China is sending out delegations this month to learn about the successes and failures of public-private partnerships (PPPs). Last week, the Asia Pacific Foundation of Canada hosted a roundtable discussion on behalf of the Chinese delegation sent to learn about Canada's PPP model.
PPP models are a very of-the-moment issue in China, especially as they pertain to infrastructure. In March, China established the US$100-billion Asian Infrastructure Investment Bank (AIIB) and earlier in the year announced its $40-billion Silk Road infrastructure fund. Public-private partnerships can help fulfill the urgent infrastructure needs of China and its neighbouring economies. China can learn from the Canadian PPP model how to share decisions and risks appropriately with private sector firms in order to provide goods and services to the public that are high in quality and affordable in cost.
In Canada, the use of various models of PPPs to deliver public services has spread across the country. These projects—typically led by provincial governments—are now common in several provinces, particularly in the areas of roads, public transit, health care and for justice and corrections facilities. The objective of a properly structured PPP is to harness the efficiency and innovativeness of the private sector, through the forces of competition, to provide public services of a desired quality at the lowest possible cost to taxpayers or users. Since the 1990s there have been a little more than 100 completed and operational PPP projects in Canada, and there are about another 100 under construction or in procurement. Over this period there has been a lot of learning about how to deliver effective PPP projects in Canada, and something of a Canadian PPP model is emerging – one that is respected internationally. Let me explain some of the elements of this model.
First, there is flexibility in terms of what services the private partner provides. While the "all-in" DBFOM (design, build, finance, operate and maintain) model is common, where it does not make economic sense slimmer models such as "design, build, finance, maintain"; "design, build, finance" and even "build, finance" have been used. In a related way, even in projects that do include a private financing component, there is a recognition that the possibly more expensive private financing does not always need to cover the whole project. In many cases a much smaller fraction of private financing will still provide strong incentives to the private partner for on-time and efficient project delivery, but at a lower total financing cost.
Second, there have been significant investments by provinces in creating the talent teams needed to implement PPP programs. These are complicated arrangements that require a lot of advanced planning by skilled people and the provinces have recognized this. Many have moved to create specialized agencies like Partnerships BC to oversee PPP activities. There have also been efforts by these agencies to standardize processes to create more certainty for the market and reduce transaction costs for all parties.
Third, while many motives (good and bad) to undertake PPPs may have been considered in the early years, the focus now is clearly on undertaking projects using the PPP model in order to maximize the value for money delivered to the province's taxpayers and facility users. This keeps us from undertaking PPPs for poor reasons such as because we see them as a source of "free money" from the private sector (they are not) or because we see them as a chance to privatize a service and remove it from the government's control completely (they are not that either!).
Fourth, more recent PPPs in Canada have not placed as much reliance on shifting "demand risk" to the private partners – these are the risks associated with uncertainty regarding how much demand there will be for the new infrastructure by fee- or toll-paying users. Other jurisdictions that have been more aggressive in shifting demand risk have seen operator failures and significant delays and disruptions in the flow of services to users when demand is less than anticipated. Shifting demand risk is often expensive with little offsetting benefit if the private partners have little they can to do manage that risk, that is if there is little they can do to influence demand upward or downward.
Even though China and Canada have significantly different legal, political and citizenry relationships the goals of a good PPP are the same: to create an accountable partnership with a private firm that leaves the government, the public and the contracted firm with a fair deal.
In October, the Canada-China Foreign Investment Promotion and Protection Agreement (FIPA) came into force, with such an agreement in place and Canada and China currently having a dialogue on what makes a good PPP now is the perfect time for Canada to showcase its history of successful PPPs and perhaps become a part of some of the fast developing infrastructure PPP relationships in China.
Thomas Ross is the UPS Foundation Professor of Regulation and Competition Policy at the Sauder School of Business at the University of B.C.