Public Private Partnerships

1
Public Private Partnerships

• Presentation to Construction Specifications
  Canada
• Alternative Approaches to Procurement

May 18th, 2006
2
Agenda

• Plenary Group Overview
• View of Traditional Design-Bid-Build Public
  Infrastructure Projects
• General Overview of the P3 Delivery Model
• The P3 RFQ and RFP process

3
Introduction to Plenary Group
4
Plenary Group Overview

• Plenary Group is an independent, specialist
  public private partnership business. Australian
  Head Office, Canadian operations are based in
  Vancouver and Toronto and focus entirely on P3
  deals across Canada
• Plenary Groups business model represents a
  unique service offering in the Canadian P3
  market. True to our name, the company brings a
  comprehensive and complete, or plenary approach
  to all projects we undertake
• Plenary Group will take an active role in all
  aspects of infrastructure projects including
  development, financing, construction and
  operations
• Importantly, Plenary Group is seeking both the
  development and the long term ownership of P3
  assets
• Plenary Group is owned by its staff and by
  Deutsche Bank with specific project financings
  underwritten by Deutsche Bank

5
Relevant Experience

• Plenary Groups senior management team in Canada
  and Australia have been working in the P3 market
  for more than a decade and have had key roles in
  financing projects under numerous P3 models and
  across all asset classes
• The management team has had a combined
  involvement in structuring and financing more
  than 40 P3 projects
• In Canada, the local management team had a role
  in the development of the P3 industry. While
  working within an infrastructure business for a
  major international bank these individuals led
  the bidding, structuring and financing of
• 110m VGH Academic Ambulatory Care Centre,
  British Columbia
• 450m Abbotsford Regional Hospital and Cancer
  Centre, British Columbia
• 380m Anthony Henday SE Ring Road, Alberta

6
Design-Bid-Build-Tender vs. P3 Procurement Process
7
Traditional Design-Bid-Build

• Process
• Identified need for renovation or new space
• Functional Programmer is hired to work with the
  identified user group
• The Public Sector Agency (PSA) hires an architect
  who then hires remainder of design team and
  specialists, working with user group
  representatives over a number of months to
  develop a design that conforms to the functional
  program
• Typically, to conform to the traditional public
  sector model, a Quantity Surveyor will be brought
  on board at key intervals in the design process
  to confirm budget
• 100 design to building permit stage, project is
  tendered to open marketplace, on larger projects,
  pre-qualification of generals is usually
  preferred approach
• Traditional models worked with some success in a
  stable construction market under normal labour
  and material supply conditions

8
Traditional Design-Bid-Build

• Shortcomings
• Lack of constructability input into the design at
  critical early stages
• Lack of control over user group expectations and
  demands
• Less ability to fast-track and phase construction
  due to uncertainty of overall costing until late
  in the project
• Lack of control over choice of contractors with
  access to labour and critical sub-trades
• Lack of incentive for innovations or for
  performance-based outcomes
• Cost issues do not become apparent until very
  late in the process when design changes and
  construction changes are very expensive

9
P3 Delivery Model

• Widely used in UK, Australia and more
  increasingly in Canada
• Provides a structured process to tender for
  design, build, finance and maintain new assets,
  typically through RFQs and RFPs.
• In BC, this process has been run on behalf of
  Provincial departments by Partnerships BC.
  Partnerships BC has now successfully run and
  closed 8 projects in the past three years
• Process for a project can take 6-12 months to
  select a preferred proponent and to enter into
  final documentation. This can be a time and cost
  intensive exercise and given the significant
  upfront costs to be incurred by bidders, may
  require the payment of an honorarium to
  unsuccessful bidders
• While front end intensive, once the financial
  close is reached, construction can start next day.

10
P3 Delivery Model

• Key Benefits of the P3 Process
• Model works, if structured appropriately, to
  transfer key risks from the public to the private
  sector that this sector is more able to manage
  effectively
• Innovative design in context of competition
• Innovative use of different construction delivery
  methods and approaches
• Fixed time, fixed price construction delivery
• Fixed payments for the government (sometimes
  linked to CPI increases)
• Committed future investment in asset through life
  cycle program
• Fixed price operating costs
• Guarantees for condition of asset at handback to
  government
• One of the key benefits of the P3 model is that
  it drives innovation and cost competition,
  without sacrificing quality

11
P3 Delivery Model

• In Canada design of public institutional
  facilities has largely been completed by
  architects who have sole sourced projects through
  a mandate and they typically respond to their
  clients wishes through an extended user group
  process. The P3 model incorporates the benefit
  of architectural innovation with the budget
  discipline that the private sector can deliver
• For example, the Abbotsford Regional Hospital
  project by leveraging the at-risk discipline of
  the development and construction incorporated the
  most current thinking on innovative healthcare
  design and infection control with all user groups
  having signed off on the final design of all
  aspects without the issuance of a single change
  order
• The project is currently on schedule and on
  budget

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Basic P3 Project Structure
Equity Developer
Design/Construction
Equity
Project Co.
Lenders
Sub-contracts
Debt
Maintenance Capital Replacement
Lease Payment
Site License
OWNER (GOVERNMENT)
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Design Development

• Multi-stage sign-off process, P3 sponsor
  typically co-leads with Architect
• Important process for private and public sectors
• Ensures pursuit dollars are being spent
  appropriately
• Allows competitive final bids to be submitted
  that meet Public Sectors expectations
• Interactive workshops
• Project steering committee is convened with
  representation from Architect, User Group, PSA,
  contractor and P3 sponsor. The steering
  committee is empowered to make decisions on
  behalf of the project
• Focus and mandate of the committee has to be on
  what does or does not meet technical and
  performance requirements

14
Construction

• Typically, fixed-price, fixed time stipulated sum
  bid has been developed at RFP stage with
  allowances remaining to be detailed (typically
  higher level of allowances than normal due to
  timing of proposal and higher levels of unknowns
  but risk allocations are fixed between the team
  members)
• Project steering committee formed at Design Stage
  continues its role and is now empowered to make
  construction-related decisions on behalf of the
  project
• Reporting requirements are fairly rigorous and
  are intended to highlight and catch any issues at
  an early date to allow intervention by the
  Steering committee

15
Operations and Maintenance

• P3 sponsors take responsibility for the
  maintenance of the buildings, with experienced
  sub-contractors actually performing work on a
  fixed priced basis
• Performance standards would be agreed in advance
  with the PSA and would be incorporated in the
  Project Agreement
• P3 sponsors are responsible for managing the
  maintenance services and ultimately for meeting
  performance standards. Failure to do so will
  give rights to the PSA to set-off against its
  rental payments
• Additional facility management services such as
  cleaning, cafeteria, etc. can be included in the
  services to be provided under the agreement

16
Capital Replacement

• As they are often called upon to take risk and
  provide operational performance guarantees, P3
  sponsors have developed expertise in dealing with
  life cycle issues
• This typically involves engaging sub-contractors
  early in the process to consider all life cycle
  issues in designing projects and in determining
  upfront cost
• The major assemblies and systems are run through
  a life cycle analysis program which outputs the
  capital reserve funding required to repair and
  replace all major building components over the
  term of the concession granted by the PSA. This
  funding reserve is built into the financial
  modeling to assure that funds are available to
  maintain and protect the asset upon its handover
  to the PSA at the end of the term
• P3 models are flexible with respect to how the
  PSA wishes to deal with this issue
• P3 sponsors could take the risk and
  responsibility and factor charges into the lease
  payments
• P3 sponsors could share risk with the PSA by
  managing a fund with both parties taking
  upside/downside risk
• PSA could manage all life cycle replacement
  obligations themselves
• Performance-based payments and hand back tests
  are then used to ensure private sector delivers
  on its obligations.

17
Complementary Developments

• For certain transactions the private sector can
  add value by introducing associated developments
  that provide subsidies to cost to public sector
  of key asset
• These can range from basic ancillary retail
  within the development (i.e. coffee/gift shop in
  a hospital) or parking garages to complimentary
  site developments such as commercial office space
  or residential
• Key determining factor is the underlying business
  case which must support the additional capital
  costs independent of the base asset case

18
P3 RFQ Process
19
P3 RFQ Process

• Timing
• Process is typically longer than required, 6 to 8
  weeks
• Standard list of requirements of corporate
  experience and resumes of team members
• Early warning of projects through the grapevine
  allows teams to form and prepare
• 3-4 weeks is all the time typically needed to
  assemble and structure a team to respond
• Typical Pre-qualification requirements
• Developer/sponsor capability and role of each
  team member
• Design Construction experience in type of
  project proposed
• Facility Management services and experience
• Financing Capability
• Typically a minimum of 3 teams are selected to go
  to the RFP stage dependent on the caliber of
  responses received.

20
P3 RFP Process
21
P3 RFP Process

• Single Stage RFP works best, A two stage process
  does not achieve desired result as proponents may
  view the first stage as being not at risk and
  may manipulate the process and prolong the
  selection, which in a rising construction market
  represents real risk to increase the costs or
  scheduled delivery of the asset
• 2 Types of RFP
• - BFO (Build-Finance-Operate)
• - DBFO (Design-Build-Finance-Operate)
• Typical response timeframe of 60-90 days for BFO
  and 90-120 days for DBFO depending on the level
  of detail required these timelines are very
  aggressive and require a highly intensive
  integrated team approach

22
P3 RFP Process

• BFO
• Typically the project is fully designed to the
  building permit level, full sets of tender-ready
  drawings and specifications are provided to each
  team
• Very few changes permitted to exterior and
  internal layout as user groups have signed off
• Very little value to be added by P3 on the design
  aspect, innovation is limited to operations and
  performance-based value engineering
• Submission includes hard-bids on capital, rents
  payable and operating costs with very little risk
  sharing or transfer
• Due to its limitations on synergies and
  innovation between initial design and life cycle
  costing, the process takes little advantage of
  the benefits of the P3 model

23
P3 RFP Process

• DBFO
• Typically a functional program, adjacency
  diagrams or tables and a list of technical,
  sustainability and performance specifications are
  provided
• Requirements usually include Schematic level
  drawings, detailed architectural outline
  specifications, mechanical and electrical design
  briefs, code analysis, detailed facility
  management plan
• Like BFO model, submission includes firm costs on
  capital, design soft costs, rent and operating
  costs but typically has additional built-in
  contingencies for design risk allocation between
  the team members
• The more ability given by the PSA to control and
  shape the design and the less prescriptive the
  specifications are, the less risk contingencies
  that will be carried by the P3 partner

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Cost of Submission

• Cost of assembling and submitting a DBFO RFP is
  of natural concern to private sector with the
  majority of bid costs relating to design, legals
  and other advisors
• Given that bid costs are at risk to P3 Bidders,
  there is an expectation that advisors and the
  design team will also share in this risk through
  success-based team structures
• Submission requirements should only include what
  is deemed necessary for evaluation
• RFPs typically have required too much
  information on technical side at a very early
  stage in the design which is typically not
  necessary to provide the required price certainty
• Fire suppression system plans
• Security/IT system plans
• Foundations/civil engineering design

25
Samples of P3 successes
VGH Academic Ambulatory Care Centre
South Australian Police and Courts
Abbotsford Hospital and Cancer Centre
Casey Community Hospital, Victoria, Australia