At the federal, provincial and municipal levels, Canada continues to be a robust environment for infrastructure projects generally and the use of the public-private partnership (PPP) model in particular. As facilitated in several jurisdictions by specialised government agencies, billions of dollars worth of significant infrastructure projects spanning energy, transportation, courthouses, prison facilities, health care, schools and other municipal buildings are either now in operation, well under construction or in the advanced planning stages.
A central component to this development is the federal government's New Building Canada Plan. In 2014, Infrastructure Canada has affirmed a total of C$70 billion in funding for infrastructure over the next decade, spread out among the federal, provincial, territorial and municipal levels.2 At the time of writing, there are approximately 130 PPP projects at various stages of planning and construction in Canada.
II. THE YEAR IN REVIEW
The PPP model continues to be an important element of infrastructure projects in Canada. In the past year, new jurisdictions within Canada have started to use this model to procure significant infrastructure projects. This includes an increasing use of the PPP model by municipalities, particularly in the wastewater and transportation sectors.
For example, in addition to the established specialist PPP units such as Partnerships British Columbia, Infrastructure Ontario and PPP Canada, the provincial government of Saskatchewan established SaskBuilds as a Crown corporation in October of 2012.3 As with other such agencies, the mandate of SaskBuilds is to plan and facilitate high-cost, high-priority infrastructure projects. Its project list already includes a major highway project (the Regina Bypass), hospitals and the construction of nine joint-use elementary schools.
The past year also included a potentially significant development in procurement law. The unique Canadian rules around competitive tendering are described below. However, a common debate is the extent to which an owner owes bidders a duty of fairness during the tendering process and the manner in which this duty is to be interpreted. In a very lengthy and factually complex 2013 trial decision, an Ontario Court held that an owner did not comply with its duty of fairness prior to the award of a contract, thereby entitling an unsuccessful bidder to damages for its lost profits – in the staggering sum of approximately C$30 million.4
In another very recent Ontario decision that is attracting some attention, it was held that a claim against a performance bond for an amount that is well in excess of the penal sum of the bond is a triable issue and that the corresponding claim of the plaintiff ought not to be dismissed on a preliminary motion.5 This decision will be of interest in circumstances where there is an allegation that a bonding company has failed to comply with its obligations under a performance bond in the face of an insolvency or other default event under a construction contract.
Overall, the significant level of project activity in Canada, together with continuing developments of interest in construction and infrastructure law, have set the table for an intriguing year ahead.
III. DOCUMENTS AND TRANSACTIONAL STRUCTURES
i. Transactional structures
The most commonly used project finance models in Canada all share a basic framework. They typically include a governmental or quasi-governmental entity contracting with a private entity, usually structured as a special purpose vehicle (SPV), to complete the project based on a grant of a concession or licence. The SPV then subcontracts the works involved in the project, passes the risks and liabilities down to its subcontractors and enters into financing arrangements to fund the project, typically based on a combination of senior debt (either bank loans or capital markets debt) and equity financing.
Larger projects, including those structured as a PPP, often follow a design-build-finance- maintain (DBFM) model, which can sometimes also include an operational component (design-build-finance-operate (DBFO) or design-build-finance-operate-maintain (DBFOM)). In a DBFM project, the term of the concession or licence granted by the governmental authority typically lasts for around 30 years after the initial construction phase. During the period of the concession after construction, the SPV maintains and operates the asset in return for payments usually based on an availability/ performance deduction regime and, at the end of the concession, the asset is returned to the governmental authority based on specified handback requirements. An increasingly common model in Canada for smaller scale projects is the design-build-finance (DBF) or build-finance (BF) model. In these types of projects, there is no long-term concession and the agreement with the governmental authority typically comes to an end after a short (one or two-year) warranty period following construction completion. The financing structures for these types of projects are necessarily different as there is no long-term cash flow available on DBF or BF projects. DBFM projects are usually financed through a combination of short-term and long-term senior debt (depending on whether there is a take-out payment offered by the governmental authority upon construction completion) and equity financing. DBF and BF projects are usually financed through short-term construction financing (either bank loan or bond) with no equity or only limited equity financing. Beyond the DBFM, DBFOM, DBF and BF models, there is the option for complete privatisation, whereby the governmental authority transfers all responsibilities with respect to a given piece of infrastructure to the private sector.
The specific set of documents for the above types of projects varies depending on the model used, but key documents usually include the project agreement or concession agreement, credit agreements or trust indentures, underwriting agreements, 'dropdown' subcontracts (usually a construction contract and an operations, maintenance and rehabilitation agreement), interface agreement, direct agreements between lenders and subcontractors and collateral agreements between the governmental authority and subcontractors. These are in addition to typical security documentation such as general security agreements, letters of credit, performance bonds and guarantees. Finally, depending on the project, a variety of other documentation may be required, such as equity contribution agreements, legal opinions, officer's certificates, and various corporate/partnership documentation required to establish the SPV and any other entities in the structure.
iii. Delivery methods
The procedure for awarding contracts in Canada varies depending on the project and the procuring governmental authority; however, PPP projects are nearly always awarded through a prescribed and highly regulated competitive procurement process. The procurement process often follows a process whereby expressions of interest are sought initially, followed by a request for qualifications (RFQ) phase which will be used to determine a shortlist of selected bidders who are then invited to participate in a request for proposals (RFP) phase, the outcome of which will be the selection of a preferred proponent who will enter into the project agreement or concession agreement with the governmental authority. Unlike some other jurisdictions, the RFP phase in Canada often results in a 'final' version of the project agreement or concession agreement which proponents bid to and is rarely renegotiated in any substantial way after the selection of the preferred proponent. This process leads to relatively rapid closing times, with projects often proceeding from selection of preferred proponent to financial close in two months or less.
Originally published by Law Business Research Ltd, London.
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