P3 progress report: Momentum building for water and wastewater partnerships

Elizabeth Brubaker

Recent months have seen several encouraging developments on the water and wastewater front.

■ Saint John, New Brunswick, has decided to seek a private partner to design, build, and finance a new water treatment plant and to operate and maintain it for 30 years. For a city that has endured more than its share of boil-water advisories, this is good news indeed.

In March, city council voted seven-to-one in favour of a public-private partnership (P3) for the project. Although the city has not revealed expected costs, the press has reported estimates of $220 million for the plant and accompanying infrastructure. According to PricewaterhouseCoopers, a plant built through a P3 will cost $3.2 million less than a purely public plant. Since funding from the federal and provincial governments is available for many P3s, the city’s (but not the taxpayers’) savings will likely be much greater – the mayor suggests they will exceed $85 million. Other anticipated benefits of a P3 include price certainty, a shorter and firmer construction schedule, and access to greater expertise and knowledge.

■ Regina, Saskatchewan, is planning to use a 30-year P3 to upgrade its aging sewage treatment plant. In February, city council voted unanimously to seek a private partner to design, build, finance, operate, and maintain the plant.

Like Saint John, Regina is driven in part by the promise of federal funding. The P3 Canada Fund will cover up to 25 percent of the construction costs of a project, which in this case are expected to total $224 million. The mayor explained to the press, “We have a crushing amount of infrastructure we have to replace, and any support we can get from a senior government to move this forward is what we have to do.”

The city acknowledges that financing costs will be higher under a P3, but expects private-sector efficiencies and economies of scale to help offset these costs. The city also stresses the value of transferring risks to a private partner, and the greater cost certainty that results.

But the benefits of a P3 aren’t just economic: The city expects better environmental performance from a private partner. Financial incentives will be built into the contract, the city explains, “to compel the contractor to meet all requirements and specifications.” It warns, “performance payments can be withheld if the contractor fails to meet the specified standards.”

■ The federal Standing Committee on Government Operations and Estimates released a report in March on the effectiveness of P3s in the delivery of public infrastructure. The report, Public-Private Partnerships: A Tool in the Tool Box, noted the growing interest in P3s among governments that need new infrastructure but face financial constraints. P3s can help such governments maximize value for money. They tend to generate innovative solutions that lower long-term costs. Equally important, they enable governments to transfer risks to the private sector.

The Standing Committee report summarized the advantages of P3s as follows: “P3s promote better upfront planning, more complete long-term planning, whole life-cycle cost optimization, enhanced monitoring during project management phases and appropriate risk sharing, while creating incentives for innovation and delivery of projects on time and on budget.” However, the report continued, “although projects under P3 arrangements can be of higher quality, be delivered more quickly, and use less financial resources than traditional procurement models, they also have limitations.” The report explained, “P3s are an important tool in the tool box, but like all tools, should only be used under the right circumstances. The value of P3s is best leveraged in large and complex projects where innovation can reduce lifetime costs and deliver better infrastructure.”

The report concluded with recommendations to improve P3 contracting. It stressed the need for a thorough value-for-money analysis, recommending that both the methodology and detailed and accurate calculations be readily available. More generally, it recommended “building transparency, monitoring and reporting mechanisms into P3 agreements.”

■ In February, PPP Canada released its Water / Wastewater Sector Study. The agency provides expertise, advice, and funding for communities that choose P3s for infrastructure development. Having received numerous applications for assistance with water and wastewater projects, it undertook the study to determine the suitability of P3s to projects of various sizes and types.

The study concluded that the comprehensive DBFOM model – in which a private partner designs, builds, finances, operates, and maintains the water or wastewater infrastructure – should be “readily applicable” to large projects. The model also “shows promise” for mid-sized projects, although private financing of such projects has not yet been tested. In contrast, the study found, the model may not suit small projects in remote locations – projects where the innovations and economies of scale associated with P3s may be less likely to bring significant savings.

The study noted that there exists a tremendous opportunity for P3s in Canada. Water and wastewater infrastructure requires substantial investment. A 2007 survey by the Federation of Canadian Municipalities estimated that $88 billion was needed for new and refurbished systems. But there are also potential impediments to using P3s, including resistance from municipal water departments that are oriented to maintaining purely public systems, and opposition from a public that is unfamiliar with P3s and misunderstands the way they work.

■ The Canadian public is not simply unfamiliar with P3s. More generally, it is unaware of the challenges facing municipal water and wastewater systems. This was a primary message in  RBC’s latest Canadian Water Attitudes Study. The study, released in March, revealed that the majority of Canadians show “little appreciation for the current state of affairs regarding water systems management” and “do not see a need for immediate investment in water treatment, delivery and storm water management systems.”

Only 57 percent of those surveyed were aware of the condition of their local water, sewage, and storm water systems. Nonetheless, large majorities expressed confidence in their systems – 84 percent gave their municipalities high marks for providing good quality drinking water, and 78 percent agreed that their water and storm water systems were in good condition and needed only minor regular investments for upkeep. Just 21 percent believed their systems were in poor condition and needed major investments immediately.

Although one might expect such complacency to go hand-in-hand with acceptance of our current public model of water management, a surprising number of those polled supported a private alternative. Forty-three percent supported having companies, rather than governments, owning and managing the water systems in their community. Support for private water systems was highest – at 48 percent – in mid-size towns and cities. The survey did not address P3s, which typically involve the private financing and management of publicly owned systems.

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