In Canada, public-private partnerships (P3s) are increasingly being used to build big infrastructure projects—everything from wastewater plants to roads and hospitals. P3s are a performance-based approach in which the private sector not only assumes a major stake in financing big projects, but also their overall design, construction, and long-term maintenance. In Canada, P3 models have been successfully used to deliver 170,000 square feet of new school space, 4,790 hospital beds, 170 courtrooms, 930 kilometres of roads, and other infrastructure.
Making the selection of which infrastructure projects to invest in is arguably among the most critical decisions governments have to make—and the most complex, given the myriad factors involved (demand, economic, social, fiscal, political, et cetera). Governments around the world have implemented structured approaches that guide this process and ensure business cases are comprehensive and ultimately reflective of government objectives.
Once a specific project has been selected, a key next step is to identify the delivery model that will best address the project’s objectives. While public-sector entities have historically delivered infrastructure projects through traditional models (typically a design-bid-build approach with maintenance responsibilities retained by the public sector), governments are increasingly considering, where appropriate, P3s. These alternative means of project delivery involve the private sector through multiple aspects of design, construction, financing, and/or long-term maintenance within a clear contractual structure intended to ensure on-time and on-budget delivery as well as long-term performance.
In Canada, for example, a two-stage P3 model selection process has been established at the federal level for municipalities and other entities applying for large-scale projects funding through the New Building Canada Fund. This process involves an initial qualitative P3 screen to assess the high-level suitability of a P3 model, followed, if necessary, by a more detailed qualitative and quantitative P3 business-case assessment. Provincial jurisdictions in Canada and across the world apply similar approaches.
Quality first
After a project’s initial suitability for a P3 is established during the early stages of project planning, further analysis is conducted to evaluate the project’s more granular details and determine exactly how to proceed. This typically involves a qualitative analysis that considers a wide range of factors that may vary across projects depending on the unique circumstances and the objectives of the project’s sponsor.
The qualitative factors examined include:
- Project characteristics and risks;
- Project schedule and budget considerations;
- Private sector market interest and capacity;
- Political constraints and acceptance;
- Regulatory and legal considerations; and
- Other factors such as technology and security considerations.
The qualitative analysis also requires the involvement and input of key stakeholders and subject matter experts that reflect the comprehensive nature of the factors being considered—factors that may be translated into qualitative evaluation criteria to be used in assessing the range of potential models. The expected outcome is the identification of a preferred model (or shortlisted options as appropriate) for further consideration.
Value for money
A quantitative assessment of the shortlisted or preferred P3 delivery model is typically completed following the qualitative assessment, and is considered in the final selection. The key component here is a value-for-money (VFM) analysis intended to compare the risk-adjusted costs of a potential P3 delivery model against a traditional approach in order to estimate the potential quantitative benefit of each. The use of a VFM assessment is a common practice globally—a recent Organisation for Economic Co-operation and Development study found that 19 out of 20 countries surveyed adopt a VFM assessment for proposed P3 projects.
VFM results are typically used to confirm that a P3 delivery model is indeed expected to achieve greater value for money. In that respect, the purpose of a VFM analysis is not to serve as a decision-making tool, but rather as an important test to validate a preferred delivery model. It’s important to recognize that even with their increased adoption over recent years, P3 delivery models do not always represent the most appropriate delivery option.
Ground rules
Leading P3 jurisdictions around the world have been successful in establishing clear methodologies to guide the application of VFM analysis in support of their P3 programs. In Canada, the VFM assessment process is very well established. Infrastructure Ontario (IO) and Partnerships British Columbia are the procurement agencies leading the largest P3 programs in the country—and each has a published guide that details the methodologies employed in their VFM assessments. Both also issue public project reports that present the VFM results for all projects they undertake. Research by the Conference Board of Canada found that the leading jurisdictions in Canada (Ontario, British Columbia, Alberta, and Quebec) have all developed a rigorous VFM methodology. At the federal level, PPP Canada does not have a specified methodology for VFM assessments, but does require project sponsors to use established methodologies applicable to their jurisdictions.
Jurisdictions with large P3 programs also continuously evaluate the performance of projects, adopting lessons learned and best practices to improve P3 delivery procurement processes, template contracts, documents, and methodologies. IO conducted a refresh of its VFM methodology in 2014 to reflect lessons learned from its own portfolio of projects and to align it with recent experience and the state of the P3 market. As part of this process, IO consulted with key clients and external experts to meet its objectives to be more transparent and to use information grounded in actual experience and data that is now more readily available. The result is a number of key changes being made to the VFM methodology that acknowledge the evolving nature and continuous improvement principles inherent to the process.
P3 track record
The expansion and success of P3 programs around the world has helped deliver much-needed infrastructure across numerous sectors. Beyond the assets’ functional benefits, infrastructure is a major driver of economic activity and growth. These social and economic benefits may be seen as attributable to the essential delivery of the infrastructure, not a direct benefit of its delivery through P3 projects specifically. It is arguable, however, that P3 programs (and their integration of private financing) have introduced new flexibility in public-sector funding frameworks that allows for more urgently needed infrastructure investment than would otherwise have been delivered.
There is a growing body of empirical evidence that, when used appropriately, show P3s can be a very effective means of protecting the public sector from the risks associated with large project delivery. The vast majority of information available to date indicates that, globally, P3 projects have achieved strong performance in terms of on-time and on-budget delivery. For instance, a 2009 National Audit Office report in the United Kingdom showed that 69 per cent of projects were delivered on time and 65 per cent were delivered within budget—a rate that increases to 94 per cent when projects less than five-per-cent over budget are included. Closer to home, findings from the Conference Board of Canada in 2010 showed that, out of 55 Canadian P3 projects, none exceeded budget; of the 19 projects that had achieved substantial completion, 17 were completed either on time or ahead of schedule. At the provincial level, a 2014 Altus Group report on Ontario-based P3 projects concluded that 36 out of 37 projects were completed within budget and 27 out of 37 were delivered on time or within one month of their scheduled completion date (see Figure 1).
Unfortunately, there is currently no systematic performance data tracking of traditionally delivered projects in Canada. In an attempt to provide a general indication of the schedule and budget performance of these types of projects, Deloitte researched publicly available information on budget and schedule for a subset of traditionally procured, public-transit projects to provide a non-empirical indicative comparator of performance. Deloitte identified 20 projects delivered through traditional delivery models in ReNew Canada’s Top 100 Projects report for the years 2007 to 2015. Through a search of public information on these projects, we determined 16 of the 20 appeared to be behind schedule and/or over budget. In contrast, Deloitte identified five projects using the same Top 100 list, delivered through P3 delivery models with none showing indications of cost overruns or schedule delays (see Figure 2). While this research was only indicative, it is generally aligned with the empirical studies cited earlier. The absence of a comprehensive database comparing traditional and P3 delivery of projects is not a barrier to sound value-for-money analysis. Best practice is to rely on the advice of professional cost consultants, many of whom have significant experience in both P3 and traditional delivery and the risks under both models.
As P3 delivery models become more prevalent, and an increasing number of projects reach advanced levels of maturity, public sector sponsors will have greater access to real-world project data and experience. Additionally, a structured and disciplined approach to collecting relevant performance data is also worthwhile for traditionally delivered projects, which together may serve as an excellent source of knowledge. This knowledge can then be used to feed the refinement of VFM assessments to ensure reliance on inputs and assumptions that are as evidence-based as possible in supporting infrastructure investment decisions.
Gianni Ciufo is a partner and the public sector market leader with financial advisory at Deloitte. Kanishk Bhatia is a senior manager of Infrastructure Advisory & Project Finance at Deloitte. Mohammed Mehany is a manager of Infrastructure Advisory & Project Finance at Deloitte.
