone at the time.
• It also provides the private sector with an opportunity to introduce complementary services that often fall outside the governments’ mandate.
• P3 projects strive to achieve maximum value for taxpayers by taking an innovative approach to the design, construction, financing, operation and maintenance of public facilities.
• They also provide an opportunity for risk-sharing, whereby risks – such as managing costs, controlling quality and staying on schedule – are transferred to the party best suited to manage them.

Slide 20- Key Benefits of P3s for citizens are:

• Ability to access new state-of-the-art infrastructure
• Faster design and construction
• Projects that reflect citizens’ priorities
• It helps to stimulate economic growth and employment
• Minimizes impact on resident taxes
• It frees up public funds for other core services such as the CBC example we just discussed.

Slide 21 and 22 – Key Benefits of P3s for the Public Sector

• Shares risk and responsibility with private-sector partners
• Addresses critical issues such as multiple demands, high expectations and pressure to reduce debts
• Accesses new sources of funds and new specialized skills
• Delivers capital projects (buildings and infrastructure) faster
• Reallocates resources to core areas
• Increases efficiency and effectiveness ( Dave move to next slide here, please)
• Creates high-quality infrastructure
• Promotes transparency, accountability and in-depth cost/benefit analysis and scrutiny of proponents offering the best value
• Allocates risks to the party best equipped to manage them
• Obtains private-sector investment in public-sector infrastructure
• Enhances competitiveness

Slide 23 – Key Benefits of P3s for the Private Sector

• Steady revenue streams linked to secure contracts
• New business opportunities
• Potential to build on the expertise of government organizations
• Sharing of risks
• Can move project faster at times – such as obtaining environmental approvals, zoning etc.

Slide 24 – Golden threads

There are generally two golden threads running through public-private partnership contracts. The first is that generally, the cost will be borne by the users; and the second, new technology and innovation drive the adoption of the P3. For example, today, with the advent of computer chips, it is possible to do electronic tolling on bridges.  No longer do cars have to stop as they traverse the new bridge, but electronically, their fee is noted by the computer, and some form of billing is generated. Certainly is a new technology at airport security has driven new public-private partnerships between airport authorities and security services, been frisked lately?

Slide 25 – So — Is there agreement on the value of PPPs?

YES — Crystallizes on a few singular points:

• PPPs should be limited to projects delivering greater Value for Money (VFM) than other forms of procurement.
• Governments can contract the provision of quality of service,
• transfer of a significant share of risks to the private sector,
• can implement the presence of competition or incentive-based regulations,
• Can provide a sound institutional and legal framework,
• Can provide a sufficient level of technical expertise in the government to manage the relationship,
• The government can provide the proper disclosure of PPP commitments and government guarantees in government financial statements (and in their debt-sustainability analyses).

Slide 26, 27 and 28 – Models of Public-Private Partnerships

• Design-Build (D.B.): The private sector designs and builds infrastructure to meet public sector performance specifications, often for a fixed price, so the risk of cost overruns is transferred to the private sector. (Many do not consider D.B.’s to be within the spectrum of PPP’s).
• Operation & Maintenance Contract (O & M): A private operator, under contract, operates a publicly-owned asset for a specified term. Ownership of the asset remains with the public entity.
• Design-Build-Finance-Operate (DBFO): The private sector designs, finances, and constructs a new facility under a long-term lease and operates the facility during the term of the lease. The private partner transfers the new facility to the public sector at the end of the lease term.
• Build-Own-Operate (BOO): The private sector finances, builds, owns and operates a facility or service in perpetuity. The public constraints are stated in the original agreement and through ongoing regulatory authority. (Dave move to a new slide here, please)
• Build-Own-Operate-Transfer (BOOT): A private entity receives a franchise to finance, design, build and operate a facility (and charge user fees) for a specified period, after which ownership is transferred back to the public sector.
• Buy-Build-Operate (BBO): Transfer of a public asset to a private or quasi-public entity usually under the contract that the assets are to be upgraded and operated for a specified period. Public control is exercised through the agreement at the time of transfer.
• Operation License: A private operator receives a license or rights to operate a public service, usually for a specified term. This is often used in I.T. projects.
• Finance Only: A private entity, usually a financial services company, funds a project directly or uses various mechanisms such as a long-term lease or bond issue. (Dave move to a new slide here, please)
• Other terms used in the PPP field:
  RFEI: Request for Expressions of Interest
  RFQ: Request for Qualifications
  RFP: Request for Proposals

…. there are others

Slide 29 – Scale of Public-Private Partnerships
The options are available for delivery of public infrastructure range from design-build to outright privatization, where the government transfers all responsibilities, risks and rewards for service delivery to the private sector. Within this spectrum, public-private partnerships can be categorized based on the extent of public and private sector involvement and the degree of risk allocation. A simplified range of public-private partnership models used in Canada can be seen on this slide prepared by the Canadian Council for public-private partnerships.

Slide 30 – What does the research on PPPs say?

Overall, the research suggests that bundled contracts are preferable when there is room for high-powered incentives to innovate or improve the infrastructure before the operational phase. More recent studies have focused, among others, on the level of details of contracts, the presence of private finance (and concentrated investors as monitors), the essence of cost overruns (as costs associated with trying to make arrangements complete), the need for a careful review of contracts, and the usefulness of properly designed auctions.

I would recommend that bureaucrats with the mandate to adopt a P3 project develop a flow chart of the whole business process.  Understand how that component considered for P3 interfaces with the other value chain/supply chain components.  For example, if BC Ferry’s or some part thereof was to be regarded as a P3 candidate, then the decision-makers must examine integration and coordination in the compete British Columbia intermodal transportation system.  Is the component under consideration a core component of the transportation system?  If so, then a P3 would be challenging to support. However, if alternate routes are available, then further examination of the P3 candidate should continue.

A further consideration is a requirement for decision-makers to undertake a life cycle approach to capital management.  This means linking all capital expenditures and the operating costs for the life of the project and fully costing before committing to a P3.  This is one of the troubling constraints of proceeding with the commuter rail projects. All operating costs must be considered.

At the end of the day, the projects being considered must be evidence-based not reflect the rhetorical philosophies of the private sector, unions and government officials.  The test I would commend is what is in the best interest of Taxpayers.

Slide 31- P3’s gone bad…??? Plato or Aristotle

By 2007, one-fifth of public services in the U.K., valued at £60 billion, was delivered in the private and voluntary sectors. Once P3s get a foothold, they are challenging to dislodge. It is a slippery slope. My, cab it would be arriving at a determination whether PIII’s record or bad, be aware of your bias towards the political philosophy of Plato—collectivism—one for all and all for one—the state over the individual vis-à-vis Aristotle political philosophy enhanced to include economic philosophy by Adam Smith, John Stuart Mills, David Ricardo, and the ideology of others that places the individual over the interest of the state. If you do not allow for this bias in your decision will be skewed.

NOTE – In 2020, Victoria Blue Bridge is a good case study Bridge builder sues the City of Victoria for bad design – Investigations – Focus on Victoria.

 Slide 32 – Criticism of Public-Private Partnerships

• Those opposed to public-private partnerships most often cite the loss of public control when a private sector company is involved in financing, building or delivering public services.
• Compared to other countries with vibrant P3 activity, the political culture of Canada is often seen as a barrier to further progress on P3’s. Especially in healthcare, such as “public goods” as water, Canadians remain suspect of partnerships that put “shareholder” value above the public interest.
• Organized labour often sees public-private partnerships as resulting in job loss, poor quality, and lack of oversight.

Slide 33 – Depends on the terrain you are standing -Undertake a Stakeholder analysis

 For example, consider the terrain the Union stands on when highways, faeries, or computer services are considered a public-private partnership.  Unions will contend:

P3’s are like outright privatization; they change the control of public services. And like contracting out, they change the way public services are delivered. Further, P3 drives a wedge between public services and their delivery, creating a category of services that are still public, but which are privately delivered.

Aware of stakeholders’ concern, your task as a decision-maker is to craft a strategy that will minimize the impact or exploit the opportunity to particular stakeholder presents the venture.  Again be aware of your biases—Plato or Aristotle when you formulate a strategy.

Slide 34 – The Canadian Experience

A recent Council publication entitled “100 Projects: Selected Public-Private Partnerships Across Canada” shows that PPP’s have become a successful vehicle to deliver public services in over 25 distinct sectors at all levels of government.

Canada has many high profile projects, such as the Confederation Bridge, Highway 407 Electronic Toll Route, Moncton Water Treatment Plant, St. Lawrence Seaway Commercialization, Kelowna Skyreach Place and Bruce Nuclear Power Plant lease.

Slide 35 – Canadian Progress in PPP – Project Values

Here is some recent Canadian Progress in PPP – Project Values you might find of interest.

Slide 36 – The Fundamental Question is:

 At the end of the day, the fundamental question is, “What do P3s bring to the table, for public capital, that other forms of public sector engagement with the private sector do not?” YOU must identify the synergy in the venture. Two plus two equaling four is not worth doing.

Slide 37 – Tips

As a practitioner, here are some tips, you might find helpful when you are implementing a public-private partnership.

• Treat PPP development as a matter of public policy
• Recognize that the engagement of the senior civil service in the discussion is critical
• Keep evangelistic rhetoric at bay
• Expose failures & work to understand how or why projects fail to improve future projects
• Do not allow the public sector unions to derail or monopolize the debate & acknowledge where they have valid criticisms of PPP.

Slide 38- Action Plan – to Implement P3s

Here are some significant components of the action plan. Fully consider how you will craft and implement a strategy for each—and once having done that, develop an action plan to implement.

• Education and Mobilization
• Coalition and Community Partners
• Community Mobilization
• Working with Union Trustees on Pension Plans (have the funds)
• Lobbying government
• Research – Coordination and Building Evidence
• Elections –play a role—the political philosophy of Plato and Aristotle often make a difference in whether or not P3’s are on the table.
• Learning with others around the World

Slide 38 – Need the background to get started?

• There are many organizations around the world dedicated to advancing the science of Public-Private Partnerships. You can find out more about P3s by visiting the following Web sites:
• Canadian Council on Public-Private Partnerships
• Partnerships B.C.
• Government of Nova Scotia
• S. National Council for Public-Private Partnerships
• United Nations Development Program

I hope you find this high-level overview podcast and video power points of some value when you encounter P3’s… remember, in the land of the blind the one eyed man is king!

[1] “Change for the better” refers to philosophy or practices that focus upon continuous improvement of processes in manufacturing, engineering, supporting business processes, and management.