This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
The champions of public-private partnerships (P3s) have long maintained that outsourcing project design, delivery, and long-term operations and maintenance, along with the related procurement processes and project financing, is the best solution for avoiding project delays and cost overruns. However, critics of P3 projects argue that this approach results in higher transactional and borrowing costs to government. They also assert that the purported scheduling certainty associated with P3 projects is more a product of lowering initial expectations in project delivery times than a product of better execution. Finally, the critics of the P3 model claim that the cost savings associated with this model are actually the result of biased initial cost estimates, which tend to inflate the estimated costs of more traditional procurement approaches, only to be credited for managing and reducing those cost risks when arriving at the total project costs and notional cost savings of the P3 projects. This discussion will summarize these competing perspectives.
In its November 2011 discussion paper entitled Managing the implications of public private partnerships, referred to in the report as “PPPs”, the New Zealand Controller and Auditor General noted that there “has been a lot written internationally about public private partnerships”, but that much of that attention “focused on the upfront structural and contractual arrangements involved, which are central to organising the process and the parties”, and that, unfortunately, many appraisals of P3 engagement “are highly specific to particular countries, remarkably polarised, and, taken as a whole, inconclusive.”
While the discussion paper noted that the use of P3s was maturing, it found that much work remained to be done in the employment of the model, and that “a sound platform for an ongoing programme of PPPs still needs to be built” to address a “limited understanding in wider stakeholder and community groups”, the limited guidance and support for local government, and the “fragmented public sector skills, knowledge, and information flows”. In addition, the discussion paper raised concerns about “limited diversity in the capital markets and funding base” and a “lack of some domestic private sector expertise and capability.” In summary, the paper observed that “careful attention is needed to ensure that innovation continues to be encouraged and the challenges and opportunities that these partnerships present are fully understood, managed, and accounted for.” With regards to the public sector, this means “broadening oversight and control of the PPP programme to ensure that the public’s interest is electively represented, supervised and, ultimately, satisfied.”
While concerns over the administration of P3s may remain widespread, some studies have shown that the optimism bias that leads to systemic, widespread, and prolonged cost overruns and delays in conventionally run major infrastructure projects has been successfully addressed through the use of P3s. In a 2012 Asper Review of International Business and Trade Law article titled “A Legal Perspective on the Case for Procuring Capital-Intensive Infrastructure Services Via P3s in Canada”, L.B. Jatto noted that:
A number of studies have yielded empirical evidence, which strongly suggests that, the world over, significant cost overruns and time delays characteristically attend conventional public procurement of capital-intensive infrastructure projects, but not the procurement of such projects via PPPs. This global phenomenon, characteristic of conventional public procurements, is known either as “appraisal optimism” or “optimism bias.”
As Jatto noted, the Flyvbjerg Study of 258 conventionally managed major transportation infrastructure projects carried out over 75 years in 20 countries across five continents found widespread cost overruns:
One example of the studies just referred to, is that in which Flyvbjerg, Holm & Buhl examined 258 transportation infrastructure projects carried out over a seventy-year period across twenty countries and five continents, including Europe and North America. Of this number, there were fifty-eight rail projects, thirty-three fixed-link (i.e. tunnels and bridges) projects, and 167 road projects. With the notable exception of the Channel Tunnel, “the overwhelming majority” of these projects had been “developed using conventional approaches to public procurement.”
Jatto also observed that those findings were not limited to transportation projects:
Significantly, Flyvbjerg, Holm & Buhl observed that cost underestimation is not limited to transportation infrastructure projects and occurs in other types of infrastructure projects as well. They “reviewed cost data for several hundred other projects including power plants, dams, water distribution, oil and gas extraction, information technology systems, aerospace systems and weapons systems.” Notable among these other types of infrastructure projects were the “Sydney Opera House, with actual costs approximately fifteen times higher than those projected, and the Concorde supersonic airplane, with a cost twelve times higher than predicted.” Their analysis of the data led to the conclusion that “other types of projects are at least as, if not more, prone to cost underestimation as are transportation infrastructure projects.”
Jatto referred to a second extensive analysis, the Mott Macdonald study, which also found the prevalence of the optimism bias in conventionally run major procurement projects, but not in P3s:
The Mott MacDonald study observed that in the case of the thirty-nine conventionally procured projects, actual capital expenditure exceeded estimates by an average of 47 per cent. For those same projects, the duration between contract award and benefit delivery (works duration) exceeded estimated time by 17 per cent. By contrast, optimism bias levels were significantly less for the eleven PFI/PPP projects — 1 per cent for capital expenditure and minus 1 per cent for works duration.
Turning to Canada, Jatto referenced a Conference Board of Canada study of 55 P3 infrastructure projects initiated between June 2004 and November 2009 in Alberta, British Columbia, Ontario, and Quebec. These projects showed very low rates of cost overruns or delays:
All of the projects examined proceeded according to budget, even where there were contract variations and time delays, resulting in cost certainty and ultimately guaranteeing the realization of the cost savings indicated for P3s in the first instance through the forward-looking VfM estimates…[F]urthermore, out of the nineteen projects that had reached their substantial completion dates by November 2009, and which could thus be assessed for time certainty in the Conference Board report, only three experienced delays.
However, despite these positive findings, concerns over due process in P3 projects have drawn considerable international attention. For example, in its February 2013 report entitled Inquiry into the Government’s decision to negotiate with SkyCity Entertainment Group Limited for an international convention centre, New Zealand’s Auditor General criticized the decision-making process that led to the government’s contract award decision for the construction of a conference centre.
While the Auditor General found “no evidence to suggest that the final decision to negotiate with SkyCity was influenced by any inappropriate considerations”, it did find deficiencies in the advice that the Ministry of Economic Development provided to decision-makers and in the decision-making process conducted by government officials and Ministers. More specifically, the Auditor General found that the “quality of support that was provided fell short of what we would have expected from the lead government agency on commercial and procurement matters.” The report also found that the government’s decision to “explore the market through a formal and competitive process with a request for expressions of interest” was “poorly planned and executed”, and that “insufficient attention was given to planning and management of the process as a whole, so that risks were not adequately addressed and managed.”
While the report noted that “financially constrained governments are looking for new and creative ways to collaborate with the private sector to achieve their goals” and that “more initiatives that test the boundaries of established ways of working – including established procurement procedures” are inevitable, it concluded that “the underlying principles [of due process] still need to be respected.” The reservations expressed by the Auditor General echoed similar concerns raised in other P3 project audits.
