Public-Private Partnership (P3) – A Brief Overview
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Public-Private Partnership (P3) – Value-for-Money
The P3 delivery model is utilized when it can be shown to provide value-for-money to an Owner. At a high level, the value-for-money is demonstrated when the higher costs of the model are more than offset by the reduction of retained risks for the Owner, including financing, delivery, and operational risks.
The reduction comes from:
- The transfer of on-time and on-budget delivery to the private partner
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If O&M is included in the scope:
- A whole-of-life focus when making design and construction decisions, which takes into account not just the initial cost to construct but also the long-term maintenance and operational costs
- A regular and consistent maintenance approach, including preventative maintenance in order to address issues before they arise
- Option to include asset renewal at a fixed upfront cost such that asset at the end of the concession has pre-defined remaining life
- Handback requirements, that ensure an Owner gets back an asset that will continue to have a useful life
Public-Private Partnership (P3) – Advantages and What it Does Well
- The model allocates risks to the parties best able to manage them, while the Owner maintains ownership of the land and assets
- The performance-based contracting structure of an availability payment contract, particularly where it includes O&M, gives the Owner a mechanism to ensure the private partner will deliver on its obligations, including long term O&M and asset life performance criteria, otherwise facing potentially significant monetary deductions and risking that their financing and equity contribution are not fully repaid if the project's performance criteria are not attained
- This then drives a focus on whole-of-life costs, which reduces the overall cost of a project for an Owner over its lifespan
- Design and construction decisions consider long-term costs rather than just upfront costs to construct — this is similar to the benefit of a design-build but also incorporates the O&M
- Innovations from similar projects implemented in other jurisdictions can be incorporated, but since the private partner owns the performance risk it is incentivized to focus on functional solutions
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If O&M is included in the scope:
- Maintenance is also approached from a preventative rather than reactive perspective, so that problems are identified and fixed before they become catastrophic and much more expensive
- The handback requirements ensure the Owner receives a project at the end of the contract term that is in a guaranteed condition with pre-defined useful life remaining
- The payment mechanism also provides greater budget certainty for an Owner
Public-Private Partnership (P3) – Challenges & Lessons Learned
- Increased development cost for Owners given the required costs for consultants, and significant commitments by proposers (and therefore stipend costs in the case of performance-based contracting structures)
- The model is therefore better utilized for large and complex projects-where coordination and interface risks are a significant issue, where new technologies might be employed and/or innovations might provide significant cost savings
- The contract must be reasonable
- Owners must allocate risks appropriately, otherwise the cost for the private partner to take on some unreasonable risks may make the project financially infeasible
- The performance regime must also fit the asset, otherwise the Owner may run the risk of making the deal financially infeasible for no additional gain
- Proper governance structures are critical to the success of these complicated and lengthy deals
- Owners cannot simply choose a partner and expect to remove themselves from any decision-making or oversight responsibility
- Coordination across different groups—planning, construction, operations—is similarly important to ensure ongoing understanding of the underlying contract, as well as the reasoning behind certain decisions and their implications
- Maintain a focus on solving problems rather than taking an adversarial approach
- For revenues on these projects, Owners must carefully weigh whether retaining some or all revenue risk—and reward—is the best approach
Public-Private Partnership (P3) – A Note on Progressive P3
- Similar to a progressive design-build, the Developer is engaged earlier than is typical for P3 and negotiates the P3 terms, including price, with the Owner
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Scope performed in two phases:
- Pre-development phase: Scope will vary depending on the project and status of environmental (the phase may overlap with the environmental process) - The phase may include: design development; commercial/technical feasibility analysis; collaborative working groups; risk management; alignment of long-term needs and costs, negotiation of the terms and price for the implementation phase and full P3 agreement
- Implementation phase: Design, financing, construction and, if applicable, long-term operation and maintenance
Public-Private Partnership (P3) – Summary: When to use these Delivery Methods
P3 – When is it typically used
- Revenue generating assets where the private sector may be willing to take significant development and revenue risk
- Critical assets that require strict performance requirements for operation, maintenance, and/or asset life
- Complex and/or technologically sophisticated projects
- Performance-driven long term project objectives
- Where the Owner is seeking strong value from innovation
- Where there is value in locking in the long-term O&M service requirements-for example, where there is no existing O&M division and/or where residual asset life is critical
- Where project readiness has been sufficiently addressed to allow for fixed pricing at the procurement stage (unless the Owner is utilizing a Progressive P3 that allows for pricing later in the design process)
- Long-term funding stream is available to the Owner but private financing will help to accelerate delivery
When is it not suitable
- Contracts where Owner needs to retain control of the design
- Where no private finance is necessary and benefits do not outweigh cost of capital
Explore P3 in more depth
Members will soon gain access to detailed P3 statutes, procurement examples, risk allocation tools, and case studies from complex projects.
Legal Disclaimer: The information included in this Online Resource Center is summary information provided as an introduction to the delivery methods referenced. It does not constitute legal advice and is not intended to provide a comprehensive review of the delivery methods nor the related law and practice, nor is it intended to cover all aspects of each delivery method referred to. Please take legal advice before applying anything contained in these materials to specific issues or transactions. If you are a member and would like more information, please reach out to CALINFRA to enquire about scheduling a training session.