The case for public-private partnerships in infrastructure

Canadian Public Administration

Volumn 51, Issue 1, 2008, Pages 99-126

  Murphy, Timothy J ^a,b  

^a McMillan Binch Mendelsohn in the P3 Area ^*

^b UNIVERSITY OF TORONTO   (Canada)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 48249156583     PISSN: 00084840     EISSN: None     Source Type: Journal    
DOI: 10.1111/j.1754-7121.2008.00006.x     Document Type: Article

References (112)

1. There is a significant, often politically motivated, debate about what properly constitutes a P3. While privatization opponents often conflate the two, F3s and privatization are not the same. For this article, P3s are characterized by two key components: 1) a risk allocation to the private sector that permits efficiencies in life-cycle costing through the overlap of design and operation; and 2) private financial participation.
2. Different jurisdictions have used different names. Ontario uses "alternative financing and procurement" (AFP) and England uses "private finance initiative" (PFI). For ease of reference, we will use the term P3.
3. Canada, Public Sector Accounting Group of the Canadian Institute for Chartered Accountants, Guideline to Accounting for and Reporting Tangible Capital Assets (Ottawa: Public Sector Accounting Group, 2007), available at http://www.psab-ccsp.ca/download.cfm?ci_id= 37536&la_id=1&re_id=0.
4. D. Burleton, Creating the Winning Conditions for Public-Private Partnerships (P3s) in Canada (Toronto: TD Economics, 2006), p. 15.
5. Ontario, Ministry of Public Infrastructure Renewal, Building a Better Tomorrow: An Infrastructure Planning, Financing and Procurement Framework for Ontario's Public Sector (Toronto: Queen's Printer, 2004), p. 27.
6. Donald G. Pierce, Ira J. Berg and Cristina Alaimo, The Latest in Delivery Methods in Canada: Design Build, Public-Private Partnerships and More... (Toronto: Goodmans, 2003), p. 11, available at http://www.goodmans. ca/docs%5CTheLatest Delivery_Methods_in_Canada-_Don_Pierce.pdf.
7. W.D. Eggers and T. Startup, Closing the Infrastructure Gap: The Role of Public-Private Partnerships (New York: Deloitte Research, 2006), p. 7.
8. United Kingdom, Treasury Taskforce, How to Construct a Public Comparator. Technical Note No. 5, quoted in G. Allen, "The Private Finance Initiative (PFI)." Research Paper, Economic Policy and Statistics Section, House of Commons Library, December 2001, p. 27.
9. Mott MacDonald Report, Review of Large Public Procurement in the UK (July 2002), p. 14, cited in Peter Fitzgerald, Review of Partnerships Victoria Provided Infrastructure. Final Report to the Treasurer (Melbourne: Growth Solutions Group, 2004), available at http://www.gsg.com.au/pdf/PPPReview.pdf.
10. United Kingdom, National Audit Office, PFI: Construction Performance (London: NAO, 2003);
11. Mott Macdonald Report, Ibid.
12. R. Andres, "The Infrastructure Deficit: Current Challenges." Paper presented at the Second Annual Summit on the Future of Canada's Infrastructure, Toronto, 26 September 2006, p. 2.
13. See, for example, Vining Aidan, Anthony Boardman and Finn Poschmann, "Public-private partnerships in the U.S. and Canada: There are no 'free lunches,'" Journal of Comparative Policy Analysis 7, no. 3 (September 2005), pp. 199-220;
14. Steven Globerman and Aidan Vining, "A framework for evaluating the government contracting-out decision with an application to information technology," Public Administration Review 56, no. 6 (November/December 1996), pp. 40-6;
15. Joan Price Boase, "Beyond government? The appeal of public-private partnerships," CANADIAN PUBLIC ADMINISTRATION 43, no. 1 (Spring 2000), pp. 75-92;
16. C. Mylvaganam and S. Borins, If You Build It: Business, Government and Ontario's Electronic Highway (Toronto: University Centre for Public Management, 2004);
17. and other recent academic studies focusing on a series of projects, such as the Confederation Bridge and Highway 407, that largely pre-date efforts by Canadian governments to significantly improve their contract management and risk assessment and allocation skills. These new agencies have attempted to learn the lessons of prior P3s and draft contract provisions that manage and allocate transaction costs to deal, inter alia, with projects where failure rates may be higher - that is, ones with high asset specificity, high complexity and/or uncertainty and low competitiveness.
18. See, for example, Vining, Boardman, Poschmann, "Public-private partnerships in the U.S. and Canada," Journal of Comparative Policy Analysis.
19. See Roy Hrab, "Privatization: Experience and prospects." Panel on the Role of Government in Ontario, University of Toronto, June 2003. Research Paper # 22, p. 10, available at www.law-lib.utoronto/investing/about.htm.
20. Ibid.
21. Fitzgerald, Review of Partnerships Victoria Provided Infrastructure, p. 17.
22. See Allen, "The Private Finance Initiative" [Research paper], p. 31, quoting Arthur Andersen and Enterprise LSE, Value for Money Drivers in the Private Finance Initiative. Report commissioned by The Treasury Taskforce (London: The Treasury Taskforce Limited, 2000).
23. United Kingdom, Partnerships UK, Report on Operational PFI Projects (London: Partnerships UK, 2006), pp. 12-14.
24. Eggers and Startup, Closing the Infrastructure Gap, p. 9.
25. Lewis Auerbach, issues Raised by Public Private Partnerships in Ontario's Hospital Sector ([Toronto]: Canadian Union of Public Employees, 2002), p. 19, available at http://www.healthcoalition.ca/cupe3p.pdf.
26. H. Kitchen, A State of Disrepair: How to Fix the Financing of Municipal Infrastructure in Canada (Toronto: CD. Howe Institute, 2006), p. 11.
27. In fact, J-E. de Bettignies and T. Ross argue, after a comprehensive review, that it is not at all clear that governments can borrow at a lower cost than the private sector. See de Jean-Etienne Bettignies and Ross Thomas, "The economics of public-private partnerships," Canadian Public Policy 30, no. 2 (June 2004), pp. 135-54.
28. See Globerman and Vining, "A framework for evaluating the government contracting-out decision with an application to information technology," Public Administration Review. Globerman and Vining rightly argue as part of a "positive" theory of P3s that an accurate comparison must include all of the transaction costs including the incremental cost of negotiating with and monitoring the performance of the private partner.
29. See David G. Duff, "Benefit Taxes and User Fees in Theory and Practice." Research Paper 45, submitted to the Panel on the Role of Government in Ontario, 2003, available at http://www.law-lib.utoronto.ca/ investing/reports/rp45.pdf. The underlying principle is straight-forward: those who benefit from infrastructure and the services it provides should pay for it. The ability to set correct prices depends on the asset and whether specific beneficiaries are easily and discretely identifiable.
30. Elizabeth Woodman, "The market for financing of infrastructure projects through public-private partnerships: Canadian developments," Financial System Review (June 2006), p. 36, available at http://www.bankofcanada.ca/en/fsr/2006/reports.pdf.
31. R.W. Poole Jr. "A response to critics of toll road leasing," Public Works Financing 205 (May 2006), p. 3.
32. B. Flyvbjerg, M.K. Skamris Holm and S.L. Buhl, "How (in)accurate are demand forecasts in public works projects: The case of transportation," Journal of the American Planning Association 71, no. 2 (Spring 2005), pp. 131-46;
33. and see also Aidan Vining and Anthony Boardman, "Public-Private Partnerships in Canada Theory and Evidence." UBC P3 Project Working Paper 2006-04.
34. United States, National Council on Public-Private Partnerships, Creating Effective Public-Private Partnerships for Buildings and Infrastructure in Today's Economic Environment [White Paper] (Washington, D.C.: NCPPP, 2005), p. 6, available at http://ncppp.org/resources/papers/ HDRP3whitepaper.pdf.
35. United Kingdom, National Audit Office, PFI: Construction Performance (London: NAO, 2003);
36. and the Mott MacDonald Report, Review of Large Public Procurement in the UK, cited in Fitzgerald, Review of Partnerships Victoria Provided Infrastructure.
37. Vining, Boardman and Poschmann, "Public-private partnerships in the U.S. and Canada," Journal of Comparative Policy Analysis; and Globerman and Vining, "A framework for evaluating the government contracting-out decision with an application to information technology," Public Administration Review, make the case that a key factor in reducing transaction costs in P3s rests on the contract management skills of governments. As governments build specialized procurement vehicles for P3 arrangements, such as Partnerships BC and Infrastructure Ontario, these skills are being quickly developed.
38. n.a., "Ceremony opens new $132M Royal Ottawa hospital," [CBC on-line news story] CBC.ca (Toronto: Canadian Broadcasting Corporation, 2007), available at http://www.cbc.ca/canada/ottawa/story/2006/10/ 27/royal-ottawa.html.
39. R. Bain and J.W. Plantagie, The Anatomy of Construction Risk: Lessons from a Millennium of PPP Experience (New York: Standard & Poor's, 2007). Some of the public debate on the cost-effectiveness of a P3 fails to distinguish between a project that is "on budget" and a project where bid price exceeds the initially budgeted price (which some Canada Line critics have done). In the latter case, all that has happened is that the private-sector price has exceeded the public entity's budget allocation for the project. In that case, the key calculus remains value for money. If the bid price exceeds the public-sector comparator, the project should not proceed as a P3.
40. See, for example, n.a., "Private-Public-Partnerships (P3s) and the Transformation of Government," Ontario Federation of Labour Policy Papers (Toronto: OFL, 2005), available at http://ofl.ca/uploads/library/ policy_papers/P3s.pdf; Auerbach, issues Raised by Public Private Partnerships in Ontario's Hospital Sector, p. 29;
41. n.a., A CUPE Backgrounder on Urban Infrastructure (Ottawa: Canadian Union of Public Employees Research Branch, 2004), p. 19;
42. and n.a., Re-Building Strong Communities with Public Infrastructure: A Submission to the Ontario Minister of Public Infrastructure Renewal in Response to the Discussion Paper on Infrastructure Financing and Procurement - "Building a Better Tomorrow: Investing in Ontario's Infrastructure to Deliver Real, Positive Change" (Toronto: Canadian Union of Public Employees - Ontario Division, 2004), p. 7.
43. Auerbach, Issues Raised by Public Private Partnerships in Ontario's Hospital Sector, p. 29.
44. de Bettignies and Ross, "The economics of public-private partnerships," Canadian Public Policy, pp. 144-45
45. Burleton, Creating the Winning Conditions for Public-Private Partnerships (P3s) in Canada, p. 16.
46. Transportation Investment Act, S.B.C. 2004, c. 44.
47. Ontario, Ministry of Community Safety and Correctional Services, "Central North Correctional Centre Transferring to Public Sector Operation: Private Jail Operation Contract not Renewed" [Press Release, 27 April 2006] (Toronto: Queen's Printer, 2006), available at http://ogov.newswire.ca/ ontario/GPOE/2006/04/27/c1439.html?lrnatch=&lang=_e.html.
48. Ontario, Ministry of Finance, Budget 2007 (Toronto: Queen's Printer, 2007), p. 113.
49. C. Smith, "Prisons," in N. Avery, ed., Public-Private Partnerships (St. Paul, Minn.: Globe Publishing, 2006), pp. 89-90.
50. United Kingdom, National Audit Office, The Operational Performance of PFI Prisons: Report by the Comptroller and Auditor General HC 700 Session 2002-2003: 18 June 2003 (London: NAO, 2003), available at htrp://www.nao.org.uk/publications/nao_reports/02-03/0203700.pdf.
51. Smith, "Prisons," in Avery, Public-Private Partnerships, p. 90.
52. Sir John Bourn [National Audit Office], "The Operational Performance of PFI Prisons." Report by the Comptroller and Auditor General, HC 700 2002-2003. National Audit Office Press Notice, 18 June 2003 (London: NAO, 2003), available at http://www.nao.org.uk/pn/02-03/0203700.htm. A well-drafted P3 contract will encourage the kind of behaviour the supervisory public authority prefers - either greater security or more purposeful activities for prisoners.
53. See, for example, R. Harding, Private Prisons and Public Accountability (Buckingham, U.K.: Open University Press, 1997).
54. Auerbach, Issues Raised by Public Private Partnerships in Ontario's Hospital Sector, pp. 16-17.
55. Tim Gosling, "Openness Survey Paper." London: Institute for Public Policy Research, 2004, available at http://www.ippr.org.uk/press/files/ opennesssurveyfinal.pdf, cited in D. Cart lidge, Public Private Partnerships in Construction (London: Taylor & Francis, 2006), p. 84. Joan Price Boase too is rightly critical of the lack of transparency in some early Canadian P3 deals. See Boase, "Beyond government," CANADIAN PUBLIC ADMINISTRATION.
56. Partnerships BC, Procurement Related Disclosure for Public Private Partnerships (Vancouver: Partnerships BC, 2007), p. 2, available at http://www.partnershipsbc.ca/pdf/pbc-disclosure_ guidance-25-apr-07.pdf.
57. Cartlidge, Public Private Partnerships in Construction, pp. 139-40.
58. See Ontario, Infrastructure Ontario, Assessing Value for Money (Toronto: Queen's Printer, 2007);
59. and Ontario, Infrastructure Ontario, Value for Money Assessment: Hôpital Montfort Expansion and Redevelopment Project (Toronto: Queen's Printer, 2006), available at http://www.infrastructureontario.ca/en/projects/ health/montfort/files/Montfort%20Value%20 for%20Money%20-%20Final.pdf.
60. Arthur Andersen and Enterprise LSE, Value for Money Drivers in the Private Finance Initiative.
61. Partnerships BC, Project Report: Achieving Value for Money Sea-to-Sky Highway Improvement Project (Vancouver: Partnerships BC, 2005. The Partnerships BC web site is at http://www.partnershipsbc.ca.
62. The Infrastructure Ontario web site is at http://www. infrastructureontario.ca/en/index.asp.
63. Cartlidge, Public Private Partnerships in Construction, p. 87.
64. Partnerships UK, Report on Operational PFI Projects (London: Partnerships UK, 2006), p. 85.
65. n.a., CUPE Backgrounder on Urban Infrastructure, pp. 19-20.
66. Burleton, Creating the Winning Conditions for Public-Private Partnerships (P3s) in Canada, p. 16.
67. Canadian Council on Public-Private Partnerships, Transitioning Staff from Public to Private Organizations in Public-Private Partnerships: A Guide to the Successful Handling of Collective Bargaining Issues (Toronto: CCPPP, 2001).
68. Auerbach, Issues Raised by Public Private Partnerships in Ontario's Hospital Sector, p. 42.
69. Burleton, Creating the Winning Conditions for Public-Private Partnerships (P3s) in Canada, p. 16.
70. Avery, Public-Private Partnerships, p. 72.
71. n.a. [CUPE], Re-Building Strong Communities with Public Infrastructure, p. 13.
72. Ontario, Ministry of Public Infrastructure Renewal, Building a Better Tomorrow Framework: An Infrastructure Planning, Financing and Procurement for Ontario's Public Sector (Toronto: Queen's Printer, 2004), p. 22, available at http://www.pir.gov.on.ca/English/infrastructure/framework.htm.
73. Ibid., pp. 16-17.
74. T1T2 Ltd. Partnership et al. v. The Queen in Right of Canada (1995), 23 O.R. (3d) 66 (Ont. Gen. Div.); T1T2 Ltd. Partnership et al. v. The Queen in Right of Canada (1995), 23 O.R. (3d) 81 (Ont. Gen. Div.); T1T2 Ltd. Partnership et al. v. The Queen in Right of Canada (1995), 24 O.R. (3d) 546 (Ont. C.A.).
75. Canada, Department of Justice, "Settlement Paves Way for Progress at Pearson International Airport." News release, 16 April 1997 (Ottawa: Public Works and Government Services Canada, 1997), available at http://www.justice.gc.ca/en/news/nr/1997/pearsn.html.
76. See 407 ETR Concession Co. v. Ontario (Minister of Transportation) (2004) O.J. 373 (Ont. Div. CO; and Ontario (Minister of Transportation) v. 407 ETR Concession Co. (2005) CarswellOnNt. 36 (Ont. S.C.J.).
77. 407ETR Concession Company Limited v. Registrar of Motor Vehicles (2005), 82 O.R. (3d) 703 (Ont. Div. Ct.).
78. Ibid., pp. 716-17.
79. This section is based in part on a legal opinion filed by the Canadian Council for Private-Public Partnerships at the Walkerton Inquiry, Submission to the Walkerton Inquiry, Part 2, Legal Opinion (Toronto: CCPPP, 2001), available at http://www.pppcouncil.ca/pdf/fretrade.pdf;
80. and also Canadian Council on Public-Private Partnerships, Public-Private Partnerships and Trade Agreements (Toronto: CCPPP, 2003).
81. Steven Shrybman [Sack Goldblatt Mitchell], Public-Private Partnerships: Assessing the Risks Associated with International Investment, and Services Treaties (Ottawa: CUPE, 2002), p. 2, available at http://cupe.ca/updir/P3s & Trade Agreements.doc.
82. Canadian Council for Public-Private Partnerships, Submission to the Walkerton Inquiry, Part 2, Legal Opinion.
83. Robert Azinian and others v. United Mexican States, ICSID Case No. (AF)/97/2, (NAFTA Tribunal, 1999), cited in Canadian Council for Public-Private Partnerships, Submission to the Walkerton Inquiry, Part 2, Legal Opinion, p. 11.
84. Ibid.
85. United Mexican States v. Metalclad Corp. (2001), 89 B.C.L.R. (3d) 359 (B.C.S.C), para. 99.
86. Marvin Roy Feldman Karpa v. Mexico, ICSID Case No. ARB (AF)/99/l, (NAFTA Tribunal, 2003) at para. 103, available at http://www.state.gov/documents/organization/16639.pdf.
87. Ibid., at para. 103.
88. North American Free Trade Agreement between the Government of Canada, the Government of Mexico and the Government of the United States of America, 17 December 1992, Can. T.S. 1994 No. 2, 32 I.L.M. 289 (entered into force January 1, 1994 ("NAFTA"), Article 1114.
89. Shrybman, Public-Private Partnerships, p. 27: "At least two commentators ... argue that the participation of private service providers should not prove fatal to this reservation, so long as public funding is preserved."
90. Annex II to NAFTA.
91. Allen, "The Private Finance Initiative (PFI)." [paper], p. 30.
92. de Bettignies and Ross, "The economics of public private partnerships," Canadian Public Policy, p. 139.
93. It is important to distinguish risk from uncertainty. Risk is used here to denote known or knowable risks that, as a result, can be priced. Uncertainty, in the sense that the risk cannot be known or calculated at the time of the bid, presents real challenges to planning for both traditional procurement and the P3 model. It is the informational vacuum, not complexity per se, that can create project failure particularly in the area of revenue-dependent projects. See, for example, Vining, Boardman and Poschmann, "Public-private partnerships in the U.S. and Canada," Journal of Comparative Policy Analysis, p. 212.
94. Cartlidge, Public Private Partnerships in Construction, pp. 51-2;
95. and Burleton, Creating the Winning Conditions for Public-Private Partnerships (P3s) in Canada, p. 23.
96. Eggers and Startup, Closing the Infrastructure Gap, p. 25.
97. See Woodman, "The market for financing of infrastructure projects through public-private partnerships: Canadian developments," Financial System Review, p. 36;
98. and Ontario, Ministry of Public Infrastructure Renewal, ReNew Ontario 2005-2010: Strategic Highlights (Toronto: Queen's Printer, 2005), p. 3.
99. United States, National Council on Public-Private Partnerships, Creating Effective Public-Private Partnerships for Buildings and Infrastructure in Today's Economic Environment [White Paper], p. 21;
100. United States, General Accounting Office, Report to the Honorable Stephen Horn, Committee on Government Reform, House of Representatives - Public-Private Partnerships: Key Elements of Federal Building and Facility Partnerships (GAO/GGD-99-23) (Washington, D.C.: GAO, 1999), p. 5, available at http://www.gao.gov/archive/1999/gg99023.pdf;
101. th Annual Conference, Canadian College of Construction Lawyers, 2006, pp. 1-2;
102. Residential and Civil Construction Alliance of Ontario, The Infrastructure Funding Deficit: Time to Act (Toronto: RCCAO, 2006), pp. 12-13, available at http://www.rccao.com/research/files/Rccao_InfraFundDeficit- Jun06.pdf.
103. Partnerships BC, An Introduction to Risk Management in a Public Private Partnership (Vancouver: Partnerships BC, 2006), p. 4, available at http://www.partnershipsbc.ca/pdf/risk-management-ppp-28-jul-06.pdf.
104. United States, Government Accounting Office, Public-Private Partnerships, p. 5.
105. United States, National Council on Public-Private Partnerships, Creating Effective Public-Private Partnerships for Buildings and Infrastructure in Today's Economic Environment [White Paper], p. 8.
106. Vining, Boardman and Poschmann, "Public-private partnerships in the U.S. and Canada," Journal of Comparative Policy Analysis, p. 25.
107. See also Burleton, Creating the Winning Conditions for Public-Private Partnerships (P3s) in Canada, p. 18.
108. de Bettignies and Ross, "The economics of public private partnerships," Canadian Public Policy, p. 145.
109. Ontario, Ministry of Public Infrastructure Renewal, Building a Better Tomorrow Framework, p. 9.
110. Allen, "The Private Finance Initiative (PFI)." [paper], pp. 29-30.
111. Ontario, Ministry of Public Infrastructure Renewal, Building a Better Tomorrow Framework, p. 31.
112. Canadian Council on Public Private Partnerships, Position Paper: Building a Better Tomorrow through Public-Private Partnerships. Submission to the Ontario Government's Discussion Paper on Infrastructure Financing and Procurement (Toronto: CCPPP, 2004), p. 5.