World-class architectural firms design P3 projects and win awards for their innovation. When design services are integrated into a P3 contract, the consortium’s architects and contractors plan the project together.
Why integrating design into a P3 project reduces risks
In comparison, in a traditional delivery model design and construction activities are planned and developed separately. This approach increases the risks of design omissions and errors, and results in scope changes.
Oxford University Professor Bent Flyvbjerg’s research on infrastructure cost overruns across the globe found 90 per cent of megaprojects went over budget due to scope changes.
- Better coordination between the design team and main contractor produces fewer errors that may cause delay and increase cost
- Designers are motivated to reduce the construction timeline
- More upfront planning and due diligence work are completed by the public sector to ensure bid documents are complete
- Complete bid documents better informs bidders of any issues
- Awareness of issues allows bidders to make contingency plans in their proposals, avoiding problems that add time and money to design, construction, maintenance and operations
- This partnership leads to design innovations and better quality equipment and materials that improve an asset’s performance and prolong its life
A main contractor is always one of the companies in a P3 consortium.
In P3 contracts, the contractor commits to:
- Deliver the project on time and on budget
- Monitor construction cost to ensure it stays in line
- Change the construction schedule in very limited circumstances
- Integrate design and construction planning (if design is part of the contract)
A P3 project agreement outlines which risks are transferred from the public sector to the private sector.
A contractor accepts construction risks because it has the expertise and resources to:
- Manage construction and the construction schedule
- Hire subcontractors and determine the availability of sub trades
- Buy and arrange delivery of all construction materials
- Dispose of waste materials
- Survey environmental issues and problematic geotechnical conditions
- Address conflicts with local communities and stakeholders
- Determine construction access and traffic flow
- Obtain the appropriate building permits
- Ensure construction practices are compliant with the project agreement
- Maintain health and safety standards on the construction site
Unlike a conventional delivery model that requires the public sector to fund a project throughout construction, a P3 consortium is responsible for financing a portion of or the entire capital cost of a P3 project during construction and/or design phases.
The consortium either borrows money (debt) and/or put up its own funds (equity that is repaid when construction is complete) to build the project. Having ‘skin in the game’ motivates a consortium to complete a project on time and on budget.
Why integrating financing risks improves the private sector’s performance:
- It finances a portion or all of a project’s upfront capital costs
- Payment is received for the project when it is complete as agreed to
- It is on the hook for costs associated with delays
- The public sector has less exposure to the credit risk of a consortium’s partners/subcontractors
- It must provide liquid security and performance bonds
- Its lenders monitor project cost throughout construction and/or design, providing due diligence
- The public sector makes monthly payments based on the availability of the infrastructure
Operations and Maintenance (O&M) services:
- The government owner pays for the project in full when the project reaches substantial completion.
Operations and Maintenance (O&M) services:
- The government owner makes a lump sum payment at agreed to milestones and upon substantial completion it makes monthly payments over the contract term. Monthly payments include a non-index linked portion used to repay debt and equity and an index-linked portion to pay for operations, maintenance and rehabilitation costs based on the nature of the contract.
Transferring risks for service operations to the private sector commits it to operating or providing services for a period of time (i.e. 10, 20 or 30 years).
For example, a consortium may be contracted to operate a water treatment plant, to provide transit services or to collect road tolls. Despite having a private operator, in the Canadian context, the infrastructure remains publicly owned.
Why integrate service operations in a P3 project?
The private sector commits to:
- Meet public sector specifications
- Include the operator in the planning process to ensure a seamless and more effective operation of services
- Integrate operational best practices into a project’s planning and execution
- Allow for greater synergy between design and operation of the asset
- Set clear performance standards (for system up-time, customer service and quality of outputs), which are often non-existent under public operation
- Bring international operational expertise from other projects to maximize efficiencies (may be lacking on the public sector side, especially in smaller municipalities)
- Bring state-of-the-art monitoring and control systems that help automate previous manual processes and improve reporting information
- Bring commercial expertise and financial due diligence
- Make capital investments to improve energy efficiency and better manage associated risks
- Meet service obligations because its reputation depends on it
Other benefits of integrating operations:
- Long-term employment for skilled workforce
- Public sector controls fares and rates for services
- Public sector generates revenues from services
- Clear roles and responsibilities for maintenance and operations functions
The private sector takes on the risks of maintaining and renewing the ‘bricks and mortar’ (also called ‘hard’ facilities management) of public infrastructure when the maintenance component is included in a P3 contract.
Although rare in Canadian jurisdictions, a maintenance provider may also take care of ‘soft’ facilities management, such as hospital cleaning.
Dedicated funds are set aside for long-term maintenance and life cycle costs when the private sector is contracted to manage maintenance services in P3 project agreements. That arrangement also provides a long-term warranty on the ‘hard facilities.’
In schools, hospital or a courthouse, the private sector may maintain and repair the heating and air conditioning system, elevators and escalators.
On roads and bridges, the private sector may be responsible for repairing potholes, pavement, or lighting systems.
For a transit system, the private sector may be responsible for maintaining the transit cars, rails, systems, stations and storage facilities.
Examples of life cycle renewal services:
- Providing a new roof or heating system for a hospital
- Repaving a road
- Replacing the light rail track or refurbishing a station
Advantages of integrating maintenance
Throughout the contract term, the private sector:
- Repairs and renews the infrastructure, as agreed to in the contract provisions
- Uses good industry practices
- Keeps the asset operating at all times or faces financial penalty (e.g. for an elevator out of service or lack of access to an operating room or courtroom)
- Submits regular ‘state of repair’ updates to the public sector and allows periodic audits by third-party technical advisors
- Turns over the asset to the government in a good state of repair at the end of the contract term