Canada appears to have escaped quite lightly as far as the global credit collapse is concerned. Compared to Europe or Australia, that is.
Earlier this year, there was a moment of panic as major projects fell apart and deals were dramatically restructured to cope with expensive debt. Key contractors pulled out of the market, European banks fled having been ordered to spend money closer to home, and all at once there was a hiatus in Canada’s previously smoothly run projects market.
But the problems were patched up if not solved. The region’s PPP leader, Partnerships British Columbia, paved the way by replacing bank debt with its own funds; and give or take one or two causalities along the way, the pipeline for health, highways and courthouses remains strong.
So it is no surprise that Balfour Beatty Capital, a veteran of the British partnerships market and one of the few international firms to make regular income from US P3 projects (as they are known in North America), has decided to set up shop in Canada.
When discussing the market, Bruce Robinson, the firm's chief executive, and Susanna Han, vice its president of business development, use words like “well established” and “exciting”. But do they think the market has settled, or are there bigger challenges to follow?
Back in the day
Both Han and Robinson have already spent long spells in the international projects market. While in the UK, Han worked on the now collapsed – and notorious – Metronet PPP project to upgrade the London Underground, an experience she describes as “interesting”.
She also worked on a hospital project in Birmingham, which she uses to highlight the biggest difference between the Canadian and UK markets. “I worked on that I think for three and a half years,” she says. “The timelines, in terms of bidding and time at preferred bidder stage, are a lot longer in the UK.
“Whereas here [Canada], you're generally speaking a couple of months at the requests for qualifications stage, six months at the requests for proposals stage and then a couple of months thereafter, in terms of achieving close because of the committed finance. So you're just looking at about a year's time, which is quite attractive as a bidder.”
Han soon left the UK for Canada, where she spent time at accountancy firm KMPG and Balfour’s rival contractor Carillion, before returning to Balfour Beatty last month. A Canadian native, and with several projects there under her belt – she worked on the Alberta schools deal and the Royal Victoria hospital – Han has boundless enthusiasm for the market.
“Despite the number of projects that have already been closed, it's still relatively in its early infancy stages. It is a fantastic model, and so in terms of opportunities and looking into community markets, this is an ideal time for looking at the Canadian market.
“A few of the projects have closed. There is standardisation in terms of documentation and there's still a massive pipeline of projects still to come.”
But does this mean Canada will replace the UK as the heart of Balfour Beatty’s partnership work? Robinson insists this is “not necessarily the case”.
“What Canada provides us with is another great entry point to use the experiences … we've had in the UK,” he says, “combined with what we've done in the US to expand our global reach.”
Robinson’s background is in the United States projects market. He was chief financial officer of GMH Communities Trust, an American military accommodation firm, when Balfour Beatty bought it as part of its US expansion early in 2008. Before that the company was an active player in the growing American P3 market, with a portfolio of 15 military housing projects.
Since the arrival of Balfour Beatty, Robinson has knuckled down and got on with the job of expanding the company’s portfolio beyond military housing projects in the US. But while those championing P3 in the US have been loud and proud, they have yet to deliver. Does Robinson’s move to Canada signify an end to Balfour’s wider American ambitions?
“The US is somewhat challenged because it's still in the infancy stage. We are actively pursuing a transaction right now in Long Beach for a courthouse, but the problem is there's not a long line of projects keyed up,” he replies.
“The US is structured a little bit differently than the UK and Canada in that each of the states have their own separate sovereignties when it comes to these privatisation opportunities. Where the Canadian and the UK governments sort of have the central voice in saying this is how we're going to deal with this, the United States has many different voices, and all of the seem to speak differently.”
In the near future, Robinson adds, the Canadian partnerships programme "will be looked on an equal par with both the UK and Australia”.
A creative crisis
But while Canada trumps the US in terms of market potential, it has had its fair share of difficulties. The biggest problems over the last year for the market has been a lack of finance – or, when there is money to spend, it has been too expensive – around 3.5-4% above the standard lending rate – for authorities to take.
Partnerships BC was forced to abandon the C$1.6bn (US$1.5bn) Port Mann highway deal in March after reaching a stalemate with its contractor. It then found itself playing lender on the Fort St John project after bank terms proved “onerous”.
But Han argues that authorities lending on deals should be seen as something of the past. “[It] was a way of addressing a specific issue at a certain point in time in dealing with at the height of the crisis.
“The market has stabilised. There are a number of projects that have closed since that time and there is renewed optimism, in terms of financing P3 projects.”
She does admit, though, that even in Canada the financial crisis has made it “more difficult” to negotiate deals. “But I think it also stirs some innovation within the market,” she adds. “It causes bidders to be a bit more proactive in looking at different solutions.
“It's been a ‘crisis’. [But] it’s also been a good opportunity for bidders to shake things up a little bit and look at projects in a different way.”
And creative solutions for funding partnerships schemes are definitely needed to combat the liquidity crisis. “Over time, given the number of projects in the Canadian market and the large funding requirements for these projects, the market lends itself to not necessarily just looking at one, and only one, particular funding mechanism,” she says.
“In Ontario you have hospitals that range from C$200m to C$1 billion …You can have different funding solutions for each. [The market] lends itself to using different sources.”
A shake-up will also pave the way for “innovative” lending from a wider group of funders, she adds. In addition, more established lenders, such as the European banks, will return to the market as it stabilises.
Robinson agrees, adding that this is one area where the US is ahead of the game. “In the US what we've seen is some of the funding through the public market with the use of public bonds.
“Certainly right now those bonds carry a higher rate than with normal bank financing. That is [an idea] floated around … we certainly see that as a future opportunity. As markets become more normalised, that could be a new source for P3 financing.”
Pension fund investment, still a tentative prospect for most developed markets, could also be used to finance Canada’s projects. “It's a very logical investment for the pension funds,” says Robinson, “because of the long-term nature of the contracts, and the returns are fairly good and very secure.
“The pension funds are looking at this as a way to get a better return than they would get if they just invested in government obligations. But certainly I think they are much more concerned about what the risk profile is in some of the investments that were made, let's say, in the past five to seven years that seemed good at the time, maybe not so good now.”
In the short term, getting projects closed is the main challenge for Balfour’s team in Canada for the next few months. While Robinson is enthusiastic about Canada’s projects market, he admits the pressures will not ease till Balfour wins its first projects.
“The financial markets continue to provide some challenges and will, I believe, continue to provide challenges to all participants over the next year.
“We probably have a few more hurdles because we're new entrants in the market. There's getting the partnerships [ready, and] having to deal with all the financial turmoil that’s been going on.”