Public-private partnerships (P3s) for infrastructure projects are providing more cost-effective and rapid results compared with conventional procurement approaches, but they are not suitable in every situation, according to a report.
The Conference Board of Canada’s study, Dispelling the Myths: A Pan-Canadian Assessment of Public-Private Partnerships for Infrastructure Investments, 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,” says Gilles Rhéaume, vice-president of public policy with the Conference Board. “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. 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 upside
Efficiency gains—in the form of lower costs, quicker completion and higher service levels—are due to factors such as 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 project costs.
The study found that efficiency gains achieved in P3 projects ranged from less than 1% to a high of 61.2%, compared with conventional methods. This translates to savings of a few million dollars for some projects and more than $750 million in the case of the Autoroute 30 project south of Montreal.
The downside
However, there are additional costs associated with P3 projects compared with conventional procurements:
- 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; and
- the transaction costs of developing and monitoring P3 contracts are higher than for conventional procurements.
According to the study, public spending on P3s is usually between 10% and 20% of total public infrastructure spending. In certain circumstances—such as renovations or extensions to existing facilities—P3s are not appropriate for infrastructure projects, as it can be 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,” says Rhéaume. “For this reason, each infrastructure project should undergo a rigorous value for money assessment beforehand to determine if a P3 offers better value than conventional procurement.”
Rhéaume explains that some of the myths surrounding P3s—that they are the privatization of public assets and that service standards suffer under P3s for infrastructure—appear to be just that.
“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.”