The Plenary Group

Cracking the nut┬áThroughout the UK, Europe, Australia and Canada, public-private partnerships are an accepted way of procuring new public buildings, but there is still resistance in the US, as Alan T Swaby learns. In a nutshell, public-private partnerships are a way to design, build, finance and maintain community assets such as schools, hospitals or roads, but unlike other financing options, there is then an obligation to provide ongoing maintenance for a certain period of timeÔÇöusually 20 or 30 years.┬á  The public side of the partnership gets what it wants to an agreed standard, for which it pays a monthly fee that covers the operating and capital costs. Under this model, ownership rests with the public sector from day one, and the asset is handed back at the end of the term with no residual payment. The transaction is financed on the basis of the project agreement with a credit-worthy public-sector counter party, not the underlying value of the real estate. If any of the work fails to meet the agreed standard, the public body reduces the annual payment to the private-sector provider, which represents its loss of use. The risk is all transferred to the private side of the partnership.ItÔÇÖs a classic win-win situation. The public sector gets what it wants at a price measurably less than it would have paid using traditional models, while the private side banks on its ability to work more efficiently than would be possible by public bodies subjected to bureaucratic restrictions. Carrying all the risk, the private party has an absolute incentive to fulfill its obligations in the most productive and efficient way possible.The first-ever PPP was in the United Kingdom 17 years ago; since it is barely halfway through its allotted lifespan, no one knows with absolute certainty that the theory works. Nevertheless, the British Treasury and Auditor General have conducted countless analyses that confirm that the public side is still getting good value for moneyÔÇögood enough to have PPPs as the preferred option for major capital intensive projects.The idea is beginning to catch on in Canada, and one of the major players is the Plenary Group. Despite being formed only in 2004ÔÇöfirst in Australia, and then a year later in CanadaÔÇöthe management team behind Plenary has a wealth of experience, CEO Mike Marasco explains. ÔÇ£Key members of the team have been involved with PPPs for many years, working with the Dutch bank ABN AMRO. However, some felt that the AMRO model looked at the partnership through bankersÔÇÖ eyes, predominantly as a means of raising project finance. We felt that the true worth of PPPs would only be achieved if we were able to take a much longer view and work as active, full partners throughout the entire lifecycle.ÔÇØThese days, Plenary has a strategic relationship with Deutsche Bank that allows for financial underwritings (including long-term debt, construction debt and hedging facilities) to be supported by the bank. Plenary is able to draw on the extensive international and domestic network of Deutsche Bank, one of the worldÔÇÖs largest investment banks. In just a few short years Plenary has amassed an impressive portfolio of projects in its role of specialist developer, financier and then manager of exclusively public assets through PPPs. In one of the more recent Canadian projects, it has teamed with York University to deliver a new state-of-the-art headquarters for the Archives of Ontario. The archives facility will be located at York UniversityÔÇÖs main campus in the Greater Toronto area and will house over $400 million of archive collections owned by the Province.This particular project demonstrates the complexity of some PPPs. York University ran a tender for a development partner and selected Plenary with PCL Contractors to submit a proposal to the Province of Ontario. The site in question has the first three floors devoted to the Archives and then an extra five floors of office space above, which will be occupied by the university. Both elements are integrated into a single construction project but are entirely separate in ownership, management and technical requirements. The ArchivesÔÇÖ design, for example, is driven by the need for reliable and precise controls over temperature and humidity, as well as high levels of security and access control.ÔÇ£Once the building is completed in March next year,ÔÇØ says Mark Miles, vice president, project delivery, ÔÇ£it will be maintained by Morguard, a specialist subcontractor, under our oversight for the next 35 years. During this period, work must be carried out to an agreed standard, and any deviation will potentially reduce the returns we receive.ÔÇØHaving responsibility for ongoing maintenance and for handing over, 35 years later, a building in good condition obviously justifies specifying designs and materials that will deliver over the full lifecycle of the project rather than short-term needs to keep costs down. While traditional developers might cut corners knowing that problems will transfer to the new owners, a PPP developer would shoot itself in the foot by such actions.Although PPPs have become an accepted instrument in Europe and now have a foothold in Canada, they have a long way to go in the United States. Marasco believes that there needs to be a mindset shift that values the ongoing maintenance component of PPPs. Under the traditional model, developers believe that their approach is less costly. However, Marasco wants public authorities in particular to view the whole-life costs. ÔÇ£The challenge we face in the States,ÔÇØ he says, ÔÇ£is that they view PPP only as a financial vehicle, whereas in the reality of the full lifecycle of a project, raising financing is only a small part of the cost. Whenever there is a squeeze on finance, maintenance is often one of the first casualties, and of course deferred maintenance means the quality of the asset diminishes and the problems mount up.ÔÇØHowever, Governor SchwarzeneggerÔÇÖs endorsement of PPPs in California will no doubt go some way to promoting their usage. Legislation has been passed that will allow PPPs, and already there is a project for a new courthouse in the pipeline. ItÔÇÖs a small step, but the Plenary Group is hoping that it will eventually crack the enormous market that the US would represent.┬á