What are P3s?

P3s are a collaborative venture between the public and private sectors established based on the expertise of each partner which aims to meet clearly defined public needs through the appropriate allocation of resources, risks and rewards. Different models of P3s are in use (e.g. operation and maintenance contract, design-build-finance-operate, build-own-operate, etc.) and are tailored to the particular project. Two basic elements separate a P3 from traditional infrastructure and project financing: (1) the P3 relates to the provision of public services or public infrastructure and (2) the P3 necessitates the transfer of risk between partners. An additional characteristic of a P3 is a firm commitment to collaboration and cooperation between the private and public sector partners.

Who are the players in this project?

The owner of Olkiluoto is Teollisuuden Voima Oy (TVO) which is a Finnish public company owned primarily by the Finnish companies Fortum and Pohjolan Voima Oy (PVO). TVO procured Areva to construct the Olkiluoto-3 addition with a scheduled complete date of 2009. Olkiluoto is now expected to start operation in 2012 - three years behind schedule. The Olkiluoto project was structured as a turnkey fixed price contract and the time to construct the plant was to be 5 years.

What are the challenges?

After an almost 20 year moratorium on nuclear energy in the European Union, Areva was understandably anxious to take on this project which was likely intended to act as a platform for marketing their EPR third-generation reactor. This may have been the reason Areva agreed to what appeared to be unfavorable terms such as a fixed cost of 3 billion EUR (c.a. $5.1 billion CAD) and a commission date in the first half of 2009 - just five years after Areva planned on applying for a building license.

Some would argue that the terms of the agreement which TVO negotiated with Areva disproportionately allocated the risk. The turnkey model of Olkiluoto may have put a disproportionate amount of risk on the private contractor Areva and thereby discouraged collaboration with TVO.

Olkiluoto is for the most part a conventional design-build project where Areva was contracted to design and build the infrastructure to meet public sector performance requirements, for TVO at a fixed price. In this model, the risk of cost overruns has been largely transferred to Areva. Olkiluoto is expected to end up costing around 4.5 billion EUR (c.a. $7.7 billion CAD) - as much as 50% over budget. Areva and Siemens (which supply the turbine unit) agreed to deliver the plant as a turnkey project and will likely have to cover the bulk of the cost overruns.

On December 31, 2008 this matter went to arbitration to agree on the final amount owing. TVO maintains that the fundamental problem is primarily Areva's failure to have its design and engineering documents ready when construction began in 2005 and Areva contends that it is TVO's fault for taking too long to approve the design and engineering documents.

How do we get it right?

Some of the challenges faced by Olkiluoto could potentially be avoided in future developments by structuring the project as a P3. For example, if any development would proceed in Saskatchewan, SaskPower would likely partner closely with a private contractor to design and build the nuclear plant and after construction is complete SaskPower would operate the facility. In a true P3 model the future operator, SaskPower, would collaborate directly with the private developer in the design and construction, whereas this was not the case with Olkiluoto. Direct collaboration creates a more balanced allocation of risk between private and public interests and may help avoid the challenges associated with one partner (whether public or private) bearing a disproportionate amount of risk.

Naturally, any vertically-integrated utility lacking expertise in developing nuclear plants will not take the lead in designing and building a nuclear facility, but by collaborating closely many benefits arise. The local utility inevitably has much more knowledge of the regulatory requirements of the jurisdiction and can assist the private contractor in ensuring that regulatory requirements are met. In the Olkiluoto project, Areva was largely left to their own devices to sort through the very onerous safety requirements in Finland (arguably some of the most onerous in Europe and North America). Contractually Areva was obligated to ensure regulatory compliance but if TVO had a more prominent role, this may have been a less daunting task.

Cost overruns such as happened in Olkiluoto could be kept in check by granting some form of equity in the project to the private developer. Areva would likely have been more motivated to avoid cost overruns, if these overruns would have a financial effect on their long-term equity stake in the project, even if this equity stake was comparatively very small. In a tightly regulated electricity market such as Saskatchewan it is critical to avoid significant cost overruns because otherwise these are inevitably passed along to taxpayers. Granting a private developer an equity stake in a future development may save the taxpayer more money in the long run by avoiding costly overruns in the construction phase.

TVO maintains that the problem with Olkiluoto is primarily Areva's failure to have its plans ready when construction began in 2005 and Areva contends that it is TVO's fault for taking too long to approve the plans. A collaborative P3 structure may have avoided this by allocating risk to both partners equally and ensuring collaboration at every step (including approval of all technical and engineering plans) along the way.

How do we deal with the 20-year break in construction?

The almost two-decade break in actively building new nuclear plants seems to have caused reactor-building expertise to atrophy, while technology has progressed and safety requirements changed. TVO has stated that the delay with Olkiluoto is due to a number of factors, including the length of time that had elapsed since construction of the previous nuclear power station, which had meant it had taken longer than expected to bring subcontractors up to the level of expertise required. The construction companies sub-contracted by Areva at the Olkiluoto site may have underestimated how many workers they needed and how rigorous the safety procedures in Finland would be, largely because they had no recent experience with such projects.

As a pioneer on this project, Areva has gained a valuable prototype and more importantly experience which will very likely enable it to win new contracts that it can complete on budget and on time and likely negotiate at more favorable terms possibly using a P3 model.

My experience working as a lawyer in Finland on the Olkiluoto project leads me to conclude that a pure turnkey fixed-price model is too inflexible for 3rd generation nuclear projects and breeds a certain amount of distrust among parties. As a broad generalization, Finns are first-class collaborators. Finns have in fact, pioneered the P3 model in the information technology industry many years ago and P3 partnerships lead to the growth and dominance of Finnish mobile phone giant, Nokia. So the approach to the Olkiluoto project which TVO has taken is quite uncharacteristic. In any case, the lessons learned on the Olkiluoto project can bridge the 20-year gap in our knowledge and assist lawyers and developers structure successful developments, possibly in Saskatchewan, in the future.