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Don't Throw Out the P3 Baby With the Bathwater

12/21/2014 03:01 EST | Updated 02/20/2015 05:59 EST

Something as dull sounding as public-private partnerships (P3s) has suddenly grabbed headlines thanks to a recent report from Ontario's Auditor General. While some claim the report is evidence that we should abandon the use of P3s, the report is actually a constructive critique of how the Ontario government can improve the P3 process.

P3s are an increasingly common tool for governments in Canada, and around the world, to provide infrastructure such as roads and bridges. At their core, P3s are a way for governments to partner with the private sector to share the risks and rewards of providing public infrastructure. The government still owns the infrastructure and establishes the project's goals and desired outcomes while a consortium of private sector companies takes on the task of achieving them.

If the contract is properly structured and private sector partner fails to deliver, the government imposes financial penalties. The point of a P3 is to harness the innovative capacity, efficiency, and expertise of the private sector for achieving the government's ends.

But not all projects are well suited to the P3 model, so the challenge is to figure out which projects should move forward as a partnership. There are processes in place in Ontario and elsewhere to help governments make that call including a method for estimating the potential value-for-money of a project using the P3 model compared to conventional government-led delivery.

The Auditor General's assessment is that the Ontario government's value-for-money methodology artificially favours P3s. The recommendation is to improve the process for deciding when to use the P3 method, not to abandon the model altogether.

As the Auditor General points out, risk-sharing is critical to the government's rationale for going the P3 route. Risk-sharing occurs when the private partner takes on some project risks that would otherwise be borne by taxpayers. Delays and cost overruns are common risks in constructing public infrastructure. In a conventional government-led project, taxpayers pay these extra costs; in a P3, the private partner is on the hook. Being responsible for poor performance encourages the private partner to avoid delays and cost overruns.

Much ink has been spilt over the claim that the Auditor General's report shows P3s are "$8 billion more expensive" than government-led projects. But that's not what the report actually says. In fact, the $8 billion figure is the estimated cost difference between the two options before adjusting for the value of risks retained by taxpayers. Once risks are accounted for, research shows P3s can offer prospective savings that range from 0.8 per cent to 61.2 per cent relative to the cost of government-led projects.

Government-led projects would be cheaper (given the government's lower cost of borrowing) if they were risk free. But that is simply not the case. In fact, government-led projects have a long history of being over budget and delivered late with taxpayers ultimately bearing the extra costs.

P3s, on the other hand, have a strong record of delivering public infrastructure on time and on budget. In a recent analysis of 42 Canadian P3 projects from 2009 to 2013, an impressive 83 per cent finished on time or early. In a separate analysis of 19 Canadian P3 projects from 2004 to 2009, an even more impressive 89 per cent finished on time or early.

The international experience shows similar results. A UK study found P3s typically finished one per cent earlier than scheduled while government-led projects finished 17 per cent behind schedule. Cost overruns averaged virtually zero in P3s compared to 47 per cent in government-led projects. Moreover, an Australian study found P3s were delivered 3.4 per cent ahead of schedule while government-led projects were delivered 23.5 per cent behind schedule.

Still, the P3 model should only be used if it provides value-for-money to taxpayers. The value-for-money calculation involves estimating and comparing two hypothetical scenarios to see which would be better for taxpayers. The calculation is complex and government agencies don't always get it right. Ontario's Auditor General offers important criticisms and suggestions for improvement; hopefully this results in better decision making.

That said, we shouldn't throw out the P3 baby with the bathwater.

Hugh MacIntyre, Fraser Institute policy analyst, also contributed to this column.