hscorp.ca Public-Private Partnerships
Public-Private Partnerships Given there is no designated government funding program for regeneration in Canada and there is less and less funding available for building social housing, public-private partnerships are emerging as a possible strategy to bridge the financial challenges and to foster creativity from a range of different players. Public-private partnerships are used in other countries to facilitate investment and stimulate the regeneration processes, however, in Canada it is an approach that is more common for a limited range of public infrastructure. The following is a brief primer on public-private partnerships. The focus is on partnerships that relate to the physical redevelopment process, rather than partnerships that lever social programming and related benefits. The objective of the primer is to provide you with an understanding about public-private partnerships, how they are conventionally used in Canada and elsewhere, and important things to consider before pursuing this strategy. 1
Why are Public-Private Partnerships of Interest for Regeneration? Public-private partnerships offer the possibility of developing a dynamic relationship that creates the platform for alternative financing strategies, that draws together diverse experience and players, and has the potential to achieve a range of objectives through the lens of shared interests and mutual benefits. What are Public-Private Partnerships? One way of defining public-private partnerships is to think of the approach as a spectrum of models that progressively engage the expertise or capital of the private sector. At one end, there is straight contracting out as an alternative to traditionally delivered public services. At the other end, there are arrangements that are publicly administered but within a framework that allows for private finance, design, building, operation and possibly temporary ownership of an asset. A general definition is provided by The Canadian Council for Public-Private Partnerships as follows: A cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards. However, for the purposes of understanding the role of public-private partnerships in relation to regeneration and social housing, it is more helpful to broaden the definition to reflect the participation of the non-profit sector and the dynamic between different levels of governments, social housing providers, and private developers. An alternative way of thinking about public-private partnerships is: A joint effort between the public and either the private for-profit or the private non-profit sector where two or more organizations agree to work together to achieve shared objectives that can take a number of different forms based on joint investment or resources, such as time, expertise, information, funding, development sites, materials; or it can be based on joint risk sharing and benefit sharing; or it can be based on shared responsibility and authority. 2
What are the Advantages of Taking a Public-Private Partnership Approach? For the public and non-profit sector partnering with a private sector organization can bring a wealth of experience in construction, design, real estate finance, marketing, property management, and risk management. In addition to these benefits, partnering with the private sector can offer well established networks on which to leverage additional fundraising resources and economies based on long-term relationships with suppliers and contractors. For the private sector, reasons for involvement may include generating financial returns, developing a competitive edge and growing their experience from an innovative project, accessing funding sources that would otherwise not be available without a non-profit partner, enhancing their company s reputation by demonstrating social responsibility, which can also have positive effects on staff recruitment and retention. Are Public-Private Partnerships Widely Used For Delivering Social Housing and Regeneration in Canada? True shared-risk partnerships between the public and private sector are more the exception than the rule in Canada in the delivery of social housing and regeneration. It is more conventional that the public sector acts as the provider of funding and facilitator of the process through various incentives that can be implemented through the planning and development process; such as relief from development levies, tax rebates, or the provision of land. Whereas, other sectors in Canada do utilize a public-private partnership approach to deliver hospitals, highways, and schools, for example. The underlying concept for P3s is that they are an alternative way for the public sector to finance projects, build infrastructure, and deliver services. However, social housing, and regeneration more generally, does not currently have a policy framework that includes housing development and community building. While that means that regeneration partnerships can be uniquely created to respond to the particular regeneration challenge, it also means that the relationships, instruments, and contracts have to be developed on a project-by-project basis. 3
Do Other Countries Use Public-Private Partnerships for Regeneration and social housing? There are a variety of governmental responses in other countries that have been put place to stimulate private sector participation in developing social housing, in which can also be applied to regeneration. The commonality is that the mechanisms create opportunities for alternative forms of financing and reducing the cost of debt, rather than solely relying on grants or profit from commercial components of the project, which is conventionally practiced in Canada. For example, in the United States, public-private partnerships are an important source of financing for social housing. Unlike funding initiatives in Canada, programs in the United States have designed and applied a range of models and subsidy techniques to encourage local communities and partnerships, which include housing block grants that are provided to state and local authorities, effective interest rate subsidies provided through tax exempt bonds, mortgage insurance and guarantee programs, regulatory influences on mortgage capital, and state and local financial support mechanisms such as housing trust funds, which dedicate a source of public revenue for affordable housing projects. Like the United States, the social housing sector in the United Kingdom has depended on the private sector to supplement public funding through the use of initiatives that bring together local housing authorities, financing institutions, and housing contractors. The idea is to put in place housing service contracts, including construction, repairs and maintenance, that are attractive to the private sector and to transfer some of the risks from the public to the private sector, as a strategy to reduce public investment and to manage both short-term and long-term risks. This approach also includes tax credits that can be used by municipalities to purchase the private sector. These types of mechanisms do not exist in Canada. 4
How do I Know if a Public-Private Partnership is the Best Strategy For My Organization? What are the Things that I Should Think About? A good partnership is about achieving more together than you could have alone. Ultimately, each partner should bring something to the table and fill gaps that need to be filled. The areas to consider include land and property, finance, production and development, and professional expertise. Some Questions to Consider: Strategic fit and contractual issues: Does this partner fit with your organization s values and long-term objectives? Where do your shared interests intersect and do you have a clear understanding of your roles? What type of contract would facilitate the best end results? Is it joint venture, design-build, or build-operate-transfer? And will that contracting strategy achieve your goals and manage your risk appropriately? Is it short-or long-term? Costs and benefits: What are the tangible benefits that the partnership will create and what are the direct costs, including financial and staff time? Will the proposed partnership structure be efficient and effective in terms of driving the project forward and will it increase the ability to lever funds from a range of sources? 5
If Getting into a Partnership that Requires Shared Investments Seems Too Much, are there Options to Shift the Risk to the Private Sector? If engaging in a joint venture, which is premised on a shared risk/shared benefit partnership, is more than your organization is willing to take on, the accompanying graphic illustrates how other sectors, as noted above, approach public-private partnerships. The options available range from design-build, where the private sector has almost no risk and simply delivers the building at a fixed price, to outright privatization, where all responsibilities, risks and rewards for service delivery accrue to the private sector. Within this spectrum, public-private partnerships can be conceptualized based on the extent of public and private sector involvement and the degree of risk allocation. There are other variations, including allocating the risk by a certain percentage, but the purpose of the graphic is to demonstrate the increasing or decreasing scale of risk. Ultimately, risk and reward are two sides of the same coin, which means a private sector partner is unlikely to get involved if the risks are high and the reward is low. The balance between risk and reward are the key variables for the design of the partnership strategy and associated agreement. It will largely depend on the degree to which your organization wants to move the project forward, the available resources, and the degree to which the private sector understands the short-and long-term financial benefits to engaging in the project. Privatization Degree of Private Sector Risk PPP Models Concession Design-Build-Finance-Maintain-Operate Design-Build-Finance-Maintain Build-Finance Operation & Maintenance Design-Build Degree of Private Sector Involvement The Scale of Public-Private Partnerships: Risk Transfer & Private Sector Involvement The Canadian Council for Public-Private Partnerships 6
Terms: Source: The Canadian Council for Public-Private Partnerships Design-Build (DB): The private sector designs and builds infrastructure to meet public sector performance specifications, often for a fixed price, so the risk of cost overruns is transferred to the private sector. (Many do not consider DBs to be within the spectrum of PPPs). Finance Only: A private entity, usually a financial services company, funds a project directly or uses various mechanisms such as a long-term lease or bond issue. Operation & Maintenance Contract (O & M): A private operator, under contract, operates a publicly-owned asset for a specified term. Ownership of the asset remains with the public entity. Build-Finance: The private sector constructs an asset and finances the capital cost only during the construction period. Design-Build-Finance-Maintain (DBFM): The private sector designs, builds and finances an asset and provides hard facility management (hard fm) or maintenance services under a long-term agreement. Design-Build-Finance-Maintain-Operate (DBFMO): The private sector designs, builds and finances an asset, provides hard and/or soft facility management services as well as operations under a long-term agreement. Build-Own-Operate (BOO): The private sector finances, builds, owns and operates a facility or service in perpetuity. The public constraints are stated in the original agreement and through on-going regulatory authority. Concession: A private sector concessionaire undertakes investments and operates the facility for a fixed period of time after which the ownership reverts back to the public sector. 7