Blog | May 28, 2013

Dan Ovsey, Financial PostLast month, a coalition of labour and public-interest groups calling itself Public Interest Alberta released the results of an Environics study showing more than two-thirds of Edmontonians disagree with the City’s decision to enter into a public-private partnership for the expansion of its southeast LRT (Light Rapid Transit) line.The survey showed respondents believed the P3 deal would lead to higher fares, a lack of coordination between the extended and existing portions of the LRT line and, most importantly, a lack of accountability on the part of City Council should something go awry.Such concerns are understandable. The concept of private industry delivering a service traditionally provided by public-sector workers through tax dollars seems unorthodox. There’s an inherent cynicism that the private sector partners will attempt to delude the public; that its insatiable desire to maximize profits will lead to corners being cut, adversely affecting the quality of service being provided. Such concerns are reinforced by past scandals, including the tragedy involving Ontario’s wastewater treatment plant in Walkerton and the mismanagement of the ORNG air-ambulance service.Yet, P3s aren’t all bad. Proponents of public-private partnerships point to success such as Vancouver’s Canada Line, a $720-million transit route that takes passengers from the city’s international airport to the downtown core and beyond. Others point to PEI’s Confederation Bridge, a toll highway linking the Maritime island with mainland New Brunswick.The question then becomes: Why do some P3s fail miserably while others evolve into long-term success stories?Part of the answer has to do with the public sector partner’s ability to monitor the private sector partner’s activities and hold the latter accountable for its contractual obligations.“If you allow the private sector to sign up and price a set of responsibilities and then you let them off the hook because you’re not keeping your eye on them, or because you didn’t draft the contract right in the first place and you left some border room they can walk through, then shame on you,” says Will Lipson, partner with KPMG. “That’s not the private sector’s fault. Of course he’s not motivated to operate as efficiently as he should.” Mr. Lipson has seen his fair share of P3s evolve. He’s served as a consultant for both private and public-sector entities over the course of his lengthy career, and he’s a big believer that in some instances – not all – P3s can help achieve significant costs savings over the long term and offer much better service to the public. One of the keys to success, he says, is being vigilant about the enforcement of contractual obligations. “What tends to happen is that the people who put all this stuff up front in the contract are not the people who stay behind to do the monitoring.”Those ideas may seem intuitive but they’re often not followed as religiously as they should. That’s why Bob Boutilier, Edmonton’s transportation manager, isn’t taking any chances.The civil servant is taking a page out of Vancouver’s Canada Line playbook with respect to the level of detail included in the contract between Edmonton and the private consortium that will fund the LRT extension.“The biggest work on this is setting up the contract,” he says. “It’s not standard boilerplate stuff. You can’t cut and paste it and you have to spend a lot of time . We’ve called in expert advisors. We have a financial advisor, a fairness advisor, a technical advisor. We have excellent staff here, but if we’re going to go toe to toe with these consortiums, we need people who are in that league.”The details of the contract will have to delve into the minute operational details of transit operations – from the frequency of structural maintenance to the number of staff and cars necessary to service the anticipated number of riders to the maximum acceptable number of delays.The prevalence of P3s has been growing at a rapid pace over the past 20 years, hitting a peak in the 2009-11 period when 39 projects finalized capital funding to the tune of $21.7-billion approved. While the rise of P3s has left many labour groups and private citizens feeling unsettled, those with intimate (and internal) knowledge of the public sector’s capacity to carry out major infrastructure projects agree P3s play a critical role in a time when public finances are extremely limited and highly scrutinized.Andre Jureau, the federal government’s deputy minister of infrastructure between 2002-2006, says he was struck by the limitations within the public sector with respect to its ability to execute major infrastructure projects.“There’s a limit to how many projects a government can deliver,” he says. “They have all sorts of capacity limits in terms of the workforce and the knowledge they’ve got. The private sector can expand on that.”But Mr. Jareau cautions the execution of P3s shouldn’t be done without a public consultation process; that the public for whom the service is being provided must buy into the concept before too many grand plans are made.Mr. Lipson notes that the rise of P3 models is a response to government’s desire to focus on what it should be doing – governing, rather than providing services.“Deep down, I want to set policy as a public sector rather than assume I know how to operate things,” he says. “We no longer go out and build roads; we hire firms.”Transferring risk for the unexpected that may arise over the course of a project to the private sector comes at a price, says John McBride, CEO of PPP Canada, a publicly funded institution established in 2009 that uses $1.3-billion in federal funding to help all levels of government facilitate P3s.“The answer to that is, yes, the private sector costs more,” he says, tempering his remarks with a note that the disparity between private-sector lending on a P3 and what the government could borrow is now less than 200 basis points. “That’s why it’s important to do detailed analysis for value. The P3 approach isn’t always the right approach. We do a detailed assessment of the risk and see whether it warrants the costs.”Mr. McBride estimates P3s make sense only for about 10-15% of infrastructure projects needed today.One of the key challenges for P3 stakeholders is the limited number of P3s that have gone through a full lifecycle and could be used as case studies from which to garner best practices. However, given the pace at which P3s are being embraced today, the next generation of government and business leaders is likely to have the knowledge required to execute 3Ps with fewer hiccups and greater benefit to all involved.Read the article at the Financial Post.