Thought Leadership

Private Money Financing Public Assets

Category: News & Events
N. Ryan Smith • November 12, 2019

I’m attending the annual conference for the Canadian Council for Public Private Partnerships on November 18 and 19 in Toronto, to meet with the companies and people at the leading edge of P3s and to talk projects and project performance.

If you’ll be there and you’re interested in learning more about Modus and our industry-leading approach to managing risk through independent project oversight, please reach out.

I’m enthusiastic about meeting the leaders of P3 and the governmental organizations and private companies that are delivering these projects. Unique and innovative contracts, risk-sharing models and creative incentives/disincentives are driving some of the biggest public/private contractual commitments ever made.

With the costs of infrastructure projects on the rise across North America and beyond, the P3 contract model has picked up steam as a way for municipal, provincial and federal governments to provide required public assets while “smoothing out” the impact on the tax base.

The sheer volume of new and refurbished transit, roads and bridges, energy, health care infrastructure and other needs, however, has made this and other hybrid financing plans a necessity for local governments. The public simply doesn’t have the funds at hand to finance hundreds of billions of projects through their tax bill, and governments know it. The key question is whether a P3 model addresses the short and long-term financing goals while also driving project outcomes for overall schedule, budget and risk.

P3 and other hybrid strategies are not a new concept, as finding ways to provide public services while deferring the impact on the taxpayer is an age-old government strategy. Further, being able to commit to investing in new infrastructure in key localities while keeping tax increases at a nominal level is a magical combination to secure those critical votes come election time.

In many ways the principles of the P3 approach offer a win/win proposition. But managing P3 projects offer unique challenges that conventional project risk management and oversight approaches do not address.

P3 contracts contain considerations for private companies to finance, design and build the project, and then to operate and maintain the built asset for some fixed period of time. At the end of that duration, the companies may be selected to continue providing the services or, if there are issues with performance, the government may go out to bid to get another group to take over.

As a result, the contract partners in a P3 are engaged for an extended duration, much longer than a conventional EPC (engineering, procurement and construction) contract. This creates unique contractual complexities and risks on both sides of the agreement. The solvency and stamina of the consortia providing the services, and the way they behave if they begin to suffer impacts on profits or even losses, are critical to the governments.

Further, the governments signing the P3 contracts likely won’t see them through, due to the long tenure of these agreements and four-year election cycles. The changing views of the electorate mean that the contracts must be written in a way that can withstand regime change without incurring crushing penalties to exit the agreement if the government du jour wants to go in a different direction.

We also know that contracts don’t manage projects and contracts don’t manage risk. Contracts lay out the obligations and the consequences if the parties don’t deliver, and neither side ever wishes to enforce them, because this means the project is in some trouble.

So, proper characterization and quantification of risk is critical, because mitigating those risks will impact the overall cost and sometimes the structure of the P3 itself. The risks involved on both sides run the gamut, including reputational, financial, political, and public safety risk, to name just a few. Ensuring all design, functional, and performance requirements are met before the operations and maintenance begin is critical. Establishing and maintaining a positive and motivated team environment and personnel continuity for possibly decades is critical. P3 concessionaires thus need to play the “long game” and realize that cost or schedule risks during construction can be mitigated over years of successful post-construction operation.

P3s take all these things into consideration, to varying degrees. Once these long agreements are finally inked, there’s the “small matter” of getting on with the project plan and realizing the promise of the agreement.

There is never a substitute for a vetted, high-quality project plan built on the principles of defined scope, robust schedule and cost estimates that accurately reflect the work and time to execute it, and a total risk profile that puts a high confidence envelope around these objectives. No contract model compensates for these things, and the ultimate success and perception of the project depends on it.