Partnerships give communities new freedom to make choices about public investment dollars. One of the most important benefits partnerships deliver is the transfer of risk: whether cost-increases or environmental compliance, a well-structured partnership agreement transfers risks to the private-sector operator, and away from the tax-base.
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The efficiency of a project is the result of the business processes practiced by a project manager, and is not inherent in the nature of the organization’s ownership.
Ontario’s Expert Panel on Water and Wastewater Water, commissioned by the Ontario Government in response to the tragedy at Walkerton, found that “Whether the assets are publicly or privately owned, it is the details of management and operations that dictate excellence with respect to public health, environment quality, and cost containment.”
For communities entering into partnerships with privately-owned operator, it is important to select an operator with a proven history of performance.
In Edmonton, for example, EPCOR has entered its second five-year performance-based rate (PBR) regulation. The PBR requires the company to meet specific standards for quality, reliability, service, and environmental and safety performance. The City also limited potential rate increases, placing the onus on the operator to efficiently deliver a quality service.
EPCOR has consistently delivered to the City’s performance standards. For example, water main breaks are now at their lowest level since the 1960s, and distribution system water loss is less than one-half the national average. Customers have benefited from rate increases that totaled only 8.6% over five years. Nearby Calgary residents, whose water is provided by a traditional public utility, saw water rates increase 25% during the same five-year period.
Successful partnership agreements usually begin with a competitive RFP process. While sole source contract negotiation can be suitable for small projects, or projects where there are significant time constraints, a competitive process helps assure the public-sector partner that the private service provider is delivering the right product at an appropriate price.
In successful P3s, the private provider operates efficiently, avoiding duplication, waste, cost overruns and project delays. These benefits can be passed onto the public partner through lower costs and more frequent ‘on time and on budget’ project delivery.
Partnership arrangements encourage the analysis of a project’s life-cycle costs, detailing the capital costs of building and constructing an asset, the operation of the facility, major upgrades and maintenance required in the future and decommissioning or disposing the asset at the end of its useful life.
The life-cycle cost analysis provides a more detailed picture of the entire project costs and can identify innovative potential savings that may not be found by sourcing out separate tasks through traditional tendering arrangements. These life-cycle cost savings create two benefits for governments and taxpayers:
- the savings can be used to increase the quality or quantity of the service without increasing the cost to taxpayers, and/or
- the savings can be flowed-through to taxpayers in the form of reduced costs.
The interest rates available to governments are typically lower than those available to a private enterprise because government’s power to raise revenue through taxes lowers the risk to lenders. The flipside of this is that when governments borrow to finance projects, their taxpayers become liable for the real financial risks of cost overruns or project delays.
The best measure of a project’s true cost to taxpayers, then, is not simply the cost of financing (which includes both the interest rate charged for debt, and the return on equity), but the ‘risk adjusted’ cost.
In a well-structured public-private partnership, the slightly higher financing cost reflects a risk premium – in return for this premium the private sector takes on the risk for construction, overruns, operational downtime and capital improvements that would otherwise be borne by the government’s reserves.
By transferring risk to the private sector, governments and taxpayers:
- Manage their true ‘risk adjusted’ costs;
- Gain greater financial certainty about the cost of service;
- Become better able to plan how taxpayer dollars should be allocated to other public initiatives.
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Systems that are operated by third-parties – whether through performance-based, or partnership-based contracts – typically involve explicit performance standards, enforcement of noncompliance, and operators who are motivated to perform.
Third-party operators are held accountable for performance both by the legal structure, their shareholders, and the regulator’s focus on operator accountability.
In “A Study of Best Practices in the Water and Wastewater Sector,” prepared for Ontario’s SuperBuild Corporation, the author’s found that “Private sector involvement in, and alternative forms of governance of, water and wastewater utilities, can enhance utilities’ accountability to stakeholders and to public policy objectives in general. A key element of that accountability is the separation of operations and the regulation of operations, which can help ensure better enforcement compared to self-regulation... [A] better focus of inquiry lies in ‘accountability’ as opposed to ‘control.’”
A transition to third-party operation can lead to more demanding and effective regulation, as the government specifies the utility’s performance standards, sets out penalties and rewards for performance, and separates the conflicting duties of management and regulation.