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Public-private partnerships: To P3 or not to P3?

Nationwide, provinces and municipalities are embracing these partnerships, or P3s, to build large infrastructure projects such as the $38-million Shenkman Arts Centre in Ottawa's east end.

Blair Gable/blair gable The Globe and Mail

What's happening at the Shenkman Arts Centre is something unheard of in suburban areas across Canada.

Well-known artists such as Sarah Slean, who would have played mostly downtown in the past, are drawing crowds to the new theatre in Ottawa's east end.

"We've only been open since the end of June and already we've surpassed the audience numbers we hoped for in the Shenkman's first year," Christine Tremblay says proudly.

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Through economic upturns and downturns over the past 20 years, Ms. Tremblay, now executive director of Arts Ottawa East, pushed municipal politicians to create a home for the arts in Ottawa's Orleans suburb. Last spring, that dream finally became concrete in the $38-million, custom-built, 500-seat Shenkman theatre. Except, it wasn't the city that fronted the cash.

"Only when the project became a public-private partnership was it viable to build," Ms. Tremblay says.

Nationwide, provinces and municipalities are embracing these partnerships, or P3s, to build large infrastructure projects such as hospitals, bridges and schools. Yet, despite a recent report touting the procurement method and money flowing from a new federal incentive fund, P3s have received strong criticism and experts caution those considering one to have patience, sound advice and a strong plan on their side.

"At its heart a P3 is all about risk transfer," says Richard Abboud, president of Forum Equity Partners, the Shenkman's private-sector real estate collaborator. "In a traditional procurement, governments design the building and put it out for contractors to bid on," he says. "But with P3s they can ask firms for proposals to design, build, finance and manage those buildings for up to 30 years."

Putting money into a cultural centre isn't at the top of the list for politicians who have to justify the risks they're taking, Ms. Tremblay says. So to leverage the design, construction and lease of the arts centre, the City of Ottawa offered up 19 acres of vacant land to developers in the heart of Orleans. (The Shenkman Family Foundation also contributed $1-million to the project in honour of the late Ottawa real estate developer Harold Shenkman.) The idea being that the centre would become an attraction that their private partner could surround with commercial and residential units.

"The Shenkman is the crown jewel of the new Orleans town centre," Mr. Abboud says. "It's a unique opportunity to build a community where people can walk, work and play in what is otherwise a suburban location." When the final phase of the project wraps in 2017, the nearby area will sport new town homes, retail, office towers and a seniors' residence.

The project taps into the idea of the creative city, Ms. Tremblay says, by using the arts as a focal point to build the community and grow the economy.

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"We get a first-class facility, the developers get a reliable tenant, tax breaks and the land to build on," she says. It's all about spreading the risk around to different groups, making it more manageable.

But before embarking on such an ambitious project, municipalities need a reality check, says Georges J.G. Arbache, associate vice-president of Bridgepoint Group, which specializes in project development and showing partners how to finance and manage a P3.

"Most municipalities don't really understand what a P3 is and what's involved in creating a successful partnership. They think it's all about risk transfer to the private sector," he says. "My job is to help them understand what kind of projects private firms are interested in bidding on and to face the reality of what it costs to get it finished."

All too often, municipalities come to the table with unrealistic expectations. "If it's just a mayor or councillor's pet project it's not going anywhere," Mr. Arbache says. "You need the community's support to actually make it work."

A way of gaining that support is through a scrupulous value-for-money report which compares the cost of the P3 with traditional procurement. At the end of the day, the difference in costs has to be substantial enough for the partnership to offer value to taxpayers.

Not every project is meant to be a P3, either. However, the Canadian market is still so new that there aren't any perfect projects that can be used as a model. To change this, federal Finance Minister Jim Flaherty announced the creation of P3C, a new Crown corporation, at the end of 2008 and set aside $1.25-billion to grease the wheels of the P3 market.

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The corporation is able to fund up to 25 per cent of each project it picks, and in the coming weeks will announce the first round it intends to support, with the second call for applications going out in early May. "We're hoping that by selecting and demonstrating projects that work at the municipal level that we'll be able to share that expertise," says John McBride, the chief executive officer of P3C.

But they're going to need to do more than that to encourage growth in the market, Mr. Arbache says. The fact that only six projects were submitted by municipalities during the first call for proposals is telling, he says.

"P3C has to put in a lot of work to get municipalities to understand what a P3 is. Their role should really be to help them find the proper projects and consultants to work with," he argues. "The council doesn't necessarily understand that there are a lot of studies that still need to be done."

A study published by the Conference Board of Canada in January, funded by P3C and a few provincial agencies, trumpets P3s for delivering "0.8 per cent to 61.2 per cent of the cost of a conventional procurement."

However, forensic accountant Ron Parks is highly critical of the report. "It contains a lot of verbiage, but doesn't get down into the nitty gritty of the numbers," he says.

Last year, Mr. Parks, who first got involved with P3s while evaluating B.C.'s project to build the Abbotsford Hospital in 2003, published his own study which investigates four projects procured by the province.

"What we found is that there has been a push to do P3s notwithstanding some of the potential consequences and costs," he says. Analyzing provincial fiscal plans and value-for-money reports, Mr. Parks discovered that the province dramatically decreased the estimated costs of P3s using inflated discount rates, and that there's a lack of transparency and public accountability in the procurement process.

In the case of B.C.'s Diamond Health Centre, he found that the project costs $203- million over the life of the contract, compared with $89-million had the project been publicly procured - a difference of nearly 130 per cent. And recent Auditor Generals reports in Nova Scotia, Ontario and Quebec have made similar discoveries.

If the province had built the health centre itself, they would have saved millions, Mr. Parks says, but his solution isn't for governments to ditch P3s as an option, but rather to assume their financing, since their borrowing rates are much lower.

Moving forward, he urges that governments can't go off half-cocked. They need to do their research and take a realistic look at all the options.

"P3s look good," Mr. Parks says, "but they're not necessarily the best, sole solution."

Shenkman Arts Centre costs

After the City of Ottawa's 30-year lease of the Shenkman Arts Centre expires, the building will become public property. During that time, this is what the project, which has applied for LEED silver certification, will cost:


To fund construction, the city's private partners (the Orleans Town Centre Partnership) borrowed $27.8-million from a financial lender and the remaining costs were covered by the city in a $9-million loan.

Lease payments

In its first year the city will lease the Shenkman for $1.4-million, which is set to increase at a rate of 2.5 per cent per year over the 30-year loan term.

Operation and maintenance

The city covers the operation and maintenance as well as life cycle renewal costs of the building, which are anticipated to amount to $958,000 and $212,000 in year one, bringing the total annual operating impact to $2.57-million.

Source: City of Ottawa

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