Common Questions about P3s

Index

What is a public-private partnership (P3)?

A P3 is a different, non-traditional way for government to create capital assets (such as roads, schools, and other types of government facilities). A P3 can save time, money and reduce risk to the government by having one contractor design, build, finance, and maintain, and in some cases operate,  a facility. In the case of roads projects in Alberta, the government entered into one agreement with a contractor responsible to design, build, partially finance, maintain and operate roads; and in the case of schools, one agreement to design, build, partially finance and maintain  the infrastructure over the life of the contract.

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How do P3s differ from traditional procurements?

The chart below lists some of the differences between a P3 procurement and a traditional approach.

Traditional Procurements Public-Private Partnerships
A well understood model where the public sector tenders design and then construction and pays for the infrastructure as construction progresses. Operations and maintenance are managed separately by the public sector either directly or by tendering the work separately to the private sector. The design, construction, maintenance and sometimes operations are tendered as one package. The integration of these elements can result in infrastructure that is less costly over the life of the agreement than tendering each element separately.
The public sector pays for the infrastructure as it is constructed.

The private sector partner fully or partially finances the project. The public sector pays for the infrastructure over the life of the agreement and all payments are subject to deductions for failing to meet contractual standards. By making payments to the private sector partner “at risk,” the public sector can enforce the risk transfer in the agreement.

Risks are generally retained by the public sector. Risks are allocated to the party best able to manage them.
The contract could be standardized and relatively simple to understand and administer.

The contractual agreement may be unique to that type of infrastructure and includes inter-related provisions that require a person that knows P3s to administer.

There is no major incentive to the private sector to finish the project on time, on budget or within scope. Payments to the private sector partner are subject to deductions if the private sector partner fails to complete the project on time and within the defined scope. Payments are pre-determined during the tendering process so additional payments are not made by the public sector if construction costs are higher than anticipated.

There is limited scope for innovation.

Opportunity exists for significant innovation.

 

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Why are P3s used in Alberta?

P3s are used only when there are clear benefits to taxpayers. A P3 approach can provide a number of benefits. Projects could be built and put into service earlier than with traditional delivery. The government is guaranteed a fixed price and delivery date for the project. Also, the work comes with what is effectively a long-term warranty (30 years for roads and schools), which means the infrastructure must be in the condition specified by the contract, during the contract and at the contract’s conclusion. Most projects delivered traditionally only have one or two-year warranties. P3s allow the province to allocate some risks, such as inflation and weather-related delays to the private sector. P3s can also provide the opportunity for the contractor to introduce innovation. The government will only proceed with a project as a P3 if it provides value for money over the life of the contract so P3s also save taxpayers money over the contract period.

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Who owns the P3 projects when they are completed?

Ownership of the infrastructure remains with the public sector throughout the term of the agreement. For Government of Alberta P3 projects, the province or another public-sector entity, such as a school board, owns the infrastructure and provides public services to Albertans the same as it does with infrastructure procured using a traditional approach.

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How can the Government of Alberta be assured that the private partner will deliver the project on time and on budget?

The province’s P3 agreements are set up with business terms that help ensure the private sector partner finishes the project according to an agreed-upon schedule and on budget. The private sector does not receive payment on the privately-financed portion of the construction costs until the infrastructure is complete. The province may pay part of the construction costs during the construction period, but payments for the balance of construction costs do not start until after construction is completed and there are deductions if the target availability date is not met. The maintenance or operations component of the agreement is structured such that the consortium will receive payments when they provide the services. All payments are subject to deductions if the services are not provided in accordance with standards outlined in the agreement. The payments amounts are established during the competitive bidding process and set out in the agreeement so the private sector must absorb any unexpected cost increases as they cannot pass these costs on to the province.

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If the Government of Alberta can borrow money more cheaply than the private sector, how can a P3 arrangement save money?

While the Government of Alberta can borrow money more cheaply than private companies, the borrowing rate is only one factor in the total cost of the entire project. The overall efficiencies of the private sector and any innovation they bring can more than offset the higher borrowing costs. The private sector can provide shorter design and construction periods, construction efficiencies, economies of scale, innovative designs and improved operations and maintenance processes. In a P3 the private sector entity also has a substantial amount of its own capital at risk, so it puts more pressure on the contractor to deliver efficiently and effectively. The Government of Alberta will only undertake a P3 project if it costs less over the life of the contract than the traditional approach.

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How is the private sector partner selected?

The private sector partner is selected through a competitive bid process. This is usually a two step process. The first step involves assessing potential partners’ qualifications through a process called an “RFQ” or “request for qualifications.” In this step the Government of Alberta accepts submissions from private sector respondents outlining their qualifications to deliver the type of P3 project the Government of Alberta is looking to undertake. Normally the top three respondents meeting the qualifications are invited to participate in the second step, which is the “RFP” or “request for proposals” stage. The Government of Alberta will then select the winning proponent based on the lowest net present value proposal received in the RFP stage. Proposals are evaluated in the RFP stage to determine if they represent good value.

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What are the key criteria for evaluating P3 projects?

Some of the typical project evaluation criteria are:

  • Project is sufficiently large (typically $50 million or more)
  • Asset provision and operations can be defined in an output specification
  • Payment and/or revenue can be tied to performance
  • Opportunity for the project to generate value for money and achieve risk transfer
  • Private sector has the ability to deliver
  • There is enough private-sector interest to generate a competitive process
  • There is a sufficient operating period to generate savings
  • Not all projects are suitable as P3 projects. Only a portion of the Government of Alberta’s Capital Plan will be delivered as P3s.

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What is net present value?

Net present value is the current value of a future sum of money. It is a standard method to compare the value of money over time (a dollar today is worth more than a dollar tomorrow because of interest and inflation) to assess long-term projects. It is produced by applying an interest rate and an inflation rate (collectively called the “discount rate”) to a future sum. The amount and timing of cash flows differ in the two options for producing the schools (traditional and P3) and the calculation of net present value accounts for those differences.

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What is a Value for Money (VFM) Assessment?

A VFM assessment measures whether a P3 is the best option for a particular project. The net present value of the cost to produce and maintain a facility using the traditional approach is called the Public Sector Comparator, or PSC. The three proposals submitted by the P3 project proponents are evaluated against a public sector comparator to ensure they represent good value for government and taxpayers. If clear benefits are not demonstrated, the project would not proceed as a P3.

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How are risks assigned in a P3?

Risks, both qualitative and quantitative, are inherent in all P3 projects, as in any other infrastructure projects. Risks are assigned to the sector that can best manage it. The province retains certain risks and transfers risks that can be more effectively handled by the private sector. The project team and stakeholders identify, analyze and respond to risks throughout the life of the project.

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What kinds of P3 projects has the province done?

The province has used P3s to procure ring road segments in Edmonton and Calgary, schools throughout the province and a water and waste water treatment centre in Kananaskis. The province will consider P3s for other types of infrastructure where a P3 has the potential to provide value.