Written by Jim Janetos and Morgan Troke

Canadian governments utilize a variety of delivery models to procure and deliver infrastructure projects and services that address public service commitments. In addition, large infrastructure projects are a key component of Canada’s and every province’s economic stimulus packages.

One delivery model used with much success in Canada to deliver large infrastructure projects is the Public Private Partnerships (PPPs or P3s) model.

Canada currently enjoys a mature and robust PPP market with Canadian PPP projects in various industry sectors, including light rail and other mass transit, roads, bridges, hospitals and health care, justice and corrections, schools, recreation and culture, water and wastewater, airports and civil aviation, ports, energy, universities, government services, property management, data centres, defence and communications. Over the course of the last 20 years the experience, expertise and capabilities related to PPP projects in Canada have grown dramatically, both in the public infrastructure procurement authorities, and also in the major investor entities, construction companies and service providers who constitute the participants in PPP projects.

Notwithstanding the success of the PPP delivery model, Canadian public procuring authorities are now developing other delivery models to address growing market pressures related to certain risk allocations within the P3 model and other traditional delivery models. One new model emerging incorporates a new phase in the project delivery timeline — a period during which the public authority and the private sector work collaboratively to develop the project's design, reduce (or identify more accurately) construction and delivery risks and finalize project costs/pricing for the infrastructure project. These models, commonly referred to as the progressive design-build model or the progressive P3 model, are currently being used in Canada in the context of complex transit projects and hospital projects.

The result of the experience gained with the large number of recent projects has been the development of project procurement processes that allocate risk reasonably between the public sector and the private sector — thereby achieving value for money for the public. The recent projects have been procured under a clear and competitive process and that process has been steadily refined by the development of common and consistent “best practices” across Canada.

The Canadian infrastructure market is highly competitive, and includes both domestic and international constructors, service providers, equity providers and lenders. In most Canadian projects, there is no “local source” requirement and international companies are encouraged to participate. However, project teams must pre-qualify in order to participate in the RFP process and usually only three teams are qualified, so that smaller international participants often initially enter the market as part of a consortium.

International banks were major participants in PPP infrastructure financing prior to 2008, but their high level of participation has declined, and they have been replaced by a combination of primarily Canadian banks with a smaller number of international banks (providing debt financing primarily during construction) together with an active private placement and broadly marketed bond market in Canada and the U.S. (providing primarily longer-term debt).

Government support for infrastructure projects in Canada is generally strong at both the federal and provincial level (although it varies somewhat by province) as the current methods being utilized to procure and deliver projects have proven to address the infrastructure backlog.

Many federal, provincial and municipal governments in Canada have established dedicated agencies, which manage the process of using PPPs to achieve the completion of infrastructure projects. These agencies include Infrastructure Ontario, Infrastructure BC, Alberta Infrastructure, Infrastructure Québec, SaskBuilds, Nova Scotia’s Department of Transportation and Infrastructure Renewal, and Partnerships New Brunswick. Also, the Government of Canada has established the Canada Infrastructure Bank, a Canadian Crown corporation operating at arm’s length from the government. The Canada Infrastructure Bank is to work with provincial, territorial, municipal, federal, Indigenous and private sector investor partners to build infrastructure across Canada (with a focus on large, transformative projects, such as regional transit plans, clean energy, transportation networks and electricity grid interconnections), by providing federal support to such partners to ensure the commercial viability of their projects. In addition to the public sponsors of projects, there is a growing trend among large pension funds and private equity firms to identify large infrastructure projects, which may be suitable for their portfolios (assuming construction and delivery risks are (or will be) clearly identified), and then actively promote these opportunities within government. An example in this regard is CDPQ Infra, a subsidiary of Caisse de dépôt et placement du Québec, which proposed the Réseau express métropolitain project (REM) in Montréal, a 67-km, light rail, high-frequency network for the Greater Montréal area.

There are several different models of PPP in Canada including build finance, design-build-finance, design-build-finance-maintain (DBFM) and concession, in all of which the project entity is compensated by milestone payments (often paid upon achievement of substantial completion of construction), availability payments, project revenue or a combination of them. In a typical DBFM PPP:

• a private entity (usually a consortium of one or more equity providers with one or both of a construction contractor and a service provider) (Project Co) and the government/public sector entity enter into a single contract under which Project Co accepts responsibility to design, build, finance and maintain the infrastructure asset;
• the project is delivered by Project Co, which contracts with a construction contractor to design and build the infrastructure, and with a service provider to operate and maintain the infrastructure asset;
• the operation and maintenance obligation extends over a long period (usually 25 to 35 years) with predefined hand-back conditions;
• operating and maintenance requirements are performance based;
• construction costs are primarily financed by debt and equity, and payment from government or the public sector entity begins upon completion of construction and extends over the operation and maintenance term (with interim payments during construction in many cases); and
• payments from government or public sector entities are subject to deduction for failures in service delivery.

The emerging progressive DBFM delivery model modifies the typical DBFM PPP characteristics by introducing a development phase during which the government/public sector entity and private sector entity contractually agree to work collaboratively for a specified period to progress the design of the infrastructure project and identify and price the associated construction and delivery risks. This development phase precedes the execution of the DBFM project agreement for the project.

Every province in Canada has its own regulatory and legislative requirements, but there are significant similarities in the procurement process and documentation. The Canadian jurisdictions utilizing PPPs and other delivery models share a desire to utilize an efficient and consistent procurement process followed by a short closing period. The process is administered by well-staffed and experienced procurement agencies that routinely publish RFP documents and project agreements, as well as value for money reports. The procurement is intended to be transparent and may be subject to the supervision of a “fairness monitor,” and all elements of the procurement process have become increasingly standardized.

Each procurement authority tends to utilize its own standard RFP process and bid requirements over all or most types of projects — utilizing common bid submission documents, the same project documents negotiation process and established closing protocols. Bid submissions for P3s are required to be for a fixed price and to include committed or underwritten financing. There are varying but always short periods from the selection of the successful bidder to closing, based on the settled documents and committed financing at bid submission.

The Canadian infrastructure market is expected to remain active in the coming years as all levels of government have witnessed the benefits of using PPPs, and now progressive delivery model, to procure and deliver infrastructure projects and related public services.