Tough at the top

Canada has long been at the forefront of the global P3 market. But political changes and a slowdown in activity mean municipal projects will be key to maintaining dealflow, reports Dan Colombini.

In November, industry experts expressed concern over the future of the Canadian P3 pipeline, with upcoming budget cuts, plus elections in Quebec, British Columbia (BC) and Ontario.

Speaking at the time, chief executive of the Canadian Council for Public Private Partnerships (CCPPP) Mark Romoff warned that “strong political commitment” is required if the pipeline is to be maintained.

“Until we know who the leaders are in those provinces, you can’t speculate on whether there’ll be a different approach to P3s,” he said.

Elections in Ontario are due in the spring of 2013, while a budget announcement is due in Quebec. But BC remains the biggest cause for concern, as the union-backed New Democratic Party currently heads the election polls.

“The big one that people worry about is BC because it’s the founding jurisdiction for the current P3 model and initiative,” says Douglas Buchanan, partner at law firm Davis LLP.

“But I’m not as pessimistic as some and, I believe, if there is a change of government then they will be smart enough to conclude that if it’s not broken then there is no need to fix it.”

Buchanan also predicts that a solid existing pipeline in Ontario and a large infrastructure deficit in Quebec will see those states’ dealflow continuing next year.

“The election in Ontario is not imminent,” he said. “Infrastructure Ontario also has a deep pipeline, which they are starting to apply to all sorts of asset classes. So just because there is a leadership change, I don’t really see dealflow being affected there.”

He adds that as Quebec currently has a minority government, its infrastructure needs lend it to becoming more active in the P3 market next year. “The federal government is planning a number of big projects, so I think, although there may be pressures, the P3 model – the transparencies and the success of the procurement process – is going to be desirable in the province.”

But as we move into a new year, the big concern for the Canadian P3 market is whether levels of competition are being squeezed, as the market continues to mature.

According to Dominic Leadsom, partner at law firm Turner & Townsend, the number of responses to requests for qualifications (RFQs) has reached new heights this year, suggesting bidders are scratching around for new work.

“I don't think there is much nervousness in the market surrounding the political changes,” he says. 

“Perhaps a little around BC, but the bigger nervousness is the level of competition in the market now, which is seeing as many as eight fully assembled teams responding to RFQ documents.”

“I think that on the highly desirable P3s we are seeing six to eight RFQs, of which only three are selected. In the old days you may have seen four or five,” adds Buchanan.

He says that “virtually every big player in the world” has a position in the Canadian market, viewing it as a toehold into North America and the rising US sector.

Many firms may be willing to wait around until 2014, when the country’s new infrastructure plan will be launched.

In the meantime, though, it is the municipal P3 market that is likely to see growth this coming year, with local governments seeking an additional $2.5bn a year to pay for infrastructure projects.

“The next big challenge is the municipalities,” explains Leadsom. “In Ontario and BC there are initiatives for provincial bodies to work alongside municipalities, but there is still a cap on the value of those projects.”

However, 2012 has already seen a number of large municipal projects come to market, with the Rideau Transit Group being named preferred bidder for the $2.1bn Ottawa Light Rail earlier this month.

Another large transport project also highlighted the activity at municipal level in October, with the announcement that Alberta’s $1.8bn Edmonton light rail project was seeking $400m from the federal P3 fund. If successful, construction on the proposal will begin in 2014.

But more than half of all municipal roads in Canada are still in dire need of attention, according to a recent report from the Federation of Canadian Municipalities. In addition, 40% of wastewater plants and pumping stations also need to be upgraded or replaced.

As a result, Buchanan believes the sector is where “the real expanse” will continue to be seen.

“Without a doubt this will drive dealflow in 2013,” he added. “Everybody assumes municipal projects are not going to be large, but deals such as the Ottawa Light Rail deal and the Waterloo LRT are already in that category.”

Experts are now in agreement that the Canadian P3 market is beginning to mature, with the country currently boasting 180 projects that have either signed or are currently in procurement. 
Historically, Canada has focused mainly on social infrastructure projects.

But as the market evolves, water and waste – along with the big transport P3s – will begin to open as infrastructure needs at both federal and municipal level increase, according to Gary McCarthy, a director at engineering firm WSP.
“Areas like this [water, waste and transport] are hugely technically challenging, and Canada now has a decent level of solid delivery behind it to look at these projects.”

Romoff agrees that waste and water were likely to feature heavily on the 2013 deal front, particularly at municipal level. He also highlights social housing as an area for investors to keep an eye on.

“Social housing, both provincially and at municipal level, are certainly a growth area,” he says. “BC has moved ahead with their housing project and there are now more and more city’s looking at the P3 model for their own areas.”