The Case for Public-Private Partnerships in Infrastructure

By Murphy, Timothy J. | Canadian Public Administration, March 2008 | Go to article overview

The Case for Public-Private Partnerships in Infrastructure

Murphy, Timothy J., Canadian Public Administration

While still controversial, public-private partnerships (P3s) are quickly becoming an important part of infrastructure procurement for all Canadian governments. (1) A P3 project office was announced in the federal government's 2007 budget, and P3s are proceeding, or have been undertaken, in Alberta, Ontario, British Columbia, Quebec, New Brunswick, Nova Scotia and Nunavut, and in cities such as Ottawa, Calgary and Kelowna. (2) Publicprivate partnerships are playing a bigger role in capital projects across all areas of government, such as transportation, communications, power generation, energy delivery, water and wastewater, waste disposal, courthouses, hospitals, jails and even legislative assemblies.

This article attempts to distil the public arguments for and against P3s, including, where appropriate, the academic literature, and argues in favour of them, particularly for infrastructure assets and related services, as long as governments clearly understand the risks involved from the outset and throughout the life of the project and ensure an optimal and effective allocation of risk to the private sector. To do this, governments need the right expertise on their side of the table and the right levers of accountability to help enhance the legitimacy of P3s as a vehicle for delivering public and quasi-public goods and services and to monitor risk allocation throughout the project term.

The public policy rationale for P3 arrangements

"Off-book" financing--a declining factor

One primary rationale for a P3 arrangement rests on the transfer to the private sector of the financing of the delivery of the public asset. Historically, this has reflected the accounting treatment by governments of infrastructure spending in a cash accounting system. In the past, governments who reported their finances on a cash accounting basis benefited if infrastructure spending could be done "off-book" by the private sector. For example, instead of recording the full cost of a $100-million expenditure in the year it purchased a building, the government could pay the private-sector operator a $5-million annual "lease" payment and record only this lesser amount in its books. In this system, postponing the obligation or stretching the payment through a P3 arrangement permits a government to build now and pay later--an attractive proposition to cash-strapped governments.

Many Canadian governments are now changing to accrual accounting, which spreads the cost of acquiring an asset over its useful life and requires governments to consider in their annual budgets such asset-related expenditures as maintenance, replacement and other life-cycle costs. The federal government adopted accrual accounting in 2002, and the Public Sector Accounting Board has published new standards that will require local governments in Canada to use accrual accounting as of 1 January 2009. (3)

As a result, much of the attraction for government in making a deferred stream of payments to a private-sector entity instead of recording the entire purchase cost of an asset in a single fiscal year disappears as the accounting treatment of both methods of procurement merge. (4) The net result is that over time, most, if not all, of the accounting differences that might create incentives to a P3 are being eliminated. The Province of Ontario, for example, takes the position that, with its move to accrual accounting, "accounting considerations are no longer a driver of the model to be used for delivering infrastructure investments." (5) Nonetheless, P3s still offer the potential to secure better value for money and greater innovation in the delivery of public services. The advantages are summarized below.

Accelerating construction

While the accounting treatment of P3s and traditional procurement has largely merged, there can remain a difference between the timing of payments in the two procurement models such that needed public infrastructure can be built faster under a P3 for debt-restricted governments. …

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