This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its 2008 Annual Report, the Ontario Auditor General found that the use of a public-private partnership format, or P3, for the construction of the William Osler Health Centre (WOHC) resulted in $200 million in additional costs to the taxpayer. In its report, the Auditor General recommended that institutions conduct a value-for-money analysis prior to utilizing the P3 approach to procurement.
As the Auditor General’s report explains, the P3 financing model can be used by public institutions to shift project administration costs to contractors and extend the timeframe for paying for the infrastructure works:
Generally, P3s are contractual agreements between government and the private sector by which private-sector businesses provide assets and deliver services, and the various partners share the responsibilities and business risks. In the case of a hospital agreement, the private sector partners would typically be responsible for the design costs, the construction costs, and the financing (and possibly the ongoing facility capital maintenance costs as well). The hospital would then repay the partners through a series of payments over the long term. Governments enter into P3s because they provide an opportunity to transfer risks to the private sector, allow both sectors to focus on what they do best, and accelerate investment to help bridge the gap between the need for public infrastructure and the government’s financial capacity.
However, while the P3 model may have its benefits in the appropriate circumstances, the Auditor General found that in the WOHC hospital construction project the decision to use the P3 approach had been imposed by the provincial government with insufficient consideration of its cost-effectiveness:
We noted that WOHC had invested much time and effort in planning and delivering the new hospital project. However, WOHC did not have the option of choosing which procurement approach to follow. Rather, it was the government of the day that decided to follow the public-private partnership (P3) approach. We noted that, before this decision was made, the costs and benefits of alternative procurement approaches, including traditional procurement, were not adequately assessed. This, along with a number of other issues we had with respect to this first P3 project at WOHC, led us to conclude that the all-in cost could well have been lower had the hospital and the related non-clinical services been procured under the traditional approach, rather than the P3 approach implemented in this case.
The Auditor General noted that the province could have borrowed funds to finance the project at a more preferable interest rate at considerable savings to the taxpayer. In fact, had more traditional, government-obtained financing been utilized, the “savings would be approximately $200 million over the term of the project’s P3 arrangement”. Unfortunately, the Auditor General found that the hospital “had not considered the impact of these savings in its comparison of the traditional procurement approach with the P3 project.”
The Auditor General also noted that using the P3 approach significantly increased the cost of external advisors and that those expenses were not factored into the consideration of the cost-effectiveness of the P3 structure:
WOHC and the Ministry engaged approximately 60 legal, technical, financial, and other consultants at a total cost of approximately $34 million. About $28 million of these costs related to the work associated with the new P3 approach, yet they were not included in the P3 cost. While acknowledging that additional professional services will be required given the newness of the P3 process, we still believe a significant portion of the professional costs relating to the P3 arrangement should have been included in the cost comparison.
Furthermore, the Auditor General found that in many instances the project failed to follow appropriate procurement protocols when those external advisors were retained:
Over 40% of the advisers in our sample were single sourced. In addition, many consulting assignments were open-ended, without pre-established budgets or a ceiling price. We acknowledge that this was in part due to the arrangement being a pilot and to the uncertainty regarding the exact requirements of the various aspects of the project.
In its report, the Auditor General warned institutions that are considering the more complex P3 procurement structure to realistically assess the total cost of the P3 approach when compared to more traditional financing and tendering strategies. It advised that this “assessment should be carried out early in the process” as part of initial business case. As this case study illustrates, the selection of an appropriate contract design format is a critical component of proper project planning.
