PEETHREEPHOBIA, OR THE FEAR OF P3s (Public-Private Partnerships)

I remember attending a conference on the economic model of Quebec in 2004, where a UK government representative was advocating for P3s and their advantages. It seemed that England had found a way to make it work and that P3s were used extensively; success stories were plentiful.

However, there is much debate in Canada and especially in Quebec on the merits of P3s. Interest groups such as labour unions finance anti-P3 campaigns such as this one currently seen on TV nationwide:



Should P3 initiatives be terminated in order to protect Canadian citizen interests? After taking a look at both sides of the argument, here are my conclusions.

First off, what are P3s? The Canadian Council for Public-Private Partnerships defines P3 as: “a cooperative venture between the public and private sectors, built on expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.”

Typically, P3s will tend to be long-term agreements where financing, design, construction and maintenance of facilities are shared between public and private organizations.

Although one of the first countries to use P3s was France in the 18th century(1), the UK and Australia are credit for its invention. The UK is by far the biggest purchaser of P3s, with as many as 400 projects commissioned in 2005(2). Here in Quebec, P3s were introduced by Monique Jérôme-Forget, then Minister of Public Administration and Government Services, at the turn of the century. Once the Quebec Public-Private Partnerships Agency (PPPA) was founded by Jérôme-Forget, the controversy began.

In Canada, the media has been much more responsive to failures than successes, possibly affecting public opinion on the matter (4). Despite a difficult start, there is a consensus that the media is starting to be more objective in its reporting of P3 projects and moreover, surveys show that public opinion has been more favourable to P3s recently (4).


The P3 debate plays along the following lines:

1. Are P3s less expensive than traditional public procurement schemes?

Although it is difficult to assess this in the case of Quebec because P3s are relatively recent here, data from the British Columbia Council on P3s show that 100% of projects were delivered on budget and on time or ahead of schedule (3). In the UK, this rate is 78%, but in the case of cost increases, the government agencies did not bear the difference (4).

Further, there are interesting mechanisms in the P3 framework such as honoraria and break-fees that encourage competition in the bidding process as well as more diligence in the drafting of project proposals. Honoraria are given to competing suppliers to encourage quality in their bid proposals. Break-fees are paid out when suppliers are committed, but the project is cancelled.

The bidding process is far from perfect in Canada and could be improved in terms of efficiency and effectiveness. Recently, it was found that the decision of the Government of Quebec to use a P3 for the construction of the CHUM is based on reports that are deliberately slanted towards the P3 case, with risks minimized for the partnership case and costs maximized for the traditional case (6). Evidently, there is room for improvement here.

2. Do P3s provide better services for citizens?

This question is difficult to evaluate because of the lack of data on this subject. The real test for this question will be seen 10 years from now, when the initial projects will go beyond the construction phases and into maintenance and operations.

However, if we take a look at Chile, that has invested in an important P3 infrastructure starting in 1996, the results seem favourable in terms of consumer satisfaction although if we look at projects collectively the results are mixed (5).

In this area, proponents of P3s believe that some projects are far too ambitious and lengthy in time for governments with little experience with the mechanism. It would be better than to start off with few little projects, than many big projects.

3. Are P3s creating monopolies?

Because the P3 industry in Canada is still in its infancy stage, domestic and international competition, especially in the construction industry is quite low, which can stifle innovation and competitive pricing. Again, with more time, I believe results will be more conclusive.

4. Are P3s affecting job conditions?

The argument that jobs become less secure in a P3 environment predominantly originates from labour unions. However there is little data to support his argument. According to the labour unions, P3 workers are mostly atypical workers that earn lower salaries and are subject to precarious job conditions that pose serious psychological and health hazards (1). If we take this argument further, this means that organizations that are awarded P3 contracts do not abide by federal, provincial and municipal laws on labour and work safety. Let us not forget that P3 consortia are formed of the same private companies that run business everyday in non-P3 matters, therefore work conditions cannot be alienated to the extent of making P3s harmful for workers.

5. Is the P3 bidding mechanism transparent?

There is a general trend towards non-disclosure of information because of participation of private organizations in the process (1). However, some provincial governments have made public detailed reports on P3 projects, but the market would be more confident if documents on bidding details were also made public.

6. Are P3s a “Trojan horse for privatization”(1)?

England has adopted P3s in a time where there were budget constraints on the government and major infrastructure projects had to be implemented. P3s was an alternative that was used in order to push the projects without overburdening the government with debt(2). I believe that P3’s make a good compromise between privatization and nationalization. If the public sector assures the quality and universal access for citizens and benefits from expertise from the private sector, then this compromise truly creates value. The government’s move towards P3’s does not mean that there is a desire to privatize.

Conclusion

There is more fear than harm in the case of P3s in Canada. Strong interest groups and slanted media has helped building a case against P3s, but there is plenty of evidence that show that there is a bright future for P3s.

However, there are important improvements to be made. P3s boil down to complex agreements between the public and private sectors. These agreements must find the right balance of accountability so as to find the perfect mix of risk between the public and private agencies. Failure to find the right balance mostly means failure of the project. For instance, higher bidding prices may be the result of too much risk placed on the side of the private sector. Also, more transparency must be applied in the bidding process in order to satisfy the market’s need for fair competition. Next, the government must not impose to many restraints in the bid offers since this could diminish innovations and lead to more expensive proposals. Lastly, the government must make sure that P3 initiatives continue on a regular basis in order to build much needed expertise in the matter, attract competition and build the market for P3s.

UPCOMING TOPIC: Corporate Governance in US and Canada... too much lax?


SOURCES


1. Roy, Louis. “Improving State-Building Capacity: The P3 Paradox” Confédération des Syndicats Nationaux. Presentation in Zurich Feb. 2008.
2. “Overview of Public Private Partnerships in the UK” Unison. June 2005.
3. “Public Private Partnerships” Partnerships BC. Jul. 23 2008.