PRIVATE-PUBLIC PARTNERSHIPS: PANACEA OR PANDORA’S BOX?

PRIVATE-PUBLIC PARTNERSHIPS: PANACEA OR PANDORA’S BOX?

MAY 2004 TD ECONOMICS REPORT, “MIND THE GAP” Four guiding principles to eliminating the infrastructure gap • A greater tilt towards user-pay model • Giving cities the right tools for the job • A bigger role for the federal government • More fully engage the private sector

P3S/AFP FORM PART OF THE SOLUTION (NOTABLY DBFO)

POTENTIAL BENEFITS OF P3s/AFP Taxpayer benefits: • Frees up government to do what it does best • Improved care of public assets • Maintain service quality through innovation • Shifting risk from taxpayers to private sector • Synergies from combining components of a capital project Private sector: • Access to long-term business investment opportunities • Develop niche that can be exported • Infrastructure investments well-suited to pension funds and other institutional investors.

PUBLIC CONCERNS HOLD BACK P3 DEVELOPMENT IN CANADA Following oft-repeated assertions either not valid or over-simplify the true picture: • P3s equal privatization • P3s are more costly than traditional procurement, especially cost of borrowing • P3s lead to lower levels of service • P3s are ways of government to avoid booking liabilities • Effective way to bust public-sector unions, lower pay

P3s NEED TO BE USED WITH CAUTION P3s can be risky: • Private-sector delivery not always more efficient • Taxpayer can be left worse off: • Complex transactions that can be long-term in nature • Contract must be well-structured with proper risk allocation • Transparency and accountability can be eroded • Proper monitoring of service quality required • Ineffective risk assessment and project analysis

CREATE WINNING CONDITIONS FOR P3S • Develop a robust P3 model • Start with projects more amenable to P3s • Federal government involvement a plus

NEEDED A ROBUST MODEL FOR P3s • A solid P3 model main reason why UK model has achieved success • Some models in Canada hold promise • B.C. first out of the gate • Ontario, Alberta and Quebec also moving forward

BC’S MODEL WORTH LOOKING AT • Partnerships B.C a centre of expertise • Adopted model to help evaluate risks (CAMF) • Focus on transparency and accountability • BC government has demonstrated commitment BC has modeled P3 program after UK

BC’S MODEL WORTH LOOKING AT • Over past year, seven deals reached financial close (i.e., S2S, RAV among others) • Several others currently under consideration in several sectors • Recipient of a number of P3 awards (2004 Project Finance Magazine) • ABN Amro and Macquarie Bank set up offices in Vancouver Success achieved to date:

ONTARIO IS FOLLOWING SUIT • Somewhat different approach than B.C • Infrastructure Ontario established • Major focus on health care • Forging ahead with more than 30 AFP projects Ontario moving forward with AFP program

BARRIERS IN THE WAY OF P3S EVEN GREATER AT THE MUNICIPAL LEVEL • P3s have been used successfully in a number of jurisdictions (i.e., Hamilton, Halifax, Canmore, Port Moody, Edmonton, etc.) • Still, a number of major impediments hold back their use by local governments: • Governance Issues • Legal Restrictions • Few champions • Planning deficiencies • Lack of resources • Some high-profile P3 disasters

WISE STRATEGY TO FOCUS ON PROJECTS MORE AMENABLE TO P3S • Large in scale and capital intensive ($100+ million) • Require technical challenges, innovation or capabilities which exceed that inside government • Have an identifiable revenue stream and measurable results • Try hand first with projects that are more publicly palatable

FEDERAL GOVERNMENT NEEDS TO STEP UP TO THE PLATE • In Canada, emerging provincial models raise risk of a fragmented P3 market. • Better aligning provincial procedures would increase certainty and lead to lower bid costs and a better functioning market • Learn from experience in the UK and Australia • Federal government needs to become a national “champion” for P3s • First, Ottawa must undertake P3s in its own back yard (i.e., learn by doing).

PRIVATE SECTOR NEEDS TO CLIMB LEARNING CURVE • Interest to date dominated by European and international players • Canadian capital markets lack depth • Canadian banks getting more involved in secondary roles but still do not typically lend on a long-term basis

TD Economics www.td.com/economics

PRIVATE-PUBLIC PARTNERSHIPS: PANACEA OR PANDORA’S BOX?