The rise of the municipalities

Despite the debt crises afflicting Europe and the US, many economists have declared the Great Recession of the late 2000s long since over. Many of its effects, however, are still being felt as countries continue to look for ways to strengthen their economies and create long-lasting jobs. One legacy that remains a core policy initiative for economic growth is in the area of infrastructure development – and nowhere is this more evident than in Canada. 

What started, at the federal level, as an Infrastructure Stimulus Fund (since discontinued) and the Public-Private Partnership (P3) Canada Fund, remains a key spending initiative to help strengthen the economy and fill a gap in infrastructure spending. Coupled with the federal government’s policies, provincial and now municipal governments are looking to meet the infrastructure deficit left by years of neglect, population changes and shifting trends in infrastructure usage.

Current commitments

Funds are constantly required for both new projects and assets needing rejuvenation, and some governments have formalised funding arrangements recently to push infrastructure programmes forward. In Ontario, Canada’s largest province, the Liberal government has introduced a 10-year infrastructure investment plan with a committed C$35 billion (€24.8 billion; $35.7 billion) over the next three years. While short on specifics, there is mention of focusing on transit systems, bridges and roads as well as a commitment to Public-Private Partnership (known in Canada as P3) projects (or, in Ontario’s case, Alternative Financing and Procurement [AFP] models).

Infrastructure Ontario (IO), the province’s procurement body, will have strengthened powers to oversee projects and “have a greater role in procuring infrastructure, including engaging in traditional forms of procurement as well as AFPs when appropriate”, according to the plan. Other provinces such as British Columbia, Alberta and Quebec have their own procurement agencies for the development of P3s and, at the federal level, the P3 Canada Fund last year closed Round 2 of its project grants. Seventy-three proposals were received for projects in 11 provinces and territories. Of these, over half (35) are municipal projects. In May this year, it opened Round 3.

Challenge and opportunity

The question of infrastructure need is not up for debate. All levels of government recognise the need for improved services for the population of Canada. The question then becomes, with recession officially over, how commitment levels can be maintained and who pays for the new projects? According to a report released last year by the Residential and Civil Construction Alliance of Ontario, over the next 50 years there is a risk of public infrastructure under-investment that could cost the Canadian economy 1.1 per cent of real gross domestic product (GDP) growth. The report goes on to highlight what the effect would be on the Canadian public if they footed the bill. To pay for the identified long-term under-investment, someone born before 1965 would have to pay between C$9,000 and C$28,000; someone born after 1995 would need to pay more than C$51,000.

Mark Romoff, chief executive officer of the Canadian Council for Public-Private Partnerships, notes that the infrastructure gap will encourage future spending at the government level. “The strongest motivation for continuing down this path is the overwhelming infrastructure gap across Canada. Political leadership at every level recognised the importance of addressing the deficit but is faced with a fiscal reality,” he says. Romoff stresses that the deficits and fiscal challenges make P3 infrastructure projects more attractive at all levels of government.

“P3s are a club you have to have in your bag if you’re going to invest in infrastructure,” says Glen Hodgson, chief economist and senior vice-president with the Conference Board of Canada in Ottawa. But, he adds, continued innovation, new and creative financing structures and management models will shape the way infrastructure is built and maintained in the future.

The need to innovate

What types of innovative financing deals, management arrangements and P3 initiatives will keep pace with the growing needs of Canada’s population? Case in point is the renewal of Lansdowne Park in Ottawa. Here, according to the Conference Board’s Hodgson, is a case of a municipality looking for innovative ways to get projects completed. In the case of Lansdowne, the City of Ottawa decided to initiate a redevelopment of Lansdowne Park partly due to the condition of the lower south grandstand of a stadium in the park, which had structural problems. The City of Ottawa is handing management of the asset to a private sector consortium for 40 years and will take back ownership at that time (see Lansdowne Park sidebar).

Municipalities may lie at the heart of future of P3 projects in Canada. As stated above, more than half the submissions made to the P3 Canada Fund came from municipalities. And according to Greg Smith, managing partner, Brookfield Financial Corporation, municipalities will continue to present more infrastructure projects in the future. “I see municipalities, as well as First Nations [indigenous populations], as new sources of opportunity for consortiums – financing, design/build and facility maintenance within the P3 sector in Canada. I see municipalities as a strong growth area,” he notes.

Mario Iacobacci, director of economics at Aecom, a global infrastructure advice and development company, agrees with Smith. “If you look at the sheer need or who owns the infrastructure deficit in Canada, it is primarily the municipalities – and it has shifted drastically to the municipalities over the last 30 years”, says Iacobacci. “Funding may come from provinces or the federal government but the project owners are invariably municipal and therefore the [growth of projects] will not be a passing fancy.”

Even within the municipalities, there is further room for innovation and development. Iacobacci says we are likely to see the emergence of projects within areas that were not historically considered. For example, social infrastructure, including schools and hospitals, has always been a large part of infrastructure planning. But Iacobacci is now seeing more projects in the water and wastewater sector come online. Examples include projects in Victoria, British Columbia; Kaninaskus, British Columbia; Abbotsford, Alberta; and the Lac La Biche County, Alberta wastewater treatment facility announced in July.

Transit is also playing a large part in the municipal infrastructure story. Doug McCallum, research associate with Actual Media and author of the report Top 100: Canada’s Biggest Infrastructure Projects, notes that the biggest project in the country right now – Toronto’s $8.4 billion (estimated) Eglinton Light Rapid Transit line – is in the transit space. “For a long time municipalities have been saying they do not have the cash to invest in major capital projects like [transit],” he notes.

The P3 Canada Council’s Romoff concurs with Iacobacci and says while the market will continue to see P3 activity in areas such as health, education and correctional facilities, “there will be an increase in water, wastewater, renewable energy and green technologies.”

What began in 2008 as the Municipal Rural Infrastructure Fund will likely bear fruit for Canada’s First Nations population. Smith, Hodgson and Iacobacci all agree that municipal and First Nations projects will be a major part of deal flow within the market for the foreseeable future. In fact, in its call for Round 3 proposals, the P3 Canada Fund is “encouraging provinces, territories, First Nations and municipalities to consider the P3 model for their public infrastructure needs”.

Financing trends 

In order to get projects off the ground and maintain those already underway, P3s will have to become even more creative when it comes to financing. One issue, raised by IO in its announcement of new funding was the “bundling” of smaller projects. Romoff says governments and private industry will want to partner with entities that have experience and leadership in these areas and bundling projects can help with that. “There’s going to be more efforts to bundle projects so that you end up with a more substantial portfolio. It might be the same kinds of projects or it might be a bundle of various ones,” he notes.

Iacobacci says that municipalities may move towards pricing that monitors how end-users are using the services. For example, he notes that in many areas in Eastern Canada some utilities are offered at flat-rate pricing. “If you consider P3s as a possibility of doing smarter pricing, and perhaps the right incentives are in place…by doing more commercial projects you could revisit these issues and do them right,” he stresses, adding that costs could be better recovered.

Brookfield’s Smith says the bond market is still fairly standardised in terms of some of the financing solutions that are available. But he says, looking out over the next few years, there may be new trends or innovations in the real-return bond space as well as a possibility of variations in concession lengths between 15 and 30 years which, when altered, will produce other financing innovations.

It’s hard to say how far infrastructure and P3 investing might have progressed without a global financial crisis. Spending and stimuli may have been kept at a distance and long-needed repairs and infrastructure rejuvenation may have been delayed. But the last four years in Canada has seen a P3 renaissance, which is increasingly admired and copied around the world. Now, as municipalities and First Nations come on board and innovations in financing and deal structures mature, it is likely this trend will continue well into the future.

Case study 1: Lansdowne Park, Ottawa
Lansdowne Park in Ottawa is a relatively unique form of P3 in Canada’s capital city. Both the city and a private consortium – Ottawa Sports and Entertainment Group (OSEG) – are contributing capital towards the redevelopment. The city will contribute capital for the redevelopment of a sports stadium and a share of the overall parking requirement for a total of C$129.3 million.

OSEG will contribute capital to build a retail component with associated underground parking and to purchase a sport franchise for a total of C$118 million.

The city will fund its share from the sale of air rights for the residential component of the plan, which is estimated to be C$10.2 million. The balance of C$119.1 million will be funded through the issuance of long-term debt.

OSEG will fund its share from a minimum cash equity contribution of $19.2 million, with the balance of $98.8 million funded through the issuance of long-term debt by OSEG. Ottawa will retain ownership of the site, leasing the commercial and retail component to pay off the debt under a revenue-sharing formula with OSEG.

Case study 2: Surrey Pretrial Services Centre
Another area being undertaken by the P3 model of development occurs in the legal and detention centre sector. Case in point: The province of British Columbia has recently signed an agreement with Brookfield Partnerships Surrey to build the high-security Surrey Pretrial Services Centre expansion. The 216-cell project will more than double the existing centre’s capacity.

Brookfield entered into a fixed-price, performance-based partnership agreement with the province to design, build and maintain the facility over a 30-year operating term. The total capital value of the project is C$90 million with completion expected in 2013.