Demystifying the Public-Private Partnership

An Overview of the Model and its Application in Quebec

Philipp Duffy December 5, 2012

What is a Public-Private Partnership?

– An alternative mode of public procurement

– A bottom-up performance-based method of designing and evaluating infrastructure projects

– A means of better accessing private sector innovation and discipline

– A means for government to achieve time and cost certainty

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But it is not:

– A privatization of public infrastructure

– A substitution of the private sector for the delivery of government services

– A simple method of financing or ability for governments to finance off balance sheet

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How do P3s Work?

– Output/performance based contracts– Allocation of risk between public and private

parties– Integration of design, build, operation and

maintenance phases– Private financing– Payment upon delivery

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The Experience in  Quebec and Canada (“DBFMO”)

– “Design - build – finance – maintain – operate” DBFMO model most prevalent• asset is at all times owned by the public

entity• incorporates all of the foregoing elements• allows achievement of all of the theoretical

benefits of a P3 Model• makes concessionaire responsible

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The DBFMO Model

– Forces the public entity to clearly define the output and performance expected of the infrastructure

– Output specifications and performance requirements provide benchmarks for performance of private partner to be measured against (and penalties assessed)

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The DBFMO Model (con’t)

– Forces the private party to consider cost over the entire life of the project life cycle considerations become much more important and feed innovation/efficiency

– Enforces discipline as a result of financing component

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The DBFMO Model (con’t)

– Lends itself well to proper allocation of risk “packages risk” properly in the concessionaire

– Is easy to monitor for performance– Is inherently suitable to performance based

incentive/disincentive measures/accountability of private partner

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Drawbacks of the P3 Model

– Risk premium– Private sector’s higher financing cost– Higher transaction costs inherent to the model

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When Are P3s Appropriate?

– For larger infrastructure projects– Complex projects or projects presenting

timing/cost certainty risks– Projects with potential for tapping private sector

innovation or specialized know-how– Where a competitive market exists for private

party services

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The Procurement Process

– Each of B.C., Alberta, Ontario, Quebec and the federal government have bodies responsible for evaluating, planning, procuring and overseeing major public infrastructure, including by way of P3

– In Quebec, handled by Infrastructure Québec– Infrastructure Québec replaced “The Agence des

partenariats public-privé du Québec” in 2009

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Role of Infrastructure Québec

– Responsible for major public infrastructure projects ($40M+)

– Works with and advises the client to develop a 3-stage business care for the project

– Each stage is followed by ministerial approval

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Role of Infrastructure Québec (con’t)

– First stage involves a strategic presentation of the project with preliminary budget ranges

– Second stage provides for tighter budgeting, a rigorous “value for money” analysis and I.Q.’s recommended model for procurement.

– It is within I.Q.’s mandate to recommend:• traditional design-bid build;• the “project management” method;• turn-key procurement, or• public-private partnership

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Role of Infrastructure Québec (con’t)

– Third stage involves complete and final detailed business case for project, with estimated budget at ± 5%

– After approval any increases in cost of more than 5% must be reported to the government

– Where project proceeds either by PPP or turn-key, I.Q. coordinates the selection process

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The Selection Process

– Preparation of preliminary output specifications and design requirements

– Preparation of a Request for Qualifications (RFQ) package

– Review of responses to qualify a shortlist of consortia invited to participate in the RFP

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The Selection Process (con’t)

– The RFP is released to qualified bidders• includes full output specifications• includes form of legal agreements• provides timetable:

for various workshops (legal, design, engineering, etc) and technical proposals

for delivery of financial and technical proposals

• provides for transparent Q&A/R.F.I. mechanisms designed for fairness

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The Selection Process (con’t)

– Process necessarily expensive for both public and private parties

– Bidding agreement providing for deposit guarantees and compensatory payment to losing consortia

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The Selection Process (con’t)

– Delivery of proposals– Proposals examined for compliance with RFP– Compliant proposals subjected to “best value”

analysis

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Preferred Proponent Stage

– “Preferred Proponent” selected– Negotiation of final documents adapted to

winning proposal– Finalizing financing arrangements by private

party– Execution of Project Agreement (“Financial

Close”)

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The Project Agreement

– Together with schedules is the “Bible” of the project

– Allocates risk between public and private partners

– Site condition, design and construction obligations, works schedule, commissioning, deficiencies, services during operational term, maintenance and conservation, end of term requirements (handback)

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The Project Agreement (con’t)

– Requirements Program (output specifications)– Payment mechanism (and failure points)– Variations procedure

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The Project Agreement (con’t)

– Energy– Collateral agreement with design-builder and

service provider with step-in-rights in favour of public party

– Lender’s direct agreement

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The Canadian Experience

– Conference Board Report of 2012– Examined 55 infrastructure P3s– “Value for money” analysis pointed to savings for

taxpayers over conventional procurement– Noted a high degree of cost and time certainty

through delivery

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The Canadian Experience (con’t)

– Penalty regime seems to be working– Suggests that first wave (pre-2004) of P3s was

less successful since:• was driven by off balance sheet issues• attempted to transfer inappropriate risk• didn’t properly transfer financing risk

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Projects in Quebec

– Maison Symphonique• delivered September 2011• Gold CCPPP award winner

– Autoroute 25• delivered may 2011

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Projects in Quebec (con’t)

– Autoroute 30• to be delivered December 2012

– CRCHUM• projected delivery autumn 2013

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Municipal Project Opportunities

– 2012 report of Canadian Construction Association, Canadian Public Workers Association, Canadian Society for Civil Engineering and Federation of Canadian Municipalities rates 30% of existing municipal water and roadway infrastructure in 123 participating municipalities as in “fair” to “very poor” condition

– Replacement cost of $172Bn

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Municipal Project Opportunities (con’t)

– Challenge for P3 model is size vs. cost:• process is expensive• need larger projects to attract private lenders

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– CCPPP points to several successful smaller projects:• Vancouver Landfill Gas Cogenerating Project• Ottawa Paramedic Headquarters• Moncton Water Treatment Facility• Goderich Water and Wastewater System

Municipal Project Opportunities (con’t)

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Municipal Project Opportunities in Quebec

– Infrastructure Québec available to provide services and support to municipalities

– Can also help in obtaining Federal funds– Advantage of transparency

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Summary

– Alternative form of procurement– Value for money– Accountability and responsibility of private sector– Innovation and discipline– Not a panacea– Canada and Quebec good at this– Opportunities exist

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Questions?

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