Partnerships in Health Care
There’s a fine balance when it comes to public health care and private interests. On the whole, however, Canada’s pioneering work in health-care P3 serves as a model for the world.
“CANADA IS RIGHTLY SEEN as a global success in the adoption of the P3 model,” David Caplan, Vice-Chair of Global Public Affairs, a leading strategic communications and government-relations consultancy, wrote in September 2015. It’s a view supported by Chris Bennett, chair of the financial services practice at Osler, Hoskin & Harcourt LLP. “In the past ten years, [Ontario and British Columbia] together have closed more P3s than any jurisdiction in the world,” he says.
How did this come about? The answer, he says, is the adoption, in the early 2000s, of the private finance initiative (PFI) model developed in Australia and the UK to design, build, finance and maintain health-care facilities through public-private partnerships. “I think in Ontario alone, Infrastructure Ontario has closed in excess of 40 health-care P3s of one type or another, although they call them alternative financing and procurement projects.”
The reason health-care projects — especially hospitals — were instrumental in the evolution of P3s in Canada was “the age of our Infrastructure,” says Rick Shaban, a partner at Borden Ladner Gervais LLP, noting there was a considerable need in Ontario and other parts of Canada to upgrade or build new facilities. “Healthcare was the starting point [for P3s], leading the way at the very outset.”
In the early days of P3s, their introduction into the health-care sector was not without controversy. “There was a common misconception that these were somehow privatizations,” says Tara Mackay, a partner at Torys LLP whose practice, until recently, has been almost exclusively focused on P3s. Such a concept, in a country that takes great pride in its public health-care system, was of obvious concern to many. “But there was never a sale of any health-care asset to the private sector. The assets remain public assets at all times. All that happens is that the private sector participates.”
Although many P3 health-care projects involve budgets in “the billion- and multi-billion-dollar range,” says Mackay, “there are also a number that are down as low as 50 to 100 million dollars using the P3 model.”
The model has been “an excellent approach to health-care projects,” says Alain Massicotte, who heads the Montréal Infrastructure-P3 group for Blake, Cassels & Graydon LLP, “because it allows the public sector to attract not only private-sector investment, but also their knowhow.”
Over the years, interest from private-sector participants outside of Canada has increased. “It has created an environment where we have attracted enterprises or international companies whose core business is to build or design complex health-care projects,” he says.
Health-care P3s have enticed national and foreign investors. “The Japanese banks are very active in the P3 market, mainly out of their New York offices,” says Mackay, who works in Canada and the US. “We also see some large US-based institutional investors, [especially] life insurance companies [and pension funds] there and in Canada as well.”
What does a lawyer bring to a P3 project? “A lot of elements but the most important is the contractual discipline,” says Bennett, who was involved in the first major health-care P3 transaction in Canada — the William Osler Health Centre in the Etobicoke district of Toronto — to reach a financial close. “Good P3 lawyers have to have an understanding of the master risk allocation going on and how that risk is managed between the parties. Where we add the most value is being able to translate that commercial risk allocation into a very thick set of paper, which is what these deals are — document intensive.”
If a lawyer is working for the government, says Mackay, “we help the public sector structure and prepare their procurement documents. We help them prepare a project agreement and then negotiate the project agreement with the private sector. And if acting for the private sector, we’re reviewing the project agreements and helping them negotiate their subcontracts and their financing documents.”
A critical challenge, she says, is to help ensure clients are entering market-standard deals. “A lot of what we do is advising when documents are diverging from what we would see in the market, and helping to inform them of the risk they’re taking on so their eyes are open.”
Think of every project, which can often have a lifespan of 30 to 35 years, “as a big bundle of risk,” says Bennett. “The government has to decide how that bundle, commercially, is going to be divvied up between it and the private sector. We need to anticipate and document every risk and have the contracts tell you what will happen if one of those risks come to pass.”
P3 lawyers must work with the financial technical experts to ensure the bankability of the projects, says Massicotte. “The lawyers need to be conscious that it’s a long-term partnership between the public and private partner, whose role will be to take care of the facility maintenance. They have to be conscious that the private sector will have to deliver an Infrastructure and the services to create the proper environment for the delivery of an essential public service.”
In fulfilling that role, he says, lawyers should be aware that “bankability is an art, not a science,” and that circumstances can be different if, for example, the project is located in an urban centre or in the suburbs. “In the suburbs, for example, you likely have greenfields that have no contamination, nor any access issues.”
At the end of the day, says Bennett, “a good P3 is a P3 that has balanced risk allocation to parties that are best able to bear and price them. The market sees the Canadian templates are very on the mark in this regard.” Shaban agrees, adding that, “In the process [of allocating balance] some of the services get transferred over to the private sector, such as maintenance and cleaning.”
In the early days of health-care P3s, so called “soft services,” such as providing linen and food and landscaping, were included in the services provided by the private sector. They were soon removed, however, partially to appease the political opponents concerned about the privatization optics. Another factor was the understandable concern that it would not make sense to commit one supplier to a 30-year contract, for example, for these types of services.
In helping clients produce effective documentation, P3 lawyers today can take advantage of templates that have been developed over the past 10 to 15 years. Although these templates can be helpful, they can’t anticipate every potential issue.
“No two projects are the same,” says Shaban. “There are always nuances that arise. The nice thing about the P3 model, however, is that it has provisions that allow the parties to make any necessary adjustments to address any concerns around the level of service or the quality of the asset delivered.” Most of the P3s he has been involved in, for example, have a mandatory dispute resolution mechanism.
While health-care P3s paved the way for other such projects throughout the country, the need for new health-care initiatives has tapered off, Mackay says. “There are still some being done but the peak was a couple of years ago.” Although the needs have been well met in Ontario, BC and Alberta, she sees Newfoundland and the Northwest Territories as jurisdictions where health-care projects will still be required.
Ontario especially “has run out of hospitals to build,” says Bennett. “Right now there’s a huge shift to light rail transit, and highways and bridges. The P3 model is also being applied to wastewater projects.” Alain Massicotte agrees but says there continues to be a need for elder, long-term care facilities.”
It seems that, despite a few blips (such as the fraud allegations involving the McGill University Health Centre), the introduction of P3s to Canada has been a great success. “Infrastructure was once seen as the political equivalent of death by a thousand cuts,” David Caplan wrote in ReNew Magazine.
“But if recent media coverage is anything to go by, it has become a much safer place for politicians to stake their reputations. That change has come as a result of the positive momentum generated through projects getting built on time and on budget. The introduction of public-private partnerships played a major role in generating that momentum, and although it does not work for every project, it has been successful in giving politicians the confidence to take the plunge, knowing that risk is shared with the private sector.”
The health-care P3s also offer lawyers a sense of satisfaction many other such endeavours can’t provide. “It’s nice to work in a practice area where you’re actually able to see a completed project,” says Mackay. “I worked on the Niagara Health System [Ontario’s largest multi-site hospital amalgamation, across 12 municipalities] a couple of years ago and being able to tour that facility was pretty mindboggling. It was a really, really good feeling to see this brand-new hospital that I played a very small part in bringing to life.”