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News analysis: Proliferation of procurement methods risks P3 developer atrophy

The Canadian market for public-private partnerships is at risk if governments continue to pullback from employing long-term private financing to fund infrastructure projects, market participants have warned. 

Provinces are experimenting with a number of different procurement models in response to changing economic conditions, the risk of so-called megaprojects and efforts to reduce costs. 

Some at the Canadian Council on Public Private Partnership's annual conference in Toronto earlier this month cautioned, however, that market trends may leave some of the greatest strengths of the P3 model unused. In response, investors could start to leave the market. 

Public authorities such as Michael Lindsay, CEO of Infrastructure Ontario, said they are diversifying the types of procurement they use to fit circumstances. IO has recently used models ranging from design-build-finance, design-build-maintain to design-bid-build and design-build, often through a progressive procurement. 

"We're going to continue to use a proliferation of delivery models and contract forms to deliver our pipeline," Lindsay told the conference. 

After IO announced its fall market update at the conference, Linsday told Infralogic that "among the most important developments" signaled in the update was "the continued movement in respect to approach to packaging transit contract models," such as "the further subdivision of the Ontario [Line] works." 

Other officials and market participants said they are seeing a move away from the traditional design-build-finance-operate-maintain model and similar long-term financing contracts. 

Mark Liedemann, CEO of Infrastructure BC, said in an interview that while progressive P3s have been popular with contractors in British Columbia, the province isn't in the market with any projects that include long-term financing. Infrastructure BC has been doing alliance contracts and design-build contracts more recently, he said. 

"The progressive model is quite attractive to the industry because it's a faster process to get down to one proponent, and [contractors] don't need to tie up their resources for as long," he said. 

Government officials’ focus on how P3s allocate risk, rather than, for example, an analysis of how the model can deliver projects faster, has distorted calculations on the usefulness of partnerships, BMO Capital Markets Manading Director Laith Qamheiah told Infralogic. He said this faulty analysis could be driving Canadian authorities away from P3s with long-term financing. 

By using more DBF contracts with short-term private financing, or even DB contracts with no financing, agencies risk the atrophy of private finance expertise in the P3 realm, Qamheiah said. 

"Over the past few years there have simply been too few projects coming to market that present attractive opportunities in which debt and equity investors are able to participate," Qamheiah said in remarks at the conference. 

"While risk transfer is absolutely a vital component of the P3 model, focusing on the value of transferred risk as the main benefit of P3s and private capital ignores other intangible benefits, such as added due diligence and sharing of expertise," he said. 

Yet the benefit of having the long-term operations and maintenance contracts that can go along with long-term financing is one of the best arguments for P3s, many at the conference said. 

Derron Bain, managing director at Concert Infrastructure, which has contracts for three P3 school bundles in Alberta, said in an interview with Infralogic that many schools run by local authorities have suffered from longtime deferred maintenance. P3s with an O&M component set standards for maintenance and ensure infrastructure isn't hit by the downside of capital funding oscillations. 

"Boards are struggling with chronic under-funding for capital projects, upgrades or deferred maintenance that are getting more expensive the longer they get put off," Bain said during the conference. 

The issue of deferred maintenance will force the hand of political leaders on necessary infrastructure, and if P3s aren't used to build things sooner, or P3 contracts are cancelled, there will be consequences, those at the conference said. 

"If they really truly need it, it'll have to come back, it'll just cost more," said Magda Sabat, vice president for Canadian Building at Pomerleau, during a panel on COVID-19's impacts on P3 risks structures. 

Although political leaders may sometimes find it's easier to sell simple design-build contracts without O&M or long-term financing, it’s up to the P3 industry to make the case for the DBFOM model, attendees said. 

"When I see deferred maintenance, to me what it says is that we collectively … as an industry … we haven't done a good job of explaining to the decision-makers why maintenance is important and why we need to have that long-term commitment," said Rene Masad, senior vice president for Real Estate Asset Contract Management at Infrastructure Ontario, in the same panel discussion as Bain.