Split Personality: A view from Canada’s investors and developers

As the Canadian infrastructure market seeks to adapt and flex to a new environment, investors and developers have some divergent views on what the new world should look like

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“What has been forgotten is the number of successful projects in social infrastructure,” says Joey Comeau, chief operating officer and executive vice president of Capital at EllisDon. “All the focus is on transportation and transit.”

Comeau is speaking to P3 Bulletin after a panel session at the Canadian Council for PPPs (CCPPP) conference in Toronto, where he has tried to push back on what he and some others in the market see as an over-reliance on the progressive P3 model. As projects continue to grow in size and scale, there is an unease within the investor developer community over how risks in these deals are managed - but also over whether an emphasis from public authorities on shifting to new models is necessarily always the right approach.

“Since the progressive P3 model implemented in Canada to date, does not require a developer/equity investor lead procurement process, we don’t have any direct experience with the model, but understand from what is publicly available that owners’ experience with the progressive model has not proven to accomplish what everyone in the industry had hoped for,” says Sia Kusha, senior vice president and group head of business development & partnering at Plenary Americas.

“From what we understand, development times are longer by the time the significant design work is completed; and project costs are higher than originally anticipated, while the owners are retaining more of the project risks,” he explains. “Currently, everyone believes the model needs to continue to evolve.”

“We want to see more of a range of solutions,” adds Comeau.

While procurement agencies will argue that a range of different solutions are necessary (as Infrastructure Ontario president and chief executive, Michael Lindsay, did during the CCPPP debate), there is still concern that too often authorities are relying on a model such as the progressive P3 approach to be a solution to wider, systemic issues.

“Too much risk is being transferred to the private sector through traditional P3 models in major transit and similar types of projects,” says Sam Johnson, director of development at Graham Capital.

He argues that there are many investors and developers who have suffered under the regime of tight margins, where they will have failed to make enough money on the good deals to cover the costs where projects have not gone so well. This is why a progressive, more collaborative approach is needed.

“The private sector is licking its wounds somewhat from the impacts of the last few years,” Comeau agrees. He says that the market is mature enough now to deal with some of the issues that it has faced in the past, to make contracts work, and a progressive solution should not be the only solution.

One investor goes further, arguing that while a progressive approach is useful on some of the bigger projects, some are advocating it as a solution for all because they have not been successful on traditional P3s and are therefore searching for a different approach. He agrees with Comeau that for some social deals, a traditional P3 model works well, and the progressive model should be seen as part of the wider P3 process, rather than a separate mechanism in itself.

All this internal work - whether at private firms looking at their risk profiles with fresh eyes, or public authorities trying to recalibrate how they get the outcomes they want - means that the number of projects in the Canadian market is less than in the past.

“DBFM and DBFOM dealflow has slowed significantly,” says Kusha, pointing to a range of factors, from interest rates to politics, that have all had an influence.

Nonetheless, there remains a lot of work going on in the background. “Large scale healthcare, the energy transition, broadband, housing and higher education are sectors that have opportunities,” Kusha adds.

Authorities, however, may want to consider how big their projects are. While it can be eye-catching to tender multi-billion-dollar projects, there is a growing sense among investor developers that such large projects increase risk and are too big for all but a select few - regardless of the type of model used.

“Resource capacity issues are not always understood by the client base,” says Johnson. He says some deals can find they have a lack of interest because their scale makes it difficult to get enough workers on board to deliver it. This is being exacerbated by the massive levels of infrastructure spending taking place south of the border, where simulus efforts such as the Infrastructure Investment & Jobs Act (IIJA) and the Inflation Reduction Act (IRA) have resulted in a one-time bonanza of federal money that is only available for a limited period.

For all the tweaking of the model, then, it may be that procuring authorities would do just as well to consider how they can tweak the size and scale of their projects.

Other countries have had some success in parceling up their large transit schemes into individual packages, for example. This reduces the risk on any one contract for the private actor, and while it will up the risk surrounding the interfaces of those deals for the public authority, it may be a price worth paying to bring investors, developers, contractors and others back to the bidding table.