Blog: Painful proof of a working model

In Alberta & Colorado, news has been breaking on some faltering rail projects. While painful for all those involved, they show that P3s are walking the walk, not just talking the talk.

Credit: Getty

From Maryland's Purple Line to Hawaii’s HART, rail projects are quite often beating sticks of choice for the industry. The bottom line is that they’re hard to deliver. The P3 model promises to be an antidote to that difficulty however, offering a shield from the risk - albeit for a price.

Critics of the model often state that this promise is something of a mirage, and that the public sector will always be the ultimate holder of risks, footing the bill if a project descends into chaos. But two recent examples are showing the public sector that risk transfer can live up to its name.

Earlier this week, the team behind the beleaguered Valley Line Southeast LRT P3 in Edmonton said they’d crossed a “huge milestone” in passing key performance tests that will enable the 14km line to begin operation soon.

The project was delayed after over 20 cracks were found in the support pillars of some of the sections, just months before it was set to open to the public. The City of Edmonton’s city manager Andre Corbould said at the time the city was “deeply disappointed” by the news. Understandably so. 

But, importantly, he added a key caveat to his statements: under the P3 agreement the “financial interests [of the city] are protected”. Something that the Edmonton Edmonton Chamber of Commerce agreed with, saying it was “comforting to hear that the P3 fixed price model [...] has saved the city from taking the direct financial impact of this delay”.

Of course, evidence of this financial protection is at odds with P3s’ promises of delivery certainty, but there are plenty of testaments to its ability on that front.

What this shows is that from a public sector side, the model holds water. Cost overruns and delays are avoided by the city. Yes, it’s painful for the consortium, but it’s what they have signed up for; that’s their risk.

Meanwhile, in Colorado, the Denver Eagle project has demonstrated a similar resilience in the model, although under more litigious circumstances.

Earlier this year, a Denver judge ruled on the dispute around the Denver Eagle alert system failures, and the corresponding costs of fixing the problem. Both sides ended up litigating around the issue, with the Colorado Regional Transportation District (RTD) pursuing project termination after the consortium looked to recoup its costs.

The judge said no to both: RTD does not have to pay $111m for the Denver Eagle P3 technical problems, but also denied its request for termination.

What good is this mess? It shows to every public sector and private sector client that these deals mean business. The US’s strong legal framework will support the contract, in both good times and bad. Risk will be transferred to the private sector, and the public sector will remain a partner for the duration, unless good enough reason arises.

The strength and stability of P3s are a fundamental quality that is required to make their length workable - and legal rulings like these are often what those in emerging markets crave to show their investability. This was evidenced by Stanford University’s Carter Casady in a recent study of emerging P3 markets, which shows that strong institutional and regulatory frameworks are key to P3 market maturity. Although not an emerging market, the US P3 industry is always covering new ground, and these strong rulings will help underpin its future reputation.

Make no mistake, these two projects have had major failures. Ones that have affected the parties involved and their communities. But issues such as the construction defaults faced in Edmonton are just as likely to happen in a design-build contract, where recourse from the builder is more complicated for the public authority - and certainly wouldn’t involve the contractor voluntarily choosing to upgrade cabling on the basis that doing so would improve longevity, as the TransEd team has decided to do.

P3s are often criticised for just talking the talk, but here they are walking the walk.

The margins that P3s earn for successful project delivery is often a target for those against the model - but ultimately they are the reward for the risk. For the public sector to be shielded from that risk comes at cost - but in the case of Colorado and Edmonton, a good one.

As risk transfer can often seem quite theoretical, active examples of it working for the public sector (while disappointing from many angles) are important to highlight for what they are: a showcase of a healthy, effective model.

P3s are not a free lunch, for either side. They’re a balance of pro and con, risk and reward. But as shown above, they are a viable option with evidence of working in practice, not just theory.