How Canada does public-private partnerships
In the last decade, Canada has become one of the world’s leaders when it comes to building infrastructure through public-private partnerships. One of those Canadian deals, to create the Canada Line light rail in Vancouver, was the subject of Citiscope’s urban innovation feature this week. But Canada also uses “PPPs” or “P3s” to fund hospitals, jails, water systems and many other types of infrastructure.
John McBride leads an organization that is one of the reasons behind Canada’s success in this field. It’s called PPP Canada. It was created by Canada’s federal government in 2008 and given $1.2 billion ($1.1 billion U. S.) to help finance deals at the national, provincial and municipal levels. (Another $1.2 billion becomes available in April.) McBride’s staff of about 50 also acts as a sort of national think tank for pooling public knowledge and expertise on these complex transactions.
I spoke with McBride last week to learn more about the Canadian way of doing P3s. This Q&A has been edited for length and clarity.
Christopher Swope: Europe and Australia have been the big players for P3s for a long time. How did Canada get going?
John McBride: The modern version of P3s in Canada started in the early ‘90s. And the driver for it was recognition by a number of governments that they were just having some real problems in significant cost overruns, time delays and problems in delivering infrastructure.
How Canada does P3s
There was a previous generation of P3s which were driven more by budgetary jiggery and off-budget financing transactions. Modern P3s, what we’re after, are really about delivering value for taxpayers by getting them out of the risk of budget overruns, time delays, poorly operating infrastructure, and poorly maintained infrastructure.
Q: How do P3s do that?
A: P3s are for what we call whole-life cycle. So if you want a piece of infrastructure, you have to design the infrastructure, you have to build the infrastructure, you have to operate the infrastructure and you have to maintain the infrastructure. Traditionally governments will do a design, and then they’ll put it out as a separate contract for somebody to build. And then they’ll either put it out for somebody to maintain and operate it or they’ll maintain and operate it themselves.
What happens in that world is the person who gets the contract to design it doesn’t have any incentive to worry about what it’s going to cost to build. Or worry about what it’s going to cost to operate and maintain. And you’ll find lots of circumstances also where the builder will be halfway through the build and he says the thing’s going to be harder to build than he originally expected because there’s a flaw in the design. And there’s finger pointing between the designer and the builder, and meantime, government is managing all of these risks. It owns the design risk, it owns the build risk, it owns the operate and maintain.
“We’re headed to a place where this just becomes part of the standard practice of how you deliver infrastructure.”
In a P3, you say no, we’re going to contract with somebody and they’ve got to do the whole-life cycle. They’ve got to design it and build it and operate it and maintain it. And that gives them the incentive to design it in a way that’s cost-effective.
The other big feature of P3s is you pay only on performance. So you don’t pay until the thing is actually built. You don’t pay all of it until the thing actually delivers over its life cycle. That means the private partners have to go and borrow or raise the money themselves to build it. So you have skin in the game from the people that are doing it. And you have the oversight and discipline of capital markets to say that we believe that these people are going to deliver this and we’re putting our money behind it. They exercise a discipline and due diligence on the project that the public sector can never duplicate.
Q: Are Canadian cities doing a lot of this?
A: The provinces were the first movers in Canada. And then the federal government came to play in this.
Municipalities have come to it more recently because they’ve seen the success of projects undertaken by the provinces, and by the federal government. They’ve also come to the game because the federal government is a big funder of infrastructure at the provincial and municipal levels.
Our fund is only for P3 projects. We’ll pay up to 25 percent of the eligible capital cost of a project if they undertake it as a P3. So that’s given them an incentive to try something different. There’s a huge cultural change that requires people who’ve had 100 years of doing it the normal way of design, bid, build, and so to get people to try something different takes some incentives.
We’ve worked with probably 15 municipalities across the country in a variety of sectors. Water and wastewater, solid waste disposal, local roads — we’ve done a variety of things.
Q: How would it work in a water or wastewater case?
A: I’ll give you an example of Regina in Saskatchewan. Regina has about 200,000 people. It’s been growing fast and it needed to expand its wastewater treatment facility. And so it is going out to the market to get a private-sector entity to design, build, operate, maintain and finance an expansion of its wastewater treatment facility, with a responsibility to run it for 30 years.
And it pays only on performance. So Regina will set parameters that the input needs to be transformed into this quality of output which would meet environmental standards. If the private partner does it they get paid. And if they don’t do it they don’t get paid.
Q: Is it essential in these deals that the service you’re talking about have a revenue stream attached to it, whether it’s farebox revenue in the case of transit or water fees in case of a water system?
A: No, that’s not essential at all. In the case of the Canada Line, farebox covers I think no more than 10 percent of the cost. In fact, most projects in Canada have no user-fee revenue stream. At the end of the day, governments need to decide what type of infrastructure to build and how they want to pay for it. The question of whether or not to use a P3 is a question of how to implement it.
“If you want to build public infrastructure, the public needs to pay for it, either through user fees or tax revenues. There’s no free lunch.”
There are what they call “availability payment” deals. So take the case in Canada of a hospital. We’ve built dozens of hospitals through the P3 model. There’s no revenue stream — people show up at the hospital and you don’t have to pay to go to the hospital in Canada. If the beds and facilities are available for use by the government, they pay. If they’re not available they don’t pay. So you pay based on availability.
Even the roads we’ve funded have not been toll roads. They’re based on whether or not the roads are available for use according to the standards that were set for safety and otherwise. That’s a big misconception of P3s, that P3s mean tolls or fees. P3s have nothing to do with tolls or fees.
Q: Is this the main way Canada finances infrastructure now?
A: P3s are only a tool in the toolkit. They’re probably right for about 15 to 20 percent of projects. The ones that are larger, more complex, involve greater risk and are non-routine — something you don’t do very often.
I’m the first to say its only one tool and it’s not the right tool in all circumstances. You need a clear understanding of when and why it’s right. And it’s right when it actually delivers better results for taxpayers. This is not an ideological debate, it’s a debate about what actually produces the best results.
And that’s another reason why municipalities are getting into it. There was a time when P3s were first starting that it was seen as an ideological debate. Privatization versus public service delivery. Left wing versus right wing. But it’s not that at all. It’s a technocratic debate about what is the right way to deliver the right results.
Q: Where do you see this movement going in Canada?
A: Over the medium term we’re headed to a place where this just becomes part of the standard practice of how you deliver infrastructure.
Two things are happening. We’re seeing more jurisdictions starting to employ the tool. And now they’re starting to do it in different sectors. Between 1995 and 2000 it was almost exclusively in the health and transportation sector. But now over the last five years it’s moved into water and wastewater, we’ve seen an airport done, we’ve seen solid waste disposal. We’ve even done a social housing project through P3.
So as people get more familiar with the tool, they start to figure out how do we apply this tool in areas where it’s never been applied before. More sectors and more participants is where it’s going in the Canadian market.
Q: You mentioned social housing. How does it work in that context?
A: We funded with the province of British Columbia a bundle of 13 social housing facilities in east side Vancouver. They were historic hotels that have been converted into single-resident occupancy for the most socially disadvantaged people. And the private sector took on the responsibility of renovating these buildings, moving the people out of them and moving them back in.
And they brought innovation. In the old government way of doing it, they were planning on moving people out of one building at a time, renovating it, then moving them back in. But the private sector said no, we’re going to move everybody out. And on our own tab, we’ll rent facilities for all these people to live, so we can renovate all of the buildings faster and move them back in.
“These are complicated commercial transactions which people do irregularly. So you need to bring together that expertise.”
In thinking about these deals, cities need to focus on what do they want their citizens to get — not how. We want to move people between point A and point B in this kind of way. And then leave to the private sector, to the competitive market, to figure out how.
Governments often specify the how. For a road, we want the gravel to be this thick, we want the pavement to be that thick. But you don’t really care if the gravel is that thick, you just don’t want potholes. You want the surface to last. If somebody has a new way of doing that that can be cheaper and faster, Godspeed to them.
But we like to over specify the details, rather than thinking about what citizens actually want. Citizens want the surface, they don’t care how much gravel is under the pavement.
Q: What’s another example of innovation you’ve seen come out of one of these projects?
A: We built a road in Winnipeg and it was delivered a year early. And if you go to the private sector company and ask how did you deliver this a year early, you’re thinking you’re going to hear some huge innovation. They said we worked seven days a week.
There were two churches nearby that didn’t want the construction noise interfering with their services on Sundays. So they went to the churches and offered to put in air conditioning so they could close their windows. My government would take forever to decide to put air conditioning in a church.
So these are not rocket science kinds of things, these are just the kinds of things that practical people would do if they were released from the constraints of bureaucratic red tape.
Q: You said these work best for non-routine projects. Why?
A: Take a wastewater treatment plant. It’s once a generation that a municipality builds a new wastewater treatment plant. So all due respect to the director of public works of that city, but he’s never built one before. Wouldn’t you want to get somebody who’s built 30 of them to come and build yours and operate it? He’s figured out the most effective way to build these, and you get all the efficiency and innovation that they’ve learned. But if you tell them that they’ve got to build the walls this thick or put the roof on this angle, you disable their ability to innovate.
Q: For Vancouver’s light rail, the public-private partnership lasts until 2040. Does it have to be such a long marriage, for lack of a better word, to make these deals work?
“If in year 24, it goes kapooey, you haven’t paid them all their money yet. They have an incentive to make sure that it stays well maintained and is operated effectively.”
A: What you’re trying to do is make the private sector accountable. If you want to let them off the hook in five years, you can, but you’re not getting the full value. I want to know that what they designed and built me is going to work for the long term.
And so the concession period matches what you think is a reasonable life cycle of that asset. If in year 24, it goes kapooey, you haven’t paid them all their money yet. They have an incentive to make sure that it stays well maintained and is operated effectively.
Q: What are the lessons in Canada’s experience with P3s that other countries could learn from?
A: Lesson number one: It’s got to be about value for money. A lot of people go into P3s thinking somehow it’s going to be the new funding source. If you go into it with that viewpoint, you will make big mistakes. P3s are not about private sector financing. The private-sector financing brings capital discipline. But if you want to build public infrastructure, the public needs to pay for it, either through user fees or tax revenues. There’s no free lunch.
Number two: You need the expertise. Canada has been successful because it’s created public-sector institutions to be focal points for expertise for their governments. So Partnerships BC, Infrastructure Ontario, ourselves. There are actual institutions. These are complicated commercial transactions which people do irregularly. So you need to bring together that expertise.
The third thing is competition. Competition will create innovation and lower-cost results. Many countries in all sorts of ways shut their markets to foreign competition. But Canada has been very open to competition. It is a level playing field for both domestic and international players. So we have the French operating here, Americans operating here, Spanish and Canadian firms. Everybody competes and the taxpayer wins.
Fourth is capital markets. Canada developed a project bond finance market that has been very successful in financing P3s. Niche capital markets are different in each country. But take the example of the U. S., the tax-free municipal bond market puts a heavy bias toward public-sector financing rather than private-sector financing. We have a project bond market that kept this market flowing right through the financial crisis. Both Australia and the Europeans haven’t found their footing post-financial crisis in the P3 market again.
The last one is there’s always something to learn. We get together with our provincial counterparts, we share best practices with them, we look at what the UK experience has been, what the French experience has been. You have to translate things to your own context, but try to stay on top. Capital markets change, legal contexts change, construction practices change. This is a rapidly evolving market.
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How Canada does P3s