Canada: Infrastructure Opportunities In Canada: Alternative Financing And Procurement And Public-Private Partnerships

Over the last decade, Canada has become one of the leading markets globally for delivering much-needed public infrastructure by way of public-private partnerships ("PPPs" or "P3s") and alternative finance and procurement ("AFP"), the name given to PPPs in Ontario.

Within Canada, Ontario has been, and based on current project pipelines, will continue to be, the most active jurisdiction in terms of number and value of projects completed and under procurement. Ontario Infrastructure and Lands Corporation, or Infrastructure Ontario ("IO"), is an agency of the Government of Ontario that was created in 2005 to procure and deliver AFP projects. Since then, over 70 projects have been delivered or are in various stages of procurement or development. Six healthcare projects and three transportation projects are currently in procurement, and nine healthcare projects and four transportation projects are currently under construction, among others.

British Columbia has also been at the forefront of PPP procurement in Canada. Partnerships BC, which was established in 2002 by the BC provincial government, has overseen the delivery of more than 40 projects (many of which are still in construction or procurement), including hospitals, roads, public transit, water, waste treatment and recreational facilities. The Sea-to-Sky Highway, connecting Vancouver to Whistler and used by many during the 2010 Winter Olympics and Paralympics, was one of the earliest signature PPP projects in Canada. A worker accommodation project and a hospital project are currently in procurement.

While Ontario and British Columbia have been the most active jurisdictions in using a PPP approach, several PPP projects have been procured in other provinces, as well as federally and municipally. The province of Quebec has executed major road, hospital and prison projects using a PPP model. The province of Alberta is also an active PPP participant and has completed a number of PPP roads and schools projects and an expansion of a water and wastewater treatment facility. In addition, the City of Edmonton is currently procuring an LRT system. New Brunswick, Nova Scotia, Manitoba, the Northwest Territories and Nunavut have also been active in the PPP market, with a project for a drinking water treatment plant currently under procurement in Saint John, New Brunswick and the Northwest Territories closing last year the Mackenzie Valley Fibre Link transaction.

After disbanding its P3 Secretariat in 2009, the province of Saskatchewan has reinvigorated its PPP program with the establishment of SaskBuilds Corporation, a Treasury Board Crown Corporation, in October 2012. SaskBuilds' first project, a long-term care facility, reached financial close in 2014. SaskBuilds has also recently closed two major projects: the Regina Bypass project and the two joint-use schools projects (consisting cumulatively of nine schools), and the Saskatchewan Hospital North Battleford project is currently in its final stages of procurement. Saskatoon and Regina, the two largest municipalities in the province, have also completed other projects, including a civic operations centre, a stadium and a wastewater treatment plant

The federal government has established PPP Canada to work with the public and private sectors to support PPPs and to encourage the further development of Canada's PPP market. The federal government has also created the P3 Canada Fund to support provincial, territorial, municipal, First Nations and other partners in the development of PPP projects. The P3 Canada Fund is contributing funding to major PPP projects across the country, including projects procured by provincial procurement agencies and municipalities. PPP Canada is also involved (along with Public Works and Government Services Canada ("PWGSC")) in the procurement of the Champlain Bridge Replacement Project, one of the largest Canadian PPP projects to date.

FINANCING TO INFRASTRUCTURE PROJECTS

While the term "public-private partnership" or "PPP" has been used to describe a wide variety of transactions involving public and private participants – including the contracting out of services, the creation of non-share capital corporations (such as NavCan) and monetization of public assets through concession agreements – the present use of the term "PPP" typically refers to long-term arrangements entered into between public authorities and private sector entities pursuant to detailed contractual arrangements under which the private sector entity is required to design, build, finance and maintain and/or operate public infrastructure for a fixed period. These arrangements are effected through an agreement (typically referred to as a "project agreement" or "concession agreement") entered into between the public authority and the private sector entity which sets out the respective obligations and responsibilities of each party and allocates risks between them. In Canada, a wide range of PPP structures has been used, including traditional Design-Build, Build-Finance (which many consider to be outside the spectrum of PPPs), Design-Build-Finance, DBFO (Design-Build-Finance-Operate) and DBFM or DBFOM (Design-Build-Finance-Maintain or Design-Build-Finance-Operate-Maintain), based on the UK Private Finance Initiative model, providing for a long-term concession and including significant financing and risk assumption by the private sector. In the Canadian context, PPPs are not thought to include privatizations of public assets, as in the case of full or substantial divestiture of assets by the public sector.

PPPs are often used as an alternative means of procuring and financing infrastructure where there is insufficient public sector capital to meet immediate infrastructure investment needs. PPPs allow the public sector to access new sources of financing and achieve the benefits that private sector skills and management can bring, thereby creating efficiencies and value-for-money.

The fundamental principle underlying all PPPs is that risk should be allocated to the party best able to manage that risk. The risks typically allocated to the private sector include design, timely construction, operation and/or maintenance (where those are part of the project agreement) and financing. Milestones for project delivery, a fixed price contract and specified service standards are key components of the risk allocated to the private sector. The principal risks that are retained by the public sector, or shared with the private sector, will depend on the project type and the jurisdiction, but will typically include certain changes in law, insurance costs, uninsurable events, certain supervening events outside the control of the concession company (such as force majeure and catastrophic climate events, public sector strikes, protest actions and the like) and risks related to pre-existing but undiscoverable environmental conditions. Risks relating to adequacy of design, construction, maintenance and life cycle repairs typically reside with the private sector.

In Canada (as in the UK), PPPs typically are structured using a project finance approach under which a special purpose vehicle ("SPV") is established for the sole purpose of delivering a project and its related services. The SPV will enter into the project agreement with the public sector authority and will then "drop down" most of the design, construction and operational risks to subcontractors. The SPV will enter into financing arrangements with private sector debt providers, the debt coming from one or more of several sources (e.g., domestic and international banks, pension funds, insurance companies or bond investors) on a limited recourse basis. The lenders' principal recourse will be to the payment stream available to the SPV under the project agreement over the term of the concession. Canadian PPP projects are usually highly leveraged (with approximately 90% of the project costs being financed by way of senior debt, while the SPV's owners will typically contribute about 10% of the project costs by way of equity).

While PPPs were initially implemented in the face of considerable criticism (particularly from labour unions concerned about possible public sector job losses), as new roads, hospitals, schools and other public infrastructure are commissioned and built using a PPP model, the criticism has become much more muted. The PPP approach has become increasingly popular in Canada as many governments face significant budgetary deficits and conclude that P3s provide an innovative means of addressing Canada's significant infrastructure deficit without imperiling public finances.

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.

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