P3 For You and Me?

Governments at all levels in Canada are using public-private partnerships (P3) to procure and deliver public buildings. On the face of it, this major investment translates into opportunities for our profession. However, architects need to understand that P3s result in startlingly different business and working relationships which bring with them new roles, responsibilities, challenges and risks.

Why are Governments Using P3s?

When first venturing into P3s, governments cited our massive “infrastructure deficit” in Canada– now estimated at well over $130 billion–the reason for seeking innovative financing schemes from the private sector, claiming that they couldn’t afford to address the issue alone. P3 proponents went on to proclaim that public buildings can benefit from the efficiencies resulting from the private sector’s ability to work smarter, faster and cheaper than the public sector. Today, it is “risk sharing” that is most frequently offered as the reason for using P3s. Public owners maintain that under traditional project delivery models, they are unfairly saddled with responsibility for risky cost overruns, delays, and substandard quality in design and construction.

As a result of this economic and political climate, governments are creating complex P3 contracts that transfer these kinds of risks–and more–to private-sector “partners” with the expectation that they are better positioned to manage those risks, often by transferring as many of these risks as they can on to other partners, including architects. With P3s, it is this transfer of risk that leads to some of the greatest challenges for our profession.

What Does a P3 Look Like?

Partnerships BC, the Crown corporation in that province responsible for public-private partnerships, defines a P3, in part, as “a partnership arrangement in the form of a long-term performance-based contract between the public sector (any level of government) and the private sector (usually a team of private sector companies working together) to deliver public infrastructure for citizens.”

The prototypical P3 was launched as the Private Finance Initiative (PFI) in the UK during the 1990s. In a PFI project, the public-sector partner–a hospital for example–enters into a 25-to 40-year contract with a private sector consortium. Under that agreement, the consortium designs, constructs, owns, maintains and operates the building for the life of the contract, providing the financing to cover the cost of those activities–all on a “for profit” basis. The public sector uses the building to deliver its services, in this example health care, paying its private sector partner in regular installments. The risks related to the design, construction and financing as well as the maintenance and operation of the facility are all allocated to the private sector through the PFI agreement, at the end of which title to the building is transferred to the public owner.

Thus, a PFI consortium is a corporation created specifically for any given project and typically includes the financier, managers and often the builder. To fulfill the responsibilities it is undertaking, the consortium assembles a project team that brings together all of the expertise it will require to design and construct the building, then operate and maintain it over the life of the contract.

Risk and Risk Allocation

In a P3, the contract between the private and public sector partners sets out the risks being transferred to the consortium. The contracts between the consortium and the rest of the project team define how that risk is then allocated to other team members, including the architects.

Numerous forms of P3 are being used in Canada on a wide range of public building types including education, health care, judicial, correctional, residential and commercial. Each building type has its distinct risk profile. With so many variations on P3s in use, it is critically important to understand the specific model being used on a given project in order to identify the risks that are being transferred to the architect.

A case in point: Infrastructure Ontario is the Crown corporation dedicated to renewing and expanding infrastructure under that province’s Alternative Financing and Procurement variation of P3. It established a unique model for a number of health care projects. The owners, who were originally contemplating a design-bid-build procurement model, engaged the architects for these projects who then prepared the design and construction documents, and readied them for bidding under a stipulated sum contract. However, to be consistent with government policy calling for risk to be allocated to the party best able to manage it (and away from the public sector as much as possible), Infrastructure Ontario created its “Build-Finance” model.

Instead of calling for bids, Requests for Proposals were issued for builders to construct the hospitals and provide financing during the construction phase. As a key component of the risk transfer, the builders are required in those contracts to accept all risks related to design, including cost overruns attributable to design errors or omissions, delays and any resulting liquidated damages. Naturally, the builder would be likely to attempt to recover any losses experienced as a result of what they would consider to be designer-related errors or omissions. Yet those architects had originally prepared the construction documents based on a traditional design-bid-build model, knowing that the owner would be carrying a contingency in the budget for any issues that inevitably arise during a complex construction project. The Ontario Association of Architects’ (OAA) professional liability insurance subsidiary considered this particular threat so serious that it took the unusual step of issuing an endorsement restricting coverage on Infrastructure Ontario projects. The following are just a few examples of some of the other risks and challenges P3s can present for our profession.

Many architecture firms in the UK faced financial ruin in the 1990s as a direct result of their exposure to massive pursuit costs on early PFI projects. A public sector owner would invite a number of consortia to submit proposals where each of those bidders required the architects to complete a fully developed, detailed design demonstrating how the proposal would meet the project requirements. Unsuccessful consortia were never paid for their proposals, and they in turn did not pay their architects. There were cases where architects had progressed well into completing construction documents while receiving no compensation.

The handling of pursuit costs varies widely in Canada. Unsuccessful bidders on the Calgary Courts Centre received an honorarium. Yet most municipal P3s do not provide for payment to bidders and their architects. Infrastructure Ontario has agreed to a fee for unsuccessful consortia but only if they submit complete and compliant proposals. This fee is not expected to fully compensate those bidders, and the proportion of that fee which actually finds its way to the architects depends on their skill in negotiating with their clients, typically the builders. Furthermore, architects who obtain their portion of the fee must agree to provide a license for their intellectual property rights in their designs. Aside from pursuit costs, architects have reported severe cash flow problems on P3s often because financing may not begin to flow until most of their work has been completed. Others have observed that this highly competitive market can lead to downward pressure on professional fees.

Risks can also arise from unrealistic expectations related to the delivery of professional services being provided by the design team in a P3. Once negotiations are complete and the commercial terms established, any additional construction costs are expected to be borne by the private sector. This usually means that construction budgets become effectively frozen. There is no margin for error, and re
lative certainty that any private sector team suffering losses during the construction process will attempt to recover damages from those they consider to be at fault–and the architect is usually an easy target.

In transferring delay risks to the private sector, P3 contracts include requirements that the consortium pay liquidated damages should the building not be fully operational on schedule. The consortium would expect to recover those damages from those who caused the delay. This creates huge pressure on the design team to complete all of its work at what some architects have called “a frantic pace,” necessitating costly overtime and the tapping of additional resources through strategic alliances with other firms. Even worse, this dangerous mix of aggressive schedules and rigid budgets intensifies the quality management challenges normally faced by design professionals in the preparation of their design and construction documents. Paradoxically, in P3s there is little tolerance for anything other than perfection. Transferring risk for geotechnical and other site conditions to the consortium–often passing them on to the builder–regularly occurs in P3 contracts. In turn, the builder will try to transfer these costs on to the designers, apparently with the expectation that the designers will miraculously anticipate the unforeseeable.

There have been P3 contracts which require the consortium to guarantee a specified level of LEED certification. The consortium passes that risk downstream. Yet no one, certainly not the architect, can guarantee LEED certification because an independent third party carries it out. To make matters worse, the architect’s errors and omissions insurance is unlikely to respond to a claim arising from this requirement because of the exclusions relating to warranties. This is a good illustration of a situation where the intention to transfer the risk is unrealistic, and is ultimately thwarted because there is no insurance to mitigate the risk.

P3s and Design Quality

Design quality is paramount to our profession, and an important contributor to every architect’s reputation. However, many architects and others (MPPs, owners, critics, public) have found the design quality of many early PFI projects in the UK to be below par, a circumstance often attributed to time and budget pressures in addition to the inexperience of the teams with a new procurement model. The media even reported on politicians being too embarrassed to stand in front of a new school or hospital for the ribbon-cutting ceremony. Some early PFI schools were described as “…little better than agricultural sheds [i. e., barns] with windows.”

Looking beyond aesthetic considerations to functional and operational concerns, observers have commented that some of the early PFI hospitals were clearly designed with the interests of building maintenance and facilities management trumping those related to the delivery of quality health care. One reason this can happen is that in many P3 models, the architects engaged by the competing consortia are allowed only limited, if any, access to the end users when critical design decisions are being made during the preparation of the proposal. Close interaction with users, which most architects consider essential in the design process, is replaced by reference to a performance-based statement of requirements that is prepared on behalf of those users.

Are P3s Here to Stay?

Given these and other risks in P3 and the potential impact on design quality, many in the profession hope that governments will conclude that the merits of P3 have been oversold, and will return to the more traditional, less risk-intensive procurement models. Unfortunately, it doesn’t appear that P3s will be abandoned any time soon. When P3s were first announced, there was great public concern and the majority of Canadians didn’t support them. Today, two-thirds of Canadians approve of the use of P3s to meet our infrastructure needs. The federal government, five provinces and many lower-tier governments are now employing P3s. In jurisdictions outside Canada where P3s were introduced, their use has only continued to expand.

Many believe P3s are only viable on megaprojects, and thus are of concern only to the largest firms. Firstly, the dollar threshold above which P3s are considered viable has already dropped from over $100 million to as low as $20 million. It must be understood that public clients will bundle a number of smaller projects together to create a viable P3. For example, a school authority in the UK bundled over 100 properties together into a single PFI contract.

That highlights another risk to the profession– consider the impact of this bundling on the small, local architectural practice that sustained itself by winning a project from a local school board. These firms simply cannot compete in the P3 market.

P3 Strategies for the Profession

With P3 likely to be with us for some time, practices, especially those active in public sector projects need to learn all they can about P3 in their own marketplace and formulate their own informed responses–which may include continuing to “just say no” to these types of projects, at least for now. Those who elect to participate should consider a comprehensive P3 strategy that would include mechanisms for identifying and evaluating potential risks on specific projects and under particular P3 models, determining which of those risks they are prepared to accept, and then mitigating and managing the risks once they are taken on. The latter could include improved quality assurance measures in the practice, new investment in human resources and technology, additional insurance, and methods of either transferring risk or sharing it with others.

At the same time, we should encourage and support our national, provincial and territorial professional associations in their ongoing efforts to work with public agencies in refining the P3 procurement model to ensure ongoing business opportunities for architects and equitable, reasonable and practical sharing of the risks on public projects.CA

Led by architect and former Executive Director of the Ontario Association of Architects Brian Watkinson, Strategies 4 Impact! Inc. provides strategic support, advice and consulting services to businesses in the design and construction sector, their associations and clients. Brian has been researching P3s and studying their implementation since they were first introduced to Canada. He can be contacted at brian@strategies4impact.com.