Doing Business in Canada: Infrastructure Opportunities in Canada

by Bennett Jones LLP
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Infrastructure development has helped define Canada. Currently, Canadians lead the world’s infrastructure development projects. The infrastructure required for resource development projects such as the oil sands are some of the largest projects undertaken in the world today.

Public infrastructure development and redevelopment have gained prominence in Canada (as in other western democracies) where infrastructure deficits have arisen as a result of years of under-spending on public infrastructure projects.

Public-Private Partnership (P3) models have been embraced by most Canadians with minor variations. Roads, bridges, hospitals and other public infrastructure have been developed by private sector proponents under design-build finance maintain structures with a long-term concession period of 25 to 35 years.

Public/Private Partnerships

Canada has embraced the public/private partnership model for procuring public infrastructure assets. The federal government, through P3 Canada, and many provincial governments, through provincial agencies, have endorsed and promoted public/private partnerships as a means of addressing the growing infrastructure deficit resulting from many years of inadequate expenditures on maintenance and refurbishment.

P3 Canada

P3 Canada’s mandate is to encourage P3 projects across the country led by a province, territory, municipality or First Nation by providing advice and financial support. The P3 Canada Fund (administered by P3 Canada) is a merit-based program, designed to incent consideration of P3s in public infrastructure procurements to achieve value for taxpayers and other public benefits. Each infrastructure project considered by the P3 Canada Fund must contribute to one of the following: fostering economic growth; supporting a cleaner environment; and/or promoting stronger communities.

P3 Canada closed its second round of financings from the P3 Canada Fund on June 30, 2010, with 68 proposals received for projects across Canada in water or wastewater projects; energy or green energy projects; and transportation or transportation-related projects. More than half of the projects were lead by municipalities and 12 of these projects were First Nations projects. P3 Canada is now working on its third round of financings from the fund.

Provincial Organizations

The provinces – led by British Columbia and Ontario – have turned to P3 financing to procure their infrastructure requirements. Ontario styles P3 as alternative finance and procurement (AFP) and channels provincial spending on infrastructure through the Ontario Infrastructure and Land Corporation (Infrastructure Ontario), a Crown corporation. The province is currently procuring the sports venues for the 2015 Pan Am Games through a series of AFP procurements led by Infrastructure Ontario. In British Columbia, Partnerships BC carries out a similar role to that of Infrastructure Ontario.

Provincial infrastructure organizations have procured social infrastructure including hospitals, jails, courthouses and highway infrastructure in Ontario, Québec and British Columbia, and schools and highways in Alberta and the Maritimes. In the Province of Québec, the Centre hospitalier de l’Université de Montréal reached financial closing in June, 2011 on a $1.973-billion new hospital in Montreal.

Alberta and Nova Scotia have both completed P3 procurements of bundles of school buildings packaged into single P3 projects.

Ontario has utilized a form of AFP structure that does not include any operational or maintenance phase under the style “build finance.” The build-finance program was used to catch up on a back log of designed and tender-ready project work that had been deferred.

Financing

Financing for P3 projects has typically been provided by foreign banks and pension funds with an appetite for longer term bonds. Canadian banks participate in shorter term construction financing but have no appetite for the longer term bonds issued by P3 projects. Canadian banks will partner with funds to facilitate bank financing through construction and longer-term privately placed bond financing for the operating term. The project vehicle is usually a limited partnership structure with equity investment from project proponents and pension funds.

Process

The usual process for the provincially lead procurement process begins with a request for qualifications (RFQ). Proponents pre-qualify with teams including construction, operations and financial players. The authority selects a short list of three pre-qualified proponent teams and moves to a request for proposals (RFP). The RFP will include an extensive project agreement and will require each proponent team to submit a financing solution. If selected, the proponent team will be expected to execute the project agreement and achieve a commercial close, immediately followed by a financial close within a 30-day period.

Payment mechanisms in social infrastructure have been based on an availability payment concept. Market testing has been included to recalibrate operating costs periodically over the concession term. No Canadian jurisdiction has introduced a statutorily prescribed form of P3 procurement model.

Conclusion

Currently, Canada enjoys a robust pipeline of P3 projects. P3 markets are expanding with the entry of municipalities and other smaller, domestic government units as well as the increasing participation of international funders and construction companies. The trend away from a dependence on a requirement for long-term financing that was in limited supply is now reversing. Milestone payments and substantial completion payments introduced to alleviate the funding constraints resulting from the recent financial crisis are becoming less common.

Bennett Jones Public Infrastructure Projects Group

The Bennett Jones LLP Public Infrastructure Projects Group has led the development of Canadian P3 and AFP models. Our Group has unparalleled construction project expertise that was earned on some of Canada’s most complex projects. We couple our international construction practice with leading public and private project finance expertise and experience, structuring public sector infrastructure procurement for multiple levels of government and acting for teams successfully delivering public infrastructure as well as their advisors, investors, lenders and team members.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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