P3 Proliferation

Kicking Horse Canyon – Park Bridge (Courtesy of Partnerships BC)



Canadian P3 projects have not only endured, they have proliferated. And a steady flow of deals continues to provide opportunities for lawyers, in Canada and around the world

Among the advertisements that graced this spring’s provincial election in Ontario were several public union-sponsored initiatives lambasting public-private partnerships both as against the public interest and doomed to failure.

But with some 213 completed and ongoing public-private partnership projects valued at about $66.6 billion on the books in Canada, and signs of a secondary market in P3 assets now emerging, it’s hard to imagine that these types of challenges carry enough weight to derail the phenomenon, which has become increasingly entrenched over the past decade.

In one high-profile case, when unions in Regina objected to a proposed P3 approach for the construction, operation and maintenance of a wastewater project, an ensuing local referendum approved the initiative.

“There is broad political and legal acceptance of P3s,” says Jeffrey Merrick, of Blake, Cassels & Graydon LLP’s Vancouver office. “The legal and political climate has got to the point where we’ve attracted international capital and international construction design-build conglomerates who see Canada as a stable pipeline of significant projects.”

Indeed, a study entitled “The P3 Pulse,” conducted by Nanos Research for the Canadian Council for Public-Private Partnerships (CCPPP), found that 62 per cent of respondents, including 57 per cent of public-sector union members, supported the P3 concept for the delivery of public infrastructure. Some 56 per cent even supported the use of P3s to deliver services such as issuing drivers’ licences and administering programs.

“There was [also] a strong feeling among respondents that the three specific community projects that we surveyed wouldn’t have gone ahead had it not been for the P3 approach,” says Mark Romoff, the CCPPP’s CEO.

Public unions, however, are not the only naysayers. Rightly or wrongly, the 407 ETR, ORNGE, the Ontario Power Authority gas plants and the Brampton and Ottawa hospitals are just a few of the examples of “failed P3s” cited by critics. Among other things, they argue that governments like P3s because the costs don’t appear in their books, and not because P3s ensure cost-efficient delivery of public projects and services.

As it turns out, there is some empirical support for the criticisms. In a 2012 study entitled “Infrastructure Public-Private Partnerships: Delivering Value for Money?” published in the Journal of the American Planning Association, University of Toronto Department of Geography Associate Professor Matti Siemiatycki and researcher Naeem Farooqi examined 28 Ontario P3 projects valued at more than $7 billion. They found that these projects were on average some 16 per cent more expensive than conventionally tendered contracts.

To the contrary, a 2013 MNP Consulting study examining the track record of Ontario’s Alternative Financing and Procurement Program found that 29 of 30 projects that had reached substantial completion were below budget and 22 were ahead of schedule. As well, the winning bids in 21 of the projects were lower than the budgets the government had set.

Otherwise, the Conference Board of Canada has concluded that P3s have “a strong record of on-time, on-budget delivery” and average cost savings of 13 per cent compared to traditional projects. The Fraser Institute has arrived at similar conclusions.

Finally, another study commissioned by the CCPPP but conducted by InterVISTAS and entitled “10-Year Economic Impact Assessment of Public-Private Partnerships in Canada (2003-2012),” examined P3s from a broader perspective. In addition to finding that P3s had produced $9.9 billion in cost savings, the study also concluded that they had created some 517,000 jobs, generated $32.2 billion in total income, $48.2 billion in GDP, $92.1 million in total economic output, and $7.5 billion in taxes. Additionally, Statistics Canada attributes 10 per cent of private-sector productivity gains between 1962 and 2006 to investment in infrastructure.

Critics aside, however, P3s have proliferated in Canada. All the provinces and territories, save for the Yukon Territory and Prince Edward Island, have P3s in the works or completed. Ontario leads the way with 107, followed by British Columbia (36), Quebec (20), Alberta (17), New Brunswick (11), Saskatchewan (7), Manitoba (4), Nova Scotia (3), the Northwest Territories (2) and Nunavut (1).

“It’s not booming as much as it was a few years ago, but there’s a steady deal flow every year, including some huge projects like the Champlain Bridge outside of Montreal and the Detroit River crossing,” says Robert Borduas of Norton Rose Fulbright Canada LLP’s Montreal office. “From a legal perspective, the form of P3 transactions is now pretty well accepted, but that doesn’t mean that opportunities for stakeholders, including lawyers, don’t continue to exist.”

P3s also engage a broad industry spectrum. According to the CCPPP’s Canadian PPP Project Database, the spectrum includes hospitals and healthcare, transportation, environmental (including waste and wastewater), justice and corrections, recreation and culture, education, energy, government services, real estate, IT infrastructure and defence.

“The reality of the infrastructure deficit caused people in many sectors to be innovative,” says the CCPPP’s Romoff. “P3s are not a panacea but in the right situations they have really produced results.”

No surprise, then, that Ontario Premier Kathleen Wynne recently called on Ottawa to quadruple its contribution to Ontario’s infrastructure from $3 billion to $12 billion, or 2 per cent of GDP. Manitoba has also called for increased funding.

That in itself is probably enough to categorize Canada’s P3 business climate as “mature” — which is not to say that it has stopped evolving. But, somewhat ironically, it is P3s’ growing ubiquity that may account for the feeling in various quarters that the phenomenon has abated somewhat.

“On the whole, the market is as busy or busier than ever,” says Mark Bain  of Torys LLP in Toronto. “Transactional activity is high but it’s more diffuse, emerging in more places and in different types of projects.”

Saskatchewan and the Northwest Territories, for example, are joining the P3 bandwagon traditionalists like BC, Ontario, Quebec, Alberta and New Brunswick. As well, and after a bit of a rough start, municipalities are taking a new look at the P3 model by way of addressing the infrastructure challenges they face.

“Historically, municipalities have been a mixed audience for P3s because there were a few early experiments by municipalities who did not retain the expertise required and then found themselves in disadvantageous negotiating positions,” says Tim Murphy of McMillan LLP  in Toronto. “But nowadays they tend to understand that they can’t just do it in-house, so they’re hiring the expertise, engaging in some projects, and starting to have better experiences.”

They’re also sharing their newfound knowledge and experience, and it’s having a synergistic effect.

“This type of collaborative activity exemplifies the momentum that’s now in the market,” says Robert Shouldice  of Borden Ladner Gervais LLP’s Vancouver office. “As some of these projects close and start running successfully, more and more municipalities and funders will get comfortable supporting them.”

From a subject-matter perspective, P3s involving hospitals, courthouses and roads, which drove the market as recently as three years ago, are experiencing reductions in activity. “These are deep but narrow markets that haven’t stopped but have slowed down a little,” says Bain.

Still, Alberta, which not long ago rejected a P3 initiative for 10 schools because it turned out to be more expensive ($571 million as opposed to $557 million) than a traditional approach, has undertaken a new cancer care centre, the province’s first foray into P3s in the health sector. In February, BC embarked on its first P3 hydro generating facility when it signed the contract for the John Hart Generating Station replacement project in Campbell River. The province has recently closed on the Okanagan Correctional Centre, the first time a prison in Canada has ever been built on a First Nations reserve.

“There’s a bit of a pause in BC but there are a number of projects in the business-case stage,” Shouldice says. “The mood is still upbeat and positive, as it is in Alberta.”

Still, the market is changing shape. “Wastewater projects, for example, are the flavour of the month, particularly in Saskatchewan and BC,” Shouldice says.

Water, broadband, energy, transmission, renewables, urban transit, social housing and other projects are also picking up the slack. Examples include light rapid-transit projects on the drawing boards in Ottawa, Waterloo, Edmonton and BC; a fibre-optic project in the NWT; water and wastewater projects in BC and Saskatchewan; and social housing in Alberta, BC and Toronto in conjunction with the impending Pan-Am Games.

There’s also no shortage of mega-projects, including the multi-billion Eglinton Crosstown project in Toronto, the Edmonton Crosstown, transmission grids in Alberta, the Detroit River crossing, and the Champlain Bridge and redevelopment of CBC lands in Montreal.

But smaller projects (under $100 million), including those undertaken by municipalities, can face financing challenges. “Wastewater and solid waste P3s, for example, are interesting trends that tend to engage smaller projects,” Borduas says. “But there’s probably a way to gather them so they become more attractive to financiers, which is something that has been done with a number of projects north of Quebec City.”

As well, the financing world is getting more sophisticated about P3s.

“Institutions can now do financings in the $50-million to $100-million range, if not the $10-million to $20-million range,” says Jay LeMoine of Bull, Housser & Tupper LLP’s Vancouver office.

The delayed emergence of smaller projects seems to be a natural development in a complex arena. “P3s are a very complicated procurement model, and I don’t know that smaller projects are where the market wanted to cut its teeth,” says Carol Pennycook of Davies Ward Phillips & Vineberg LLP. “But now there’s a consistency and standardization to the transactions that makes the small projects less daunting and more feasible to stakeholders.”

LeMoine shares that optimism. “My prediction is that we’ll be seeing more and more P3s on smaller municipal and healthcare projects like long-term care facilities,”

Finally, the P3 model is gradually moving into the services realm. “For the last 18 months, we’ve started to see P3 projects expand into government services in the sense that operational elements are being added,” Murphy says. “It’s definitely a result of people in general becoming more and more comfortable with the model.”

There’s also at least one good precedent for using P3s to deliver public services. Over a decade ago, Ontario allowed the private sector to administer driver examination facilities. The contract ended in 2013, but the program has been so successful – reducing wait times from 18 months to 42 days at press time – that the government put it out for bids again.

“The original private operator retained some 90 per cent of the government employees,” says Sharon Vogel  of Borden Ladner’s Toronto office, who represents P3 contractors in her construction industry dispute resolution practice. “And in 11 years, there’s only been one very short labour disruption.”

Looking to the future, the new majority Liberal governments of two of the most active provinces, Ontario and Quebec, have made strong commitments to infrastructure development. Ontario, for example, has committed to $130 billion on infrastructure over the next decade.

“There will be revived interest in the P3 approach under these regimes,” Mark Romoff says.

For its part, the federal government – whether it increases funding pursuant to provincial demand or not – reiterated its strong support for the P3 approach in its 2013 budget by renewing the $1.25-billion P3 Canada Fund, which contributes up to 25 per cent of the capital cost of qualified provincial, territorial, municipal (the Barrie bus line) and First Nations projects. Federal funds have been particularly important in the growing “MUSH” sector, which comprises municipalities, universities (student residences), schools and hospitals.

Also on the horizon is an emerging secondary market, a development that speaks significantly to the maturity of the P3 environment, much as it has in Europe.

“There are an increasing number of secondary market deals in Canada, mostly with respect to roads and social health projects,” Borduas says. “While the sales market is still in its childhood, the secondary debt market has been quite active for the past couple of years.”

Refinancings could also play a significant role as the industry extends its life cycle.

A secondary market provides an exit strategy to large contractors who want to redeploy their assets. “Once these projects are constructed and in operation, they become extremely attractive to pension funds because they are low risk and offer a steady cash flow,” Borduas says, adding that Norton Rose is working on two such deals and is aware of “a couple of others.”

For the most part, these transactions tend to occur under the radar. “These deals are not necessarily public and usually don’t make nearly as much news as new projects, partly because the public authorities are not involved apart from the extent to which their consent is required,” Borduas adds.

He expects the secondary market to grow for at least three years. “The longer that projects are operational, the more this will become an important trend,” he says.

So what does all this mean for the legal profession?

According to Romoff, who sits on a number of international P3 committees, including groups at the United Nations and the World Economic Forum, the Canadian legal community is “inextricably linked to P3 projects.”

As it turns out, that’s a good thing, because the country’s P3 environment has an excellent international reputation.

“Canada is recognized as best in class, supplanting the UK and Australia, who were at it first, and the global marketplace is trying to emulate our model,” Romoff says. “Our processes are differentiated by a commitment to the competitive bidding process in the sense that anyone in the world is eligible to bid and is encouraged to do so because government procurement agencies want competition that will drive down prices and promote greater innovation.”

When the Quebec government organized a briefing session for the Champlain Bridge project, more than 200 companies came to the sessions and six international consortia responded to the request for bids. “All the international players of substance are either already here or training their guns on this market because they see it as one of opportunity where a strong pipeline continues to exist,” Romoff says.

There’s no question that the Canadian market has stimulated a tide of international interest, attracting international construction companies, international money and international service providers from afar, including the United Kingdom, Australia and Europe.

For lawyers and many others, all of this means increased exposure to international brands like Macquarie, Plenary Group, Bilfinger, Axiona, ACL Construction, Bouygues Construction, Balfour Beatty Construction and Sintra. And lawyers have benefitted from the exposure. “What surprised us a bit is that we are acting on P3 deals in Canada for a number of US clients who might have used American firms but preferred our deal expertise,” Torys’ Mark Bain says.

It’s a far cry from the days when foreign law firms saw the Canadian P3 market as a fertile fee generator.

“When P3s started up on the west coast, the British firms did a few deals and tried to leverage their experience,” Borduas notes. “But now we have a leading-edge P3 Bar that has taken over.”

With their increasing sophistication and the growing reputation of the Canadian P3 model, Canadian law firms have also spread their wings from the domestic to the cross-border and international markets.

The US, for example, offers some intriguing possibilities. “That’s where the next big P3 boom will be happening,” Borduas says.

In typical fashion, the Americans are wasting no time. “The US was 10 years behind, but has made up eight years of that in the past 12 months,” Murphy says.

Brian Kelsall  of Fasken Martineau DuMoulin LLP’s Toronto office attended a P3 conference in New York earlier this year. “A couple of years ago, there was a lot of hand-wringing as to whether P3s would work in the US,” he says. “Now the crowds are much bigger, the mood is much more optimistic and it’s all about the work that is actually being done in this arena.”

Indeed, statistics presented at the conference suggested that there were now more P3s in the pipeline in the US than in Canada. So with Canadian companies like EllisDon and PCL established on the international scene and seeking more opportunities south of the border, Canadian lawyers are well positioned to follow them.

“A number of clients have told us it was time to export our experience and take advantage of the opportunities that would present themselves if we had someone on the ground in the US,” says Torys’ Bain. “We responded by moving a P3 partner, Tara Mackay,  from Toronto to our New York office.”

The response has paid off with several US retainers from US and Canadian clients as well as strong expression of interests from international clients interested in spring-boarding to the US.

“There are a whole bunch of international developers camping in Canada, not just to participate in the Canadian deal flow, but also with the intention of using Canada as a base to explore the larger US market,” Bain says. “Every client we see in Canada is doing that.”

Davies Ward, which also has an office in New York, is working on several projects in the US, and was counsel to the winning consortium on the Port of Miami tunnel project. “Our experience in Canada has opened windows of opportunity,” Pennycook says.

For its part, Faskens represented a consortium led by Plenary on its successful bid in 2013 regarding the Boulder to Denver highway in Colorado, and now has mandates for two more US projects.

To be sure, Canadian firms do have to manage their expectations about their prospects in the United States. “As the industry becomes more mature in the US, it will become more difficult to retain opportunities because the US firms will be more experienced,” Pennycook says. “It’s not unlike the situation in Canada where we had UK firms involved, but only until Canadian lawyers got up to speed.”

Borden Ladner Gervais also regards the opportunities in the US as limited. “There is a hugely competitive market for legal services in the US and a strong protective mentality regarding local purchasing, particularly when it comes to professional services,” Shouldice says. “Although we’ve been involved in a few projects, we should have no illusions about how sustained this is going to be, although we’ll definitely keep responding to any clients who want us down there. What we won’t be doing is spending a lot of time investing and developing a market strategy.”

Blakes’ approach is much the same. “Canadian lawyers’ P3 expertise has translated into some opportunities, but only to a degree because the sophisticated US legal market makes it hard to compete with local firms,” Merrick says. “The US P3 market is not part of our overall business plan.”

Faskens’ Kelsall is somewhat more sanguine about the subject. “There’s been a lot of talk in the Canadian market about we’ll show the US how to do this and how do that, and there’s an element there that rings true,” he says. “But in the end, the US law firms, who are extremely aggressive and competent, won’t let a bunch of Canadians tell them what to do, and it would be naive in the extreme to think we can just march in there.”

What Kelsall does foresee is a continuing exchange of information and an approach to practice that allows Canadian lawyers some significant opportunities in the US space. “What it won’t amount to is a Canadian invasion that approximates the effect of Justin Bieber,” he says. “But with diplomacy and humility, we can make it a healthy interaction.”

As far as the rest of the world goes, the opportunities are broader. The situation, Kelsall says, is analogous to what he and other Canadian lawyers experienced in the project finance area at a time when P3s were not on the horizon.

“International financial institutions hired me to do projects all over the world, and we were senior counsel or we didn’t take the mandate,” he says. “From the P3 perspective, Canadian lawyers won’t be able to take their expertise to Europe or to Australia, but we can take it to developing places like the Caribbean, South America and Africa.”

It’s already happening. Davis LLP  has acted for the Bermuda government on a P3 hospital project, McMillan’s Murphy has been retained by the World Bank to advise the Peruvian and Sierra Leone governments about P3s, and Borden Ladner is working in South America.

Despite the opportunities, it’s not as if the Canadian P3 sector and its lawyers aren’t facing a number of challenges.

“The industry is always looking for a stronger pipeline because it’s costly to bid these projects, and it’s important that there be a large enough pipeline to keep the international community interested,” Romoff says. “We also have to stay as transparent and competitive as possible because there’s growing demand for these projects in the US, South America and elsewhere, and the bidding community is increasingly pursuing other options.”

Lawyers would undoubtedly welcome a larger pipeline, which from their perspective is becoming ever more necessary given the P3 Bar’s growth. “There’s a large number of Canadian firms that can rightfully boast some degree of expertise, so the market has become more competitive and there are significant fee pressures,” Merrick says.

It’s a market in which the hourly rate is rare. “Everyone wants a cap or flat fees,” Pennycook says. “I can think of a few cases in which we’ve made aggressive submissions and didn’t get the mandate, sometimes because firms aren’t even covering their overhead or doing the work we might expect to be done if we were retained.”

In one sense, that’s the bad news. But the fact that the discussion and the market have reached this stage indicates that the underlying message is a good one.

“When the big wave of P3s started in BC around 2003, everyone was wondering whether it would amount to anything more than a pre-Olympic flash in the pan or whether it would stay around,” Borduas says. “The good news is that P3s have not only endured but are also well-installed.”

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Women’s College Hospital (Courtesy of Infrastructure Ontario)


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Waterloo Region Consolidated Courthouse (Courtesy of Infrastructure Ontario)


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Ontario Provincial Police Regional Headquarters Orillia (Courtesy of Infrastructure Ontario)