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  • Writer's picturePaul Torkan, P.Eng.

Auditing P3 Performance

Updated: May 9, 2019

(Public Private Partnership, PPPs, DBFM)

A Public Private Partnership (PPP or P3) is an alternative financing and procurement (AFP) for construction & service delivery between the government and the private sector. This arrangement is not to be confused with privatization. It allows the government to build and update infrastructures with private funds and pay back the cost investment and its interest in 20 to 35 years, depending on the nature and cost of the infrastructure. These infrastructures could be hospitals, bridges, tunnels, roads, schools, courthouses, data centres, or jails. In order for the owner to receive the site in its original condition, most contracts have a handback period of 5-7 years prior to the end of the contract period, which will allow the owner to review the condition of the property, equipment, and associated systems through an independent 3rd party.

This arrangement not only creates jobs in various sectors, but also transfers government risk to the project company. In return the project company, which acts as a special purpose vehicle on behalf of private investors, is paid monthly plus interest to build, finance, and maintain the asset.

Each project agreement sets a mechanism for self-monitoring & self-reporting during the operation of a P3 contract and the owner exercises its right to use a third-party auditor to ensure P3 objectives are met. Project companies and service providers must adhere to the terms of the project agreement. Internal or external audits will help stakeholders find weaknesses in performance or documentation management, build a roadmap, and act to resolve shortcomings throughout the term of the contract.

Framework for P3 Audits

Every P3 Project Agreement is designed for a specific output. Comparing the specifications of a typical project with the original intent of P3s, will help develop a framework for a comprehensive audit in seven focused areas that we will discuss in the next few paragraphs.

Since P3s are new in North America, auditors may not have a full appreciation for what they should consider when reviewing a project agreement. As such, they only review a few elements of each contract, at a very high level of scrutiny. Additionally, the owners themselves may not recognize the long-term effects of an audit without establishing a basic framework. Auditors will have to first construct a detailed framework to ensure that the original objective of the project agreement has been met, then they can evaluate the construction and service performance to satisfy the framework. The framework will also prevent scope-shrinking where the owner or the service provider audits for less and less information every time.

A comprehensive framework should be designed to keep the process honest and should not only to set the baseline, but also track and compare performances amongst project companies and service providers. This will create consistency in evaluation from one project to another and will mitigate accumulative risks for all parties over time. An adequate framework should at least satisfy the original objectives of P3s from a public perspective. The answers to these objectives should set the basis for an audit of a typical P3 contract:

1. To promote of economic development by:

  • ensuring variously sized businesses and local vendors are involved in the construction and operations of the facility.

  • providing skilled jobs for the community.

  • expanding the service base to additional smaller, strategic firms

2. To improve construction quality by:

  • building governing mechanisms into specifications so that quality issues are detected and rectified during the construction, and not after the building is occupied.

  • redefining “Substantial Completion”; the current definition is in conflict with the quality systems required for Public Private Partnerships.

  • continuous audit of construction deficiencies and latent defects.

  • ensuring consortium members maintain competing interests during the process.

3. To improve service delivery during operation by:

  • rating equity holders & facility management against key performance indicators.

  • evaluate preventative and predictive maintenance programs.

  • reviewing the help desk calls and levels of response and rectification against each request

  • reviewing asset management practices including:

- Maintenance best practices.

- Fixed asset registry and assets book value.

- Work order system management.

4. To promote accountability, innovation, and sustainability by:

  • ensuring penalty regime is followed for all failure types.

  • enforcing honest reporting.

  • reviewing & validating a list of innovations and life cycle projects

  • focusing on energy & environmental practices.

5. To reduce government cost by:

  • evaluating the out-of-scope work against project specifications.

  • confirming variation pricing using cost consultants.

  • validate reasons for historical “Unavailability.”

6. To build on private sector expertise by:

  • reviewing the parties’ key individuals’ experience.

  • ensuring an on-going, technical training program for all site-specific employees.

  • reviewing human resources practices for employment retainment strategies.

  • reviewing labour relations practices and dealing with various unions.

7. To minimize the government’s long-term risks by confirming if:

  • lifecycle work mitigates the risks associated with the building handback at the end of the concession period.

  • legislative work is completed according to scope and frequencies set by the authorities with jurisdiction.

  • documents are kept in proper order within a robust information management system.

  • an annual building condition assessment is performed by the service provider.

  • the service provider has a robust health & safety strategy when performing its services on government property.

  • upgrades on virtual systems have been approved by the authority.

P3 Auditors

There are not many individuals capable of auditing all areas of a P3 contract in the market. The work requires a team of individuals with expertise in fields such as mechanical & electrical engineering, facility management, digital and communication systems, computerized maintenance management systems (CMMS), contracts, energy, and legislation. The team will need to design a framework for each contract that answers questions raised to satisfy the initial objectives of public private partnerships, then audit the project company & service provider against that framework. It can then be used as baseline for all future audits independent from any individual in the team.

It is also a good practice to ensure that auditors hold the appropriate licenses, certificates, or professional designations. This will transfer the owner’s risk to the auditing firm.

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The Bottom Line

While P3 projects allow for a self-monitoring and self-reporting mechanism, the owner is obligated to review the performance of a service provider every 5 years or so, in order to ensure the service provider’s adherence to the terms of the contract. Penalty mechanisms in a typical P3 project often do not cover a portion of end user damages caused by a failure in a critical environment, such as hospitals or a correctional facilities. Smart service providers are open to compliance audits and resolve any issues to keep their site “audit ready” at all times.

The characteristics of a contract need to be embedded into the framework, in order for an audit to achieve its full purpose. All sections of the contract and service provider practices should be reviewed against key performance indicators for facility management, capital & lifecycle planning, energy, and associated activities.

The framework for an audit, which will need to be developed by a team of experts, provides a method of consistency for ongoing compliance audits and allows the providers to gradually make improvements to their practices. This will result in minimal issues during the handback period. Asset handback will then include the return of assets, updated processes, upgraded virtual systems & fully trained facilities staff.

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