Infrastructure market shifting to collaborative contracting as demand meets macroeconomic headwinds

The move to progressive and collaborative procurement models continues
Infrastructure market shifting to collaborative contracting as demand meets macroeconomic headwinds

When public-private partnerships emerged around 25–30 years ago, Canada had a massive infrastructure deficit. Since then, says Gregory Southam, much of the infrastructure that needed to get done would not have occurred without the P3 model. Southam heads the North American infrastructure and public-private partnership practice at Davies Ward Phillips & Vineberg LLP.

Canada’s population is booming. Minister of Immigration, Refugees and Citizenship Marc Miller announced in November that Canada would aim to welcome 485,000 new permanent residents in 2024 and 500,000 in 2025 and 2026. This is a reduction from what the feds had previously envisioned but still significantly more than annual averages for the 2000s and 2010s.  

Southam says Canada, as a growing country, must continue building because infrastructure needs remain pressing, a view the public and private sectors share. New roads, light rail transit (LRT) projects, and a high-frequency rail system from Quebec City to Toronto – the largest Canadian infrastructure project in decades – are coming. The 2024 edition of the annual “Top100 Projects Report” from the infrastructure magazine ReNew Canada found that Canada’s 100 largest public infrastructure projects rose to a record-high cumulative project cost of $293 billion this year. Transit was the most active sector, with 26 projects worth $122 billion, including Ontario’s GO Expansion and the Eglinton Crosstown LRT.  

Southam says the P3 model, which marries private and public sector interests, will continue to be essential to meeting Canada’s infrastructure needs. However, that does not mean being beholden to how the model has traditionally been used. He says parties must be creative and tailor it to the required solutions.

Lawyers say the Canadian infrastructure space continues its shift toward progressive procurement models. These models follow a multi-step process where – in public infrastructure projects – the governmental authority will obtain a service provider to advance the design and development until they have sufficiently derisked the project and are ready to sign a long-term agreement for its construction, and sometimes also for its financing, operation, and maintenance, depending on the type of contract.

“That’s a trend that started a few years ago. But now, it’s just firmly part of the market,” says Lampros Stougiannos, a partner at Dentons Canada LLP who practises corporate and commercial law focusing on infrastructure, public-private partnerships, and renewable energy.

The progressive model adapts the classic P3, where the authority designs the project and service providers bid a fixed price and date.

“You end up with more collaborative models where the public authority and the private partner are forced to seek more collaborative solutions to issues that come up during the construction phase,” says Ilan Dunsky, national co-chair of Dentons’ infrastructure and public-private partnership group.

Dunsky says three factors have driven the shift to progressive models. First, there has been a drop in market competition as private-sector project participants withdrew from fixed-price contracts because they were losing money. Second, projects have become increasingly complex, which makes them less conducive to a fixed-price contract. Third, when the private service provider participates to a greater degree in the early design of the project, the amount of contingency they must include in their bid is reduced, which results in a less expensive project.

Maxime Jacquin, a partner in the corporate group at Stikeman Elliott LLP, says there has been an acceleration toward progressive and collaborative models. He says the transition is going well, but there is a concern in the industry about whether the government has the qualified staff necessary to execute collaborative contracts. “If you work on an open-book basis, it requires more oversight by the government,” which requires more resources.

“People are now asking whether the government will have sufficient resources to allocate to these projects in order for the collaboration to be effective,” says Jacquin. “That’s something to keep an eye on. But so far, everything I’ve heard from players in the industry has been positive about the progressive and collaborative models.”

Jana Mansour, the national co-chair of Dentons’ infrastructure and public-private partnership group, says the infrastructure space is generally susceptible to all the “pressure points” squeezing the Canadian economy. Infrastructure developers must contend with high interest rates, inflation, supply chain issues, and a rise in insolvencies in the construction sector.

He says there is also a lot of demand in Canada and the United States, which has created a capacity issue.

Jacquin says that debt-burdened governments, labour shortages, supply chain problems, inflation, and ambitious carbon emission reduction targets have created a “perfect storm,” while infrastructure development is in high demand. The storm has accelerated the shift to collaborative contracting, he says.

Amid the shift to collaborative contracting, the world will experience a unique democratic change in 2024, with 50 countries comprising half of the earth’s human population holding national elections, according to the Associated Press.

“I would definitely pay attention to that,” says Mansour, who notes that many right-leaning governments will replace left-leaning ones and vice versa, impacting the relationship between the private and public sectors in terms of infrastructure.

He says it could mean that some governments will retreat and leave it to others to address specific infrastructure needs, and it could mean privatization. While an ideological shift may not occur in Canada, changes elsewhere could inspire copycats here and impact whether players in the infrastructure space view Canada as an attractive location.

“Are lawyers ready for these momentous shifts if they happen?”


Davies Ward Phillips & Vineberg LLP Stikeman Elliott LLP