January 30, 2008
Until a few years ago, infrastructure projects in Canada were funded primarily by provincial or federal governments. But in recent years, the amount of available money has declined and municipalities are turning to the private sector. Firms across Canada are developing and growing their infrastructure groups to serve public-private partnership (P3) deals, which require real estate, corporate and regulatory expertise.
The typical nature of a P3 investment—steady long-term returns—is particularly attractive at a time when much of the market is feeling the effects of a credit crunch.
"They have long-term liabilities and they know eventually people are going to retire and start drawing on the funds so they have a much longer-term investment horizon than a traditional private equity fund that might be looking for a five-year turnaround," says Krista Hill. She notes that the asset at issues is often an essential service, which means that investors have a "hedge against economic downturn."
The Ontario government seems to be moving in the P3 direction with initiatives like Infrastructure Ontario, a Crown corporation created two years ago. It developed an Alternative Financing and Procurement (AFP) process to encourage P3 arrangements and give confidence to the private and public sectors that the best prices and best people for the jobs are being sought and obtained.
Value-for-money reports offer insight into the government's goals on any given project. Risks once associated with construction bids (e.g., escalating building costs) have been transferred to the private sector's shoulders. Additionally, independent oversight of the AFP process (complete with the release of a fairness report at its conclusion) is offers solace to the public at large.
This strategic move protects all parties, notes Krista: minimized risks for the government in how the job is done, simple procedures for the private sector and accountability for the public. In controversial areas, (e.g., medical care, nuclear power plants and water management), winning public acceptance may depend on demonstrating that infrastructure issues can be kept at an arm's length from the delivery of important services.
Under Infrastructure Ontario guidelines, all AFPs are guided by five key principles that include transparency, public ownership and control of core public assets, such as hospitals guaranteeing that private entities won't come into contact with patient care.
Krista saw similar precautions taken in 2001 when she helped negotiate the lease of the Bruce Nuclear Power Plant to a private firm; Ontario Power Generation leased the plant to the private operator, but it will eventually get the plant back and be responsible for decommissioning it. "I think there's been widespread acceptance of that model," says Krista. "I think in every case you need to analyze what is the concern that the government and the public sector might have about private investment, and try to deal with it either contractually or structurally."
Had the Walkerton, Ontario E. coli disaster happened in the hands of a private operator, notes Krista, the public outcry would have been felt throughout the industry. Similarly, when things go well, everyone benefits. "As we get more and more examples of public private partnerships that are working well, I think the public will get even more comfortable with it. The dire need of cash injection into the infrastructure—not just in Canada, but really worldwide—is a growing phenomenon and will really just keep growing. In order to keep our economies chugging along, we really need to invest in our infrastructure."