Article by Jeff Merrick, ©2006 Blake, Cassels & Graydon LLP
This article was originally published in Blakes Bulletin on Real Estate, March 2006
British Columbia is rapidly emerging as a leader in the Canadian public-private partnership (P3) market. The provincial government has established an independent agency, Partnerships BC, with a mandate to develop a wide variety of new public facilities using the public-private partnership model.
With recent successes such as the Sea to Sky Highway Improvement Project and the Richmond-Airport-Vancouver Rapid Transit Project – both of which will serve significant roles during the 2010 Winter Olympic Games and beyond, especially in light of B.C.’s rapid population growth – the British Columbia P3 market is proving that such partnerships can add significant value to the efficient delivery of necessary infrastructure projects.
This article examines the project structure of a typical P3 and looks at the major contractual relationships usually involved in P3s. While P3 transactions and the associated request-for-proposal process are complex, well-established markets exist in the U.K. and Australia where sophisticated P3 models have been developed over many years. These models are being imported and adapted for use in B.C. and, as the Canadian and provincial P3 markets mature and become more familiar with these models, greater opportunities exist for cost-effective, value-added solutions to traditional public sector service delivery.
P3 deals generally consist of a "Concession Agreement", sometimes referred to as a "Design, Build, Finance and Operate" or "DBFO" Agreement, between the governmental agency or authority and the private sector partner, together with a series of "subcontracts" between the private sector partner and various contracting parties who provide the specialized expertise and services for completion of the project. The Concession Agreement usually grants to the private partner a license or a lease over the project lands for a specific term, and requires the private partner to design, build, finance and operate the project for the term.
The essential feature of the Concession Agreement is the transfer of risks inherent in a major real estate development project of this type. In a typical P3 project, the private partner, rather than the government, bears the risks associated with construction, development, financing and operation including risks of site conditions (geotechnical and environmental), title matters and encumbrances, permitting, labour shortages and strikes, general changes in law and certain events of force majeure. The overall objective of the risk allocation exercise is to achieve an efficient transfer of risks to the party best able to control and price particular risks, so that the public sector achieves the best value for money in the development and operation of the project. Having agreed to assume financing, development, maintenance and operating risk, the private partner "subcontracts" with various parties to off-load the risks to those best able to manage and price them. Typically, the concessionaire will contract with a design-build contractor to provide the design and construction services and with a separate contractor to provide the operations and maintenance services. Each of these third party contractors, in exchange for fixed-price contracts, agrees to assume the risks associated with the provision of their respective services. Typically, these subcontracts are structured as "flow through" contracts whereby the rights and obligations placed on the private partner under the Concession Agreement are flowed down to the subcontractors. The final basic element of the typical P3 structure is the financing of the development. Depending on the size and nature of the transaction, the financing can take many forms including traditional secured bank debt, syndicated debt, and rated bond financing sometimes with a guarantee/insurance feature. Creating the most efficient combination of debt and equity financing to provide the public sector with the best value for money is key to the success of these P3 projects.
Dispersed among the major contractual relationships is a myriad of secondary contracts. The most important of these are the "direct agreements", firstly, the governmental authority with the lenders to the project and, secondly, both the governmental authority and the lenders with the third party contractors. These direct agreements allow the lenders and the public authority the right, in certain circumstances, to step into the private partner’s shoes under the various contracts. Accordingly, the direct agreements provide essential protection to the lenders and to the public sector (and, in some cases, to the third party contractors) against the consequences of default by the private partner under one or more of the basic project agreements.
Ultimately, the typical P3 structure is a complicated matrix of contractual relationships in which all of the necessary financing and specialized expertise to design, build, finance and operate a major development project are brought together in the public-private partnership model. As the Canadian market continues to become more familiar with this model, the opportunities for private sector participation in traditional public sector developments, such as infrastructure revitalization and hospital development, will increase and British Columbia is poised to take full advantage of those opportunities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.