Fundamentals of P3: Preparation, preparation, preparation

by mdoyle | May 14, 2014 3:37 pm

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Public-private partnerships (P3s) have been used in various forms for several decades around the globe. Since 2010, the volume of activity in North America has drawn international attention, with Canada particularly recognized as a global leader in P3 procurement for delivering public infrastructure (see the table below).

However, there remains a need for public-sector bodies considering P3 as a potential route to develop better processes for evaluating when and whether to move forward. Thorough preparation is a fundamental aspect of the early phases of procurement, and can significantly raise the likelihood of success.

P3 characteristics
A public-private partnership arrangement differs from conventional public procurement in several respects, including the inclusion of the following key features:

• a long-term contract between a public contracting authority (the ‘Authority’) and a private sector company (the ‘PPP company’) based on the procurement of services, not assets;
• transfer of certain project risks to the private sector, notably with regard to designing, building, operating, and/or financing the project;
• a focus on the specification of project outputs, rather than inputs, taking into account the project’s whole lifecycle implications;
• application of private financing to underpin risks transferred to the private sector; and
• payments to the private sector that reflect the services delivered, typically either by users through charges (e.g. motorway tolls), or by the ‘Authority’ (e.g. availability payments or shadow tolls).

The rationale for using a P3 arrangement instead of conventional public procurement rests on the proposition that optimal risk-sharing with the private partner delivers better ‘value for money’ for the public sector and, ultimately, end users.

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Step 1–Market sounding
The most important question to answer when considering procurement is: Does the project make sense as a P3? A good place to start is by asking the industry being invited to bid. This is the opportunity to receive open, uncommitted feedback on the project characteristics and whether there would be appetite to bid. To gain useful feedback, a market-sounding document should give an overview of the project’s vision, characteristics, schedule, and an indication of the risk/reward structure.

There should be no more than 10 questions asked to maximize the response rate and avoid getting in to too much detail, and each question should prompt a response that can be used to decide the project’s viability as a P3. The questions should address those aspects of the project where there is room for flexibility without fundamentally changing the overall vision.

In addition, it is wise to engage with the community directly impacted by the project. Open forums held in the community allow education and questions to be informally asked. Additionally, a web-based project page can act as a forum for questions and comments from the community as the project develops. Open lines of communication with the community, and potential private-sector proponents, will increase the probability of success and reduce the risk of project cancellation.

Step 2–VFM assessment
As noted, establishing a positive value-for-money score for a P3 project is critical in achieving the commitment and buy-in of internal and external stakeholders. Ideally, a value-for-money (VFM) assessment will be undertaken early in the project development cycle. Before this step, it is important certain project decisions have been made, such as whether any early work will be undertaken at the site before construction commences. As the output from the VFM assessment dictates whether the project proceeds as a P3, the balance between establishing sufficient project definition and the potentially abortive costs of doing so needs careful planning.

VFM is often seen as a ‘Black Art’ undertaken by accountants and manipulated to suit an end result. Indeed, where the value of risk transfer is being modelled, there is reason for caution. A well-planned risk workshop addresses numerous concerns and should result in team members leaving with a thorough and agreed approach to risk transfer and its impact on the project’s viability. The risk workshop brings together key stakeholders and their advisors, typically financial, legal, and technical. It reviews the proposed risk transfer for the project, evaluating the resulting cost difference between using a traditional ‘design-bid-build’ approach and a ‘design-build-finance-maintain’ P3 procurement.

Step 3–To P3 or not to P3, that is the question
Steps 1 and 2 help provide a better understanding of how the project can work as a P3, along with the challenges to be overcome, community perception, and the value for money available. This leaves the critical decision for Step 3—to proceed with the P3 procurement or not. This author regards the following as ‘must-haves’ for a P3 procurement to have a good chance of succeeding:

• robust P3 legislation that will not be compromised by bespoke project characteristics;
• fair and transparent process;
• education and outreach;
• political and public support;
• in-depth project due diligence;
• active project champion; and
• demonstrable VFM.

If any of these criteria are missing, there will be an increased chance of missing the critical success factors set out for the project. It is important to use the analysis undertaken for what it is—a tool to make the decision about how to proceed.

Conclusions
Most importantly, as the volume of activity in North America continues to grow, successful P3 procurement demands the public sector:

• have clear expectations—going in with a full understanding of what the project will look like and the exact risks that will be transferred before conducting an analysis (again, market sounding assists in educating internal and external stakeholders on what can and cannot be achieved);
• understand the impact of the decisions—since the great challenge is risk misallocation, one must work with advisors who can explain the impact of decisions; and
• keep an open mind—often, procuring authorities make a decision to use P3 before undertaking a full analysis; the analysis should guide the decision, not the other way around.

[3]Dominic Leadsom is a director at Toronto-based Turner & Townsend, head of lenders services in Canada, and head of public-private partnerships (P3) advisory services for the Americas region. He has 20 years of international experience in the construction industry. Leadsom has provided advice to procuring authorities, bidders, and lenders, using the P3 model for more than 14 years. He has worked on over 40 P3 projects in Canada where his involvement included option appraisals, value for money assessments, establishing project charter and governance models, developing full suites of tender, and evaluation documents and providing advice to consortia and lenders through to contract signature to construction completion. Leadsom can be contacted by e-mail at dominic.leadsom@turntown.com[4].

 

Source URL: https://www.constructioncanada.net/fundamentals-of-p3-preparation-preparation-preparation/

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