How the oil slump can hit PPPs

Developments in Canada suggest it’s not only energy investors which have cause for concern over falling prices.

With the price of Brent crude oil dipping below $50 a barrel this week for the first time since 2009, we seek your understanding for revisiting a theme that this column first covered towards the end of last year.

Our reason for doing so is that a new angle has emerged. Pre-Christmas, we explored what perhaps is the obvious line of inquiry in light of tumbling oil prices – the impact on those investors focusing on the energy sector. But now we find evidence in Canada that the effects in an infrastructure context may be more far-reaching.

Canada is, of course, a resource-rich economy which boasts 13 percent of the world’s oil reserves – making it the third-largest oil market globally after Venezuela and Saudi Arabia. It is also one of the world’s largest and most mature markets for public-private partnerships (PPPs).

The link between the two is that the oil price collapse is resulting in budget shortfalls that are apparently forcing capital projects to be at least temporarily shelved. In Alberta, which has seen its budget decline by as much as C$7.0 billion (€5.0 billion; $5.9 billion) according to reports, two projects in particular have drawn attention.

One is the planned new C$1.3 billion Calgary Cancer Centre PPP, for which Requests for Qualification were due to be issued last month. An announcement about the project’s future is now being anticipated in late February or mid-March with Health Ministry spokesman Steve Buick telling the Calgary Herald that the project would likely be pushed back but not cancelled.

The second PPP under scrutiny is the South-West and West Calgary Ring Roads project (which has staggered procurements for the South-West and West elements). This is also understood to be under review, with an announcement on its future expected to coincide with that for the Cancer Centre.

One of the strengths of the Canadian PPP market has always been its inherent reliability: processes are well structured and, according to one market participant we spoke with recently, “we know that projects which get taken forward will never be cancelled halfway through”.

Developments in Alberta indicate that this perception of the market could potentially be undermined. Although it appears that these two projects will only suffer delay rather than postponement, Infrastructure Investor understands that consortia were being assembled for both projects – those involved will not welcome even a relatively small wastage of time and resource.

Still on the subject of reputational risk, what about Canadian governments’ traditionally exemplary standing as reliable counterparties given that declining commodity-related revenues could possibly contribute to a reduction in credit quality? To preserve their credit standing, there is always the option of increasing tax rates – but this, of course, tends to be an unpopular measure.

Furthermore, it seems unlikely that Alberta will be the only province facing budgetary strain – the issue of affordability is highly likely to crop up elsewhere. Investors involved in procurement processes in other parts of the country may now be feeling some discomfort.

No one should be tempted into a view of Canada as a PPP market in danger of imminent collapse. Far from it. In recent times, there has been a renewed focus on Canada from European investors envious of its strong and reliable deal flow which is often in sharp contrast to meagre and unpredictable offerings in their domestic markets. With its vast geography and pressing need for new and revamped transport links and social services, the opportunity in Canada will not vanish overnight.

Moreover, many pundits are forecasting a recovery in oil prices sometime during 2015 – so the budgets shortfalls, and impacts on capital projects, may be a short-lived phenomenon. PPP investors in the country will be hoping so.

*P.S. Please remember, if you have not already done so, to vote HERE in our 2014 Annual Awards. The awards recognise asset class excellence in more than 50 different categories.