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Navigating P3s
How to fly right

by JoAnne Sommers

Every day, thousands of people fly comfortably and uneventfully through Canadian airspace. Many of them don't realize that the systems that guide their aircraft are provided through a public-private partnership, or P3 - an arrangement still a mystery to many.

Canada is one of the few countries in the world with a privately owned, operated and financed air navigation service, having arranged for NAV CANADA to be responsible for it since 1996. The federal government's agreement with NAV CANADA, a private, non-share capital corporation, is an example of a P3 at its best.

NAV CANADA's board of directors includes representatives of the aviation industry, the federal government and the unions as well as the company itself, ensuring broad input into how the system is run and what fees are charged. Transport Canada retains complete authority over regulating safety, and a formal safety management structure with public reporting has been instituted. The business, technological and administrative risks have all been transferred to NAV CANADA.

P3s can take many forms, says Jane Peatch, executive director of the Canadian Council for Public-Private Partnerships, a non-profit, non-partisan organization representing both public and private sector groups, created to develop awareness of the benefits of cooperative effort between public and private sectors.

There are powerful reasons for governments at all levels to consider demystifying and implementing P3s. Cost savings is one, says Steve Hollett, assistant deputy minister with the business partnerships division of the BC Ministry of Finance.

"Properly structured, a P3 can be less expensive than the government-run alternative," he says. "Despite the argument that government can borrow more cheaply than the private sector, financing is only one component. You have to consider the total costs, including capital and operating cost, over the life of the project. The private sector can create a tight structure that balances those costs over time."

Lucien Bradet, director general with the Services Industries Branch of Industry Canada, believes that the private sector can often bring a higher level of quality and accountability to such projects. "Companies are on a short leash when they do public-sector projects," says Bradet. "High standards must be maintained if they hope to do future projects." And in the area of tangible services, such as water clean-up and waste management, he says private sector firms usually do a better job than their public sector counterparts. As well, private sector firms can be held accountable if they fail to meet their contractual obligations.

"It's up to government to protect itself," says Hollett. "By structuring concession agreements involving appropriate incentives and penalties, they can protect the public interest and ensure that if a breach is sufficiently serious, the project can be cancelled without paying compensation."

According to Steve Hollett, the private sector generally has greater expertise in managing and operating multi-billion dollar projects. "They're also more likely to be on top of industry best practices and, because they're profit-driven, they must ensure efficiency and effectiveness," he says. "Private firms are not encumbered by multiple conflicting objectives, as governments often are, making it easier for them to get things done."

Moreover, many P3s, such as NAV CANADA and Ontario's Highway 407 (the world's first electronic toll road) require outside insurers who provide another level of oversight. Both projects have produced safety records comparable with any in the world.

But despite their advantages, Canada still boasts relatively few P3s. Canadians are largely unfamiliar with the idea of essential services being provided by the private sector. In many cases that lack of familiarity creates a certain degree of discomfort.

Other jurisdictions, notably the UK, Australia, New Zealand and the US, utilize them far more often. In fact, in the UK, the government has ordered that all new infrastructure spending must take the P3 route unless a compelling case can be made against it.

In Canada, however, there isn't universal agreement that the private sector is more efficient, says Bradet. "To some extent, you're also dealing with a bureaucracy that doesn't want to let go. It's a matter of vested interests hanging on."

Opposition from labor unions, particularly the powerful Canadian Union of Public Employees, is another stumbling block. "There's concern that people who were traditionally covered by collective bargaining agreements will be replaced by cheaper, non-union labour. But you can address these concerns through concession agreements," Hollett says. "Deals can be structured to guarantee the terms of existing collective agreements."

When NAV CANADA was created, existing labour contracts were honoured, collective bargaining was reinstated and most of the new contracts subsequently signed involved higher wages.

And when British Columbia launched BC OnLine, an online data access service, the province negotiated a memo of understanding whereby union jobs were protected. Workers now enjoy better protection than if they were working for the provincial government, Hollett says. But union concerns should be dealt with respectfully, he adds. "Our experience is that if you work through the issues with the unions as a key partner you can usually reach an acceptable agreement."

Not all unions oppose P3s. The Hamilton-based Laborers' International Union of North America is active in several such projects including the construction of nursing homes and affordable housing units throughout Ontario.

The need for such infrastructure projects, combined with growing public awareness of the need for government fiscal responsibility, seems to dictate that P3s will become far more common in the future. "There is a growing appetite for them," says Bradet. "Governments are recognizing that they won't be able to meet the demand for new public infrastructure without private sector investment."

And there are indications that Canada is ready to embrace the P3 model. Through the SuperBuild initiative, Ontario has committed $10 billion over five years to meet the province's infrastructure challenges. The program's goal is to secure at least $10 billion more in private sector funding through techniques such as leasing arrangements, buyback and public-private partnerships. SuperBuild's priorities include the expansion and renewal of Ontario's transportation, post-secondary education and health care sectors. To date, the province has spent more than $1 billion to expand the research and teaching capacity of Ontario's colleges and universities. The post-secondary institutions have committed $800 million to the project. SuperBuild is now looking to the private sector to build and operate the eastern extension of Highway 407.

The most important ingredient for a successful P3, says Jane Peatch, "is mutual respect. Unlike public servants, private companies report to boards, which oversee their financial viability. On the other hand, the public service is responsible for ensuring the public interest."

Steve Hollett agrees, pointing out that in early partnership agreements, problems sometimes arose because governments wanted to shift all the risk to the private sector. "That approach simply doesn't work. You must assess the risk factors and share them appropriately. Whoever can best control and mitigate the risk should assume it. Make sure you structure deals properly and that those who manage and operate them understand their rights and responsibilities."

Clarity and fairness are also crucial, says Bradet. "P3s have high start-up costs and the bidding process can be extremely expensive. Transparency is essential to demonstrate that the process is fair." And a reasonable degree of political certainty is also vital. "A lot of companies are afraid that a council or government will change its mind about the structure of a P3 in mid-stream. That can be disastrous."

So can going to market too quickly, he says. "Politicians sometimes go on fishing expeditions, issuing a Request for Proposals before knowing what they want. Private companies hate that." Instead, says Bradet, governments need a well thought-out plan, accompanied by a solid business case that interests businesses enough to generate strong competition.

Peatch says it's important to plan projects that can be completed within a government's term of office. "P3s may be vulnerable when a government has to go through an election cycle," she explains, citing the example of Halifax's City Council, which undertook the construction of four wastewater treatment plants in 1998. Before the project was completed the city held a municipal election in which the mayor lost to a council member pledged to terminate the program. "The upshot was that the project was delayed."

Similarly, last year the province of Nova Scotia abandoned a P3 project, involving the construction of 33 schools. When the Liberal government was defeated in 1999, the new government decided to kill the $350 million project, calling it a failure. Nova Scotia's auditor general had previously criticized the project, citing a lack of benchmarks and the difficulty of measuring its results.

Notwithstanding those criticisms, the province got 17 schools faster and more cheaply than if the government had done it themselves, says Peatch. She believes that a clear understanding of the goals and objectives of any P3 is essential to its success. "It's important to determine the end goal, then let the private sector figure out how to get there. You have to be flexible about the process."

P3s work best when a project has a clear, well-defined output, says Steve Hollett. For that reason, qualitative projects, such as childcare and adoption services are less well suited to P3s, he notes.

In the final analysis the success or failure of P3s often hinges on communication. "You must communicate early and often with all parties," says Bradet. "And you need individual communications strategies for the public, the private sector partner, union employees, politicians and bureaucrats."

Education and information are essential if P3s are to keep growing in Canada, says Hollett "The more you can do to answer people's questions and allay their concerns, the better your chances of success."


JoAnne Sommers is Toronto-based freelance journalist and editor whose work has appeared in the Globe and Mail, Report on Business, Onvia.ca and Investment Life Magazine, among others.


 

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