Risk & Business Magazine Jones DesLauriers Insurance Fall 2015 | Page 30

The Right Fit? The P3 Model: An Elegant Solution for Construction Financing BY: MICHAEL GEORGIEV, VP, CONSTRUCTION & INFRASTRUCTURE PRACTICE, JONES DESLAURIERS INSURANCE P ublic-private partnerships (P3s) are a solution to public infrastructure contract financing and construction, which place an emphasis on long-term performance and a whole life-cycle approach to construction. The company entering into the P3 with the government will be responsible for design, building, financing, maintenance, and operation (DBFMO) of the facility on a long-term basis. In this way, the risk is shared between the partners in the contract. will be what they receive. The second major benefit is the fact that this type of partnership incentivizes contractors to ensure quality, efficient work. If not, cost overruns or delays would fall onto the government to overcome. The government may provide designs that the contractor has problems with. With a P3 and the DBFMO principle, there is a very real incentive for the contractor to complete the work on time and on budget. The governments will not have to pay for an asset until it is completed, the cost is paid over the life of the asset only if it is properly maintained and operated, and all of the costs are known upfront and carry through the life-cycle of the asset. This helps relieve the government and, thus, the taxpayers from the burden of delays, cost overruns, or performance issues. One of the best known examples of a P3 success story is the Archives of Ontario. The original location of the archives was deteriorating and prone to flooding. Environmental damage was consistently posing a threat to important national documents. The government entered into a P3 partnership, in which all parties agreed to the DBFMO methodology, and ended up saving $25 million by preventing the deterioration of the assets stored in the facility. Additionally, they were able to complete the project in a time frame two years shorter than that which would have been required by going with a crown construction option. The two largest benefits of P3s are the most obvious. Risk is alleviated from the government because they are assured that what they have contracted out For all of their benefits, however, not every project is right for a P3. According to Ontario Auditor General Bonnie Lysyk’s annual report released in 2014, P3s sometimes have a tendency of ballooning budgets which has cost taxpayers around $8-billion on infrastructure that could have been saved if they had simply built the projects themselves with traditional public-sector financing. The higher costs incurred from P3s are a result of the fact that private partnerships shift all of the financing to the companies they work with, who pay much more than the amount the government would for the same financing. The government is willing to pay this in return for the risk alleviation that they receive from the P3 model. As you have seen, not all companies and not all projects are the right fit for P3s. With that being said, when they work, they work extremely well. For the additional costs, risk is mitigated, a more complete plan can be put together by a single partner, and proper maintenance is ensure with the newest technologies available. Our brokerage has experience with these types of partnerships and works with consultants who are ready to assist with the process should anyone require it. If you would like more information or have any questions, I’d love to hear from you. Send me an email at [email protected]. Michael Georgiev is Vice President, Construction & Infrastructure Practice at Jones DesLauriers Insurance. He has many years of insurance, surety and risk management experience in the construction industry, including financial analysis, project planning and portfolio management, as well as underwriting negotiations and best practices. 30 RISK & BUSINESS MAGAZINETM FALL 2015