Background Paper
Public-Private Partnerships: Why, Where, When, and How
Publication No. 2010-18-E
12 May 2010
Allison Padova
Industry, Infrastructure and Resources Division
Parliamentary Information and Research Service
Public-Private Partnerships: Why, Where, When, and How
(Background Paper)
HTML and PDF versions of this publication are available on Intraparl
(the parliamentary intranet) and on the Parliament of Canada website.
In the electronic versions, a number of the endnote entries contain
hyperlinks to referenced resources.
Ce document est également publié en français.
Library of Parliament Background Papers present and analyze various aspects of
current issues in an objective, impartial manner. They are prepared by the
Parliamentary Information and Research Service, which carries out research for and
provides information and analysis to parliamentarians and Senate and House of
Commons committees and parliamentary associations.
Publication No. 2010-18-E
Ottawa, Canada, Library of Parliament (2010)
CONTENTS
1 INTRODUCTION............................................................................................................... 1 2 THE POTENTIAL ADVANTAGES AND RISKS OF PUBLIC-PRIVATE PARTNERSHIPS ..... 2 2.1 Value for Money .......................................................................................................... 2 2.2 Impact on Government Expenditure.......................................................................... 5 2.3 Other Potential Advantages of P3 Procurement ....................................................... 6 2.4 Other Potential Risks of P3 Procurement ................................................................. 7 3 THE ROLE OF THE STATE IN PROMOTING SUCCESSFUL P3 DIFFUSION ................... 8 3.1 An Enabling Legal Framework ................................................................................... 8 3.2 The Creation of Enabling Institutions ........................................................................ 9 4 SOME INTERNATIONAL GUIDELINES .......................................................................... 10 5 CIRCUMSTANCES SUITED TO PUBLIC-PRIVATE PARTNERSHIPS .............................. 12 APPENDIX A – P3 MODELS
APPENDIX B – INTERNATIONAL PROJECT EXPERIENCE IN KEY P3 SECTORS
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1
INTRODUCTION
Governments are responsible for providing public infrastructure (such as bridges,
highways, waste and wastewater treatment plants, and recreation centres) and
public services (such as education, health care, and corrections) to meet society’s
needs. In order to sustain growth, industrialized countries must add capacity in public
infrastructure and services to meet the needs of a growing population, as well as
maintain existing public assets as they age. Developing countries need to build an
initial stock of public infrastructure and services in order to achieve more rapid
economic growth and improve living standards. The costs to society of inadequate
public infrastructure and services may include lower productivity, reduced
competitiveness, higher rates of accidents and health problems, and lower life
expectancy.1
In the past, public infrastructure and services were built and owned/operated or
otherwise provided almost exclusively by the public sector. Increasingly, however, the
resources required to do so exceed what many governments are able to offer. For
example, the required investments, worldwide, in telecommunications, power,
transportation, water, and sanitation were expected to exceed $1.9 trillion per year in
2008.2 Although difficult to define and measure, Canada’s gap in public
infrastructure alone is estimated at between $44 billion and $125 billion.3
Furthermore, the assumption that the public sector can deliver the required public
infrastructure and/or services at the best price through conventional procurement is
increasingly being challenged.4
Public-private partnerships (P3s) have emerged as an alternative procurement model
that may offer many advantages over conventional procurement. The term “P3”
refers to any agreement whereby the private sector takes some responsibility for
public infrastructure or service delivery. For infrastructure projects, public-private
partnerships typically involve a government entering into a contract with a private
sector consortium to transfer a number of the components of infrastructure
procurement and management (e.g., design, financing, construction, operation,
maintenance) as well as some of the risks. The private sector partner generally
recovers the cost of the investment and financing by charging fees to users of the
infrastructure.5 For public service projects, which may also have an infrastructure
component, the P3 contract sets out measurable output indicators of the quantity
and quality of services to be provided by the private sector and the risks the private
partner is to assume. The private partner in a public service P3 generally is
compensated for the investment and financing costs by charging fees to the
government for the services provided. In both cases, the government is attempting to
shift the financial and operating risks of a public project to the private sector while
ensuring that the services provided are better or at a lower cost than those provided
under conventional procurement.
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P3s are particularly prevalent in the areas of transport (roads, railways, and airports),
utilities (electricity, water, gas, sewage, and telecoms) and amenities (lighting, social
housing and accommodation). P3s in social services (health care, education and
corrections infrastructure, and non-core activities) are emerging, although they are
more complex and controversial than infrastructure applications. In recent decades,
P3 projects have been pursued by some 60 countries around the world, led by the
United Kingdom, Australia, Portugal, and Greece in terms of proportion of total public
investment. P3s are increasingly used as a procurement model elsewhere in the
European Union, Asia, South America, the United States, and Canada.6
Although this new model of procurement has many strengths, it is not a panacea.
P3 procurement is a very complex process and may not deliver a project or a service
that is better than that delivered under conventional procurement. Perhaps this
explains why conventional procurement still dominates the public infrastructure and
services markets. Nevertheless, the use of private finance to address the
infrastructure backlog has increased almost fivefold in the last 10 years.7 This paper
discusses:

the potential advantages of P3 procurement over conventional procurement, as
well as the potential risks;

how the state can influence the success of P3s; and

international guidelines for P3 procurement.
The paper concludes with a section describing the conditions under which a
P3 project might be pursued successfully. Summaries of P3 models and project
experience in common P3 sectors in select countries around the world are provided
in appendices A and B.
2
THE POTENTIAL ADVANTAGES AND RISKS
OF PUBLIC-PRIVATE PARTNERSHIPS
P3 procurement offers potential advantages over conventional procurement, in terms
of value for money and the impact on government expenditure, but it also presents
risks. Some possible positive and negative P3 outcomes are described below, with
illustrative examples from various jurisdictions.
2.1 VALUE FOR MONEY
It is a generally accepted notion today that P3 procurement has the potential to
deliver value for money8 over conventional procurement methods, if it is used for the
right projects.9 For example, contracting a private consortium to provide and operate
public infrastructure or services can result in faster, lower-cost construction, and/or
an improvement in services. A well-constructed P3 contract provides powerful
incentives to the private partner to respect budgets and timelines of construction
projects and to use innovation to improve service delivery in comparison with that
expected under conventional procurement.
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Countries that have extensive experience with P3s have generally had good
outcomes with respect to value for money. The United Kingdom is the most advanced
user of P3 procurement in the world. UK Treasury reports indicate that only 20% of
P3 projects have been delivered late or ran over budget compared with some 70% of
publicly procured projects.10 Furthermore, cost savings related to the use of
P3 procurement versus conventional procurement in the United Kingdom have been
estimated at roughly 17%.11 In Australia, another world leader in P3s, a
benchmarking study found that although P3s typically went over budget, they
performed approximately 30% better than conventional procurement with respect to
cost overruns.12 Unlike in the United Kingdom, however, the study found that
Australian P3s tend to be delivered no faster than conventional procurement.
Comparing the two models, delays are experienced upfront with P3 procurement (in
the period leading up to signing a P3 contract) whereas they typically occur postsigning with conventional procurement projects.
Experiences with public service P3s in health care and education have also been
positive in the United Kingdom, in terms of faster and cheaper delivery of services
and facilities.13 As well, there appears to have been a good value-for-money outcome
with respect to P3 prisons in the United States. Privately constructed and operated
prisons appear to be at least as cost-effective as public prisons, and the data
regarding the quality of services put private prisons on par with or ahead of public
prisons.14 Considering that conventional procurements are often delayed and over
budget, the Confederation Bridge may be regarded as a successful Canadian P3 with
respect to value for money, because the bridge was delivered on time and on
budget.15
Conversely, P3s may provide poor value for money if they result in slower, more
expensive construction of public infrastructure and/or lower quality public services
than conventional procurement. One contributing factor in a poor value-for-money
outcome is that P3 contracts are very complex and more expensive and time
consuming to negotiate and manage compared with conventional procurement. For
smaller projects, such as those valued at less than $75 million, the P3 model may
not be justifiable because the potential savings during construction and operation
may be completely offset by the higher procurement and contract management costs
experienced in the initial stage of the P3 process.
In addition to the extra contracting costs, another aspect of P3s that could reduce
the value for money is that private sector financing could be more expensive than
public borrowing. While both public and private sector borrowers must recoup
financing costs over the life of a project, the private partner may be required to pay a
higher risk premium than a public borrower, making the P3 a higher cost alternative
to conventional procurement in this regard. This aspect has been disputed, however,
as there are many reasons why the spread between the private and public sector
interest rates might not be significant. For example, public procurement of large
projects can negatively affect a small government’s credit rating and drive up its risk
premium on borrowing. Also, rating agencies may perceive global investment firms to
be less risky than governments – particularly sub-national governments – for large
projects if the firms have significant knowledge and experience in the sector and
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many projects across which to pool risk. Finally, governments increasingly bestow
tax-exempt status on their private sector partner(s) in a P3 to mitigate potential
differences in financing costs.16
A particular risk to achieving value for money associated with public service P3s,
such as health care, corrections, and school projects, is that the quality and quantity
of public services provided might be lower than what would have been provided
under conventional procurement. Poor quality or inadequate services can result if the
contract does not make clear which partner has responsibility for every detail of the
operation. The private partner, usually a for-profit company, has the incentive to
minimize costs at the expense of services unless the contract specifically requires
measurable outputs against which performance can be measured and monitored
and contains credible penalty and contract termination provisions for
underperformance. The risk of inadequate services is exacerbated, in many cases, by
the fact that the populations dependent on the social services provided under the P3
are among the most vulnerable in society.
Canada and the United Kingdom have had some successful P3 projects in social
services, but not all have been judged as such. The Province of Nova Scotia initiated
a plan to provide new schools through P3 procurement in 1997. By 1999, some
39 new schools had been constructed, but the resulting facilities and operations
were widely criticized by the public and the P3 program was terminated.17 The Auditor
General of Nova Scotia recently found that a number of contractual requirements
were not met by the private partner for these schools, including background checks
for child abuse and other criminal activities, first aid training, and fire safety
inspections.18 The Auditor General of Nova Scotia also found that procedures to
monitor whether the private partner was meeting the terms of the contracts were
inadequate. The experience with P3s in the prison sector in the United Kingdom
(referred to as “Private Finance Initiative (PFI) prisons”) has also been mixed.19 A
report by the UK’s Comptroller and Auditor General on the operational performance
of PFI prisons ranked them among the best and the worst prisons in the country.
It would seem that successful P3 programs place a greater responsibility on the
public service than do conventional procurement programs because of the need for
contract management and monitoring over the much longer P3 contract. In order to
avoid a P3 achieving inferior value for money in comparison with that achieved
through conventional procurement, commentators generally recommend that there
be:

capacity and skills in the public service to effectively negotiate and monitor
P3 contracts;

adequate risk assessment conducted by a public authority that has the power to
veto a project;

identifiable and measurable project outputs to help ensure that citizens’ needs
are met; and

performance indicators in the contract that will be used to assess penalties and
rewards for the private partner.
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2.2 IMPACT ON GOVERNMENT EXPENDITURE
Another potential advantage of P3s over conventional procurement is that they can
reduce government expenditure/debt levels by attracting private capital for major
infrastructure projects. In many P3s, private capital completely offsets public sector
investment in the construction and maintenance of infrastructure. In return, the
private partner has until the end of the P3 contract (usually a term of more than
20 years) to recoup its costs and make a return on its investment.
Some P3 contracts simply allow the public sector to freeze its level of investment in
infrastructure or spending on services. The government can freeze spending if it
agrees to transfer the regular annual appropriation for the infrastructure or service to
the private partner as a revenue guarantee.20 With respect to public service P3s, in
which the government pays for the services, expenditure growth can be frozen or
reduced if the contract requires the private partner to achieve efficiency gains. For
example, some US states require that private prison firms provide services at
5%–10% lower than the cost of services for a public prison.21
A well-constructed P3 agreement for a major infrastructure project can also reduce
the government’s financial risks (contingent liabilities) associated with building and
operating the infrastructure. This is achieved by transferring certain elements of risk
associated with construction and operations to the private partner in the contract,
thereby reducing government expenditures over the contract term. For example, the
private partner is in a better position than the government partner to manage risks
associated with delay, construction cost overruns, and maintenance of the asset
during the operations and therefore should be responsible for them. The
Confederation Bridge serves as an example of a successful Canadian P3 with respect
to contingent liabilities. The risk of cost overruns was successfully transferred to the
private consortium, and the Government of Canada has not incurred any costs or
liabilities beyond those contemplated at the signing of the contract.
In some types of P3 projects, such as a toll highway, it does not make sense for the
entire demand/revenue risk to be assumed by the infrastructure operator. One
reason that a government might share in operational risk is to attain the desired level
of private sector participation; another is that public policy decisions (e.g., to build
another highway, to change speed limits) could have a significant impact on future
demand. In these and other circumstances where it would be desirable for the
government to share some of the project risk, the government partner may provide a
revenue or loan guarantee or some other sort of subsidy to the private partner.
Unfortunately, governments may not have, or devote, the necessary expertise and
capacity to negotiate and manage/monitor P3 contracts effectively, which can have a
negative impact on government expenditure during the construction and operation
phases of the project. There may be additional government expenditures if the
contract does not prescribe ways to deal with unanticipated costs or effectively and
appropriately assess and transfer risk to the private consortium. Such situations can
give rise to disputes with the private partner that are costly to resolve in terms of
government resources dedicated to the resolution process, as well as additional
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expenditures to keep the project going or to terminate it. Furthermore, if the expected
private sector construction and operating efficiencies are not realized and/or
demand has been overestimated, the government may be forced to assume
responsibility for a project if the private partner goes bankrupt. Below are two
examples of P3s that failed in terms of risk assessment, which forced the public
partner to take over the project:

Metronet (United Kingdom): The consortium won two of three deals to maintain,
renew, and upgrade parts of the London subway network. Metronet then found
that actual costs were more than double the levels projected in its bids, which
caused project delay and ultimately Metronet’s bankruptcy in 2007. London
Underground Limited, the public sector owner of the subway network, assumed
financial responsibility for carrying out Metronet’s work program, as no other
investors were interested.22

M1/M15 Motorway (Hungary): This project had to be taken over by the public
sector when the actual traffic volume was 50% below forecast levels, and the
private sector partner’s lenders refused to finance completion of the final section
of the motorway.23
Moreover, when a P3 agreement does not appropriately transfer construction and
demand risk to the private partner, it often leaves the government open to incurring
unexpected costs in the construction and operation periods. The Alberta Special
Waste Management System is an example of a P3 that had a greater impact on
government expenditure than conventional procurement might have.24 The private
partner in the contract for the waste management facility found that the contract
provided incentives to build excess capacity. As a result, the Province of Alberta
subsidized the facility in the amount of some $445 million between 1985 and 1995
before having to take it over and operate it at a loss.
Proponents of P3s argue that a government’s contingent liabilities can be anticipated
and minimized if the public partner is skilled and carefully structures a
comprehensive P3 contract. All potential risks for project failure must be
contemplated in a comprehensive contract, and the responsibility for the financial
risk must be clear. As illustrated by the Alberta Special Waste Management System
project, the public sector must also be careful about how it rewards its private
partner. While contingent liabilities might not be avoidable, they should be
transparent. As such, potential future expenditures (e.g., bailouts for the private
sector) should be contemplated in the contract and disclosed.
2.3 OTHER POTENTIAL ADVANTAGES OF P3 PROCUREMENT
The benefits of private sector participation in public investment may extend beyond
achieving enhanced value for money and reducing government expenditure. For
example, the P3 market offers relatively secure, long-term investment opportunities
to the investing public. Infrastructure funds are attractive to investors for a number of
reasons: they are invested in projects that provide services the public cannot do
without; their high entry barriers deter potential competitors; revenues are linked to
inflation; and they yield reasonably predictable cash flows.25 A P3 agreement with a
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private sector operator is also attractive to investors because the investor can be
confident that business decisions, such as those regarding user fees, will be based
more on a business rationale than on a political one. The use of private money for
public projects has effected an increase in transparency and due diligence compared
with conventional procurement.26 With P3s, the flow of money between partners is
subject to greater accountability, as more contract terms are made public than under
conventional procurement.
Some other benefits that can flow from P3 projects include the following:

Economic efficiency: An infrastructure project that recovers a greater portion of
its costs from users is more economically efficient than one funded by non-users.

Innovation: Combining the motivation and skills of the private and public sectors
may stimulate innovative approaches to delivering public infrastructure and
services.

Redeployment of government resources: In addition to freeing up the
government’s financial resources, P3s also allow governments to redirect human
resources from infrastructure projects to core functions.

Improved asset maintenance: Involving the private sector in infrastructure
projects can result in improved maintenance of public assets over the long term,
because a good P3 contract will penalize a private sector operator that does not
adhere to the terms of the contract.
2.4 OTHER POTENTIAL RISKS OF P3 PROCUREMENT
One risk of a P3 arrangement not yet mentioned is that of encumbering future
government projects or policies. For example, if an infrastructure project procured
under a P3 poses a severe impediment to another important project or policy at
some future date, the contract may need to be renegotiated or terminated at
significant cost. The risk of a project encumbering other projects or policies is
considered to be high if the project is physically interdependent on other
infrastructure and/or is dependent on technology. The Highway 407 in Ontario is
considered to be a P3 project that has encumbered other highway projects in the
region. The Highway 407 project constrains the development of a neighbouring toll
highway project due to the traffic interdependency of the two projects. Furthermore,
the incumbent revenue collection technology in use on Highway 407 limits the choice
of technology on the new toll highway.27
P3 procurement can also result in an allocation of public infrastructure or services
that is less equitable to some segments of society than is conventional procurement.
Equity may be at risk if the price of using P3 infrastructure prohibits low-income
households from using it or if a disproportionate amount of their income must be
spent in order to use it.
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3
THE ROLE OF THE STATE IN PROMOTING
SUCCESSFUL P3 DIFFUSION
Generally speaking, significant political, fiscal, and institutional hurdles must be
overcome in order to move from the conventional procurement model for public
infrastructure or services to one that includes the private sector. The presence of
certain legal and institutional frameworks can encourage the diffusion of P3s in an
economy and support their success by attracting private sector investors and
reducing unanticipated transaction costs.
3.1 AN ENABLING LEGAL FRAMEWORK
Private sector involvement in public infrastructure and services is often either
explicitly or implicitly prohibited by the legal framework in a jurisdiction. As such,
sometimes the first step towards developing an enabling legal framework for P3s is
to seek approval for private sector involvement. Laws that provide consistency
among jurisdictions in a federation assure the private sector that P3 contracts will be
honoured and/or provide an effective dispute resolution process. These laws are also
important to attract private investors and reduce potential transaction costs. Some
examples of legislative developments to facilitate P3 diffusion in various international
jurisdictions include the following:

In the United States, some 23 states have P3 legislation that allows for private
investment in highway projects.28 At the federal level, the United States has
made legislative changes to allow for the collection of tolls on federally supported
roads, to offer federal assistance in project financing, and to allow private sector
involvement at an earlier stage in highway project development.

Changes to legislation in Italy in 2002 and Spain in 2003 allowed for the delivery
of a broader range of public infrastructure/services through P3s. Spain also
formalized in legislation the government’s responsibility to finance and ensure
the viability of projects with which it is a contracting party.

Japan has experienced rapid progress with P3s in government facilities, health
care, waste disposal, leisure, education, and serviced accommodation since a
law was passed in 2001 to facilitate the creation of P3 projects. Prior to that,
state law did not permit the government to enter into contracts that spanned
longer than five years.

In 2003, Portugal passed a law to ensure better coordination of the
government’s approach to P3s across sectors and ministries and to ensure a
significant and effective transfer of risk.

France made legislative changes in 2004 that allow the contracting public sector
to pay the private contractor over time and to provide additional security for
lenders.29
In Canada, there is federal, provincial, and territorial legislation respecting P3s.30
Some P3 legislation is limited to specific projects, such as the Deh Cho Bridge in the
Northwest Territories or Highway 407 in Ontario, whereas other legislation enables
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private investment in specific sectors, such as transportation and health care in the
case of British Columbia. Some jurisdictions, such as the Province of Alberta, the City
of Calgary, and the City of Ottawa, have published guidelines and frameworks for
P3 procurement.
3.2 THE CREATION OF ENABLING INSTITUTIONS
As mentioned in previous sections, the effectiveness of public institutions is
important to the successful diffusion of P3s in an economy and can aid in reducing
potential transaction costs. In order to enable successful P3s, the contracting
government must have the capacity to assess value for money and project risk,
negotiate (and possibly renegotiate) contracts with the private sector in a transparent
and fair manner, and monitor the contract over its term, all the while ensuring
consistency with policy objectives.31 These functions may be best carried out by more
than one government body in order to delineate the roles and responsibilities of
promoting the formation of P3s and those of managing the fiscal risks associated
with the project. Some commentators recommend a dedicated P3 promotional unit
to serve as a forum for sharing expertise, to reduce duplication of efforts, and to act
as the contact point for private partners. The finance ministry would play a
complementary role by taking responsibility for managing fiscal risks and exercising
veto power to ensure value for money at the time of contract negotiation and
renegotiation.32 There are no international standards for P3 accounting and
reporting, but disclosure requirements regarding the ministry of finance respecting
future service payments, contingent payments, and public financing support and
guarantees in P3 agreements are recommended to help incorporate P3s into public
finances.
There are several examples of national and sub-national governments around the
world that have established institutions and/or accounting practices to effectively
incorporate P3s into government decision-making and budgeting processes:

The United Kingdom has Partnerships UK, an institution that supports P3
procurement projects and develops P3 procurement policies. The National Audit
Office investigates and publishes reports on the performances of P3s, thereby
increasing transparency.

The National PPP Forum was formed in Australia in 2004 to deliver improved
project and related service outcomes through harmonizing P3 policies and
processes, and encouraging better coordination and information sharing among
Australian governments.33 The State of Victoria has its own P3 policy,
Partnerships Victoria, and is recognized for having adopted good accounting and
reporting practices for P3 projects.

Chile, Colombia, and Peru are countries recognized for having made progress in
budgeting for contingent liabilities within P3 projects.

Italy has dedicated P3 financing units at the central and regional government
levels.
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
Germany has a P3 taskforce to support individual projects and assist with
knowledge transfer.

The Ministry of Finance in France has established a P3 taskforce – the Mission
d’appui à la réalisation des contrats de partenariat public-privé.

In Brazil, a federal P3 council establishes criteria for selecting projects and
designing contracts.34
In Canada, Quebec, Ontario, and British Columbia have dedicated agencies to handle
P3 procurements. At the federal level, a new Crown corporation was established in
Budget 2007 to facilitate the development of a Canadian P3 market. PPP Canada
administers a $1.2 billion fund to support P3 infrastructure projects.35
In some countries, there is strong resistance to private involvement in the provision
of public infrastructure and services, which can dampen P3 activity in spite of legal
and institutional change. For example, P3s were widely criticized and did not
proliferate in the Netherlands until 2005 when high-speed rail, road, and school
P3 projects realized some success. Similarly, persistent political resistance to the
concept of P3s, as well as restrictions on the use of P3 contracts by France’s highest
administrative court (Conseil d’État), may dampen P3 activity in spite of legislative
and institutional changes to increase P3 diffusion.
4
SOME INTERNATIONAL GUIDELINES
In 2007, the Organisation for Economic Co-operation and Development (OECD)
adopted OECD Principles for Private Sector Participation in Infrastructure to help
governments achieve societal benefits through P3 procurement in infrastructure.36
The principles challenge national authorities that are considering P3 procurement to:
1. base the decision to involve the private sector on value for money, taking into
account the public interest and transparency;
2. ensure an enabling policy framework for the investment (rule of law, integrity,
competitive and open economy) to attract private sector participation;
3. gain public acceptance of the policy and have public sector capacity at all levels
to implement projects;
4. foster shared incentives among all partners to meet the public needs to make
the partnership work (full disclosure, measurable outputs, dispute resolution
mechanisms); and
5. communicate expectations of responsible business conduct to the private sector
partner (negotiate in good faith, negotiate with transparency, communicate and
consult with the public).
The principles are intended to be used in conjunction with other OECD policy tools
and guidance. Other OECD resources to assist in the successful development of P3s
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include a document instructing multinational companies on how to manage risk in
jurisdictions lacking in legal and/or institutional frameworks to support P3s, and
another describing best practices for budget transparency.37
Also in 2007, the United National Economic Commission for Europe (UNECE)
produced its Guidebook on Promoting Good Governance in Public-Private
Partnerships to help countries create the institutions, processes, and procedures
necessary for effective P3 delivery. The UNECE considers the following conditions as
the objectives of good governance in the case of P3s:

a fair and transparent selection process;

the assurance of value for money;

an improvement in public services for users (especially disadvantaged persons)
and adequate training for those involved in the partnership;

fair incentives and returns for all parties;

sensible negotiation of disputes that assures continuation of services and
prevents the collapse of projects and public waste; and

a general improvement in the safety of services provided under P3s.
To achieve those objectives, UNECE proposes seven governance principles for P3s
that focus on the following:

Policy: Fix clear economic and social objectives founded in core principles,
identify the right projects, and establish consultation procedures for
stakeholders.

Capacity-building: Establish new institutions and new skills for the public sector,
drawing upon external resources.

Legal framework: Create a few simple laws that provide predictability and
security for investors.

Risk-sharing: Transfer as much risk to the private sector as it can manage while
the government accepts its share (through loan support, subsidy, equity
participation, etc.), in order to achieve the desired level of private investor
involvement without destroying incentives to perform.

Procurement: Ensure a transparent, neutral, and non-discriminatory selection
process.

Putting people first: Make the public the main beneficiary of the P3 through
consultation and accountability.

The environment: Integrate the principles of sustainable development in
P3 projects.
The UNECE prepared these guidelines because it found that governance principles
had generally not been respected in the past, with P3s being pursued mainly by
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governments as a financial mechanism to shift expenditures off the public accounts.
The absence of sufficient consultation with stakeholders and the public was
particularly notable.
5
CIRCUMSTANCES SUITED
TO PUBLIC-PRIVATE PARTNERSHIPS
Simply put, it is a good idea to use P3 procurement if the net social benefit from the
P3 is greater than that from conventional procurement. Assuming that the total costs
– contract, transaction, and external (social) costs – are known, for most public
infrastructure or public service projects, a P3 contract will not be the best alternative.
Nor will P3 procurement be the best approach when accountability is critical,
competition is insufficient, vulnerable populations are affected, or social values are
more important than costs. It follows that governments experienced with
P3 procurement do not rely exclusively on this method and tend to allocate no more
than 20% of total government capital investment in P3s.38
The uncertainty surrounding the contract, transaction, and social costs over the term
of the contract makes it difficult for public decision-makers to determine which route
to take. While the contract costs may have been estimated reasonably, based on the
competitive bids submitted, the long-term nature of a P3 contract poses an inherent
risk that transaction costs may arise over the contract term. The government’s
contingent liabilities can be considerable, and estimates will always be subject to
some uncertainty, even in the most mature P3 markets. Burgeoning transaction
costs – due to contract renegotiation or termination – to deal with financial,
construction, and/or service crises over the term of the contract are often the reason
some projects fail to provide a better outcome for society than that provided by
conventional procurement. Underestimating the social costs of a project can also
render it a failure. If society is not receiving services of the same or better quality as
those provided via conventional procurement, or there are serious equity issues,
public backlash could force a government to terminate a project, at a cost.
Countries try to manage and mitigate transaction and social costs by creating new
public sector capacity and skills, as well as P3 laws. New public sector capacity and
skills are needed to accurately and transparently assess value for money and risks to
efficiency and equity that would arise from private sector involvement in public
infrastructure or services. When a suitable project is found, the public sector must
have the capacity and skills to choose the most innovative, efficient, and reputable
private sector partner and to develop a comprehensive P3 contract, complete with
performance penalties and termination provisions. These and other complementary
functions might be best divided between a dedicated P3 promotional unit and the
ministry of finance. For their part, P3 laws provide security for investors and help
attract enough players to have a competitive and dynamic P3 market. A secondary
benefit of a dynamic P3 market is that it provides the public sector with more
opportunities to develop experience and expertise. In these ways, effective legal and
institutional measures help manage the risk of project failure due to unexpected
transaction and social costs.
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Some international guidelines and principles for P3 procurement practices prescribe
similar measures for governments that wish to develop successful P3 markets. They
also recommend more multinational collaboration, the pronouncement of a P3 policy,
and public consultation in order to maximize the potential benefits of P3s to society.
Risk abounds with P3 procurement, however, and even countries with the most mature
and successful P3 markets in the world, such as the United Kingdom and Australia, do
not achieve a net social benefit from every project. When P3s fall short of expectations,
the public backlash tends to be greater than when conventional procurement fails to
deliver a net benefit to society. Therefore, public decision-makers should always
carefully exercise due diligence with every P3 procurement, even when the
recommended policy, institutional, legal, and collaborative frameworks have been
put in place.
NOTES
1.
United Nations Economic Commission for Europe, Guidebook on Promoting Good
Governance in Public-Private Partnerships, United Nations, New York and Geneva, 2008,
p. 5.
2.
Hans Christiansen, “The OECD Principles for Private Sector Participation in
Infrastructure,” in Public Investment and Public-Private Partnerships, ed. Gerd Schwartz,
Ana Corbacho, and Katja Funke, International Monetary Fund, Palgrave Macmillan,
New York, 2008, p. 143.
3.
Infrastructure Canada, Assessing Canada’s Infrastructure Needs: A Review of Key
Studies, September 2004.
4.
With conventional procurement, contracts for the provision of the public infrastructure
are separate from contracts to operate or maintain the asset. Often the public sector
operates and maintains the asset.
5.
The government may also provide or guarantee some level of revenue to the operator. In
a shadow toll arrangement, such as the highway P3s in Portugal, the government will
provide all revenue to the operator.
6.
Marco Mrsnik and G. Kiss, “Comments on Part II,” in “Part II: Fiscal Risks from PPPs,” in
Public Investment and Public-Private Partnerships (2008), p. 136.
7.
Richard Abadie, “Infrastructure Finance – Surviving the Credit Crunch,” PwC Public
Sector Research Centre, December 2008, p. 3.
8.
Value for money means higher quality for the same money or the same quality for less
money.
9.
Even P3 detractors will admit that P3s function well under certain circumstances. See,
for example, Stuart Murray, “Value for Money? Cautionary Lessons About P3s From
British Columbia,” Canadian Centre for Policy Alternatives, BC Office, June 2006.
10.
CBI, Going Global: The World of Public Private Partnerships, 2007, p. 14.
11.
UK Trade & Investment, How to Access UK Expertise in Public Private Partnerships,
2004, p. 4.
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12.
Assoc. Prof. Colin Duffield, National PPP Forum Benchmarking Study, Phase II – Report
on the Performance of PPP Projects in Australia When Compared With a Representative
Sample of Traditionally Procured Infrastructure Projects, Melbourne Engineering
Research Institute, December 2008.
13.
Andrea Renda and Lorna Schrefler, Public-Private Partnerships: National Experiences in
the European Union, Briefing note IP/A/IMCO/SC/2005-160, DG Internal Policies of the
Union, European Union, Brussels, 2006, p. 4.
14.
Aidan R. Vining, Anthony E. Boardman, and Finn Poschmann, “Public-Private Partnerships
in the US and Canada: ‘There Are No Free Lunches,’” Journal of Comparative Policy
Analysis: Research and Practice, Vol. 7, No. 3, 2005, pp. 211–212.
15.
Mario Iacobacci, Steering a Tricky Course: Effective Public-Private Partnerships for the
Provision of Transportation Infrastructure and Services, The Conference Board of
Canada, Ottawa, 2008, p. 13.
16.
Vining, Boardman and Poschmann (2005), pp. 202–203.
17.
See Erika Shaker, “The Devil in the Details: The P3 Experience in Nova Scotia Schools,”
PD Newsletter, Canadian Teachers’ Federation, Vol. 4, 2004.
18.
See Office of the Auditor General of Nova Scotia, Report of the Auditor General,
February 2010.
19.
United Kingdom, National Audit Office, The Operational Performance of PFI Prisons:
Report by the Comptroller and Auditor General HC 700 Session 2002–2003:
18 June 2003, London, 2003.
20.
An example of this is the amount of annual funding the federal government provided for
a ferry service between New Brunswick and Prince Edward Island that is now an annual
subsidy in support of the owner/operator of the Confederation Bridge. Under the
Northumberland Strait Crossing Act, the federal government makes annual subsidy
payments over 35 years of $41.9 million (in 1992 dollars, indexed to inflation) that
began 31 May 1997.
21.
Vining, Boardman and Poschmann (2005), p. 212.
22.
Iacobacci (2008), p. 26.
23.
Renda and Schrefler (2006), p. 9.
24.
Finn Poschmann, Private Means to Public Ends: The Future of Public-Private
Partnerships, C.D. Howe Institute Commentary, 2003, p. 8.
25.
Abadie (2006), p. 10.
26.
The Quebec Government’s subway extension between Montreal and Laval, which was
not a P3, cost taxpayers $566 million more than originally budgeted by the time it was
completed in April 2007. Had the subway extension been proposed as a P3, the due
diligence inherent to the P3 process might have ensured that both parties (the Quebec
Government and the private consortium) knew whether the project scope was feasible,
what it would cost, and whether there was a net public benefit before a shovel was in the
ground. Iaccobacci (2008), p. 28.
27.
Iacobacci (2008), p. 32.
28.
An overview of state legislative developments through December 2007 is available at
U.S. Department of Transportation, Federal Highway Administration, State P3 Legislation.
See also William J. Mallet, Public-Private Partnerships in Highway and Transit
Infrastructure Provision, Congressional Research Service, July 2008, p. 11.
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29.
Gaurav Singh and Craig Jamieson, “A Global Survey of PPPs: New Legislation Sets
Context for Growth,” in 2006 Global Project Finance Yearbook, Standard & Poor’s, New
York, October 2005.
30.
See Canadian Council for Public-Private Partnerships, PPP-Related Legislation and
Policies in Canada.
31.
Ana Corbacho and Gerd Schwartz, “PPPs and Fiscal Risks: Should Governments Worry?”
in Public Investment and Public-Private Partnerships (2008), p. 95.
32.
Ibid., p. 94.
33.
Government of Australia, National Public Private partnership (PPP) Forum.
34.
Corbacho and Schwartz (2008), p. 95.
35.
See the Public-Private Partnerships Canada website.
36.
See Organisation for Economic Co-operation and Development [OECD], OECD Principles
for Private Sector Participation in Infrastructure, 2007.
37.
See OECD, Directorate for Financial and Enterprise Affairs, OECD Policies for Private
Sector Participation in Infrastructure website.
38.
For example, the United Kingdom has only about 15% of public sector capital investment
in P3 projects. Iacobacci (2008), p. 5.
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APPENDIX A – P3 MODELS 1
There is an extensive range of P3 models in use all over the world. The possible
variations are almost endless, but the range is bounded by conventional public
procurement (government ownership and provision of services) on one side and by
full privatization (private sector ownership and provision of services, subject to
regulation) on the other. Between these two non-collaborative procurement models
lies a continuum of P3 contract models, each assigning a different combination of
roles and responsibilities to the public and private sector partners. The P3 models
listed below are representative examples, ranging from the least amount of private
sector participation to the most; the list, however, is not an exhaustive inventory of all
possible models. Table A.1 summarizes these P3 models and their key features,
followed by a short description of each model.
Table A.1 – Key Features of Selected P3 Models
Model
Construction
Operating
Maintain
Manage (OMM)
Lease
N/A
Lease Develop
Operate (LDO)
Operations
Capital
Investment or
Financing
Ownership at End
of Contract Term
Private
Public
Public
Private
Public
Public
Private
Private
Public
Design Build
Operate (DBO)
Private
Private
Public
Public
Design-BuildFinance-Transfer
(DBFT)
Private
Public
Private
Public
Design-BuildFinanceMaintain (DBFM)
Private
Operate
Private
Public
Design-BuildFinance-Operate
(DBFO)
Private
Private
Private
Public
Build-OwnOperate (BOO)
Private
Private
Private
Private
Build-OwnOperate-Transfer
(BOOT)
Public
Private
Private
Public
If there is an infrastructure component in a public service P3, it will likely be a variant
of one of the models for new public infrastructure. The service component in most
cases will be a variant of the Operating Maintain Manage model, as it is rare for user
services to be contracted out.
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Variants of these P3 models are in constant development as governments seek new
ways to involve the private sector in the provision of public infrastructure. What all
P3 models have in common is that the public sector retains accountability for the
delivery of a public asset or service.
OUTSOURCING OPERATIONS, MAINTENANCE, AND
MANAGEMENT OF EXISTING PUBLIC ASSETS
With outsourcing-type P3 models, a contract is negotiated with a private entity to
perform operation, maintenance, and/or management work on an existing public
asset. In the Operating Maintain Manage (OMM) model, the public sector maintains
ownership and responsibility of the asset over the life of the contract. The public
partner retains the right to revenue and pays the outsourced private contractor for
their services. In the case of the Lease model, the operating risk is transferred to the
private partner. Unlike an OMM contract, the private partner in the Lease model pays
the public owner to operate the asset and has the ability to collect revenues from
end-users for the life of the lease. Finally, the Lease Develop Operate (LDO) model is
much like the Lease model with the added responsibility of ongoing capital
investments. Lease terms between 20 and 99 years are common for LDO
agreements. The public sector continues to own the infrastructure, and the terms of
the lease generally require that the infrastructure is returned to the government in
good condition at the end of the lease. This model allows the government to regulate
the prices charged and the level of service provided by the private partner, as well as
to oversee some business decisions. An example of this kind of P3 arrangement in
Canada is the transfer of national airport and port operations to not-for-profit
corporations (“authorities”) in Canada that occurred throughout the 1990s.
CONSTRUCTION OF A NEW PUBLIC ASSET
In the Design Build Operate (DBO) model, the private sector builds and operates the
public facility. The public sector finances and owns the asset.
The Design-Build-Finance-Transfer (DBFT) model assigns the responsibility and risk
associated with the design, construction, and financing of an asset to the private
sector partner. Ownership of the asset is transferred to the public sector partner
upon completion and the public sector owns, operates, and maintains the facility or
infrastructure going forward. This model was used to build Terminal 3 at
Lester B. Pearson International Airport in Toronto in the early 1990s.
In the Design-Build-Finance-Maintain (DBFM) model, the private sector partner
undertakes and finances the construction of an asset, with the added responsibility
of maintaining it over the longer term. The responsibility for maintaining the asset at
no additional charge or at a fixed cost provides the private partners an incentive to
consider the long-term maintenance of an asset during the construction phase. Once
construction is complete, the public sector purchases the facility or infrastructure
and operates it. This model has been used extensively by Canadian provinces in the
provision of schools and hospitals.
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The Design-Build-Finance-Operate (DBFO) model is one of the most popular types of
P3 arrangements. The private sector partner is charged with undertaking and
financing the construction of an asset, as well as operating and maintaining it on
long-term contract with the public sector. The private sector collects revenue
associated with services that flow from the asset over the contract term – from the
users of the services directly, from the public sector, or from some combination of
the two. Ownership of the asset is usually transferred to the public sector at the end
of the contract term. Examples of the DBFO model include a recreational centre
(John Labatt Centre) in London, Ontario, a water treatment facility in Moncton,
New Brunswick, and the Confederation Bridge between New Brunswick and
Prince Edward Island.
The Build-Own-Operate (BOO) model differs from the DBFO model in that the private
entity owns the facility in perpetuity. The public sector remains accountable for the
public service through ongoing regulation. Other constraints on the private partner’s
behaviour, such as limits on fee increases, are usually established by the public
sector at the onset of the project. For example, the Nunavut Legislative Building
came about through a BOO agreement between the federal government and the
Nunavut Construction Corporation.2 A Build-Own-Operate-Transfer (BOOT) model adds
the condition that the private partner must relinquish the asset to the public sector
after a specified period of time.
NOTES
1.
Appendix prepared with the help of Tomasz Kasprzycki, Library of Parliament.
2.
See Canadian Council for Public-Private Partnerships, Photo Credits.
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APPENDIX B – INTERNATIONAL PROJECT
EXPERIENCE IN KEY P3 SECTORS
There is quite a range in P3 activity among countries and it is often focused in
different sectors of the economy. An overview of European, Australian, American, and
Canadian P3 sectors are provided below.
EUROPE
The United Kingdom is the global leader in P3 development and has concluded
scores of infrastructure P3 projects in the housing, airport, road, light rail, sports and
leisure, and waste and wastewater sectors.1 Although there were few projects in the
light rail sector, they accounted for just over half of the total value of P3s undertaken
in the United Kingdom as of 2006. The United Kingdom also has significant
P3 experience with the delivery of social services in the health care, education,
corrections, and local government sectors.
Elsewhere in Europe, a great many countries have made substantial progress in
adopting P3 procurement and completing projects.2 For example:

France has closed many projects in the light rail, roads, and waste and
wastewater sectors;

Portugal has completed several road projects;

Greece favours P3s in airport development; and

Spain has completed numerous road and port P3s.
Ireland, Italy, Germany, and Hungary have made notable progress among the many
other European countries using P3 procurement to provide public infrastructure and
services.
AUSTRALIA
Australia has a well-developed P3 market that was valued at some $20 billion in
2005, including projects contracted, projects out for tender, and those under
consideration.3 The State of Victoria, whose P3 project value represents
approximately half of the national market, appears to be the leader among Australian
jurisdictions with respect to P3 procurement. P3 projects in existence in the State of
Victoria include water treatment facilities, roads, hospitals, railways, schools, and
tourism and correctional facilities.4 The State of New South Wales appears to be
second to Victoria in terms of P3 activity, with completed projects in tunnels, schools,
roads, water treatment facilities, housing, corrections, and hospitals.5
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UNITED STATES
P3 procurement is not as common in the United States as it is in other major world
economies. However, since the early 1980s, P3s have been popular in the
correctional services sector in the United States. Since 1991, private sector
involvement has also been permitted in highway projects (by virtue of the Intermodal
Surface Transportation Efficiency Act), though few have been contracted. Legislative
measures to encourage private contracting and financing for transit projects also
exist but have not led to many P3s.6 In addition to highways, the US National Council
for Public-Private Partnerships lists energy, public safety, real estate and economic
development, and technology, transportation and waste/wastewater infrastructure
projects among its case studies.7
CANADA
P3 procurement activity began in Canada in the 1980s and intensified in the
mid-1990s, but Canadian governments have been relatively slow to utilize P3s as a
procurement model. In Canada, experience with P3s was limited to some 50 deals as
of 2008, most of which were for the provision of hospitals and schools. Some notable
infrastructure P3s in Canada include:

the Confederation Bridge between New Brunswick and Prince Edward Island;

the 407 Express Toll Route in Ontario;

the Golden Ears Bridge and the Canada Line (light rail) in Metro Vancouver; and

the Sea to Sky Highway Improvement Project between West Vancouver and
Whistler in British Columbia.
There are also several P3s operating in Canada today in the environmental sector
such as water, wastewater, and waste treatment facilities. Recreation and cultural
infrastructure is another active P3 sector in Canada.8
NOTES
1.
Some 900 deals were closed in the United Kingdom between 1987 and 2007.
Mario Iacobacci, Steering a Tricky Course: Effective Public-Private Partnerships for the
Provision of Transportation Infrastructure and Services, The Conference Board of
Canada, Ottawa, 2008, p. 2.
2.
Andrea Renda and Lorna Schrefler, Public-Private Partnerships: National Experiences in
the European Union, Briefing note IP/A/IMCO/SC/2005-160, DG Internal Policies of the
Union, European Union, Brussels, 2006, p. 3.
3.
“A National Approach to PPPs: The Importance of Creating a ‘Single Market’ Appearance
to Gain Global Attention: Australia’s Experience,” Speech by the Hon. John Brumby, MP,
Treasurer of Victoria, Australia, at the 13th Annual Conference on Public-Private
Partnerships, 28 November 2005, Toronto, Ontario, Canada.
See Australia, State Government of Victoria , Partnerships Victoria, Projects.
4.
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5.
See Government of Australia, National PPP Forum, Projects Contracted.
6.
William J. Mallet, Public-Private Partnerships in Highway and Transit Infrastructure
Provision, Congressional Research Service, July 2008, p. 16.
7.
See United States, National Council for Public-Private Partnerships , Case Studies.
8.
For more information about these and many other P3 procurements in Canada, see
Canadian PPP Project Directory: Selected Public-Private Partnerships Across Canada,
Toronto, Canadian Council for Public-Private Partnerships, 2006.
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