Introduction
Canada’s civil and social “infrastructure deficit” is estimated to be up to $125 billion which is approximately 6-10 times the level of all current annual government infrastructure budgets combined. In this context and facing a potentially protracted worldwide economic slowdown, many Canadians and our federal, provincial, and municipal governments have recognized that reversing the decades-long decline in infrastructure development and renewal in Canada is critical to their economy and high quality of life. The scope and scale of infrastructure plans in Canada is significant enough that alternative schemes have been engaged with different roles being played by private sector actors than in traditional government projects.
In particular, public-private partnerships (P3) are an increasingly common and controversial means being used to address the infrastructure deficit while reallocating business, legal, and technical risks between the contracting parties.
P3 Definition and Key Players
The use of the term P3 generally refers to privatized projects with material involvement of governments and private companies. However, the term “P3” is a legal term of art which varies from one political jurisdiction to another. In other words, it may be a term derived from practice or it could be set out in government legislation.
For example, on December 30, 2004, the Brazilian government passed a P3 law, which defines a P3 as a “concession contract, in the sponsored or administrative forms”, which must involve a payment of money above a threshold amount from the public to the private sector during a period of five to thirty-five years.
The term “public-private partnership” carries a specific meaning in the Canadian context. It relates to the provision of public services or infrastructure, and it necessitates the transfer of risk and capital between partners. The definition embraced by The Canadian Council for Public-Private Partnerships is as follows: “A cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.”
In essence, a P3 is a method of procuring public services and infrastructure by emphasizing the different features inherent in the public and private sectors with a goal of achieving “value for money” for all parties involved.
When governments and companies join together in an entrepreneurial fashion to produce and regulate infrastructure projects, the list of potential participants is seemingly endless. All three levels of government in Canada have been involved with P3 projects with provinces and municipalities being the most active to date.
P3 projects may be built and operated by a range of public and private companies, which may be domestic, foreign, or transnational and all of which may involve a large number of subcontractors. A government-owned or managed company, for example Dubai World, which is an investment arm of the Dubai government, may also be involved in the financing, construction, and operation of a P3 project.
A Brief History of P3s
Large-scale infrastructure projects have a long history in Canada. For example, British Columbia joined Confederation in 1871 after the Canadian government promised to build a rail link with the eastern provinces. The railway’s early construction was filled with controversy, toppling the Conservative government of John A. Macdonald in 1873 and forcing an election. By the time Macdonald was returned to power in 1878, the massive project was seriously behind schedule and in danger of stalling completely.
On October 21, 1880, a group of Scottish-Canadian businessmen finally formed a viable syndicate to build a transcontinental railway, which resulted in the Canadian Pacific Railway Company (CPR) being incorporated on February 16, 1881. Shortly thereafter, the Canadian government gave CPR a grant of $25 million, approximately 10 million hectares (25 million acres) of land, and also defrayed the cost of surveying the lands and paying property tax for the next 20 years. The last railway spike was driven in British Columbia on November 7, 1885, three years after construction had started. The first CPR passenger train left Montreal on June 28, 1886 and arrived at Port Moody, British Columbia on July 4 of the same year. Three years thereafter, the syndicate had regained its financial footing and began paying dividends to its shareholders again.
At the international level, P3s have notably been utilized in connection with the development of the Panama Canal, U.S. oil exploration in the 1930s, and the bulk of nineteenth and early-twentieth century railroads.
Railroads were often financed through a mix of domestic, foreign, public, and private capital. U.S., British, French, and German investors, all of whom were heavily dependent on the Canadian government, helped finance Canadian railways. British financiers capitalized 15 to 25% of American railways and, together with French investors, many Mexican projects as well. In modern times, the Internet is itself a P3 – a successful product of the privatization of military technology (See Law, Infrastructure and Human Rights by M. Likosky, page 102). Initially a government-generated communications infrastructure, the Internet has, over time, moved out of government control into private hands.
P3 Legal Structures
Public-private partnerships span a spectrum of models that progressively engage the expertise or capital of the private sector. At one end of the spectrum, there is straight contracting-out as an alternative to traditionally delivered public services. At the other end of the spectrum, there are arrangements that are publicly administered but within a framework that allows for private finance, design, building, operation, and possibly temporary ownership of an asset.
Some of the most common P3 models being utilized in Canada include variations and combinations of the following:
- Build-Operate-Transfer (BOT): A private entity receives a franchise to finance, build, and operate a facility (and to charge user fees) for a specified period after which ownership is transferred back to the public sector.
- Design-Build-Finance-Operate-Maintain (DBFOM): The private sector designs, finances, and constructs a new facility under a long-term lease or licence and operates and/or maintains the facility during the term of the lease or licence. The private partner transfers the new facility to the public sector at the end of the contract term which is commonly 20-30 years in length.
- Build-Own-Operate (BOO): The private sector finances, builds, owns, and operates a facility or service in perpetuity. The public constraints are stated in the original agreement and through on-going regulatory authority.
The BOT scheme is popular in the international sphere and the United Nations Industrial Development Organization (UNIDO) has actively promoted its use, including the development of a how-to book for project planners. BOT projects range from toll roads in East Asia to natural gas pipelines in Latin America to the Channel Tunnel connecting France and England by train.
Regardless of the structure chosen, contractual changes can and often do occur during the P3 concession period and must be considered alongside other long-term issues. These may include refinancing, termination provisions including events of default, and asset hand-back provisions. It is also possible that, over time, the needs of the contracting parties may differ from the original scope of services contemplated and/or that changes occur which are beyond the control of either party (e.g., changes in law which are made by another level of government).
Criticism and Uncertainty Surrounding P3s
Over 75 P3 contracts were signed between 1998 and 2008 at the provincial and municipal levels in Canada representing a total value of over $28.4 billion. However, as the value and frequency of P3 projects increase in Canada, so too does criticism from P3 detractors. Those opposed to P3s most often cite the loss of public control that occurs when a private sector company is involved in financing, building, or delivering public services. Healthcare and education seem to be particularly prone to sensitive debates in this area where it is perceived that commercial interests override or replace hard-to-define “public interests”. P3s are also often seen by organized labour as resulting in job loss, poor quality, and lack of oversight. The Canadian Union of Public Employees (CUPE) has been a particularly vocal critic of P3s.
Recent criticisms of the P3 model have focused on the methodologies used by governments which may be seen to favour P3s instead of traditional publicly-designed, owned, and operated infrastructure projects. In British Columbia for example, the methodology used by Partnerships B.C. (a provincial government-owned corporation responsible for bringing together ministries, agencies, and the private sector to develop projects through P3s) has been criticized for how it calculates value for the “risk transfer” to the private partner and the benefits from long-term performance guarantees it achieves..In particular, the most controversial alleged flaw in the B.C. Partnerships methodology is the failure to consider the higher cost of capital required to fund private development, which may be subsequently transferred to governments and taxpayers and which may add hundreds of millions of dollars of unnecessary financing costs over the course of a 25-30 year concession contract.
In Quebec, the province’s auditor-general, the first outside expert allowed to review the provincial
government’s P3 financing figures in detail, recently criticized the government for manipulating its calculations regarding the construction of two teaching hospitals in Montreal. For instance, the auditor pointed out that the Quebec government assumed that under the conventional model, the province would do little or no upkeep on the new hospitals for 30 years, at which time they would need to be replaced again.
This assumption was utilized despite the fact that it is not the government’s policy or practice to allow its buildings to deteriorate at such an accelerated pace. In May of 2009, the Alberta government announced that it would pay for four new high schools in the traditional way rather than leasing them back over several decades through a P3 as originally proposed. The reason was that the P3 model had to be refined in response to the disturbing economic climate. At the same time, however, the Alberta government confirmed that 10 other elementary and middle-years schools would still be built as P3s. Meanwhile, 18 other schools across Alberta are already under construction through a 30-year P3 deal with a consortium of companies.
Conclusion
The infrastructure deficit has both the Canadian public and governments at all levels considering alternatives to the traditional government procurement and financing model. P3s are becoming an increasingly popular way for governments to address their infrastructure needs. Nevertheless, P3s have not themselves been immune to recent economic woes. Criticisms relating to loss of public control coupled with uncertainties relating to long-term credit may slow the growth of P3s for the foreseeable future. Only time will tell whether the P3 model will become as widely used in Canada as it is in the United Kingdom, continental Europe, and Australia and whether governments and Canadians alike obtain satisfactory results or, as they are known in the P3 context, “value for money”.