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Context of application

 

The Ministère des Transports du Québec (MTQ) is considering public-private partnerships (PPP) for two projects:

• Autoroute 30 between Châteauguay and Vaudreuil-Dorion
• Autoroute 25 between Montréal and Laval

The MTQ will continue to use conventional management methods for most of the highway construction and maintenance projects under its responsibility, for which the private sector also has a major role to play.

With regard to MTQ funding for activities in areas such as public transit, paratransit and support for municipal transportation infrastructures, the management method chosen by the authorities responsible for these activities will be respected and the financial assistance they receive from the MTQ will in no way be affected by PPP or any other model.

This document presents background information on the MTQ’s approach to public-private partnerships within the above-described context of application.

The MTQ and public-private partnerships - the whys and wherefores of PPP

The MTQ’s use of PPP in transportation takes the form of long-term contracts that it signs with private partners to ensure the delivery of a range of services involving, for example, the design, building, financing and operation of a highway project deemed necessary for a community. These are contractual agreements between partners and not the privatization of a government activity.

Under such a contract, which establishes project costs over a period that may run for as long as 30 years, the private partner guarantees the availability and quality of the services it will be providing to the MTQ and agrees to absorb any budget overruns.

Before awarding a PPP contract, the MTQ must fully specify the quality requirements for the infrastructure work and services to be provided and must specify the related payment to the private partner. The latter must comply with these criteria and all contractual clauses, including those covering deadlines. Any failure to do so will result in penalties.

The ultimate goal of a PPP is to obtain the best possible social and economic benefits in exchange for the costs incurred by the project. This is achieved in various ways, which include a highly competitive process for tenders by consortia of construction firms, operators, financial institutions, engineering firms, and various suppliers, from the local and international levels.

PPP are very well adapted to transportation projects.

The difference between PPP and the conventional approach

The MTQ is already actively collaborating with the private sector. Indeed, it carries out a large part of its work through contracts with private enterprises. However, with PPP contracts, the MTQ increases the responsibilities of the private sector by bringing together activities of design, building, financing and operation, in opposition to the conventional approach that calls for these activities to be carried out separately by different firms.

As the agreement must give full details on all of a contract’s aspects for a longer term (30 years or so), PPP planning is more complicated and requires more preparation time than a conventional project. For example, the following elements must be fully specified: performance characteristics of the work, desired level of service, responsibilities of each party, length of the contractual agreement, financial clauses, and various legal conditions.

PPP gives the government an additional tool for improving the performance of public agencies and the services it provides to citizens.

Prerequisite conditions for PPP

 

Recourse to PPP is not automatic. A number of conditions must be met before it can be considered as an interesting approach to use. Accordingly, the project must:

• be of sufficient scope considering the complexity of the process;
• provide clear social and economic benefits;
• be based on the achievement of measurable results, such as quality of service in terms of traffic flow or ridership comfort;
• be carried out in a framework under which several firms compete to ensure that the contract provides the greatest possible benefits for the MTQ;
• represent added value in financial and economic terms for the government, in comparison to the conventional approach, and in terms of the quality of services provided over the entire duration of the contract.

Governmental and departmental framework for PPP

 

The government has established a specific framework to ensure transparency in the PPP process, to maximize the positive effects of competition, and to ensure quality of services for users. Accordingly:

• The Act respecting transport infrastructure partnerships sets the procedures for carrying out projects in construction, rehabilitation, or operation of transportation infrastructures in partnership with the private sector, and grants specific powers regarding such projects to the government and the MTQ.
• The Framework Policy for Public-Private Partnerships sets the objectives and guidelines for PPP and describes the procedure for carrying out projects according to this delivery method.
• The Act respecting the Agence des partenariats public-privé du Québec provides for the creation of an agency for public-private partnerships with expertise and consulting services to facilitate the recourse to this method by government departments and public agencies.

The MTQ has developed its own specific rules with respect to PPP contracts:

• The MTQ determines the needs to be met and establishes expectations with regard to performance and service quality expectations.
• Depending on the case, the PPP contractor agrees to carry out the design, building, financing and operation of a project, according to the requirements established by the MTQ.
• The MTQ monitors the performance of the private partner, which receives payment in accordance with performance.
• Infrastructures remain the property of the MTQ or are transferred to the MTQ at the end of the contract.
• MTQ employees are to be treated fairly and their rights are to be respected.
• The MTQ carries out its actions from the perspective of resource protection, respect of the environment and quality of life. Its actions are based on the concept of sustainable development.
• The MTQ ensures a strict, transparent and objective process and sees to protecting the public interest.
• In awarding PPP contracts, the MTQ will continue to carry out its role in transportation safety, movement of people and merchandise, and in the establishment of standards for design, construction and maintenance.

In awarding PPP contracts, the MTQ will continue to carry out its role in transportation safety, movement of people and merchandise, and in the establishment of standards for design, construction and maintenance.

Types of PPP considered by the Ministère des Transports du Québec

 

The type of PPP chosen depends on the nature of the project and is determined following an analysis of each project. Examples of three different types of PPP considered by the MTQ follow.

Design-build-finance-operate (DBFO)¹

The private partner is responsible for the design, construction, financing and operation of an infrastructure or public transportation service. Contracts generally exceed a period of 25 years.

The project can be financed through tolls, which can be combined with a contribution from the MTQ, depending on the expected results. Toll financing is based on the user-pays principle.

The private partner can also be paid exclusively by the MTQ according to the level of achievement of the objectives that have been set by the department.

Design-build

For this kind of project, the private partner is responsible for infrastructure design and construction. This type of partnership works effectively for projects on bridges, interchanges and other transportation infrastructures. Projects run for an average of two to five years. The partner is paid at the end of the project, following an assessment of its compliance with the MTQ’s requirements. The contract may include performance guarantees for a period of up to 20 years.

Area maintenance and management contract

In this type of partnership, the private partner takes on the management for the operation and maintenance of a public service. For example, the project may be for a highway network totalling 400 km to 600 km of road, with a 5 to 10 year contract. The partner is paid in accordance with the level to which the performance criteria defined by the MTQ are met.

The table below illustrates the risk level that the private partner takes on according to the delivery method selected for the project.

PPP benefits

 

Greater efficiency

In a PPP contract, the private partner might have the responsibility for a project’s design, construction and operation over a long period. Grouping these activities together within a single contract provides a more integrated solution and helps achieve savings. For example, to reduce a highway’s maintenance costs, the private partner will find it advantageous to increase the quality of the construction. Also, these activities can be combined to run concurrently rather than sequentially, e.g., the start of the construction at the work site can dovetail with the end of the design phase.

In general, the greater the scope of the project and the more important the responsibilities assigned to the private partner, the greater the incentives for innovation, as the agreement allows the partner to choose the appropriate methods for achieving the identified results, contrary to the conventional approach, where he must follow a series of set specifications.
The highly competitive process among suppliers at the national and international levels also has a significant effect on the reduction of costs and on the quality of the services provided.

Improved risk management

According to the conventional approach, the MTQ takes on most of the risks for a project, in terms of design, construction and maintenance. With PPP, the agreement assigns risks to the party that is best suited to manage them. Part of the risk is transferred to a private partner if he is seen to be able to manage them more effectively than the MTQ can. Optimization of risk management leads to a reduction in the project’s overall costs.

Compliance with cost estimates and deadlines

The contractual terms of a PPP are based on results, not work methods and procedures. This ensures that results will be achieved at the agreed-upon cost and within the timeframe set out when the partnership agreement was signed. The possibility of unexpected costs arising for the government is reduced and the government can establish long-term budgets with greater certainty.

Worldwide experience has shown that PPP projects are successful in meeting deadlines and cost estimates due to the strict planning process.

Client-based approach

The private partner is paid when the service is delivered. This is a strong lever for ensuring compliance with deadlines and offering communities the expected advantages as quickly as possible.

If for various reasons the service is found to be inadequate or of lesser quality, the payment made to the private partner is reduced. This contractual provision acts as a means to insure the quality level established within the contract.

Development of expertise by Québec firms

A few large organizations in Québec (i.e., engineering consulting firms and companies involved in public works, financial services, and management) have acquired PPP expertise elsewhere in Canada and in other countries.

The private sector’s work in PPP projects can lead it to expand and consolidate its expertise in managing transportation infrastructure projects. Because this type of expertise is at present highly sought after in several countries, each PPP contract obtained by a Québec firm provides it with a major advantage for obtaining similar contracts here at home or elsewhere.

New financing sources and strict management

The involvement of the private sector in the financing of a PPP project brings specific benefits: it gives the government access to new financing sources and it allows the government to spread its spending over the length of the contract.

Moreover, the financial discipline that investors must show in order to ensure the profitability of their investments in a PPP project ensures that they will closely adhere to all stages in the project’s preparation and completion.

Main steps in carrying out a PPP project

The process involved in carrying out a PPP project is complex and strict. It involves completing several steps set out in the Act respecting transport infrastructure partnerships, the government’s Framework Policy on public-private partnerships and the Guide for Developing a Business Case, which was produced by the Secrétariat du Conseil du trésor.

Development of a business case

A major project begins with the recognition of a need. At this stage, the MTQ will carry out an opportunity study, which determines the preliminary cost estimates and the socio-economic advantages of the project, in order to assess its viability.

As soon as the value in going ahead with the project has been established, the MTQ’s resources and its outside consultants carry out studies to identify and evaluate solutions that will meet the recognized need. For this stage, consultations with the involved departments, agencies and municipalities are usually held, along with public hearings held by the Bureau d’audiences publiques sur l’environnement. This process serves to identify the most feasible solution according to the conventional approach.

If this solution presents characteristics favourable to its implementation by way of PPP, the two types of tenders (traditional vs. PPP) are compared to find the optimal method, i.e., the one that will offer the best value for the money.

Private sector consultations

This optional step consists in confirming the private sector’s interest in carrying out the project as a PPP. It gives special consideration to the transfer of risks and responsibilities, and to the payment method. Consultations here are also useful for fine-tuning various points of the procurement strategy, the requests for qualifications and proposals.

Contract procurement strategy

The strategy for selecting a partner for a PPP is made up of several steps designed to ensure strong competition among the bidding firms and to obtain a contract that presents the best quality/price ratio, and not just the best price, which is the case with the conventional approach. It must also guarantee fairness and transparency. In general, the best proposal is chosen by way of three main steps, as follows: request for qualifications, request for proposals, and final negotiations leading to the signing of a partnership agreement.

Government authorization

The MTQ must obtain government authorization to carry out projects under the PPP approach as well as for the procurement strategy before issuing a request for qualifications.

Request for qualifications

This stage consists in identifying among the candidate firms those that present the best capacities and technical/financial resources for carrying out the project, and for taking on the related responsibilities and risks. It involves pre-selecting, on a competitive basis, the firms that will then be invited to submit proposals.

Request for proposals

The evaluation of the submitted proposals allows the selection of the best proposal and partner to complete the project. This stage requires potential partners to carry out considerable preparatory work. The final selection depends on the analysis of proposals in technical, economic and financial terms, taking into account the consequences (short-, medium- and long term) and benefits for the government and the community.

Negotiations, final authorization and contract signing

The last step in the process for selecting a partner entails negotiating the final arrangements and obtaining governmental approval to sign a partnership agreement between the MTQ and the preferred partner.

Project design and implementation achievement

After the formal signing of the partnership agreement, the private partner can begin designing the project, preparing plans and specifications and the construction in accordance with the contract. The duration of the design-build phases will vary according to the complexity and scope of the required work.

1 The Act respecting transport infrastructure partnerships regulates the management of toll highways in Québec. According to accepted government practices, an alternative and reasonable non-tolled roadway must be available to users. The level of traffic on a highway must be sufficient to justify the implementation of a toll.