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P3 projects help bridge the infrastructure gap

The federal government's announcement of a $14-billion Building Canada Fund brings Ottawa's national infrastructure commitment for the next 10 years to $70-billion, the largest in Canadian history. But according to the Federation of Canadian Municipalities, there is still a gap of more than $200-billion needed to repair existing infrastructure and finance new projects. Where will that money come from? Faced with deficits fuelled mainly by health-care costs, the provinces aren't going to be of much help. And most cities and municipalities are struggling to contain growing debts.

Countries around the world are facing the same challenge. A study last year by McKinsey & Company estimated a staggering $57-trillion was needed in global infrastructure investment between now and 2030. Another problem is the failure to achieve acceptable "productivity" – value for money – in public infrastructure projects. The study cited three key reasons for this: the "bias" of project planners; lack of "performance accountability" and "capability constraints" in public service administrators. A "viable improvement" in these factors could save $1-trillion a year, the study concludes.

But how could this improvement happen? Public-sector infrastructure projects are infamous for cost overruns and poor quality. The study found that, over the past 20 years, zero improvement in productivity had been made in public infrastructure projects in Japan, Germany and the United States. Not only has it become almost impossible to bridge the infrastructure gap, but projects don't deliver value for taxpayer dollars. What to do?

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A big part of the answer lies in public-private partnerships. P3s mitigate the problems identified in the McKinsey study because planning and forecasting is in the hands of private-sector experts, who are contractually accountable for successful execution.

A 2010 Conference Board study of Canadian P3 projects found that they had delivered efficiency gains of up to 60 per cent, that "the P3s … have delivered a high degree of cost and time certainty."

A study from the Fraser Institute last year also found that P3s provide greater value for money, and more opportunities for innovation. Such projects "motivate positive performance since the private-sector partner has its own money at risk." The private-sector partner is motivated to meet specific criteria for the project and deliver favourable results, or face specific penalties.

The Canada Line transit project from Vancouver's airport to city centre is an example of this approach. InTransit BC delivered the light-rail system through a 35-year agreement to design, construct, operate and partially finance it. InTransit is owned by project leader SNC-Lavalin (of which I was board chair at the time) along with B.C. Investment Management Corp. and Caisse de dépôt et placement du Québec.

Helping cash-strapped governments pay for such projects has spawned global infrastructure investment funds which, together with pension and sovereign wealth funds, are investing hundreds of billions of dollars annually.

Canada's public infrastructure gap can be reduced by accessing private-sector capital and transferring cost overrun risk. But governments would still be on the hook for the public partner's share of the capital and all of the operating cost.

Fiscal realities are accelerating the push for user-pay funding, such as fees for the use of bridges and highways. But user pay has another argument in its favour: There is a fundamental fairness to having users pay the costs, rather than all taxpayers. Under most municipal tax structures, people who live closer to the city centre bear the main cost of roads, rather than those who live in the suburbs. So those who use the roads the least pay the most to build and maintain them. The result is, in effect, inner-city subsidization of urban sprawl.

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Around the world, P3 projects are fast becoming the route to providing lower-cost, higher-quality public infrastructure. Combining private financing with user-pay fees would help cash-strapped governments be able to pay for them.

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About the Author
Gwyn Morgan

Gwyn Morgan rose from his modest roots on an Alberta farm to become one of Canada’s foremost business leaders and ardent champion of the importance of Canadian-headquartered international enterprises. Gwyn has served on the board of directors of five global corporations. More

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