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Odour Update

What are private public partnerships (P3s)?
Private public partnerships (P3s) are an approach for procuring public infrastructure where the contractor assumes a major share of the responsibility for design, construction, financing, operations and performance over the long term.

Why would a municipality choose a P3 model for an infrastructure project?
Traditionally municipalities have financed, owned, operated and maintained infrastructure assets, where one contractor designs the required infrastructure and another contractor builds it. Municipalities worldwide are looking at alternative procurement methods that involve assigning greater responsibility and risk to the contractor.

The reasons why are highly specific to each project, and can include:

  • Long term cost certainty and predictability,
  • Innovate solutions,
  • Need for new or different resources to manage more complex and/ or emerging technologies (such as in sewage treatment plants), and
  • Desire to protect taxpayers from project risks such as cost overruns, delays and problems with performance.

The unique challenges and opportunities of each project are assessed in the context of the municipality’s resources and constraints to select an appropriate project delivery model, be it a P3, or an alternative model.

What is the P3 Canada Fund?
The P3 Canada Fund was created by the Federal Government with the goal of improving the delivery of public infrastructure by increasing the effective use of P3s. The P3 Canada Fund is a merit-based program that offers non-repayable funding for eligible P3 infrastructure projects. The City was approved for $58.5 million to proceed with the P3 Council approved in February 2013.

How do P3s impact capital financing for municipalities?
Financing costs will be higher with a P3 because the City will pay a premium for the financing costs and the risk assumed by the contractor.  Additional financing costs are offset by savings and efficiencies in construction, the transfer of risk to the private sector and oversight by third party financiers.  The Design-Build-Finance-Operate-Maintain model includes a 25 per cent grant (up to $58.5 million) towards the capital cost from the federal government through P3 Canada.

The sewage treatment plant upgrade is expensive and complex. Isn’t it risky to use a P3?
The complexity of the upgrade is one of the aspects that that make a P3 attractive.  A P3 would provide the City with a fixed price for design, construction and long-term operation.

If the plant is upgraded using a P3 model, the contract between the City and the contractor will include performance requirements for the contractor to meet effluent standards. Financial penalties are built in to compel the contractor to meet all requirements and specifications.  In a Design-Build-Finance-Operate-Maintain model the financiers have a vested interest to see that the contractor performs according to the contract. Performance payments can be withheld if the contractor fails to meet the specified standards. In extreme cases the contracts could be terminated.

Does pursuing a P3 mean the plant will become privately owned?
Using a P3, Design-Build-Finance-Operate-Maintain approach to deliver this project does not change the ownership of the plant. Ownership of the upgraded sewage treatment plant remains with the City, and the City will continue to set rates.

Are we seeing a pattern with the City privatizing City services and/or our water? (Does this mean our City is for sale?)
Ownership of the upgraded sewage treatment plant remains with the City. Any future P3 projects will also ensure ownership of the asset remains with the City.

Why is a Design-Build-Finance-Operate-Maintain P3 the recommended option?
The recommended option (Design-Build-Finance-Operate-Maintain) is the most cost effective option and is more attractive because of cost certainty and reduced risk to the City. The Design-Build-Finance-Operate-Maintain model is approved for 25 per cent funding from the federal government for construction costs.

This model also has the power to attract proponents to the bid process whose business is building and operating sewage treatment plants.

Has the City’s investment in other initiatives forced its hand to consider a P3?
No. We introduced a P3 policy last year that gave us another tool in the procurement toolkit, especially for large capital projects.  We are considering a P3 because it makes sense for this specific project. It is approved for 25 per cent funding from the federal government.

This is a big project and it made sense for us to look at a number of options on how best to deliver it.  This model also has the power to attract proponents to the bid process whose business is building and operating sewage treatment plants.

Rather than outsourcing to ensure appropriate operations and maintenance of the plant, why not invest in improved asset management?
The recommended option (Design-Build-Finance-Operate-Maintain) is the most cost effective option and is more attractive because of cost certainty and reduced risk to the City. The Design-Build-Finance-Operate-Maintain model is approved for 25 per cent funding for construction costs.

This model also has the power to attract proponents to the bid process whose business is building and operating sewage treatment plants.

How will a private company stand to benefit from a P3 contract?
Companies will bid on the contract in search of profit on design, construction, and operation, depending on their specialty.

A private company has to make a profit – doesn’t that make the service more expensive?

A private company has to make a profit but this is not necessarily achieved by charging more. Companies that specialize in building and operating sewage treatment plants profit by working more efficiently and using economies of scale based on having a large number of similar operations over which to spread costs.  

The length of term of the proposed management agreement is very long. Is this cause for concern?
The length of the term is one of the facets that ensure the project will receive bids from the highest calibre proponents. The length of the term helps taxpayers by spreading debt over a longer period. It also provides a long-term warranty effect.

How will potential cost overruns be handled?
The P3 approach is much more cost-certain for the City. The contractor will be responsible for any cost overruns that exceed the bid price.

Won’t a public-private partnership be subject to delays?
The contractor will be required to meet the timelines for construction set in the RFP. If they do not meet the timelines, they would be responsible for any costs overruns and would be financially penalized by the City. The record of on-time construction completion for P3s in Canada is exemplary because the contractor is typically not paid until construction is complete.

Won’t a private contractor first serve the interests of itself and its people rather than the public?
A private entity will always look to protect its interests, as will the City. A negotiated agreement will ensure that all parties’ interests are appropriately protected. If the plant is upgraded using a P3 model, the contract between the City and the contractor will include performance requirements for the contractor to meet effluent standards. Financial penalties are built in to compel the contractor to meet all requirements and specifications.  In a Design-Build-Finance-Operate-Maintain model the financiers have a vested interest to see that the contractor performs according to the contract. Performance payments can be withheld if the contractor fails to meet the specified standards. In extreme cases the contracts could be terminated.

How will the City be able to tackle a dispute with an international corporation?
The City is accustomed to managing relationships with contractors at every level and will ensure that requirements are clearly outlined in the contract for dispute resolution and safeguards are built into contracts. Any contract will be governed by the laws of Saskatchewan and Canada and will be subject to our courts.

What impact could P3s have on the City’s infrastructure deficit?

If the plant is upgraded using a P3 model, the contract between the City and the contractor will include performance requirements for the contractor to meet maintenance standards. Financial penalties are built in to compel the contractor to meet all requirements and specifications.  In a Design-Build-Finance-Operate-Maintain model the financiers have a vested interest to see that the contractor performs according to the contract. Performance payments can be withheld if the contractor fails to meet the specified standards. In extreme cases the contracts could be terminated.

The shift from short term to long term thinking will optimize infrastructure investment and, over time, reduce the City’s infrastructure deficit.

Previous P3 projects in Canada have been mired with issues. How do we know if we pursue a P3 model that we won’t run into the same problems?
Each city has had its own unique opportunities and challenges. It would not be accurate to compare our circumstances with those in other jurisdictions.

The Canadian market now has approximately 181 P3 projects with a significant number being specifically sewage treatment plants that include design, build, operations and maintenance.

What about what happened with the P3 in Abbottsford? Will we experience the same setbacks?
The Abbottsford project was about drinking water.  The City of Regina is only looking into a P3 for its sewage treatment plant.

A sewage operation and maintenance contract in Hamilton was cancelled. In Hamilton, the contractor was hired without a public procurement process. The City will procure its contractor through a public procurement process regardless of the procurement model selected.

Other Canadian municipalities have their own unique opportunities and challenges and so it would be inaccurate to compare the circumstances of one centre to another. The City has a responsibility to pursue whatever option promises to deliver the best value to all residents.