Public-private partnerships (P3) are often viewed as a way for cash-strapped municipalities to meet increasing fiscal challenges. It is true that P3s—or alternative finance and procurement (AFPs) as they are known in Ontario—allow municipalities to leverage capital markets without incurring public debt. However, before deciding to pursue the P3 model, municipalities should look beyond the monetary benefits to ensure that the approach is aligned with broader business practices.

Properly considered, P3s can help a municipality realize a host of ancillary benefits. We will examine those benefits and the business considerations that drive them throughout the project lifecycle—that is, at the pre-transaction, transaction, and delivery stages.

Pre-transaction: Develop the business case

Before choosing a delivery model, municipalities should develop a business case that explores the attributes of a project. Only after the municipality is satisfied that a project should proceed on its own merits, should a P3 assessment be completed as part of the business case to determine the optimum delivery model.

One of many relevant metrics for deciding the optimal delivery model is value-for-money (VFM). VFM provides a quantitative basis for decision-making by measuring the difference between the public sector comparator and the adjusted shadow bid. VFM results should not be interpreted as a go/no-go metric. Similarly, a larger VFM figure does not suggest that one project is better than another.

It’s also important to understand the motivations for P3 delivery. Funding programs that support P3s (such as the PPP Canada Fund) have intrigued some municipalities to explore the option. While initially tempting to pursue a higher-tier funding source, it is more important to first answer the question of where the additional funding will come from.

The decision to pursue a P3 model should be based on a municipality’s interest in pursuing ancillary benefits of P3 beyond securing a funding source or access to capital markets. These benefits include project acceleration, risk transfer, cost savings, and the ability to achieve synergies through the integration of discrete project components including design, build, finance, operations and maintenance.

As with any business decision, cost is an important consideration. P3s force the discussion of how much a project will cost during its lifespan. P3 delivery often becomes a lightning rod for exposing a project’s true lifecycle cost. Municipal councils often hold a hard line on capital budgets without necessarily considering the long-term costs of operations and maintenance. In these instances, P3s will be deemed “too expensive” from the onset.

Municipal councils should instead switch their mindset from lowest construction cost to lowest lifecycle cost. Recent project examples have shown that synergies created through P3 delivery can save upward of 10 to 30 per cent in overall project lifecycle costs.

Municipalities also need to be aware that with P3s, deferring maintenance is no longer a budgeting option. P3 concession terms are generally 30 years. This may pose challenges for municipalities that like having the option to defer non-critical maintenance and lifecycle replacement. In the case of a P3 project, the municipality is contractually obligated to make periodic capital repayments, as well as operational and sculpted maintenance and lifecycle payments over the agreed-upon concession term. Otherwise they will be in default.

Transaction: Set the course

P3s require strong leadership. Consortiums will look for delineation and dedicated point-people assigned to the project. This is especially true of the project manager’s day-to-day role. Weak governance structures erode confidence in the municipality’s ability to successfully deliver the project using a P3 delivery model, and this can result in a less competitive procurement process.

When it comes to procurement, municipalities must be comfortable defining the desired output from the onset and having minimal input into the nuts and bolts of what actually goes into the project during construction.

This is often an issue for municipal councils. Because they typically procure capital projects with prescriptive input requirements to achieve a desired end product (design-bid-build), they perceive this as a loss of control. However, using the P3 model, which procures using output specifications, drives innovation and risk transfer.

Delivery: Resist change

P3 projects are particularly sensitive to change orders during construction because of the degree of due diligence done up front. On-time, on-budget project delivery is therefore achieved when change orders are minimized. This means there is minimal opportunity to modify project scope after commercial and financial close. Once a budget, scope and schedule are committed to under a P3 model, little opportunity exists to alter scope without material cost and/or schedule impacts.

 

Rely on expert advisors

P3 projects are highly sophisticated transactions. Municipal councils will need to educate themselves on the mechanics of the P3 model. More importantly, they will need to ensure that the project is staffed with individuals who understand the process and have the demonstrated expertise to guide the municipality. Advisors must also be unbiased—they must look for the best solution, not the best P3 project.

As indicated above, P3s should not be seen as a panacea for municipalities with monetary challenges. While initially intriguing for their ability to leverage capital markets without incurring public debt, P3s should be considered in a broader business context. If satisfied on business merits that P3 is the way to go, municipalities stand to realize benefits far beyond the fiscal. 

 

Sasha Pejcic is a senior consultant in the strategic consulting group for Parsons Brinckerhoff in Canada.

 

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