Coming from the north?

Sept. 9, 2015

P3s are thriving in Canada, but are slow to develop in U.S. 

Over the last 20 years, the pace of public-private partnership (P3) adoption in the North American infrastructure market has differed on either side of the 49th parallel.

Although Canada has embraced the use of P3s such that it is widely considered one of the world’s foremost P3 markets, the U.S. remains an emerging market for this type of project delivery. Given the varying adoption of the P3 model in the two countries, it may be informative to consider the future of the American P3 market in light of Canada’s experience and growth in infrastructure delivery.

Mature enough to know

The inception of the Canadian P3 market is generally considered to date back to the early 1990s, although many cite the Toronto Pearson Airport Terminal 3 project, constructed in the mid-1980s, as Canada’s first P3.

The Canadian Council for Public-Private Partnerships (C2P3), a national non-profit advocacy body, has documented the 22-year history of P3 delivery in Canada, tracking more than 200 projects with a combined construction cost in excess of $70 billion (CAD). Over one-third of these projects (86 in total) involved the construction of hospitals and health-care facilities. Transportation was the second-largest market sector with 53 projects. The other main market sectors included environmental projects (23), justice and correctional facilities (19), recreation and cultural facilities (19) and educational institutions (13).

The bulk of Canadian P3 initiatives have been undertaken by provincial and municipal governments in Ontario (114), British Columbia (42), Alberta (20), Quebec (18) and New Brunswick (11). The Government of Canada, through Infrastructure Canada, is proceeding with an additional eight projects across the country. Canada’s seven other provinces and territories account for a remaining 23 projects.

The development of the P3 industry in Canada may be seen to have evolved in three phases. The first phase, from 1991 to 1999, was characterized by exploratory projects, with 18 projects initiated across the country as “one-off” initiatives. No coordinated delivery program or pipeline of future work was drawn up during this period, as this period predated the establishment of any P3 delivery agency. 

Between 2000 and 2005, P3 activity began to ramp up across the country as various levels of government initiated an additional 33 assignments. Provincial agencies such as Partnerships BC and Infrastructure Ontario were formed at this time to centralize P3 delivery and act as “centers of excellence” for P3 projects. Formal project agreements and process templates were developed in several provinces at this time, and the design-build-finance-maintain (DBFM) model became the predominate delivery method.

The current phase, from 2006 to the present, has seen Canada establish itself as a mature P3 market. This is due to familiarity on the part of developers, contractors and engineers with the Canadian P3 approach, the establishment of a well-defined project pipeline in many provinces, and delivery of many successful projects. Canadian public support for P3 initiatives has risen throughout this phase and now stands at about a 62% approval rating nationwide, based on a C2P3 poll conducted in 2014.

End of the beginning

There are a number of significant differences in the U.S. and Canadian markets for P3 delivery. While the Canadian P3 market can be said to have reached maturity, the U.S. P3 market might be best described as having reached “the end of the beginning.” Compared to the Canadian experience, the exploratory phase of the U.S. market is just concluding. The next step will likely see the establishment of permanent P3 agencies outside of the state DOT domains.

In Canada, renewal of social infrastructure (mostly in the form of hospital facilities) was a leading factor in establishment of the P3 market, with infrastructure needs in the transportation sector accorded secondary consideration. In the U.S. market, the converse is true; the highway sector is leading the way in P3 delivery. Once the P3 process is more fully established across the U.S., we may expect to see more social infrastructure constructed using the P3 approach.

Canadian P3 projects are typically availability payment deals, involving payment of the capital and life-cycle costs by government. In this model, the P3 developer does not assume revenue risk. Many of the early U.S. P3s involved revenue risk, and many of those P3 business cases utilized toll revenue to minimize the state’s contribution to project delivery.

In the U.S., federal funding is a key ingredient in the financing of P3 projects. Federal funding also is important in Canada, but to a much lesser extent. In Canada, the infrastructure deficit in highways and transit is seen as an impediment to economic growth, and many provinces are willing to commit to long-term deals and infrastructure financing to address the identified needs.

In one area in particular, high-occupancy toll (HOT) facilities, the U.S. is well ahead of Canada. Canadian provincial jurisdictions are only just investigating HOT-lane facilities, for which P3 delivery may be a natural fit.

Likely for take off

Given the current state of the Canadian market and where the U.S. market currently appears situated, there is a strong likelihood of significant growth in the U.S. P3 market. Successful delivery of ongoing projects will prompt more P3 opportunities. Federal legislation permitting P3 work on the interstate system will certainly support such growth. With a stable, long-term transportation bill and committed federal funding, the U.S. P3 market is likely to take off.

Improved funding may alter the predisposition towards use of revenue-risk P3s. Availability payment P3 delivery also may become a more viable alternative. A tolling/revenue-based approach is appropriate in some situations; however, not all new corridors have traffic demand to support tolling, and few state jurisdictions are likely to add tolling to existing highway facilities. Therefore, both revenue- and availability-based P3s can be considered, based on the particular attributes of each specific transportation corridor.

Transit charged

Again, future trends in the U.S. may be informed by looking at the Canadian experience.

In Canada, municipalities are increasingly becoming involved in P3 projects, with cities such as Winnipeg, Waterloo, Ottawa and Edmonton initiating P3 projects to address their infrastructure deficits.

While the Canadian market can be said to have reached maturity, the U.S. P3 market might be best described as having reached “the end of the beginning.”

In the municipal context, availability-based P3s for transit infrastructure are growing in Canada. Cities are congested and opportunities for highway expansion are limited. Therefore, much of the current focus to address congestion involves transit system improvements. As the huge costs of transit development cannot be recovered through the fare box, an availability-based P3 approach is the best solution to reap the benefits of P3 delivery and avoid the challenges, delays and cost overruns associated with traditional transit project delivery.

Value for the money?

Working at risk is a fundamental aspect of P3 delivery. P3 developers need to move the work forward quickly, and because of that work at risk, fast-track design and innovation are critical to project success. Canadian organizations are considering changes to the project agreements to address work at risk in the context of P3 delivery to better formalize processes and address this unique P3 challenge.

Schedule adherence is another key aspect of P3 delivery. The private-sector developer is asked to deliver the project and finance the work over the construction period, prompting a tendency to squeeze the contract duration to minimize financing costs. However, the schedule must be achievable, and the developer will be held accountable to its contractual obligation to meet the project completion date.

Quality construction of infrastructure is important for the owner. This involves finding the right balance in the level of the owner’s oversight of the work. Developers are responsible to deliver a facility with the long-term operation, maintenance and rehabilitation commitment acting as their “warranty” for the quality of work. Owners need to balance in their oversight of the design and construction considering this warranty. Inspection of work by the owner is not an option, but the owner does need “boots on the ground” to have confidence in the quality of the work. The level of this owner oversight can be achieved with certification of the work by professionals, an effective audited quality system, and implementation of construction contract incentive and deduction regimes.

The delivery of “value for money,” a fundamental tenet of the P3 process, is still not considered “settled science.” A value for money assessment of a given project compares the costs of traditional project procurement to the cost of delivering the project via a P3 model to determine if the P3 model will deliver the work at a net overall lower cost. In Canada, we see private-sector financing as a key driver of the P3 process, and this commitment drives completion of the work on time and on budget. Value for money analysis addresses the marginal increase in the cost of private-sector financing, as compared to financing by the public sector. The higher cost of private-sector borrowing is offset by optimal risk transfer, contract efficiencies, innovation, and life-cycle accountability. Many organizations across North America are clearly seeing the cost benefits of P3 delivery, but it remains difficult to document the cost benefits in an empirical context. That remains a key challenge for the P3 industry to convince the naysayers. R&B

About The Author: Gauer is a senior vice president, Civil Infrastructure, of Infrastructure Ontario.

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