BC Business
Notice how the phrases Canada Line, Sea-to-Sky and Port Mann twinning have a different ring to them than, say, fast ferries? One of the major differences is public-private partnerships, or P3s.
It’s a concept born in the U.K. for handing major responsibilities of public projects to private companies, and in Canada no province has done more than B.C. In fact, when Nova Scotia wanted advice this spring on which infrastructure projects to pursue as P3s, it paid $200,000 for B.C.’s opinion.
And yet P3s are like a recipe book for how to inflame our Left Coast sensibilities: public services entrusted to private companies, tax dollars fueling corporate profits, unionized public workers excluded from provincial works, multinationals bidding against B.C. companies.
Three experts help us understand just what the deal is. Larry Blain is the CEO of Partnerships B.C., a company created by the province to vet and manage its P3s. Tom Ross is an associate dean at UBC’s Sauder School of Business and co-director of the P3 Project research initiative. Brock Johnston is a partner with Vancouver law firm Clark Wilson LLP and co-chair of the firm’s Public-Private Partnership Group.
Could you introduce us to the idea of P3s? What are they supposed to do for us?
TOM ROSS: Well, the logic of P3s is to try to bring some of the benefits of the private-sector delivery of goods and services to the delivery of public-sector goods and services. We understand from a lot of experience and research that the private sector is frequently more innovative and more efficient than the public sector for a variety of reasons, including the kind of incentives they face.
We’re very familiar with using the private sector to help the public sector do its work in terms of contracting out, but this is just kind of pushing it a little bit further.
LARRY BLAIN: The private sector is traditionally involved in most aspects of public-sector procurement, in the design of the building, in the construction of the building, in looking after the building. But a public-private partnership integrates all of those things, typically, into one contract, and through that integration a lot of the business risks can be transferred to the business partner, and that is what it’s all about.
Our model in B.C. is one in which a concessionaire will, through competition, realize a contract with the government to design, build, maintain and finance a project for a lengthy period of time, say 30 years, and receive payments through the life of that contract based on performance. So you end up with a guaranteed deal for the project to be looked after and operated and maintained and turned back to the government.
Brock, the mix of responsibilities here seems very complex. How are those managed?
BROCK JOHNSTON: Well, it is a very complicated process, and it comes from the risk transfer, not just over the construction phase of a project, but from inception through design, the competition process, the actual construction of the project, and then a long-term period where that project is operated. And how do we transfer those risks? You have a series of contractual agreements with contractors, operators, suppliers, you name it, which ensures that that project can be delivered over the long haul.
It’s a very complicated documentation process because you’ll have lenders involved as well, looking over the shoulder of everybody and making darn sure that all the i’s are dotted and the t’s are crossed. Also, the private sector needs to know they are going to get paid at the end of the day. And what that does, I think, is impose a very high level of discipline, which is, I would say, a good thing.
So, it can be harder to organize than if the government just did it on its own.
ROSS: Yes, a few people have made this point before, and what I think is very persuasive is that the P3 form encourages you to think things through very carefully at the start because you’re going to enter into a very long-term arrangement. Traditionally, governments would just start and kind of muddle through and fix things along the way and nobody sits down at the beginning and says, “Let’s plan this for the future.”
If it’s largely about transferring risk to the private partner, what’s in it for them? If it’s increased risk, companies would expect increased reward.
BLAIN: The way the analysis would work is we try to calculate what we think the government would have to pay if they were to do the project on their own. Then we ask the market to bid against that. If they can meet our requirements to build the project, look after it over the long run and make a profit, then we’re better off because it’s cheaper than what we would have paid if we did it ourselves; they’re better off because, if they do everything they say they’re going to do, they’ll earn a return on their money.
And they earn a bigger return than they would have if they had just been hired as a contractor to build something?
BLAIN: If they do everything that is in the contract, then they would earn a return on capital of 10 to 12 per cent. Low by private-sector standards for a business, but in line with what BC Hydro or regulated utilities might earn on their capital.
ROSS: When you put the risk to the private sector, they have reason to finish sooner, to work smarter, to be innovative. So that’s where risk allocation can really create wealth, by changing people’s behaviour.
What are some lessons we’ve learned early on? Certainly some of the early projects must have had some glitches where afterwards we’ve said, “Oh gee, I wish we’d put that in the contract.”
JOHNSTON: In terms of B.C.’s expertise, it’s been growing by leaps and bounds, but it’s all relatively recent. There’s a growing understanding among lawyers and concessionaires that there are some risks that are more readily borne by the government than by the private sector, and if the parties go into these things with an understanding of what those are, they don’t waste a lot of time on negotiation and drafting, which is expensive.
So which risks are better portioned to the government?
JOHNSTON: One would be changes in legislation or tax treatment. If the rules of the tax treatment change, it strikes me that that would be unfair to ask the concessionaire to bear. Other areas are things that are completely out of the control of both parties. Otherwise, the concessionaire would assume a worst-case scenario in terms of developing their pricing for taking on those risks, and that’s not something you want them to do.
BLAIN: If it’s a business type of risk, then the business partner will probably not charge too much for it because it’s a risk they understand. But changes in law, environmental assessment, negotiating permitting with governments, negotiating with First Nations – things like that the government can do probably better than the private sector, and so they should do it.
Say you have a project that results in business failure, which is what can happen in the private sector. If it’s still a public project, it still has to be there: we still need that hospital or that highway. Is the public sector really not bearing this risk?
BLAIN: If the private partner fails or goes bankrupt? The first line of defence is that the lenders would try to find another operator because their capital is at risk. In the extreme case where they couldn’t find anybody, then we, the owner, would take our asset back; they’re not going to take the bridge anywhere. We’d stop paying for it until we get somebody else to help us out, based on probably a different contract.
ROSS: The private sector assumes risks and sometimes it doesn’t work out and you fail, and that’s a lot of money that taxpayers didn’t lose that some shareholders and banks lost. Then the public sector just picks up the pieces and goes forward. I don’t consider that a failure of the P3; it’s almost evidence that it worked because taxpayers weren’t on the hook.
JOHNSTON: That brings to mind another project I was involved with which was a bridge in another jurisdiction, and there was a very rigorous approach that forced everybody to say, “This is what it’s really going to cost to build this and operate the project.” And at the end of the day, the government didn’t proceed because their price was not achievable. At the time, there was some suggestion that this is a failure of the P3 process. I would say, no it isn’t. In fact, it’s an indication of how it can work for the benefit of the taxpayers. The government dodged a bullet on that one.
Larry, what exactly is the role of Partnerships B.C.?
BLAIN: We work just for governments and they’re our client. We do the assessment of what the risks are, who should bear them, what the real costs of the project are, how to specify the performance standards, and we put it in a plan that government can approve or not approve. If they approve it to go forward as a public-private partnership, then we become the procurement manager.
Who’s your boss? Who signs your paycheque?
BLAIN: Well, our revenue comes from our government clients, and then we have a board of directors that governs us, and ultimately the board of directors reports to the Ministry of Finance.
But if these ministries are going to Partnerships B.C. for advice on what would be a good P3 project and you’re also getting contracts to manage these projects, how do they know they’re getting unbiased advice?
BLAIN: The way our board of directors governs us is we have our own performance standards. And the most significant measure our board applies to us is that we do quality public-private partnerships: projects that have good results, that generate value for money. If we give biased advice, we get bad results. That’s the main way, and it’s a very reputable board of directors. They look at every project we do, and their primary role is to approve the analysis that we do, that this project should be a P3 or not.
There is a perception that the government wants to do everything through P3s, so what you’ve brought up here is interesting. Which projects work as P3s and which ones don’t?
BLAIN: If you were to look in the provincial budget, capital spending is approximately $6 billion a year. We tend to be in the order of $1 billion to $1.5 billion per year with the province, so around 20 per cent of the total capital budget is spent in public-private partnerships. The vast majority is not relevant – it’s just the large projects where there looks like there’s a scope for innovation, where there’s good competition, where there’s lots of risk – those are the ones that attract us.
So what would be an example of something that would not make sense as a project for you?
BLAIN: Well, we looked at the Pitt River bridge, and it was a replacement bridge. The design and engineering issues were pretty straightforward; there didn’t seem to be a lot of risk. That one we recommended it be done as a design-build, rather than a design-build-finance-maintain.
P3s get vehement opposition from certain groups. Where does this come from? What is the argument here?
ROSS: There are legitimate concerns about the P3 form in the sense that they do involve granting more authority, more autonomy to the private sector. Part of getting the private sector to do things better is giving them freedom to make decisions that normally would have been made by some bureaucrat, and you pay a price for that in terms of some lost control. In the end, they make decisions based on a commercial business basis that you look at afterward and say, “Oh geez, it would have been nice if they hadn’t done that.”
Nevertheless, you do have to see that you’re surrendering control – it’s part of the point. By giving them control, you’re giving them the ability to do things differently and hopefully more efficiently. Of course, people can expand on that and say, well, we’ve surrendered the asset, we’ve surrendered control, and that’s only true if you didn’t design a very good contract.
The group that seems to be the most opposed to P3s are groups that represent public-sector workers. That’s understandable. The P3 process is often going to involve bringing in private-sector workers to do the jobs that might have been done by unionized public-sector workers. So you’ve got a set of workers who are not really used to competing for their jobs, and now they are in a position of having to think about the kind of value proposition they offer their employer and government. It’s a bit of a new world for them and they’re struggling with it.
BLAIN: Also, a lot of the private-sector participants who used to contract directly to the government may now be contracted to somebody else, and that’s often not an arrangement they are used to. If you look at the types of companies who are participating in the public-private partnerships in B.C., there’s just an array of new players from all around the world. It’s very good for our economy, it’s very rejuvenating, but it’s a change and that’s what causes resistance.
B.C. has been doing P3s for a number of years, and we’ve gotten a lot of projects off the ground. Where do we stand in terms of Canada and the world as far as expertise in this process?
ROSS: The U.K. and Australia are the most experienced. The U.K. experience goes back at least to the early ’90s, and Australia not too long after that. But if you take those two countries out, Canada looks fairly advanced, relative almost to anyone else. British Columbia, with Partnerships B.C., would be the most advanced in the country.
JOHNSTON: Partnerships B.C. has had the opportunity to learn from some of the mistakes, learn how to improve on documentation and on process, from other jurisdictions. We may even be moving ahead in terms of clear documentation, allocation of risk, analysis of what makes a successful project. I don’t think there’s any question that B.C. is a leader in the world scene.
Larry was mentioning before that P3s are somewhere around 20 per cent of capital spending. Do we see that increasing?
BLAIN: I don’t.
ROSS: I don’t either, and it seems like we’re thinking about them for the right kinds of projects, and I don’t see them moving into a whole new category of capital spending.