BUSINESS The Ups & Downs of P3s
October 1, 2011
By by Peter Kenter
For consulting engineers, participating in public-private partnerships (P3s) can be hell -- or heaven -- depending on whether firms are positioned to negotiate the complex requirements of these contracts.
For consulting engineers, participating in public-private partnerships (P3s) can be hell — or heaven — depending on whether firms are positioned to negotiate the complex requirements of these contracts.
That’s the message of Understanding Public Private Partnerships in Canada, a guidebook published by the Association of Consulting Engineering Companies (ACEC). The book amasses the collected wisdom of current participants in Canadian P3 projects, the procurement model that involves the private sector in designing, constructing, and often owning and operating public buildings and infrastructure.
The ACEC guide includes input from ACEC members, owners and other stakeholders — even those who hate the P3 model — to present a list of ways to analyze the risks and rewards of this procurement practice.
“When P3s go well, they go well big time, but if you’re not prepared, they can also go wrong big time,” says John Gamble, P.Eng., president of ACEC. “It may be difficult for some firms with strong expertise to watch a P3 project proceeding, feeling like they’re on the outside looking in. But P3s aren’t for everyone. There will still be plenty of work offered under conventional delivery models.”
One of the strengths of the P3 model is that it can create projects that might not have proceeded at all under conventional delivery.
“P3s tend to be large projects with a lot of certainty once financing is in place,” says Brian Watkinson, former executive director of the Ontario Association of Architects and principal of Strategies 4 Impact!. Watkinson was a consultant to the ACEC P3 task force. “Once an engineer demonstrates a successful track record on P3s in Canada, there are a lot more opportunities, both domestically, and internationally where Canada is seen as a leader in P3s. The prestige of being involved in these projects can also lead to more work in conventional projects.”
The shorter term of many fast-track P3 projects can also have a positive impact on a company’s bottom line.
“If you’re completing a 10-year project in four years under a P3, there could be interesting results on the profitability side,” says François Plourde, executive vice-president of Quebec-based consulting firm CIMA+. Plourde was chair of the ACEC P3 task force.
But the first question an engineering firm should ask itself is whether it wants to participate in a P3 project at all. Some of the most critical markers include the company’s size and staff availability, its tolerance for risk, and the size of the company’s nest egg.
Joining the right team
If a company decides to become involved in a particular P3 project, how does it feel about the team it is being asked to join?
“There’s the old line about the chain being only as strong as its weakest link,” says Watkinson. “Be extremely careful about which team you want to play on.”
Gamble notes that many consortiums are now single-purpose business entities, each with its own personality. “Who are the players involved?” he asks. “Discern their DNA by looking at the individual players. Find out who you’re getting into bed with contractually.”
As with a high stakes poker game, a consortium pursuing a P3 project will want every player to demonstrate that they’ve got the stamina and resources to assume some of the high costs of pursuing the contract.
“Engineers and architects may be required to produce 75 to 80 per cent of the design before knowing whether they’ll be awarded the project, and a consulting engineer may have to work for up to a year without seeing much compensation, or [may be] working below market rates,” says Plourde. “Firms should assess whether they’re up for this. If you have 100 people working for a year, can you absorb the cost of not winning the contract?”
Gamble puts it succinctly: “Some consulting engineers can afford to lose a potential P3 project once — but not twice.”
Engineers can protect themselves by negotiating fees that adequately compensate them for pursuing the project and allow them to perform their job well.
And as Gamble points out: “Owners are becoming more generous with honoraria and other compensation for pursuit costs. By making pursuit more financially palatable, they’re encouraging bidders to put more meat on the bones of the submission. In turn, they receive higher quality submissions that give them greater price certainty.”
Some consortiums will encourage engineers to take on an equity position in the project. While involvement in P3s is potentially profitable, even a small equity position in a large project can expose a firm to considerable financial risk. “You need to assess your risk tolerance accurately,” says Plourde. “Only a few of the big players have that capability, while most consulting engineering firms do not.”
Risks and the Alpha Dog
The biggest game in P3 projects is allocation of risk. When that’s done well, risk is allocated to parties who know how to carry it and know how to monetize it. Done poorly, risk is allocated to the party with the weakest negotiating skills.
“Often, a partnership can include an Alpha Dog who tries to offload too much of the risk on whoever will accept it,” says Gamble. “For example, you wouldn’t want to warranty the actions or lack of actions of a third party with which you have no contractual arrangement, or to guarantee that environmental approvals can be achieved by a certain date.”
Consulting engineers should negotiate ownership of the designs they produce, whether or not the consortium is awarded the contract. “Intellectual property rights need to be expressed clearly,” says Gamble.
Once a P3 project gets moving, the game strategy switches from poker to a horse race. The pace can be gruelling, with the project often proceeding out of normal sequence. Structural construction may begin, for example, before the electrical system drawings are completed.
“While researching the guidebook, I interviewed an architect on a P3 project in the U.K.,” says Watkinson. “He pointed to a chair in the production office and said: ‘That seat never gets cold until the project is finished. It’s 24 hours a day. Once the project starts moving, you’re always trying to keep up.'”
Failing to keep pace has a price, with the consortium assuming heavy penalties for failing to meet negotiated deadlines.
Because capital costs on P3 projects are fixed, engineers may find themselves pressured to adjust the engineering solutions to maintain the budget.
And if owners bundle a number of conventional projects into P3 projects, when traditional delivery models would have better served the owner and the public, then engineers should be wary of the project.
“It doesn’t serve our members to get involved in a project that may fall victim to faulty planning,” says Gamble.
P3s are creating other situations that require careful consideration. For example, if consulting engineers provide advice related to the maintenance or operation of an asset once it’s built, under an agreement intended for design and construction, they may find that they have unwittingly extended the discovery period under statute of limitations legislation, thus extending their vulnerability to professional liability suits.
Another tricky scenario arises when a consulting engineer that is working with a consortium on one project may have to decide whether to work as part of a compliance team monitoring that same consortium on a different project.
“Engineers are all about getting the job done and focusing on solving problems, sometimes to the exclusion of considering the optimum business practices required to benefit most from the contract,” says Gamble. “To succeed in P3s, consulting engineers will need to pay far more attention to their business relationships.” cce
Peter Kenter is a freelance writ
er based in Toronto.
To obtain a copy of the ACEC guide, Understanding Public Private Partnerships in Canada, visit www.acec.ca.