The Economics of Public-Private Partnerships (P3s)

1. The Economics of Public-Private Partnerships (P3s) Based on notes provided by J.-E. de Bettignies and T. Ross Sauder School of Business UBC P3 Project Economics of Public-Private Partnerships

2. Abbotsford Regional Hospital and Cancer Center • What is the purpose of the facility? • What will the private group, AHA, do? • What expertise does AHA bring to the project? • How will performance be monitored? How long is the contract? • A private partner, ABM, will finance the product. How will they be compensated for financing the facility? Who retains ownership? • What incentives are there for AHA to meet construction costs and standards for facility operation and maintenance? What incentives are there for exceeded expectations? • What are the major components of the service payments to AHA? What are total payments in NPV terms? • How are risks shared? Why? Danielle, Dan

3. Providing Citizens with Goods and Services Familiar Mechanisms: 1. private markets (most goods) 2. (pure) public provision (e.g. primary and secondary education, defense) 3. regulated private provision (e.g. local telephone service) Economics of Public-Private Partnerships

4. When does the public sector step in? • Externalities and public goods • Fairness and social justice (to assure adequate consumption for everyone) • To control monopoly (natural monopoly) • Other reasons (e.g. imperfect information) Economics of Public-Private Partnerships

5. Perceived problems with traditional public provision: • High and rising costs • Weaker “on-time” performance • Less innovative Economics of Public-Private Partnerships

6. Potential key advantages of private sector vis-à-vis public sector: • Profit motive provides incentives to • control costs • innovate • Greater flexibility • Expertise • Economies of scale/scope • Facilitating user-pay Economics of Public-Private Partnerships

7. “NEW” Initiatives: Alternative Service Delivery (ASD) • Contracting-out (C-O) (e.g. refuse collection, IT services) • Public-Private Partnerships (P3s) (e.g. roads, schools, prisons) • Privatization Economics of Public-Private Partnerships

8. Definitions: Key Elements • Sharing of risk and reward between public and private partners • Sharing of authority for decision-making • On-going relationships, not spot-market Economics of Public-Private Partnerships

9. How “New” is this? • Private sector involvement in provision of public services is not new – e.g. the private sector has frequently provided: • Basic supplies (e.g. paper, pens, desks) • Equipment (computers, medical, automobiles) • Construction services • Consulting services Economics of Public-Private Partnerships

10. What is New? • The increased scope of the private sector’s participation – particularly in: 1. broader scope of activities (finance, design, construction, operations, and maintenance) 2. financing, ownership of assets Economics of Public-Private Partnerships

11. Who are the private partners? They can be: • Private, for-profit firms • Consortia of private, for-profit firms • Private, not-for-profit firms Economics of Public-Private Partnerships

12. Roads Schools Hospitals Prisons Bridges Water treatment Property management Recreational facilities Information tech. Social services Common Areas of Application Economics of Public-Private Partnerships

13. Incinerator Biosolids processing Recycling programs Water treatment Bridge Building revitalization Harbour revitalization Electric utility Parking management Public transit Recreation centres Business park Canadian Municipal P3s – Examples(some are proposals) Economics of Public-Private Partnerships

14. Current BC Projects These are at various stages from complete (or nearly) to proposal stages: Economics of Public-Private Partnerships

15. Abbotsford Hospital Economics of Public-Private Partnerships

16. Academic Ambulatory Care Centre (Vancouver) Economics of Public-Private Partnerships

17. Britannia Mine Water Treatment Plant Economics of Public-Private Partnerships

18. Kicking Horse Canyon Project (Phase 2)(upgrades to Trans Canada Highway) Economics of Public-Private Partnerships

19. Golden Ears Bridge ( Fraser River Crossing in Vancouver area) Economics of Public-Private Partnerships

20. Wm. Bennett Bridge (Kelowna) Economics of Public-Private Partnerships

21. Northern Sport Centre (at UNBC) Economics of Public-Private Partnerships

22. Canada Line Economics of Public-Private Partnerships

23. Sea-to-Sky Highway Improvements Economics of Public-Private Partnerships

24. Sierra Yoyo Desan Resource Road Upgrade Economics of Public-Private Partnerships

25. Whistler Wastewater Treatment Plant Economics of Public-Private Partnerships

26. Other “Reasons” for P3s • Labour union issues – contracting out work of highly paid public sector workers • Keeping debt off the gov’t balance sheet • Gifts to the friends of the gov’t • Deflecting blame for low levels of services Opponents of P3s typically suspect that these are the real motives. Economics of Public-Private Partnerships

27. Providing Public Services – The Various Tasks 1. Define and design the project 2. Finance the project 3. Construction (build the project) 4. Operation & maintenance of the project 5. Pay for the service Economics of Public-Private Partnerships

28. On Assigning Tasks: General Questions • Are there complementarities between the tasks such that they should be managed by same party? • Who is most efficient at the task? • special knowledge • economies of scale or scope? • Can the right incentives be put in place to get optimum performance? (contract design issues) • How should risks be allocated? • Can there be strong competition between potential private sector partners? Economics of Public-Private Partnerships

29. Complementarities -- Examples Benefits from coordinated decision-making with respect to: • Design & Construction • Construction & Operation • Financing & Construction Economics of Public-Private Partnerships

30. Risk and Incentives • Managing risk is really about managing incentives – the party bearing the risk has an incentive to reduce those risks. • This is done by subjecting the party most able to control a risk to the costs associated with that risk. • Of course, parties must be compensated for incurring risk but if they can limit the risk, then efficiency increases. Economics of Public-Private Partnerships

31. Allocating Risks – A Key Feature of P3s • Construction risk (higher than expected costs) • Operating risk (higher operating costs than expected) • Revenue risk (lower demand than anticipated) • Force majeure risk (war, natural disaster) • Regulatory/political risk (changes in laws) -Which risks are better borne by government? Economics of Public-Private Partnerships

32. Good and bad of the profit incentive • Good: • incentive to reduce costs (increase production efficiency) • In a competitive environment, incentive to improve services to increase revenue • Bad: • if revenue stream is fixed, little incentive to provide high quality services • Thus, P3s involve an elaborate system of monitoring, rewards and penalties Economics of Public-Private Partnerships

33. Monitoring and penalties at AHCC • Performance standard with respect to helpdesk, food services, housekeeping, laundry, parking, etc. • Monitoring: Every 5 years, costs of services to be benchmarked and prices adjusted accordingly • Rewards: Payment deductions. Per day deductions for non-operating facilities are • $180 washroom • $900 bedroom • $2250 MRI procedure room Economics of Public-Private Partnerships

34. Role of Competition • Can lower prices taxpayers or users must pay (allocative efficiency) • Provides further incentives for cost minimization (productive efficiency) • Provides further incentives for innovation (dynamic efficiency) P3s are ex-ante competitive (in bidding stage) but may face limited competition later. Sometimes ex-ante competition is limited. Economics of Public-Private Partnerships