The Evolution of P3s

Sep 28, 2018

If there’s any doubt that public-private partnerships (P3s) are beacons of innovation, the emergence of Montréal’s $6.3-billion Réseau express métropolitain (REM) should silence the skeptics.

The REM is a new, integrated, fully automated transportation network linking Montréal, the South Shore, the West Island, the North Shore and the airport. When completed, the 26-station, 67-kilometre long network will be one of the largest automated transportation systems in the world behind only Singapore, Dubai and Vancouver. It’s the largest public transportation Infrastructure project in Montréal since the Métro was inaugurated in 1966. Completion of construction, which began in April, is scheduled for 2021.

Driving the REM is a P3. Well, perhaps not a P3 as Canada has come to know the model, but a P3 nonetheless. The brainchild of the Caisse de dépôt et placement du Québec and its subsidiary CDPQ Infra, founded in 2015 and dedicated to Infrastructure development and management, the REM brings a new P3 model to the market.

Above all, what makes the REM model unique is that CDPQ Infra is taking on the entire risk of the project, mitigating it only by hiving off interests to other investors. No portion of the project resides on government balance sheets. But the government has an important role, serving as guardian of the public interest by identifying the public’s Infrastructure needs. Once the government does so, it is the private sector that does the initial planning and investigation to determine the project’s commercial viability. It then proposes alternatives to government, which decides on the proposal that suits its purposes best.

The Caisse has committed $2.95 billion to the project. The Québec government and the federal government are each investing $1.283 billion in the project. Hydro-Québec will contribute $295 million to cover the fixed equipment needed to electrify the REM. 

According to Mark Romoff, president and CEO of the Canadian Council for Public-Private Partnerships (CCPPP), the REM demonstrates that governments need to keep an open mind to meet the Infrastructure challenges they face.

“Governments should not be prescriptive about how to achieve their goals and they should keep all options on the table when examining funding and financing alternatives,” he says. “They need to be clear about the outcomes they are seeking and then let the private sector innovate to achieve those outcomes in the best way possible.” 

To be sure, Romoff doesn’t see P3s as the be all and end all to Canada’s Infrastructure conundrum. “P3s are one tool that can successfully achieve outcomes, but they are not a panacea,” he says.

If mainstream acceptance reflects a mature market, however, there’s no question that public-private partnerships (P3s) have made the grade as reliable delivery mechanisms for public Infrastructure projects. “We have 180 projects operational, 96 under construction or at the procurement stage, 80 more in the pipeline, and the value of the projects that have reached financial close exceeds $127 billion,” Romoff says. “Canada is a mature P3 market now, recognized as a best-in-class jurisdiction globally.”

But as demand evolves, so must P3s. If the past is any guide to the future — and if the REM is any indication — they will. According to a study by the Ryerson Institute for Infrastructure Innovation in 2016 entitled Understanding the Effect of Public Private Partnerships on Innovation in Canadian Infrastructure Projects, the P3 delivery system “provides unique innovation opportunities that traditional delivery models cannot support.” The authors also conclude that it is the private sector that has initiated a majority of public Infrastructure project innovations.

“Innovation is at the heart of P3s,” Romoff says. “By making the private sector responsible for the design, build, finance, and operations and maintenance of an asset over the long term, the private sector is not only able to bring expertise to the table, but it is incentivized to ensure the asset is built to last at a high quality, given that the sector remains responsible for its long-term maintenance.”

There are other reasons to believe that P3s are a sustainable model. According to a study by the Canadian Centre for Economic Analysis (CANCEA) in 2016, entitled Why building infrastructure ‘on time’ matters and commissioned by the CCPPP, savings to government in the 200 P3 projects surveyed could be as high as $27 billion, P3s tend to be completed one year more quickly than traditional projects, they create 115,000 jobs annually, and they add $4 billion to GDP and $5 billion to wages. “It’s these kinds of numbers that have driven the greater uptake of P3s by politicians,” Romoff says.

They’ve also driven uptake in the financial markets. “P3s are now viewed as a traditional procurement methodology,” says Doug Sanders, a partner in Borden Ladner Gervais LLP’s Vancouver office. “So much so that we’re seeing some traditionally conservative Canadian players, like insurance companies, come into the market.”

It wasn’t always that way. Indeed, the first wave of P3s, spanning the period from 1993 to about 2006, produced mixed results, largely because of growing pains. But Canadian P3s have blossomed in the last 10-12 years, so much so that almost 50 jurisdictions have visited Infrastructure Ontario to learn from the organization’s experience.

According to statistics from the CCPPP for the period from 1993 to 2016, some 80% of projects have been provincial or territorial with most of the remaining projects municipally driven. Some 40% have been health care-oriented, 20% fell in the transportation sector, 10% related to utilities and an equal proportion to justice projects. Transportation, however, contributed some 40% of the dollar value of all projects, with health care and utilities both at around 20%. Megaprojects like Toronto’s Eglinton Crosstown LRT, Highway 407 ETR in the Greater Toronto Area, the Ottawa LRT (known as the Confederation Line), have much to do with that. The REM suggests that the trend will continue.

 “A significant number of P3s in Canada have been in social Infrastructure, particularly in the health care space,” Romoff says. “We are now seeing a shift towards large, urban transportation as the busiest asset class and growth area.”

Transit, of course, is key to Infrastructure planning and development because of population growth, and critical to the phenomenon known as “compact development,” which dominates government thinking these days. Compact development aims for a more efficient use of land through higher-density development or redevelopment such as infill or brownfield projects. The benefits of compact development are said to include reducing sprawl, reducing the need for private transportation, encouraging people to walk, and increasing efficiency in delivering urban services. “Practically speaking, compact growth means lower costs on water, sewer, electricity and roads because these services will traverse shorter distances,” Romoff says. “This means that there are untapped opportunities in the municipal sphere.”

As Catherine Doyle, a partner in Blake, Cassels & Graydon’s Toronto office, points out, Infrastructure gap reports point to municipal services as most wanting. “Municipalities can tax property and impose development charges and levies, but they can’t tax income,” she says. “That has left them hamstrung for a long time, but they’re starting to realize that P3s — especially revenue-based models — are one way in which they can begin bridging the gap.”

The upshot is that municipalities, which are receiving many of the benefits of these projects, are increasingly involved from the outset. “They’re not only having input into the project, they are actually participating in the development,” says Sean Muggah, a partner at Borden Ladner in Vancouver.

Compact development also embraces the validation of suburbia as a place to live and work. “What Metrolinx [the Crown agency that manages and integrates road and public transport in Ontario’s Golden Horseshoe region] is doing, for example, can be transformative to suburbia because it envisages point-to-point commuting not only to and from Toronto but to and from areas outside Toronto,” Doyle says.

As Romoff sees it, Infrastructure can be leveraged to support compact development. Indeed, much compact development is possible because smaller P3 projects are becoming ever more viable. “There are some 40 to 80 municipalities working on downsized P3s, and we’re going to see more of them because we now have the expertise and the models that are necessary to achieve that,” says David Kauffman, counsel at De Grandpré Chait LLP in Montréal. “It’s a fairly new phenomenon that’s about five years old, and it’s being driven by the federal government encouraging provinces, municipalities and Aboriginal communities to adopt the P3 model.” 

The Bridgepoint Hospital-Don Jail P3 in Toronto’s East End, Romoff points out, is an excellent example of how public and private sector stakeholders are working together to build and retrofit urban and suburban places. One feature of the 10-storey, 680,000-square-foot, state-of-the-art facility for the treatment of complex chronic diseases is the restoration and reuse of the five-level, 84,000-square-foot Don Jail, a heritage site which now houses the hospital’s administration. “Cells to offices, that’s how innovation works,” Romoff says.

In Québec, a focus has also emerged on building and repairing schools. “There is a movement toward maintaining Infrastructure that already exists,” says Clementine Sallée, a partner in Blakes’ Montréal office. “That doesn’t mean megaprojects, like transit, won’t continue, but smaller projects are finding their own momentum.”

From the P3 perspective, it doesn’t hurt that the federal government has taken a proactive approach, creating the Canadian Infrastructure Bank (CIB) in 2017 and funding it with $35 billion annually over the next decade. The Crown Corporation’s mandate is to use federal support to attract private sector and institutional investment to new revenue-generating projects. “The CIB’s participation reduces risk and gets other investors interested in revenue-generating projects, which have rarely been used in Canada, but is utilized in many other parts of the world,” Romoff says.

What makes the CIB even more interesting is that it will respond to unsolicited proposals. “This is novel, because historically government has never considered unsolicited proposals, preferring to initiate projects on their own,” Romoff says. “Now they’re not only prepared to consider unsolicited proposals, but actually encouraging them.”

If even government is innovating, does the private sector, especially P3 stakeholders, have any other choice? Probably not — but they’re clearly rising to the challenge. 

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