The following article, which is being published concurrently in our Legal Framework construction law newsletter, is intended as a primer for readers who have limited experience with Public Private Partnerships.is not intended to be a technical paper for experts.

Since October 2006, any capital project to which the Province of British Columbia contributes $20 million or more must be considered for treatment as a public private partnership (often referred to as a “P3” or as we will refer to them here, a “PPP”). PPPs are now the base case model for delivery of such projects in BC unless there is a valid reason for some other manner of delivery. There is a new wave of PPP projects which is now coming to market in BC. The following article is intended to be a primer for the uninitiated on PPP projects in BC.

What is a PPP?

In a sense, any time that a private entity works with government to deliver a project or service which could have been delivered by the government, a sort of public private partnership is involved. However, when we speak of PPPs, we are typically referring to arrangements whereby government agencies enlist private bodies to design, build, finance and operate public infrastructure. Typically, the private sector plays an active and collaborative role in all aspects of such projects, from design through construction, financing and operation to ultimate handover of the project at some distant future date. It is thought that PPPs achieve higher levels of innovation, lower costs, better management of scheduling and on-time delivery and sourcing of investment capital than is typically available through conventional procurement and tendering. In addition, the private sector assumes the risks over the project’s life which can best be mitigated by the private sector. As a result, over the long run, the public achieves better value for the tax dollars it spends on the infrastructure projects it requires.

PPPs in their modern form were developed in Europe, and in particular, in Great Britain. They have gained acceptance throughout most of the world and a number of organizations have been established to advocate PPP and other major infrastructure projects. In Canada, we can look to the Canadian Council for Public Private Partnerships (www.pppcouncil.ca). A number of corporate groups with roots in England, Germany, Spain, France, Australia, Canada and elsewhere have evolved out of large scale contracting, banking and engineering firms to bid on and successfully develop and operate PPP projects all over the world.

BC’s Capital Asset Management Framework

In May of 2002, the Province introduced the Capital Asset Management Framework (“CAMF”), in which the Province established standards and processes which apply through a capital asset’s full life cycle, from planning and acquisition through to operation, maintenance, disposal or renewal. The CAMF can be found at www.fin.gov.bc.ca/tbs/camf.htm. The PPP process is ideally suited to implement the CAMF and elicit from all participants a high level of professional expertise, the diligent scrutiny of alternatives to achieve a project’s objectives and the discipline which comes from strict accountability. The public sector is required to clearly identify its objectives and establish a business case for the PPP project. Typically, this includes the establishment of a payment mechanism, not only for payment of initial design and construction costs, but also for long term payments through the project’s life which amortize the initial capital costs, pay for ongoing operations and maintenance and provide to the private sector a reasonable return on investment. If a PPP is properly structured, the private sector is fully motivated to achieve the objectives of the PPP project. This is because the agreements which surround the PPP project are performance based. They provide that if the objectives of the project are not achieved because the private sector entity which takes on the project (commonly called a “concessionaire” or “partner”) has not met its obligations, the amounts payable to such concessionaire through the life of the project will be reduced. This could cause the concessionaire to miss its profit targets or even lead to the concessionaire suffering an outright loss.

RFQs

Once the public sector has identified a need for an infrastructure project and a business case for its delivery, the public sector will consider how to attract the right groups of potential concessionaires (commonly referred to as “proponents” during the bidding stage) to bid on the project. For major projects this is often done pursuant to a request for qualifications (“RFQ”), in which the public sector outlines the project in terms of general scope and objectives and asks potential proponents to submit their credentials for delivering it. Private groups will determine if they are interested and if they are, they will establish consortia comprised of key contractors, architects, engineers and other consultants, financial parties and lenders and these consortia will respond, setting out their qualifications for the project. The public sector will consider these submissions and likely establish a short list of proponent teams from whom it will elicit detailed proposals.

RFPs

At this stage, the public sector will issue a request for proposals (“RFP”), which will contain detailed requirements for the project and outline how the successful proponent will be paid for delivery. The RFP will outline the criteria for evaluation of the proposal and will likely include the weighting which will be allocated to each of the criteria when the proposals are evaluated. Usually, there will be a draft of the key agreement which the public sector agency will expect the successful proponent to enter into in relation to the delivery of the project.

It is at the RFP stage that the short listed proponents will begin to incur significant expenses as they prepare their detailed proposals in response to the RFP. At the same time, each proponent will need to ensure that it has the various contractors, subcontractors and consultants, as well as its financiers, firmly lined up in order to ensure that when the proponent submits its proposal, all elements of the project’s design, construction, operation, maintenance and financing are accounted for and budgeted. There will likely be extensive negotiations at all levels and the lawyers of the parties will be actively involved in settling the terms of the agreements between the key players, including their lenders. Depending on the scale of the project, each proponent which submits a proposal may incur millions in costs. For large projects or where the public sector believes that it may be difficult to attract quality proposals, the public sector may offer an honorarium to defray part of the costs of preparing a proposal which meets the requirements of the RFP.

The proposals are then submitted to the public sector agency, and after a thorough evaluation, based on the criteria set out in the RFP, and typically after dialogue and clarifications between the public sector and the proponents, a successful proponent will be chosen to negotiate with the sponsor the definitive long term agreements for the project.

The Payment Mechanism

Following selection of the concessionaire, the final project agreement or concession agreement and related contracts will be finalized, including all of the schedules which detail the various technical, performance and operational requirements to be achieved by the project. This will also include details of how the concessionaire will be paid for delivering the project and operating and maintaining it afterwards and the consequences of non-compliance with project requirements. Payment during the design and construction stage is likely to be limited or non existent, on the principle that it is up to the concessionaire in the PPP model to deliver a project which meets the public sector’s objectives, and the best way of achieving this is to defer payment until the project is substantially completed and commissioned. The concessionaire will be highly motivated to achieve commissioning of the project in order to start the meter running on project payments.

Another benefit of the PPP model is that it can permit delivery of major capital projects before they are paid for. In typical procurement, government agencies pay for projects as they are built, on a work in place basis, subject to lien holdbacks. Typically, governments borrow pursuant to bond financings to support their capital project needs. In the PPP model, the concessionaire will usually be paid pursuant to a mechanism whereby the agreed remuneration will be paid on an amortizing basis over the life of the PPP concession, plus allowances for operations and maintenance and repairs. Such payments will likely only commence upon the completion of construction and commissioning of the project, which is an important motivator to achieve timely completion. The remuneration will be subject to deductions if the project does not achieve the agreed performance criteria, both as to operations and repair and maintenance. Sometimes, all payments earned by a concessionaire will come from the sponsoring agency. However, it is possible that the concessionaire will be expected to be largely or entirely remunerated from rents paid by occupants of the project or by fees paid by users of the project. Consider the case of student residences or parkades in public complexes. A portion of the project may be commercially leased for office, retail or restaurant use and these revenues may also be part of the mix. In the case of roads and bridges, remuneration may be dependent on tolls paid by users which will, in whole or in part, support the project’s costs.

The actual payment mechanism for a PPP project is typically highly sophisticated and will be tailored to the nature of the project. But the thing to remember is remuneration will be highly dependent on the overall, long term ability of the concessionaire to achieve the requirements of the project as established by the public sector and perhaps, the satisfaction of the public at large. For instance, if the payment mechanism for a PPP project provides that a significant part of the concessionaire’s remuneration is derived from user fees, but actual use falls below expectations, the concessionaire will suffer the consequences.

Financing

Likely during the RFQ phase, and certainly by the end of the RFP phase of a PPP project, each proponent will have identified how it will fund its obligations if it is selected as the concessionaire and how it will recover its costs and earn the profit it requires to participate in the project. Each member of a proponent consortium will determine how much of its ongoing funding requirements it will provide from its own resources and how much will be borrowed from arm’s length banks and other intermediaries, which may include financial bodies which are related to a consortium member. Bank loans and various mezzanine facilities are typical during construction, until the project is commissioned, and these are typically replaced, in whole or in part by long term amortizing facilities pursuant to corporate bonds. There are often multiple levels of financing and priority arrangements among the lenders. The public sector may require that the concessionaire obtain bonding in support of its construction performance and payment obligations. The concessionaire may require bonding on the part of its subcontractors. Providers of credit may require financial enhancements by way of guarantees, interest and foreign exchange hedges, monoline insurance and other arrangements. The financial obligations of the concessionaire in relation to the project may require rating by a recognized credit rating entity such as Moody’s, Standard & Poor’s or Dominion Bond Rating Agency. The financing of a PPP project is likely to be complex and the requirements in relation to ongoing reporting and financial performance are likely to be onerous.

One of the objections to the PPP model has been that government agencies, issuing bonds on their own credit, are likely to borrow more cheaply than can a single purpose consortium which takes on a PPP project. It is said that the financing costs of the project, which are ultimately paid for by the tax-payer, are therefore likely to be cheaper for a conventionally procured project than for a PPP project. There is an element of truth to this objection, although the senior debt on many PPP projects achieves very high, investment-grade ratings. What is missed in this objection is the fact that borrowings by the Province are not risk-adjusted to specific projects. A PPP project will be financed on a risk-adjusted basis. Therefore, providers of credit on a PPP project play a very active roll in monitoring the project to ensure that it is economically viable and maintains a high level of scrutiny to ensure that the concessionaire is achieving its obligations during all phases of the project. After all, if the concessionaire defaults, the project’s lenders may not be repaid. As a consequence, the project lenders will require that they be notified if the concessionaire fails to meet its obligations. They will also require the opportunity to step in and take over the project if the concessionaire defaults. The role of lenders in the PPP model is one of its strengths. Their onerous and detailed requirements impose a very high level of discipline to all concerned.

Competitive Process

For the PPP model of procurement to be successful, it is critical that there be healthy competition from the private sector in relation to each PPP project. Competition ensures that the public sector achieves value and also fosters the development of creative solutions to the public sector’s infrastructure needs. To achieve this competition, the RFQs and RFPs for a PPP project must be developed and managed in a fair and transparent manner, where all proponents can be confident that they know what is expected from them and that their proposals will be evaluated on the basis of the merits and not on the basis of undisclosed biases or factors. In addition, it is imperative that there be no conflicts of interest pursuant to which participants in the process have some sort of “inside track” because of undisclosed past involvement with the project or a non-arms length relationship with anyone who is associated with the evaluation of the proposals. All of this requires a high level of expertise on the part of the sponsor for a PPP project, to ensure that its RFQ and RFP and related documentation and procedures meet industry expectations. In addition to establishing clear criteria and procedures for evaluating proposals, on larger projects, there is likely to be a fairness advisor who will be a legally trained individual who can advise the public sector sponsor on any concerns as to fairness and transparency in the bidding process. Often, this individual will provide a report at the end of the bidding process which comments on its fairness. On smaller projects, counsel for the sponsor may perform the fairness advisor function.

Competition also requires a reasonable number of qualified proponents who are prepared to respond to RFQs and RFPs. While the PPP model of procurement is relatively recent in Canada, it has been used extensively elsewhere in the world, and in particular, in Great Britain, Australia and Europe. As a result, there are a number of international organizations which are capable of taking on PPP infrastructure projects of virtually any size and various international financial institutions have developed considerable expertise in financing such projects. A number of these organizations and institutions have established permanent offices in Canada, primarily in British Columbia and Ontario. To keep the interest of such proponents, it is important that there be sufficient Canadian project flow to ensure that they are prepared to commit the resources necessary to bid on and deliver local projects. We cannot lose sight of the fact that other jurisdictions are also trying to attract the resources necessary to build their own infrastructure and that they will seek to involve many of the parties which can deliver the PPP projects British Columbia requires. For the time being at least, there is sufficient deal flow to sustain international interest in PPP projects in BC. However, local contractors and consultants must become familiar and comfortable with the PPP model, so that they can participate in future PPP projects. Again, this seems to be happening.

Labour and Employment

By definition, a PPP project will result in the delivery of services by the private sector which have, in the past, been delivered by the public sector. The labour movement, and in particular, public sector unions, have been fierce opponents of PPP projects due to labour concerns. This opposition may be addressed by a number of facts, including:

• The qualifications and numbers of the design, construction and operational personnel who are required for the delivery of all aspects of a project will be the same whether it is delivered as a PPP project or through conventional procurement. A PPP project should not cost anyone their job.
• There is no reason why construction and operational personnel involved in a PPP project cannot be organized under collective agreements.
• In other jurisdictions, the success of the PPP model has led to more modern, better equipped facilities, constructed earlier than would have been the case under conventional procurement. This often leads to a work environment which is an improvement on the status quo.
• Particular services which are especially sensitive and which the public feels should be delivered through a public agency can be accommodated in the PPP model. For instance, in the context of hospitals, the services of doctors, nurses and other clinical staff are not likely be administered by the concessionaire, but will be subject to the same health authority administration as they have been in the past.
• Absent special legislation, the successorship rules which apply to a PPP project are the same as would apply in relation to other projects.

In fact, in the current employment environment, the bigger challenge in British Columbia is to find the qualified personnel who are needed for our infrastructure projects, regardless of their labour affiliations or how the projects are delivered. The sheer volume of projects, the aging of the work force and the labour magnet of Alberta have led to a labour shortage in BC. This shortage may be addressed in part by immigration, both from overseas as well as from other provinces, but concessionaires face an ongoing challenge in BC to find the personnel needed for PPP and other projects.

Partnerships BC

Partnerships British Columbia Inc. (“Partnerships BC”) was incorporated in May 2002 as part of the strategic plan of the Province of British Columbia to deliver publicly funded projects more effectively and affordably. Partnerships BC is a business corporation, the sole shareholder of which is the Province, represented by the Minister of Finance. Partnerships BC has its own board of directors.

As stated in the Partnerships British Columbia Service Plan 2007/2008 – 2009/2010, the core business of Partnerships BC is to:

• provide expert services to the Provincial government and its agencies in the procurement of major public projects, ranging from advice on business transaction and procurement management, to overall project management;
• identify and evaluate new opportunities to enhance the effectiveness of major capital asset procurement through public private partnerships;
• foster a business and policy environment for successful public private partnerships by offering a centralized source of knowledge and best practices, understanding, expertise and practical experience in partnership projects; and
• manage an efficient leading edge organization that meets or exceeds performance expectations.

Since incorporation, Partnerships BC has grown rapidly, in size, capability and profile. It has built upon its core business successfully to serve its public sector clients, develop local expertise, refine and apply best practices and cultivate the market for the delivery of infrastructure through the utilization of the PPP model. And most importantly, in an extremely buoyant and inflationary construction market, Partnerships BC has established a remarkable record of delivering the projects with which it has been involved, on time and on budget, with demonstrated value added over what would have been achieved through conventional procurement.

A PPP project can be undertaken in British Columbia without direct involvement of Partnerships BC, however Partnerships BC establishes the benchmark for how such projects should be handled, from inception through completion and into operations. For more on Partnerships BC and the many projects with which it has been involved, go to www.partnershipsbc.ca. The Partnerships BC Service Plan referred to above is particularly informative.

The Future of PPPs in BC

For the foreseeable future, British Columbia’s economy and population base will continue to grow and the Province’s infrastructure requirements will grow as well. In the meantime, existing infrastructure is often inadequate and has been the victim of deferred maintenance. The cost of providing new infrastructure and replacing existing infrastructure will require vast investments and much of this will need to come from the private sector. At the same time, financial institutions are looking for the steady, reliable sources of investment income which PPP projects can deliver, provided that those projects are economically sound. The PPP model, while not a panacea, is probably the best available means of delivering much, if not most, of the infrastructure and public works which our society demands. We should expect to see many more PPP projects of varying sizes in the coming years.

Clark Wilson and PPPs

The lawyers at Clark Wilson LLP have been working on infrastructure and public works projects for many years, and long before the PPP model became a common way for delivering such projects. More recently, we have been involved in many of the leading PPP projects in BC, including the award winning Britannia Mine Water Treatment Plant, where, working with Partnerships BC, we represented the Province of British Columbia. We have been involved with bridges, athletic and event centres, highway projects and hospital projects and we have acted on behalf of government agencies, proponents and contractors. For more information on our PPP practice, go to www.cwilson.com/p3.

This article was authored by Brock Johnston, who is Co-Chair (with Alex Petrenko) of Clark Wilson’s Public Private Partnerships Law Group. Brock would like to thank Partnerships BC, and in particular, Sue-Anne Fimrite, Director and Jennifer Davies, Director, Communications and Government Relations, for their thoughtful comments.