Skytrain passengers on the Canada Line make their way on to the train in Vancouver. The Canada Line is often touted as an example of a successful P3 project.JOHN LEHMANN/The Globe and Mail
Supporters of public-private partnerships (P3s) often point to projects like the Oakville Trafalgar Memorial Hospital as examples of how the P3 funding model can work for the public's good. Not only did the hospital open on schedule in 2015, it stayed within its $2-billion budget. The result: a 1.6-million-square-foot acute-care hospital boasting 457 beds and an airy, environmentally sustainable design with cutting-edge technology.
"That's a clear example of the benefits of a P3," says Lou Serafini Jr., president and CEO of Toronto-based Fengate Real Asset Investments, which specializes in infrastructure, real estate and private equity investment strategies.
For months the talk of the town has been the newly-minted and contentious Canada Infrastructure Bank (CIB), for which $35-billion has been set aside. The Liberals have described the bank as a tool to invest in infrastructure projects that have revenue-generating potential and are in the public interest – with a focus on public transit systems, trade and transportation corridors, and green infrastructure projects – and to attract private sector and institutional investors to projects so that more infrastructure can be built in Canada. When a lack of capital poses a barrier to those projects, the bank will provide loan guarantees and small capital contributions to third-party entities to enable their completion.
"By leveraging P3s, the Canadian Infrastructure Bank can become a centre of excellence to facilitate investment in new infrastructure projects across Canada," notes Mr. Serafini. "P3 projects take a performance-based approach, [which] ensures an efficient risk transfer [to the private sector] and delivers cost certainty for the public sector and taxpayers."
Already, there are 267 such projects in the works across Canada, according to the Canadian Council for Public-Private Partnerships (CCPPP). The value of P3s completed or currently under construction is about $120-billion.
"The government funds should allow "larger, more complex, revenue-risk projects to come to life," says Serafini. He cites Vancouver's Canada Line, which links the airport to downtown. "The private sector designed it, built it and are running and maintaining it. It was completed ahead of schedule in time for the Winter Olympics and it saved the government $90-million while generating huge social and economic benefits for the province."
As for the Oakville hospital, the P3 model gives the government the full benefit of the private sector's considerable know-how, according to Mr. Serafini. "For a hospital board like Oakville's, this is the only hospital they've built. The last hospital was built maybe 60 years ago. They have no lessons-learned or best practices to draw on. [In contrast], a company that has built 150 hospitals is going to have a lot more relevant experience and that expertise allows for innovation."
But perhaps the most important factor is that P3s are outcome-based. Consortiums are contractually obliged to deliver projects by a certain date and an agreed-upon cost. If costs creep up, the consortium pays, rather than the government. And if they're late delivering, the government can charge a penalty. "In the case of the Oakville hospital, the penalties could have been north of $100,000 per day for not completing the building on schedule," says Mr. Serafini. "That's a powerful incentive."
According to a report by the Toronto-based research institute Canadian Centre for Economic Analysis (CANCEA), governments have saved as much as $27-billion using the P3 approach on 200 projects that are operational. Projects also tended to be completed 13 per cent more quickly on average than those delivered through a traditional procurement model. "That's significant because every year's delay ends up costing the government about 10 per cent more," says Mark Romoff, president and CEO of the CCPPP.
Some P3s also guarantee that the project will be operated and maintained "over a period of time, usually 25 to 35 years," notes Mr. Romoff. "They're not going to use inferior gravel on a road because they will have to keep repaving that road over the next 30 years. They want to be able to maintain it and still make even a modest profit."
That said, the P3 approach is not without critics. Warren Thomas, president of the Ontario Public Service Employees Union (OPSEU), has argued that governments can borrow money for these projects at a lower interest rate than any corporation and that P3s are simply a "subsidy to money lenders, paid for by cuts to public services and jobs elsewhere." When all the accounting is in, governments may have ended up paying more, in exchange for transferring to the private sector the risk of something going wrong.
"People ask whether P3s are good or bad," says Matti Siemiatycki, an associate professor of geography and planning at the University of Toronto. "The answer is, it depends. It depends on what the rationale is for using them, it depends on how they're structured, and it depends on how they're implemented."
Mr. Siemiatycki points out that there have been some horror stories of international P3 projects that have gone bankrupt and had to be bailed out by the government or have non-competition clauses that tie the hands of future governments.
"I would say [that] in Canada we've avoided some of that instability by thinking of P3s as a method to get on time and on budget construction and, in some cases, to transfer some of the availability risk – to make sure there is a maintenance plan and it's funded over the long term," he says.
Still, Mr. Siemiatycki contends that P3 projects must be carefully justified based on value-for-money and supported by policies that maximize the public benefit. One thing that definitely makes a difference to creating a good outcome, he notes, is when the government has an ongoing culture of handling this model of delivery and has developed a level of expertise. He credits organizations such as Infrastructure Ontario, Partnerships BC and PPP Canada with developing the skill sets needed to help deliver big projects under both the P3 and traditional procurement models.
In the end, P3s are "not a panacea," Mr. Romoff notes. They work best for larger, more complex projects where the government needs assurance that costs won't get out of line. "[But] when [P3s are] done for the right reasons on the right projects," he says, "the returns have been great."
This content was produced by The Globe and Mail's Globe Edge Content Studio, in consultation with an advertiser. The Globe's editorial department was not involved in its creation.