Public-Private Partnerships in Canada: Theory and Evidence

By Vining, Aidan R.; Boardman, Anthony E. | Canadian Public Administration, March 2008 | Go to article overview

Public-Private Partnerships in Canada: Theory and Evidence


Vining, Aidan R., Boardman, Anthony E., Canadian Public Administration


This article examines the emerging issues regarding the implementation and performance of public-private partnerships (P3s) in Canada, focusing primarily on infrastructure projects. A number of projects with P3 characteristics began to emerge across Canada in the 1980s, but it was not until the mid-1990s that P3s really began to take hold. From a public policy perspective, there are three important questions for potential initiating governments: 1) What goals do they expect to achieve through the use of P3s? 2) How effective have implemented P3s been at delivering value to governments and citizens? 3) Are there lessons that can be learned and, more importantly, generalized? These questions are important for Canadian policy because emerging evidence from a number of countries suggests considerable dissatisfaction with the outcomes of many P3s. These countries include the United Kingdom, (1) Ireland, (2) the Netherlands, (3) Denmark (4) and Australia. (5)

The article first reviews posited government rationales for P3s. Second, we propose a "positive theory" perspective on P3s that attempts to explain actual P3 behaviour and outcomes. This perspective is based on an eclectic mix of public choice theory, transaction cost economics, and past experience with contracting-out government services, "mixed" enterprises and P3s. Third, we review and evaluate ten Canadian P3s in light of this positive theory perspective. Finally, we synthesize and summarize this evidence.

Although risk transfer is a major posited goal of many public-sector governments, at least initially, our review of the Canadian evidence suggests that, in negotiating (and re-negotiating) P3s, government has often failed to achieve significant risk transfer, especially that which is related to use-risk. Use-risk is usually, but not always, equivalent to revenue risk. Additionally, we find that the transaction costs of many P3s appear to be high. These transaction costs include ex ante contracting and negotiation costs, as well as ex post (i.e., after formal contract agreement) costs, such as monitoring, renegotiation and termination costs. These costs may be borne by government, by the private sector, or both. But, no matter by whom these costs are borne, they represent real social costs that must be considered in assessing the benefits of P3s.

The case-study findings on which we report are generally consistent with the positive theory perspective outlined below. They suggest that Canadian governments have sometimes found it difficult to effectively reduce either their total costs (that is, the sum of production and transaction costs) or their budgetary risk exposure (by transferring revenue risk) through the use of P3s. At the same time, the for-profit, private-sector partners have sometimes had difficulty generating adequate profitability, although this is a tentative conclusion, since they have usually had incentives to publicly emphasize losses, or potential losses, and to be secretive about profits. One surprising occurrence is the dissolution of the P3 more quickly than envisioned in the original contract, through government buy-outs, re-design of the contract, bankruptcy of the private entity, or some mix of these. A more common outcome, however, is protracted conflict, with high contracting costs borne by one party, or both.

Our findings throw into doubt the social desirability of P3s as a widely replicable mechanism for delivering public infrastructure. More encouragingly, however, P3s in Canada have worked reasonably in certain specific circumstances, namely, where 1) governments have not attempted to transfer use-risk or revenue risk to the private sector; 2) projects have required specialized knowledge or proprietary technology that is only held by private-sector firms (usually a small number of large global firms); and 3) governments were able to transfer construction risk at something close to a fixed price. These circumstances are close to traditional "design-build-transfer" or "build-transfer" contracts. …

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