With P3s, governments can share the risks of providing public infrastructure with the private sector
By Charles Lammam and Hugh MacIntyre : The Fraser Institute It’s easy to take public infrastructure for granted, but events like the Skagit River Bridge collapse in Washington State are a sharp reminder of how important infrastructure is to our daily lives and the wider economy. After all, roads and bridges allow us to get to and from work and move commercial products over great distances.
As governments here in Canada wrestle with the challenge of providing high-quality transportation infrastructure, they should increasingly consider public-private partnerships (P3s). The record shows P3s are more likely to be built on time and on budget and they offer greater value for money than conventional infrastructure projects.
At their core, P3s are a way for governments to partner with the private sector to share the risks and and rewards of providing public infrastructure. The government agency involved in the project establishes the project goals and desired outcomes while a consortium of private companies takes on the task of achieving them.
Consider a hypothetical example wherein a provincial government wants to partner with the private sector to build a highway. The government would decide on strategic matters such as the route, traffic flow, and measurable safety outcomes. The private partner then designs, builds, and usually operates and maintains the highway according to the government’s requirements. The private partner gets paid directly by the government or through tolls paid by drivers.
The provincial government still owns the highway and is ultimately responsible for ensuring adequate services. The point of a P3 is to harness the innovative capacity, efficiency, and expertise of the private sector for achieving the public sector’s ends.
That the private partner wants to make a profit is fundamental to the success of a P3 project. A P3 contract is structured so that the private partner’s profit depends on whether it achieves government objectives like finishing the project on schedule and meeting technical requirements. While payment on delivery helps keep the private partner on track, other features of P3s also help drive improved performance, including risk-sharing.
Risk-sharing occurs when the private partner takes on some project risks that would otherwise be borne by taxpayers. Delays and cost overruns are common risks in constructing public infrastructure. In a conventional project, taxpayers pay these extra costs; in a P3, the private partner is on the hook. Being responsible for poor performance encourages the private partner to avoid delays and cost overruns.
The profit motive and other unique features of P3s is why Canadian and international evidence point to P3s having a strong record in the construction phase, with projects generally completed on time and on budget. In a recent analysis of 19 Canadian P3 projects from 2004 to 2009, an impressive 90 per cent finished on time or ahead of schedule. In the United Kingdom and Australia, comparisons between P3s and conventional methods show that P3s substantially outperform conventional projects in the construction stage.
Most P3s in Canada involve the private partner in operating and/or maintaining the infrastructure after construction is completed. The long-term involvement of the private partner fosters operational efficiency and higher quality outcomes, and independent value-for-money assessments consistently show P3s have the potential to produce benefits over multiple decades. One key reason is that the private partner — again, motivated by profit — has a keen interest to develop innovative designs for the infrastructure so that it is more cost effective to operate and maintain over time.
Despite the clear benefits of P3s, opponents often attempt to discredit the P3 model by pointing to particular cases where a P3 project had problems. The overall pattern of P3s, however, shows they are superior in terms of predictable costs, delivery time, and operational efficiency.
Some projects are better suited for the P3 model than others. Those most likely to succeed as a P3 have certain characteristics, like potential risk-sharing benefits and measurable performance outcomes. And to truly capture the benefits of the P3 model, governments must develop the proper framework and capacity to both engage in and continuously monitor P3 projects.
Thankfully, no one was seriously hurt when the Skagit River Bridge collapsed. But the incident should remind us of the importance of maintaining existing infrastructure and investing in new projects. As long as governments are in the business of infrastructure, P3s are important option that can help improve the quality and provision of our roads, bridges, and railways.
Charles Lammam and Hugh MacIntyre are co-authors of Using Public-Private Partnerships to Improve Transportation Infrastructure in Canada available at www.fraserinstitute.org.