Twenty years following the closing of the Confederation Bridge transaction, the public-private partnership (P3) model is now generally accepted throughout Canada and the pace at which such projects are announced, procured and delivered shows no signs of slowing down. In fact, the Canadian P3 model is now widely regarded as a benchmark throughout the world.
The Confederation Bridge – widely-regarded as Canada’s first true P3 – opened in 1997. The 13 km bridge spans the Northumberland Strait, a particularly harsh stretch of water separating Canada’s province of Prince Edward Island and the mainland. At that time, Canadian P3 expertise was limited. Government authorities, financial advisers, legal experts and Canadian-based sponsors and developers were generally inexperienced with this manner of procuring major infrastructure projects, although they were well aware of how successfully the model was being deployed in the UK and Australia. Today, over 100 projects have been developed using the P3 model throughout the various provinces and territories of Canada. Since Canada is a federation – and because of the particular, constitutionally mandated allocation of responsibilities between provinces and the federal government – the majority of large-scale infrastructure projects fall under provincial jurisdiction, the principal exception being infrastructure, such as bridges, crossing navigable waterways.
Following the success of the Confederation Bridge project, provincial procurement authorities began to take a serious look at the model, leading within a few short years to P3s becoming a widely accepted project delivery method. Many provinces have established specially mandated provincial agencies to evaluate, structure and procure P3 projects. British Columbia created Partnerships BC in May 2002 with a mandate to implement P3 infrastructure projects in that province. Other jurisdictions followed suit, with Ontario, Quebec, New Brunswick, Alberta and others quickly settingup similar agencies or specialised procurement units within existing government ministries. These agencies and units permit provincial authorities to centralise expertise and decision-making authority within entities responsible for most or all P3 projects within each province. The federal government also established an agency, P3 Canada, which plays a different role as described below. This article highlights some of the reasons behind the success of the so-called “Canadian model”. We then provide an overview of the key P3 transactions that closed in Canada in the past year, before providing insight on what’s ahead in the Canadian market.
The Canadian model
Canada’s success in implementing P3 projects does not result from any one particular factor, but rather the combination of a number of elements that have brought about a strong and stable P3 transaction environment.
The federal government and nearly all of the provincial governments have adopted enabling legislation that not only permits the development of P3 projects, but requires tendering authorities to evaluate the feasibility of implementing any major infrastructure transaction above certain predetermined thresholds as a P3. For example, the province of Quebec’s major infrastructure implementation agency, Infrastructure Québec, is required to consider a P3 delivery mode for any proposed project having expected capital expenditures in excess of C$40M. The business case analysis conducted in respect of each project is therefore key to determining the development model to be used in respect of each project. Value for money remains the deciding factor, with additional elements such as a project’s financeability, lifecycle expectations, revenue generation potential and social acceptability factoring in to the authority’s assessment of a project’s business case.
At the federal level, P3 Canada, a federal crown corporation incorporated in 2008, advances efforts to increase the use of P3s in Canada. P3 Canada administers the P3 Canada Fund, a merit-based programme, which provides financial support equal to up to 25% of a project’s cost to provincial, municipal or other tendering authorities seeking to implement a P3 transaction. Moreover, the federal government maintains a number of additional funds that provide financing for other infrastructure projects throughout the country.
The federal government also requires that all federally procured infrastructure projects – that is, those falling directly within federal jurisdiction, including, for example, government buildings – developing an asset with a lifespan of at least 20 years and having capital costs of C$100M or more be subjected to a business case to determine whether a P3 may be a suitable procurement option. Should the assessment conclude that a P3 is feasible, the procuring department must develop a P3 proposal among possible procurement options.
The country’s P3 agencies also assist municipalities in structuring and implementing P3s, oftentimes acting as the procuring agent on behalf of the municipality. Indeed, in recent years there has been increasing interest from municipalities to procure infrastructure using a P3 model. These projects tend to be smaller than the ones procured by provincial authorities and the federal government, although some have been quite large.
Standardised procurement processes and documentation
One of the key features of Canada’s P3 market has been the high degree of transparency by the country’s various procurement agencies. The pipeline of upcoming projects is generally well known in advance, allowing sufficient lead time to existing and new private sector participants to ready their consortia and, eventually, their responses. In addition, contractual documentation is readily available, with each of the jurisdictions that procure infrastructure pursuant to a P3 model generally publishing redacted versions of the signed project agreement online.
Furthermore, procuring agencies have made an effort to ensure that within their jurisdictions the procurement processes at the RFQ and RFP stages, along with the project agreement and many ancillary agreements to be entered into between the authority and the private sector partner, are similar to those for past transactions. This helps both to reduce transaction costs and to ensure that the proposed risk allocation is well understood by project participants. Each provincial procurement authority has tended to develop its own models, but over time many of these models have tended to converge. This is true both between provinces and also to a degree among P3 sectors.
While the early models were often inspired in part by Australian and UK precedents, these have tended toward rapid “Canadianisation”, reflecting increasing confidence, government objectives and policy choices, and the demands/constraints of the Canadian market.
The tendency towards standardisation is also reflected in financing documentation. Although technically not part of the procurement process, lenders and other financiers have encouraged the use of similar contractual clauses. Given the importance of financing to the success of a P3 transaction, the predictability of financing documentation also has a facilitating effect on project implementation.
Stable financing environment
Canada has emerged from the so-called Great Recession relatively unscathed. Indeed, most P3 projects continued to achieve financial close both during and in the aftermath of the 2008 financial crisis. Obviously, this does not mean that changes were not made to ensure project financeability. For example, various provincial procurement authorities agreed to make partial milestone payments, including substantial completion payments, during and after the construction period. In addition, project lenders were afforded greater rights over revenue flows, in some cases to the detriment of government authorities and in other cases to the detriment of equity holders.
A key advantage to Canadian P3s is a well-developed bond market when compared to many European jurisdictions. The bond market, which developed to serve the corporate finance needs of Canadian corporations, has adapted well to the exigencies of the P3 market and most large P3 projects are now financed largely through the issuance of project-related bonds, often in conjunction with a bank debt tranche. This has had the effect of making projects more easily financeable at lower costs, since project loans can be structured to reflect different risk profiles and tenors. The value of bond issuances related to P3 transactions has skyrocketed since 2009 and reliance on such issuances to finance the major portion of project capital costs is widely expected to continue.
Much of Canada’s urban infrastructure dates back to the 1960s and 1970s and needs to be replaced. This has led to an increase in demand in P3 as governments seek alternative methods to procure and finance infrastructure.
Many Canadian municipalities have experienced rapid growth during the past decade and require both civil infrastructure and facilities such as sports complexes, hospitals, schools, water treatment plants and the like.
Foreseeability of project pipeline
Several provinces have established forward-looking, multi-year, infrastructure plans that have helped reassure prospective bidders of continuous opportunities in the P3 sector, thereby reinforcing the other advantages of the Canadian market.
The resource boom of the past few years in Canada has created a need for related infrastructure, such as roads, railroads, ports, housing facilities, generation facilities and related infrastructure.
New market entrants
The openness and transparency of the Canadian P3 market, and the lack of significant entry barriers to foreign bidders, has attracted high-quality bidders. This increases competitiveness, with a consequent effect on prices as well as on-time and on-budget delivery. Furthermore, the decline in the European P3 market has paradoxically had the effect of energising the Canadian P3 market as a number of new entrants appeared in Canada to take advantage of the relative strength of the market.
Highlights from the past year
In British Columbia, the Evergreen Line Rapid Transit Project reached financial close in January 2013. EGRT Construction, led by SNC-Lavalin, was awarded the C$889M contract to design, build and finance the Evergreen Line. The project will link the cities of Burnaby, Port Moody and Coquitlam with an 11 km advanced light rapid transit line between Lougheed Town Centre in Burnaby and Douglas College in Coquitlam. It is expected to be in service in 2016. The components of the project include elevated and at-grade guideways, a 2 km bored tunnel, six to eight new stations, power substations, train operating systems, parking facilities, and a vehicle storage and light maintenance facility.
In Alberta, financial close was achieved on the Northeast Anthony Henday Drive in May 2012. The project will complete the ring road highway surrounding the city of Edmonton. A consortium comprised of Meridiam, ACS and Hochtief is scheduled to deliver the C$1.8B project in 2016. The project includes 27 km of six- and eight-lane divided roadway, nine interchanges, two road flyovers, eight rail crossings (flyovers), and two bridges across the North Saskatchewan River, for a total of 46 bridge structures.
In Ontario, the Ottawa Light Rail Transit project reached financial close in February 2013. Rideau Transit Group was selected as the preferred bidder to design, build, finance and maintain the project and to build and finance the widening of Highway 417. Key consortium members include ACS, EllisDon, SNC-Lavalin, Dragados and Veolia Transportation. The C$2B project will be the capital’s first light rail public transit system and is scheduled to be in service in 2018.
In Quebec, the Horizon Justice Sorel-Tracy consortium was selected in April 2013 as the preferred bidder to design, build, finance, operate and maintain the Sorel-Tracy Detention Centre. Financial close is expected sometime during the summer of 2013. The winning consortium is led by Fiera Axium Infrastructure and includes Pomerleau, Verreault Construction and Johnson Controls. The project will house 300 inmates, is expected to be in service in 2014, and represents one of the few detention centre P3s in Canada.
The federal government has announced that it will proceed with a P3 for the design, construction, financing, operation and maintenance of a new bridge for the St. Lawrence to replace the city of Montreal’s ailing Champlain Bridge, Canada’s busiest. Project specifics are expected in late 2013 with the delivery of a business case. The RFQ could be launched as early as 2014, with initial estimates being that the project will cost anywhere from C$3B to C$5B.
Provincial and municipal procurement
Ontario continues to be Canada’s most active P3 market and after years of focusing primarily on health care and other social infrastructure projects, a wave of transportation and transit projects have been announced in the province. Projects include the Eglinton Crosstown LRT and Scarborough LRT Lines, Highway 407 East Phase 2, Waterloo Rapid Transit System, East Rail Maintenance Facility and the Sheppard Maintenance and Storage Facility.
In British Columbia, while the focus remains on the social infrastructure space, a number of municipal wastewater and waste-to-energy projects are proceeding under P3 structures, pointing to a diversification of Canada’s P3 market. Projects include the city of Surrey Biofuel Processing Facility Project, the city of Victoria’s McLoughlin Wastewater Treatment Plant Project and the Greater Vancouver Sewerage and Drainage District’s waste-to-energy project.
The province of Quebec is developing multiple large infrastructure projects, although in many cases the procurement model remains unknown. A number of public infrastructure projects in the transportation sector in the Montreal region have commenced or will likely commence procurement in 2013-14 or shortly thereafter, although whether these projects will proceed under a P3 model is uncertain. Projects include a new light rail maintenance centre in Montreal’s Pointe-Saint-Charles borough, expansion of existing LRT lines, a new LRT project linking Montreal’s airport with its downtown, as well as a provincially procured LRT line which is planned to cross the federal government’s new bridge over the St. Lawrence. Finally, the province is proceeding with a design-build project for the replacement of the Turcot Interchange, a C$3.7B multi-level interchange of three highways located near downtown Montreal, for which three consortia have been pre-qualified.
The P3 market is also paying attention to developments in the province of Saskatchewan, which in late 2012 saw the creation of SaskBuilds, a Crown corporation with the mandate to integrate, co-ordinate and prioritise infrastructure spending in the province. The agency was mandated to prioritise procurement through P3 where possible. Potential projects include the construction of new schools, a hospital project, as well as new highway projects. Saskatchewan’s capital, Regina, is already implementing a wastewater treatment plant P3 and a new stadium project. The city of Saskatoon is also currently implementing a project for the development of new transit facilities.
In Canada’s Maritimes, the province of New Brunswick continues to favor the development of new infrastructure projects using a P3 model.
Finally, the country’s northernmost territory of Nunavut is proceeding with a P3 to design, build, finance, operate and maintain a new airport in the territorial capital of Iqaluit. Pre-qualified bidders were announced shortly before this article went to press. This project is perhaps the most northerly P3 ever developed anywhere.
Canada’s success in adapting the P3 model initially developed in the UK and Australia to reflect local objectives and market expectations showcases the adaptability and flexibility of the model and its ability to meet the challenges of the “infrastructure gap”. This has not gone unnoticed by developers who have responded by enthusiastically entering the Canadian market.
As countries worldwide struggle to develop or replace infrastructure, the Canadian P3 experience has become widely respected as a model for other countries’ own infrastructure needs, with Canadian developers, financiers and advisors increasingly participating in major projects in the US, Europe and emerging markets.
This article was published in the Privatisation & PPP Review 2013/14, published by Euromoney Yearbooks. For further information please visitwww.euromoneyplc.com/yearbooks.