Demystifying Infrastructure P3 Chapter Five: Can P3 be more transparent?

I want the truth! YOU CAN'T HANDLE THE TRUTH!

In chapter one of this demystifying series I flagged that P3 projects are generally large and complex undertakings for the public sector authority in question. Before it ever has a P3 label, the project is, for the most part, well known, well publicized and well documented.

Compare that to say, the paving crew on your local road: any idea what that is costing you, what the tender process looked like, the deadline for the project to be finished, the terms and conditions of the contract, who bid for the project and so on? P3 projects are often far more transparent and accountable to the taxpayer than the regular capital budget expenditures of the government authority. And yet taxpayers generally hold a belief that P3 lacks transparency.

So time for some truth.

P3 can be more transparent! There are some natural limits that exist due to the nature of P3 as well as the nature of public tendering processes. Everything that I have covered in chapters one to four of this demystifying series are elements of the P3 decision making process that are not normally discussed or explored with the public in any great details - either before, during or after the decisions are made. The challenge is significant however. Take the following examples:

• should the public authority reveal its risk register to the public and therefore the bidding community? Should the authority take input from the public with respect to risks and risk quantification? The risk register can show the public both the rigor of the analysis and thought process of their government authority, but it also reveals some very hard truths about construction and budget estimating in general. For example, when the public sees the risk "design error" with an associated dollar figure attached - is this seen as good prudent budgeting and acknowledgement of the reality that in undertaking such a major project the chances of design errors is not zero - or is it seen as padding the budget for incompetence? Should major project risks be part of the public engagement process perhaps? And should maybe the use of the risk register as a project and risk management tool be better explained rather than simply reporting on risks? What would the risk register reveal for the bidding community? Would it stifle innovation or would it ensure more robust project risk understanding? Would it result in better prices or more "loaded" prices? Which is better for the taxpayer?
• should more details on the value for money (VFM) analysis or the full business case rationale be presented to the public prior to, or at the time of the P3 decision? Would the public be happy to see the full lifecycle costing of their project, including the operations and maintenance period, or would the all-in price tag and associated tax increases that would be necessary - generate negative reactions? Would the public comment on the discount rate that is utilized and what this suggests of the value for money that the government holds (see chapter four for more)? Should the VFM analysis be part of the public engagement process - highlighting the link between prescriptive design, opportunities of innovation and VFM? In the hands of the bidding competition, what would the VFM analysis reveal of the project's budget expectations and limits? Would this create a pricing "anchor" and limit true competitive pricing? Would the VFM be criticized for being too aggressive or conservative? Understanding that there is a tension between risk transfer, level of private financing and VFM, how many scenarios should be shared with the public? And should the VFM analysis have some bearing on the project budget?

I pose these questions, not to suggest that the current level of transparency on these items is correct - but only to suggest that in moving from the generally held current levels of transparency, to some new level - that these questions will need to be considered and factored into the decision making. At a minimum, more can and should be done to engage with the public, either through the formal public engagement process or alternative approaches, to educate and enter dialogue with public interest groups around any potential P3 model that might be advanced for a particular project. Ideally this could occur with openness on both sides of the discussion - rather than having warring factions trying to win a debate in public.

Competition, Confidentiality, Challenge

I want to introduce what I have termed the three Cs that typically can stand against transparency. In my time advising clients at various levels and in various jurisdictions, these three Cs have been barriers to better transparency in some format or another. The first is the often touted "competition" goal. The idea is that more transparency in the various factors explored earlier can hinder a robust competition. By revealing too much of the public sector's homework and thinking, the private sector contractors have less aspects of uncertainty to innovate and compete on. In procuring a major complex project undertaking using P3, the authority has acknowledged that it doesn't know everything and needs a P3 partner to complete the project. That P3 partner is going to bring expertise and international experience to bear. So why would we show them our advanced work - which may make them focus on the wrong things - or result in very limited options being explored later. We want to fully encourage their solutions for our project.

Competition in the P3 context is often very focused on "innovation": innovation in how the project will be structured, undertaken, financed, secured and so on. In seeking out innovation from the bidding parties, the public authority must consider if it is offering a degree of confidentiality protection to those bidders. The more confident that the bidder is, that its innovations will not be revealed to their competition later, the more innovation that would be anticipated to occur, generating value for taxpayers. The trouble is, this confidentiality requirement, to encourage more competition, has the effect of really limiting the ability to "show" the public things like the full and final P3 contract, or final design elements of certain project elements, aspects of the project solution, final pricing, breakdown of pricing and so on. The reason for this commercial confidentiality is obvious - the bidders will compete on projects around the globe and so are in a constant state of competition - not only on our project but on many others. Revealing the winners information, terms and conditions they secured, the scope of the financing package, particular design innovations etc., - these can hurt the bidders' prospects on other projects. To the degree that this would be considered a risk for the bidder on our project - then the less likely they are to engage or offer their best innovations and solutions.

This leads us to the final C - Challenge. Many P3 formats incorporate a blend of technical and financial criteria leading to the award decision. Sometimes the bidders will have negotiated individual solutions, security packages or financial requirements in the P3 process. In other instances the bidders are all bidding to one P3 contract with no variation. In any case, once the winner is selected, the revelation of information associated with the winning bid opens the public authority up to the potential "challenge" of the result by the losing bidders. They may perceive some unfairness or bias having revealed some elements of the bid. The private sector bidders have expended significant dollars pursuing the P3 project, so if they feel they have lost unfairly - typically they will make such challenges. In another twist, the risk of challenge, and having a degree of transparency to allow for appropriate challenge - is in of itself a means of promoting open, fair and transparent competition (which bidders demand before they risk their bid pursuit dollars).

So all three Cs work in a harmony to generate the best competition for taxpayers. But this cannot be taken for granted and indeed - doesn't just happen. The balance must be proactively stuck. Tipping the scale one way or another will require realignment of other elements.

Just posting information is not transparency

It is in many authorities nature to post a redacted version of the P3 contract and sometimes the procurement documents for public consumption, after the award of the contract has been made. But this in of itself is not transparency. I have spent years writing and reading P3 contracts and procurement documents. Years understanding the balance between evaluation criteria, striking the balance of the three Cs, understanding the interplay of the procurement process with the resulting P3 contract and so on. And even still I find these documents to be a dense and cumbersome read (sometimes even the ones I wrote myself). They are layered and require significant time and effort to "decode" the balance of things in the context of the project.

So the idea that the provision of this information in of itself is somehow helpful, is misplaced. Authorities should consider educations sessions or a type of podcast series to breakdown the contract and the procurement processes and post these sessions for public consumption. A guided tour would be a much better approach to transparency. Such sessions could also aim to transparently explain redactions that have been made. Why not do the same at the front end of the decision making - or in explaining construction progress or issues that may arise and so on. Public engagement and discussion should not stop at the early design stage.

Hyper honesty can be exhausting and is not transparency

There is plenty of philosophy out there about whether the public at large really want full honesty from their public authority. I opened this chapter with a homage to "A Few Good Men", where Jack Nicholson's character points out how his country's people don't want to know what he needs to do to keep them safe.

Everywhere is different. Folks in one city or province/state, may demand more or less transparency of officials than in other places. And as may be obvious in the writing here, transparency is not the mere reveal of documents or nuggets of redacted info. But it also isn't found in the deluge of information in a hyper honest and hyper transparent format.

Truth is, improving transparency in the format that I have touted here would be expensive and may miss the mark in many instances. Why? Because it would likely fall to advisors and lawyers, or a select number of public servants to undertake the transparency that is called for. Expecting this burden to be managed by the same public servants that also must get on with building the project would slow projects down (which is expensive due to escalation in pricing). Imagine having an open house on P3 VFM analysis. Imagine having to advance these concepts and discussions at the public consumption level for every capital project.

Why every project? Because to only do this for P3 projects would present such a significant and artificial barrier to P3 that you would never do one (best for project or not). And so we have to be willing to look at everything - not just apply a higher standard to one contracting format. That could prove exhausting. Better to never do a P3 and then the public would never look at us!

All of this transparency needs to be routed in a foundational public understanding of the following important elements also:

1. Construction is NOT a pretty business. It is messy. It is hard. It is cold, wet, windy, hot, suffocating, noisy, disruptive, mucky, dangerous business. It takes an immense amount of labour, skill, engineering, supervision, logistics, supply chain, and hard lifting, pulling, hammering, plastering, balancing on a ladder to get a measurement, nails, wood, clips, boots, kicks and machinery to get a project designed and built. And construction is slow. There is a reason we watch time lapsed footage rather than live cams of projects being built. The scope for things to go wrong, for design to be unworkable in the field, for a large rock to be in a place nobody expected, for concrete to set at the incorrect temperature and so on - are vast. P3 or not - construction is the same. P3 doesn't stop the rain, the mud, the noise - it only allocates responsibility for these things to various parties.
2. Capital budget expectations are set too early and then communicated with too much certainty. Budget setting itself is victim of "optimism bias" and the desire to present a number that is thought to be both palatable and realistic. Most projects are handed a budget during the early preliminary engineering stage. That budget number will be recognized as being potentially plus or minus 30% of the quoted number for example. This is a huge range. However, when communicating with the public, a single number is quoted and often gets locked in as the sound bite. Why not quote the plus 30% number? Well because this might unnecessarily tie up excess amounts of available funds for various other projects. And delaying a project that would benefit one neighborhood or interest group until you see the capital price on a different project - when you might be being overly conservative in any case - that doesn't make for easy politics. Furthermore, larger budgets, even as project understanding gets refined, don't necessarily lead to efficient spending. If you have an initial budget at the plus 30% range, the natural instinct is not to return the 30% overage, but to include more scope, more bells and whistles - or simply hold more contingency.
3. Even the best P3 contracts need accountability within the public sector. Of the P3 contracts that I have seen fail, they fall into two categories: 1) the project was not a suitable P3 to begin with and 2) the P3 contract was not administered correctly by the public authority. There is no point in spending significant upfront money crafting a P3 contract and a P3 procurement process - only to then ignore all of the contract framework and tools within it afterward and revert to "this is how we do construction". And it is also a major failing that the administration of these hugely complex contracts is often "relegated" to junior administrators, without any training or education on the contract or contract management approaches that ought to be adopted (or ability to gain support from the original advisors). What if I told you that your public sector engineer in charge of a large capital budget, had only a few years of actual construction experience? What if I told you that the one's with the experience or either significantly under paid, or stretched across too many projects to exercise effective oversight, or sometimes and often - both. What if I told you that the best public administrator for the project has been pulled off the project to start a new project - leaving behind the file for a new public servant to take over cold? How much of the inner workings of your public authority would you like to know in the interests of transparency? How should the performance of these administrators be measured? And why are we only interested in looking at their performance on P3? Why not in general?

Transparency can be a rabbit hole. Honesty can be exhausting. A line needs to be drawn with an appropriate level of accountability and oversight function being applied equally to all capital spending - not just because the project is a P3 or not. We should not have a double standard.

Truth is, P3 can be more transparent - so could everything. Let's figure out a better balance together.

More to come.