The Canadian market may soon see new opportunities and unique challenges for public-private partnerships ("P3s") in water assets as municipalities across Canada prepare to face costly upgrades to wastewater infrastructure.

The federal Wastewater Systems Effluent Regulations (the "Regulations")1 on managing wastewater effluent under the Fisheries Act,2 came into force on July 18th, 2012. While water treatment and management in Canada is a responsibility shared among federal, provincial and municipal governments, municipalities are delegated significant authority over drinking water treatment and wastewater management, with most treatment facilities owned and operated at the local level. The new regulations add to municipal governments' existing legal obligations by requiring wastewater facilities to be brought up to new standards in fairly short order. Given the cost, size and scope of the infrastructure needed, P3s are positioned as an attractive and cost-effective implementation model for municipalities to meet the challenges imposed by the new regulations.

The Regulations provide regulatory clarity on standards and rules on reporting for the more than 3,700 Canadian wastewater facilities, through the adoption of national effluent quality standards requiring secondary wastewater treatment across Canada.3 The Regulations apply to any wastewater system that deposits a deleterious substance to surface water that serve as a fish habitat and that is designed to collect an average daily volume of influent of 100 m³ or more or that actually collects an average daily volume of influent of 100 m³ or more during the year.4 Monitoring, record-keeping and reporting requirements come into force on January 1, 2013, while other provisions are phased in over the next several years.

trends in P3s for water infrastructure

Private investment in water infrastructure is limited compared to Canada's other infrastructure sectors, but there are recent indications that the private sector presence in this area is expanding. Over the last decade or so, many of the P3s sponsored by municipalities in respect of water assets adopted narrow models that focused on contracts for the operation and maintenance of publicly-owned facilities, with only a few examples of integration across the design, construction and financing phases of the project.5 In Ontario, for instance, P3s sponsored by the Municipality of Brockton and the Town of Goderich were restricted to 5 and 10-year contracts for the operation and maintenance of their water and wastewater systems.

P3 announcements coming out of British Columbia, Alberta and Ontario suggest that the new trend in water infrastructure is one of greater integration with the private sector. In mid-July and early-August of 2011, details were released about P3s for upgrades to the Lac La Biche Biological Nutrient Removal (BNR) Wastewater Treatment Facility and the Evans-Thomas Water and Wastewater Treatment Facility.6 In December of 2011, the City of Greater Sudbury announced its partnership with the Government of Canada to construct a new Biosolids Management Facility.7 In July of this summer, P3 funding was announced for the construction of a Biosolids Energy Centre, as part of a new wastewater treatment system in Greater Victoria.8 In all cases, the private sector is allocated responsibility for the design, construction and operation of the facilities, and, in the case of upgrades to the Evan-Thomas, Victoria and Sudbury facilities, for providing partial financing. The level of private sector integration in these projects may provide a model for municipalities needing to improve their own wastewater systems under the Regulations.

opportunities for P3s

When the Regulations were published in July 2012, Environment Canada estimated that approximately 25% of existing wastewater facilities will require upgrading to meet the minimum secondary wastewater treatment standards.9 Transitional authorizations will be granted according to a risk-based timeline, whereby wastewater systems will be classified according to the characteristics of the system's effluent, the receiving environment and the overflow locations from combined sewers.10 Systems that are classified as high-risk will have to meet the effluent quality standards by December 31, 2020,11 leaving a narrow window of time for municipalities to secure funding.

Given the size of this undertaking and the cost of upgrading water infrastructure, P3s offer an opportunity for municipalities to maximize value. While P3s are not a panacea, the combined strengths of the public and private sectors create an attractive model when effectively structured and employed. By allocating responsibility for the project, municipalities can take advantage of (i) operational efficiencies and cost savings, (ii) additional sources of financing, (iii) improved speed of procurement, (iv) transfer of risk from the public sector, (v) improved regulatory compliance and (vi) clear paths of accountability. As an example, private sector water firms can achieve efficiencies and cost savings through economies of scale. By operating multiple water and wastewater systems private firms can invest in technology and training, and possess the leverage to make high-volume purchases for supplies such as chemicals.

An added incentive for municipalities is the potential to access the federally-funded P3 Fund when sponsoring P3 wastewater projects. The fund promotes P3 financing in Canada by granting financial support to selected projects, with wastewater infrastructure included among the categories of eligible infrastructure.12 Most recently, the fund provided federal funding in the amount of $3.8 million to the Lac La Biche BNR project,13 $11 million to the Biosolids Management Facility project in Sudbury,14 and $83.4 million to the Biosolids Energy Centre project in greater Victoria.15

some challenges

In pursuing opportunities for P3s in wastewater infrastructure, municipalities will also confront challenges to private sector involvement.

A unique feature of wastewater facilities is that they are a long-lived and intensive fixed capital investment, requiring significant up-front capital expenditure and specialized construction and operation, generally matched by long term financing. Wastewater systems also involve underground assets, making certain information about the quality of existing infrastructure and local real estate rights a due diligence challenge. With these added complexities, municipalities may need to go to greater lengths to make the investment attractive to private firms or end up taking on more project risk themselves.

Municipalities have also at times been hesitant to involve private partners in public infrastructure projects, tending to procure large infrastructure undertakings on a more traditional basis. Water has long been considered a public good, essential for the health of Canadians, and municipalities have at times been exposed to public criticism when P3s have come under consideration for water assets. In the fall of 2011, for example, citizens of Abbotsford, British Columbia voted against procurement of the $291 million Stave Lake Water Project via a P3 model, notwithstanding local and federal government financial support. However, recent experience in the healthcare, education and transportation sectors has shown that private involvement, and P3s in particular, can actually enhance the ability of government to deliver core public services on-time and on-budget, while maintaining appropriate controls with the procuring government.

Transactions costs associated with P3s may also be a deterrent for municipal governments since municipalities generally lack experience with P3 processes such as procurement and allocation of project risks. To successfully drive down these costs, access to experienced project participants is critical. Today, more than ever before, there is a full complement of advisors available, both on the private and public sector sides. In Ontario, for example, municipalities looking to upgrade their wastewater treatment facilities will want to leverage the experience of provincial agencies and their counterparts' nation-wide in their dealings with the private sector.

It remains to be seen, however, whether provincial agencies will exercise political caution about becoming involved in municipal water projects if there is a risk that they could face voter ire at the provincial level if, for example, existing municipal ratepayer fees were ultimately not sufficient to cover the significant capital cost investment in required upgrades and annual operating expenses.

With these challenges in mind, P3s remain positioned as an attractive model for upgrading wastewater infrastructure. With the enactment of the Regulations we expect to see a growing market for municipality-sponsored projects, securing wastewater facilities as an expanding P3 asset class.