Providing facility management services in a P3 environment

Public-private partnerships, or P3s, are partnerships between governments (Public Authority) and the private sector to build public infrastructure or to deliver public services, including hospitals, roads, bridges, schools, justice facilities, water treatment plants and transit systems. Under the P3 model, the public-sector partner integrates all parts of a project into one performance-based contract. The Design-Build-Finance-Maintain-Operate (DBFMO) model integrates the work of several private sector companies into one contract. The private sector companies form a special purpose vehicle, a Project Company or consortium, to complete the project1. A private consortia would consist of the builder, architects, engineers, consultants, service provider and equity provider.

The deployment of the P3 model in Canadian healthcare infrastructure has seen tremendous growth in recent years. Between 2003 and 2011, more than 50 hospital P3s valued at over $18 billion were in operation or development in Ontario, British Columbia and Quebec2. The provincial infrastructure agencies – Infrastructure Ontario, Infrastructure Quebec and Partnerships BC being the three largest – have found significant benefits in this delivery model, including:

■ Significant value for money

■ On-time, on-budget delivery

■ Design innovation

■ Long-term cost certainty3

Partnership Structure

1 The Canadian Council for Public-Private Partnerships. What are Public-Private Partnerships (P3s)? 2 The Canadian Council for Public-Private Partnerships. “Breaking New Ground: P3 Hospitals in Canada” Toronto, 2011. 3 The Canadian Council for Public-Private Partnerships. “Breaking New Ground: P3 Hospitals in Canada” Toronto, 2011.

“This alternative model is proving public infrastructure can be delivered sooner and more cost-effectively than in a conventional delivery model, providing better value for money.”

Canadian Council for Public Private Partnerships

There are several contract structures within the DBFMO model and these may involve any number of individual private companies partnering together to form a project consortium. Depending on the project, private consortiums may be contracted to provide Operations & Maintenance (O & M), Build-Finance, Design-Build-Finance-Maintain (DBFM) or full Design-Build-Finance-Maintain-Operate (DBFMO) services. This partnership structure is determined by the public contracting authority and defined by the project agreement.

In a P3 agreement, the project consortium is responsible for financing a portion of or the entire capital cost of the project during the construction

Build Finance OperateMaintainDesign

and design phases. Under a DBFMO structure, where operations and maintenance services are being provided by the consortium, the public authority makes a lump sum payment at an agreed to milestone and, upon completion, it makes monthly payments over the contract term, typically a 25 or 30-year concession period with a set interest rate. The consortium designs and builds the facility and delivers facility management services over the concession period. The contractual obligations are described in and mandated by the project agreement.

Facility Management (FM) Services

Figure 1.1: P3 Partnership Structure

Public Authority

Service Provider

General Contractor

Project CoFunders Equity Provider

Financing Agreements

Project Agreement

Equity Contribution Agreement

Construction Contracts

Services Contract

The scope of work for the private sector consortium’s (Project Co.) facility management services are provided by the Public Authority and described in the project agreement. When maintenance is included in a P3 contract, the private sector partner/consortium takes on the maintenance and renewal of the “hard” facilities management, also referred to as the “bricks and mortar” facilities. This is defined by long-term maintenance and life-cycle costs, including building maintenance and asset replacement. In a healthcare facility, this work could include the heating and air conditioning system, elevators and escalators, roof and building façade repairs, as well as help desk and security services. In some P3 contracts, Project Co. may also be responsible for “soft” facilities management. Soft FM services

may include housekeeping, food services, landscaping and grounds services, waste and recycling services and laundry/linen services. Under the P3 model, Project Co. contracts with a single entity (Service Provider) who in turn may sub-contract some of the services to speciality sub-contractors.

At the end of the 25 or 30-year concession period, the consortium hands back the asset to the Authority in the condition stipulated by the project agreement. One of the key advantages of integrating maintenance into the P3 contract is that the building’s assets are often handed over in excellent condition at the end of the contract because the Service Provider is obligated to refresh the building’s assets throughout the concession period as mandated by the project agreement.

Figure 1.2: Facility Management Services Structure

Option 1

Authority

Project Co(Consortia)

Architects

Engineers

Consultants

Maintenance

Housekeeping

Helpdesk

Security

General Contractor

Service Provider

Equity Provider(s)

Option 2

Authority

Project Co(Consortia)

Food Services Linen/Laundry

Architects

Engineers

Consultants

General Contractor

Equity Provider(s)

Maintenance

Service Provider

Helpdesk

There are several advantages to delivering an infrastructure project under the P3 model, including:

■ Cost savings/value for money

■ Construction schedule certainty

■ Risk transfer from the public to private sector

■ Community socio-economic benefits, including job creation

■ Design innovations

■ Well-maintained facilities over the contract term

One of the key advantages is cost and schedule certainty. According to the Canadian Council for Public Private Partnerships (CCPPP), “This alternative model is proving public infrastructure can be delivered sooner and more cost-effectively than in a conventional delivery model, providing better value for money.” Once the project agreement is finalized, the consortium commits to a construction completion date. The Public Authority benefits from cost certainty over the long term because the payment schedule is arranged from the outset. Costs are fixed over the term of the concession except when changes to services are made. Annual service payments are subject to adjustments based on annual inflation.

There are several advantages of integrating maintenance into the P3 project. Throughout the term of the contract, the private sector partner is responsible for the following, as agreed to in the contract:

■ Repairing and renewing the project’s infrastructure

- Eliminating the issue of deferred maintenance

■ Using good industry practices

■ Keeping the asset operational at all times

■ Submitting regular updates to the Public Authority on the state of repair work, allowing for periodic third-party technical audits

■ Handing over the asset to the Public Authority in a good state of repair at the end of the contract term4

Throughout the duration of the contract the facility is maintained to best industry practices, which results in the handing over of a well-maintained and updated building at the end of the concession period. The requirements of the project agreement also require Project Co. to lifecycle key assets throughout the 25 to 30-year term, essentially eliminating any deferred maintenance issues. In addition to this stipulation, the life of each asset is extended through the service provider’s contractual requirements to maintain building infrastructure and equipment over the 25 or 30-year term. At the outset of the project, the general contractor works with the service provider to review and assess each building element to select products that will both stand the test of time and that are cost effective from both a capital cost perspective and a lifecycle replacement perspective.

4 The Canadian Council for Public-Private Partnerships. P3 Components – Maintenance

Procurement ProcessThe procurement of a P3 infrastructure project follows a detailed competitive process with evaluations of technical, design and financial capabilities. In the Request for Qualifications (RFQ) stage, submissions are reviewed to pre-qualify project teams that have appropriate design, construction and facilities management experience, as well as the qualified personnel and financial strength to deliver a project of the size and complexity specified by the RFQ.

Following the short list of the project consortia, a formal Request for Proposals (RFP) is issued and pre-qualified teams are provided with specific technical, design and financial criteria to respond to. Proposals are evaluated and scored based on their teams’ ability to meet these criteria. For example, on a large hospital new build project, technical submissions may be evaluated on the: project management and construction plan, works schedule, medical equipment procurement and coordination plan, transition and commissioning plan, and operations plan. Design specifications could include: project vision and objectives, clinical and general functionality, design quality and sustainability. The financing requirements are typically evaluated on the net present value (NPV) and the quality of the proposed financing plan. The maximum score is given to the proponent with the lowest NPV.

A third-party Fairness Monitor is retained by the Public Authority to ensure that fairness, equity, objectivity, transparency and adequate documentation are maintained throughout the procurement process.

Benefits

ChallengesThere are also some challenges in the delivery and operations of a P3 building that need to be considered when providing facility management services. These key challenges may include the following:

■ Aggressive initial bid prices may not fully realize operational risk and the price for service exceeds the Public Authority’s expectations.

- The process of achieving a new mutually-agreed upon price may affect the partners’ relationship and established trust.

■ The project agreement and contractual structure may not clearly define responsibilities and the reporting structure, resulting in blurred or ineffective lines of communication between the Public Authority, Project Co. and the service provider.

- The Public Authority needs to be able to communicate directly with the service provider on day-to-day issues and all parties must understand when to escalate issues to Project Co.

■ There may be increased oversight and monitoring from the Public Authority.

- The Public Authority may become frustrated that they have no direct control over the service provider and how they provide on-site services. The service provider’s obligations are to meet the performance standards set out in the project agreement and how this is achieved is at their risk.

■ The service provider is responsible for self-reporting monthly, including indicating issues where contractually-provided key performance indicators (KPIs) have not been met, and the Public Authority has the right to apply penalties based on these reports.

- The self reporting model is very time consuming and detail oriented for the service provider.

- This reporting structure penalizes the service provider for non-compliance; however, it does not reward compliant or extraordinary performance.

■ The use of KPIs and deductions to ensure performance can cause disagreement between all parties.

- The interpretation of the project agreement and application of deductions can cause disagreement between the parties.

- Disagreements can quickly escalate to a full dispute without a strong partnership between the parties.

The Jim Pattison Outpatient Care and Surgery Centre (JPOCSC) is a 188,000 square-foot facility located in Surrey, British Columbia that provides a full range of scheduled outpatient services including day surgery, diagnostic services and specialized health clinics. The centre offers a Breast Health Clinic, Heart and Lung Clinic and a specialization in senior care. The facility is expected to care for 450,000 patients annually. Built to LEED® Gold certification standards, the Jim Pattison Outpatient Care and Surgery Centre was awarded the 2011 Commercial Building Award for Excellence. The $186 million design, build, finance and maintain project reached substantial completion in March 2011.

Case Study: Jim Pattinson Outpatient Care and Surgery Centre

The JPOCSC experienced the following market testing challenges:

■ Initial bid prices on the project were aggressive.

■ Risk was realized during the operations phase that was not anticipated.

■ The new proposed price for service exceeded the Public Authority’s expectations.

■ A reduction of scope was required to achieve a mutually-agreed-to new price.

The process of establishing a new price had the potential to affect the trust and transparency established in the relationship. A strong relationship between Project Co. and the Public Authority was key to facilitating an agreement. Facilitating a successful agreement strengthened the relationship further and demonstrated Project Co.’s ability to achieve resolution through negotiation.

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Initial Bid Price

Proposed New Price

Authority Expectation

Agreed Price Achieved

Marketing Testing Services

Figure 1.3: Marketing Testing Services

Initial bid price

Proposed new price

Authority expectation

Agreed price achieved

The Surrey Memorial Hospital – Critical Care Tower (SMH-CCT) is a 420,000 square-foot addition to the existing hospital campus in Surrey, British Columbia. The $327 million design, build, finance and maintain project reached substantial completion in February 2014. The eight-storey tower added 151 net new beds to the campus, and houses the busiest Emergency Department in Western Canada, including separate and specialized mental health, substance use and pediatric emergency services.

The following challenges have been experienced in delivering this project:

Case Study: Surrey Memorial Hospital – Critical Care Tower

■ Monthly self-reporting model:

- Performance failures are broadly categorized in the project agreement and the determination of what category or severity applies to a specific event is often open to interpretation.

- Differences in how the service provider and the Public Authority interpret severity and operational impact can lead to significant deltas in how a penalty is reported and how the Public Authority expects it to be calculated.

- Manifestation of these interpretation issues during the operations phase can result in a project having a higher risk profile than originally anticipated and priced during the bid phase.

- A strong partnership and open communication helps prevent these misinterpretations and can assist in reaching a mutually-agreeable understanding.

Successful DeliveryP3 projects are typically large, complex projects with long-term contracts and, as such, both the private and public-sector partners have a vested interest in making the project a success. The key to this success is a strong and honest relationship between the contracted parties. Specifically, this involves:

■ Open, honest and transparent communications.

■ Collaboration versus cooperation – cooperate is what you do when you are protecting your own interests; collaborate is what you do when you are working to create a win/win solution that considers the position of each party.

■ Excellent customer service and a focus on client satisfaction.

The results of successful P3 partnerships are beautifully-built, innovative and well-maintained infrastructure projects that serve their communities for the long-term.

■ Use of KPIs and deductions:

- Performance indicators and values of functional units within the facility are assigned and finalized during the procurement and financial close phases of the project.

- Application of these performance indicators during the operations phase does not always generate the appropriate incentive for performance, occasionally resulting in excessively punitive penalties, or, alternately, negligible impacts.

- The project agreement allows for an annual review of KPI and deduction levels to ensure that relevance in a changing operational environment.

■ Additional layers of bureaucracy and/or oversight for facility changes:

- The contractual structure requires formal approval from the Public Authority for any changes to the facility, meaning that end-users need to go through appropriate channels and cannot generally request changes directly from the service provider.

- The involvement of many different companies within the consortium (Project Co., the service provider, sub-contractors, the general contractor, etc.) often results in slower turnaround times on quotes and project implementation as each organization needs to perform its own checks and balances. This timing can lead to frustration for the end-user who is used to going directly to an internal FM provider.

- Contractual obligations lead to a greater cost transparency for any facility change, often highlighting to the end-user the true cost of changes that were previously grouped under overarching FM budgets.

- Regular end-user education provided collaboratively by Project Co. and the Public Authority can help manage expectations and highlight the benefits of the P3 model.