P3 Myths & Facts

The common are some common misconceptions and facts about P3s:

• Aren’t P3s really a form of privatization?

  Public-Private Partnerships (P3s) projects are publicly owned, publicly controlled, and publicly accountable.

  A private sector company may enter a lease/service agreement with the public sector to maintain or operate a public asset or service but once the contract ends, the private sector must hand back the asset/service to the public sector in the condition agreed to.

• Don’t P3s end up costing more than traditional procurements?

  While P3 transaction costs are higher than the traditional bid-build contracts and the private sector’s borrowing costs are higher than those available to the public sector, a well-structured P3 delivers better value for the public dollar and saves money.

  This is because the P3 model makes sure funds are set aside for regular repair and maintenance – the single most important factor in keeping infrastructure costs down.¹ The P3 model considers an asset’s whole life, which can affect many decisions on the project and lead to better value in design, construction, maintenance and operation. Looking at life-cycle costs in advance ensure the private sector has money in hand for maintenance and repairs and protects it from being used for some other initiative.

  Furthermore, because appropriate risks are transferred to the private sector, cost and time overruns are often paid for by the private sector.

  Additional information

  Other factors that contributes to better value:

  • The private sector’s obligations to its shareholders give it very low intolerance of cost overruns and project delays.
  • It manages construction and operational risks better, which result in savings to taxpayers.
  • Contractors are penalized if they go over budget, take longer than expected, or underperform.
  • By delivering projects on time, the P3 model alleviates economic pressures put on moving goods and people during construction, and helps to provide better access to health care and public services sooner.

• The Value-for-Money analysis inflates the cost of government-held risk to favour P3s.

  The strengths of the VFM analysis are that it provides a way to assess which procurement model is best suited for a given project.

  P3 agencies use the best available information to calculate risk premiums, by participating in workshops with experts to identify risks and to develop economic models and simulations that consider possible outcomes of those risks. These risks are rarely quantified for traditional government procurements, so P3s add an additional important level of analysis to ensure value for money.

  Detailed financial information is usually available about P3 contracts because they are often financed through publicly rated bonds and information is also available in corporate credit rating reports and government capital plans.

• P3s create big private-sector profits using public money

  • It's important to understand that the private sector designs and builds both traditional and P3 infrastructure projects.
  • That said, P3s protect the public interest with a transparent and competitive procurement process that is overseen by a fairness monitor.
  • This process results in competitive bids and on time and on budget delivery.
  • Throughout procurement, a fairness monitor participates in meetings and exchanges between interested bidders and the project owners to ensure no one bidder is getting an advantage over another.
  • The fairness monitor's assessment of the process is summarized in a report, which is made public.

• The public sector can borrow at lower interest rates than the private sector

  It's true the private sector's borrowing costs are higher than those available to the public sector. However, P3s deliver better value for the public dollar and saves money. This is because:

  • Significant risks are transferred to the private sector, which outweigh the difference between public and private sector borrowing rates
  • Infrastructure projects are seen as viable, stable investments by lenders and investors
  • Lenders and investors, who partner with contractors to deliver a P3 project, continually monitor the project milestones because of their investments, providing additional oversight to keep the project on track
  • Canada's capital markets are competitive and considered to be very cost-effective
  • The private sector has “skin in the game” (i.e. significant investments and responsibilities) that creates the necessary incentives to provide on-time, on-budget, and high quality infrastructure

• P3s take longer than traditional procurement

  Canada is considered a world leader in public-private partnerships. The procurement process has become very well refined and is viewed globally as one of the shortest and most efficient.

  Under a P3 model, the private sector does not receive payment from the public sector until construction of an entire project is complete or it completes agreed to construction milestones. This arrangement puts financial pressure on the private sector because it:

  • has taken out a loan to pay for the project’s design and construction
  • owes its lenders and must repay loan promptly upon project completion
  • will be penalized with additional financing costs if it misses the completion timeline
  • is on the hook for additional financing cost

  So there are significant incentives, unlike traditional procurement, to deliver P3s on time and on budget.