Room in the Boom

With public private partnerships for renewing Canada’s infrastructure creating new opportunities for North American chartered surveyors, BTY Group’s Ross Templeton, MRICS, PQS, advises newcomers to the market to think globally but reduce risk locally.

Canada’s Public Private Partnership (P3) market is burgeoning. Having grown steadily since the first P3 project transactions in the late 1990s, it is now set for more dramatic expansion. BTY Group has worked on more than 30 P3 transactions, primarily in the Lenders Technical Advisory and Independent Certifier roles. BTY Group sees concerted government effort across the country to renew aging infrastructure — both hard and soft — paving the way for a new, deeper and wider wave of P3 infrastructure projects in Canada. This infrastructure wave will help the construction industry “continue to outperform much of the Canadian economy through the recession period from 2009 to 2012,” according to the Construction Sector Council, an industry lobby group, in a recent report.

P3s have proven their value

With dozens of successful P3 infrastructure projects constructed and now in operation, this form of alternate procurement has established a strong track record in Canada. A January 2010 Conference Board of Canada report stated that “value-for-money studies comparing the projected costs of P3s and conventional contracts showed that the Canadian P3s initiated from 2004 onwards have so far delivered important efficiency gains for the public sector (i.e., taxpayers), ranging from a few million dollars to over CDN$750 million per project.”

Recent high-profile P3 successes are also helping improve public opinion of the model, particularly in British Columbia and Ontario, which have led the way in developing the country’s P3 models. The Canada Line, Vancouver’s new urban rail service that commenced operations ahead of schedule in August 2009, is posting ridership numbers approaching the original forecast of 100,000 passengers per day. The CDN$762 million Golden Ears Bridge in suburban Vancouver opened in June 2009 on time and on budget.

Ontario has approximately 28 infrastructure projects completed or underway; most are hospitals, prisons, courthouses, police stations and a massive provincial data center. Their success to date has led the province to make the P3 model its mainstay in planning for a massive CDN$90-billion, 15-year megascheme aimed at renewing the province’s roads, jails, schools and, most urgently of all, hospitals. At the recent opening of a new cancer center in Ottawa, the province’s premier, Dalton McGuinty, pledged his commitment to the rebuilding plan: “We’ve got to keep the capital-spending dollars flowing.”

Flexibility in the Financial Crisis


Niagara Health Complex

While the financial crisis forced some P3 projects to alter course, it also revealed the model’s ability to adapt itself to challenging market conditions. The CDN$2.46 billion Port Mann Bridge in British Columbia started under the PPP model but converted to design build when the province and the Macquarie-led consortium were unable to reach final agreement, according to Patrick Boocock, a partner at Brookfield Financial. The adaptability was exemplified when Deutsche Bank withdrew from the CDN$759 million Niagara Health Complex in Ontario’s Golden Horseshoe. Then only a sustained group effort by Borealis Infrastructure (OMERS’ infrastructure group) as preferred equity investor, continued commitment from Canadian lenders to the P3 sector and significant progress and completion payments from the province ensured continued project financing.

The Province of British Columbia also showed adaptability when it chose to procure two of its most recent P3s: Fort St. John Hospital, which closed in July 2009, and BCCA Prince George Cancer Centre, with a P3 modification that required private sector proponents to inject 20 percent equity into the project with the remainder of the funding coming directly from the province.

In Ontario, where seven projects closed in 2009 and another three are expected to close in 2010, the province is using substantial completion payments to help reduce the total dollar value of private sector funding while maintaining an appropriate risk allocation framework. All the projects were financed either via an underwritten bond solution or a direct private placement with Canadian life insurance companies.

Strong Fundamentals for P3 Deal Flow

With greater certainty from more settled financial markets and a number of P3 projects nearing construction completion, the market is expected to see secondary sales of assets with proponents looking to free up capital for new pursuits. The P3 market will also have stronger and more widespread federal and provincial government support — including a CDN$33.6 billion federal infrastructure spending plan — that promises to widen the sectored scope of potential P3 projects and provide more support for creating greater P3 deal flow, especially through municipalities. That widening scope also promises to drive more robust due diligence requirements on the P3 value for money proposition from all involved — government agencies, private sector proponents and lenders.

Canada’s CDN$125 Billion Infrastructure Deficit

Golden Ears Bridge

Canada’s total infrastructure deficit is estimated at CDN$125 billion. A prime driver of the need for new infrastructure is Canada’s population growth. Fueled by immigration that is concentrated mostly in urban areas, the Canadian population growth rate is higher than those of most industrialized countries.

The steady pace of urbanization and population growth is driving the need for new and upgraded infrastructure, particularly roads and sewers, with highways and bridges right behind. Roads and highways, sewer systems, wastewater treatment facilities and bridges comprise some 80 percent of all engineering infrastructures owned by federal, provincial, territorial and municipal governments. A 2003 Government of Canada study showed that three of the four components — roads and highways, sewer systems, and wastewater treatment facilities — were well past the halfway point of their service lives.

In the wake of the financial crisis in a still fragile economy, these governments remain under increasing pressure to deliver value for money in developing new and upgraded infrastructure, whether for the “hard” infrastructure just noted, or the “soft,” or social infrastructure such as schools and public safety facilities, including courthouses and police complexes. Even as P3s remain the dominant procurement for large-scale infrastructure projects, they are also becoming a preferred option for soft infrastructure as governments at every level seek to deliver optimum value to taxpayers.

Healthcare for an Aging Population

Canada’s population is also aging; by 2019, people older than 65 are expected to account for more than a quarter of the population. By 2029, more than a third. This profound demographic shift will require expanded healthcare facilities to provide appropriate care for the elderly. While healthcare projects have become a staple for P3 projects across Canada, the number of P3s in this sector is expected to grow rapidly as health care authorities strive for efficiencies in providing care for the growing population of the elderly.

In 2010, construction industry expert John Bisanti, senior vicepresident at Mississauga-based EllisDon Corp., Canada’s secondlargest construction company, told the Toronto Globe and Mail back in February that he expects to see 18 projects valued at more than CDN$3.5 billion in the social infrastructure sector alone — mostly hospitals tendered in Ontario — and a further CDN$1.5- billion’s worth in British Columbia, New Brunswick and Nova Scotia.

Growing Government Support for P3s across Canada

The governments of British Columbia, Ontario and Quebec already have well-established agencies (Partnerships British Columbia, Infrastructure Ontario and PPP Quebec) dedicated to identifying and delivering public-private partnerships. British Columbia in particular has been a P3 leader with nearly CDN$10 billion invested in partnerships to date. BC’s capital policy requires that a P3 must be considered the base case procurement option where the provincial contribution to the capital cost exceeds CDN$50 million. More than 30 partnerships have been completed, or are being completed on time, or early, and on budget.

Ontario formed Infrastructure Ontario in 2006 to foster the development of P3 projects delivering private finance and private sector operation. The governments of Alberta, Northwest Territories and New Brunswick have pursued several P3s and are in the process of procuring or constructing more. The governments of Nova Scotia and Prince Edward Island recently announced plans for partnerships with the private sector to deliver public infrastructure. And municipalities in almost every province and territory have pursued PPPs in recreation and culture, water/wastewater, landfill gas, downtown redevelopment and public transit.

A CDN$33 Billion Infrastructure Boost

The Government of Canada recently created PPP Canada, a Crown corporation, and a CDN$1.2 billion P3 fund to develop the P3 market. This fund will help various levels of government to support P3 infrastructure projects as part of the Ministry of Infrastructure’s CDN$33 billion Building Canada Plan. More than half of the funding under the Building Canada Plan will be provided as base funding for municipalities. In total, that amounts to more than CDN$17.6 billion over seven years.

Combined with other sources of capital, including Infrastructure Ontario’s municipal loan program and similar programs adopted by various provinces, this provides municipalities with significant capital to build vital infrastructure. While very little of this capital has been deployed, the CDN$1.2 billion P3 fund could be instrumental in supporting the development of a streamlined procurement process that would be especially helpful for municipalities — a large number of which have projects that require funding.

Municipalities, however, typically lack the resources and budgets to effectively procure major pieces of infrastructure, such as a wastewater treatment plants. A full P3 process and standard documentation can overwhelm smaller scale projects. A streamlined procurement process — with appropriate budgets — for municipalities would enable them to pursue infrastructure projects for which funding is available under the Building Canada Plan and get the necessary expertise to move projects forward. Such a streamlined process would provide the private sector with significant confidence that projects will proceed as planned using standard documentation and risk allocation frameworks typically used on larger provincial projects.


Calgary Trail Overview             © Anthony Henday

Opening Up Long-Term Capital Sources

With large-scale infrastructure projects — such as Ontario’s 407 tollroad expansion — likely to test the capacity of the traditional long-term domestic lending market, there could be an opening for foreign lenders to re-insert themselves in the Canadian market. The testing of traditional longterm domestic lenders could also open up another source of long-term capital: small- to medium-sized domestic life insurance companies and pension funds that are keen to enter the sector as a primary funder but lack the scale and experience to do so. Boocock said he sees a possible solution in the formation of a senior debt fund that is able to coordinate smaller lenders and underwrite commitments to proponents. For such a fund to work, institutions must be willing to rely on a centralized underwriting team with the power to make investment decisions and proponents must be willing to partner with these institutions.

A More Selective, More Competitive Market

Even with more settled financial markets, greater government funding for infrastructure renewal and replacement and potential new sources of long-term capital, the Canadian P3 developer market is experiencing capital restrictions. As is the case globally, these restrictions are causing developers to be much more selective in the projects they pursue. When combined with the fact that a number of global integrated infrastructure providers have established themselves in the Canadian market, this selectivity is making for a much more competitive and complex market.

Global Players, Local Risk

Bridgepoint Hospital, Toronto

Every opportunity has its attendant risks and the emerging boom in Canada’s infrastructure renewal is no different. Beyond the normal risks associated with a P3 project, there is an added potential risk to global proponents and/or lenders seeking to participate in P3 projects in Canada. It’s a new world for offshore proponents, lenders and investors, geographically, legally and logistically. The added risk is the lack of knowledge of local capital, life cycle, facilities management and operational pricing and practice in undertaking projects in Canada.

Having advised on more than CDN$15 billion capital P3 investment in Canada during the last 10 years, BTY Group has learned first hand how critical local knowledge is to mitigating local risk — and it has seen how the lack of local knowledge can trip up an otherwise well planned and well executed project. BTY Group serves as both Lenders Technical Advisors and as Independent Certifiers for both social infrastructure projects such as hospitals, schools and public safety facilities, and for transportation infrastructure such as roads and bridges.

While there is a lot of room in Canada’s infrastructure boom, the most reliable risk mitigation comes from the people who know the ground upon which you propose to build. Think globally, reduce risk locally. •