Profit and Risk
That the private partner wants to make a profit is fundamental to the success of a P3 project. A P3 contract is structured so that the private partner's profit depends on whether it achieves government objectives like finishing the project on schedule and meeting technical requirements. While payment on delivery helps keep the private partner on track, other features of P3s also help drive improved performance, including risk-sharing.
Risk-sharing occurs when the private partner takes on some project risks that would otherwise be borne by taxpayers. Delays and cost overruns are common risks in constructing public infrastructure. In a conventional project, taxpayers pay these extra costs; in a P3, the private partner is on the hook. Being responsible for poor performance encourages the private partner to avoid delays and cost overruns.
The profit motive and other unique features of P3s are why evidence points to P3s having a strong record in the construction phase, with projects generally completed on time and on budget. In a recent analysis of 19 Canadian P3 projects from 2004 to 2009, an impressive 90 percent finished on time or ahead of schedule (lacobacci, 2010).
Evidence from the United Kingdom and Australia shows that P3s substantially outperform conventional projects in the construction stage, both in terms of cost and completion time. A UK study of 11 P3s and 39 conventional projects found P3s typically finished 1 percent earlier than scheduled, while conventional projects finished 17 percent behind schedule. Cost overruns averaged virtually zero in P3s, compared to 47 percent in conventional projects (Mott Macdonald, 2002).
Similarly, an Australian study of 21 P3s and 33 conventional projects found partnerships were delivered 3.4 percent ahead of schedule, while conventional projects were delivered 23.5 percent behind schedule (Duffield et al., 2007).
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How P3s Work
