Canada has a rich inventory of major projects facilitating the country’s commercial and social systems. Amid the surge of successful major capital projects in Canada in recent years, we have nonetheless seen some recurring challenges in getting projects off the ground. In this article we explore some of those challenges—and potential trends offering solutions—that those in the infrastructure space will want to consider, particularly with more projects on the horizon as part of Canada’s economic recovery.
Common challenges and risks
Across the continuum of project structures across Canada—from private commercially driven sectors, to public sectors, to hybrid public-private sectors—projects share similar objectives: choosing the right project; running efficient and effective procurements; maximizing value for money through on-time, on-budget delivery; finding the right government pay/user pay mix; rewarding high performance stable cost operations; and conducting a lifecycle cost analysis. This is all while balancing the needs and expectations of many stakeholders including governments, permitting authorities, regulators, debt and equity investors, as well as the rights and interests of Indigenous groups. And all face similar challenges and risks—permits and approvals, interfaces with other works, credit or demand risk, site acquisition and quality, technology and other risks. Despite these challenges, potential solutions are emerging that may help not only move projects forward, but that will also serve to innovate the “infrastructure of infrastructure” for the next wave of projects.
Infrastructure sector priorities
We have seen a decade of ambitious initiatives across a variety of economic sectors—power, water, telecom, transport, pipelines and ports—and social infrastructure sectors, such as municipal, university, schools, healthcare and justice facilities. There has been a focus on getting people, goods, and information to market, with “green” infrastructure being given a relatively high priority. The COVID-19 pandemic has revealed some weak spots requiring further attention though, including ex-urban broadband and multiple long-term care facilities.
It will be interesting to see whether historically dominant sectors regain momentum, or if government stimulus programs change the direction to drive different sectors and structures. With the 2008 financial crisis as recent precedent in governments leveraging infrastructure projects for economic stimulus, Canadian governments may apply different scrutiny to project selection this time around: “an important lesson learned was that ‘shovel-ready’ projects do not necessarily mean ‘shovel-worthy’, so more consideration of asset management principles and environmental impacts are required lenses for stimulus allocation”1.
“More steering, less rowing”
How can governments and the private sector make the most of the “new normal” opportunities? We are well past the days of governments procuring mostly DBB projects for government designed, used and funded projects. The way governments at all levels in Canada are engaging with infrastructure projects is evolving. We are seeing a move toward “more steering and less rowing” by governments in moving major projects down the river: as we approach the pandemic economic recovery phase, it seems apparent that governments will increasingly look to advance projects with the private sector, with different structures and different interfaces than may have been historically considered.
As a result, we expect to see not just more federal financial support, but also more federal influence over project selection and prioritization by lower orders of government to suit federal policy goals. The Canada Infrastructure Bank is likely to play an increasing role in delivery of federal projects and federally funded projects through its recently announced $10 billion Growth Plan. Municipalities and territories, as sub-sovereign governments, will need to be even more nimble in balancing increasing infrastructure demands with requirements to collaborate with other government funders.
Equally of interest will be what role the combination of a rising demand for projects with a modernized approach to environmental issues will play in the desired surge in activity. Presumably the green imperative should apply as much (possibly more) to a state-of-the-art mining operation as it would to a proposed net zero emissions office park.
We can also expect that pressures from stakeholders across the spectrum will continue to materialize in the permitting process. From investors and lenders that need timeline certainty to put large sums at risk, to local communities that have been demanding earlier, more substantial participation in project planning for years. The hope is that the result of recent government initiatives like the new federal Impact Assessment regime will be implemented in practice in a manner that results in more stakeholder satisfaction, less litigation risk and projects that can go from conception to build in a commercially viable timeframe. Based on our recent past, that outcome is by no means certain but there is some encouraging potential.
Indigenous projects and roles
We increasingly see Indigenous peoples and communities more centrally and actively involved in the successful development, construction and operation of infrastructure projects. New approaches to and requirements for consultation and engagement are essential to successful project development and operation. A key corollary to successful consultation and engagement is ensuring that Indigenous peoples share in the economic benefits of infrastructure projects—what is referred to by some as economic reconciliation. There are various means by which this can be achieved, including equity participation and employment, training and procurement opportunities as well as the more traditional means of benefits and royalty agreements. Special consideration should be paid to the unique impact that COVID-19 has on Indigenous communities, particularly remote communities, and the impact on these communities’ ability to engage on infrastructure projects. For those developers who engage early and often and with an appreciation and respect for community realities and dynamics, there is a path forward to successful engagement with and participation by Indigenous communities.
Creative project financing
Recent market activity and announcements from governments at all levels on projects as part of economic recovery point to the potential roads ahead for innovative project financing of major projects. We are looking at potentially hundreds of billions of dollars being required to fund the flow of major projects ahead.
Governments and many corporations have strained balance sheets. Pension funds, specialty infrastructure funds, bond underwriters and international banks have the opposite problem—too much idle money looking for worthwhile projects to invest in. With these factors developing in concert, while conventional project financing has often relied on a strong sovereign or corporate credit as the feedstock for a project financing, we may see new models come on stream which might stretch the imagination. Data centres, tolled projects, other user pay or demand risk projects and hybrid structures advanced by Canada Infrastructure Bank and others will require a rethink of conventional project structures and their financing elements.
Mature infrastructure projects with stable operating cash flows from essential assets and services have long been popular with infrastructure funds, pension plans and other investors. We expect continued interest in and competition around infrastructure and energy projects given the proliferation of funds and other pools of interested capital. However, we also expect this capital to become more engaged in creating and structuring new opportunities and taking on board more development risk going forward, which in turn will ultimately create an active secondary market.
The current environment leaves many questions open about the future of Canadian infrastructure. Will the known approaches to dealing with governments, Indigenous groups, regulators and financiers still work, or has COVID-19 changed everything? What industries, asset classes, structures and initiatives will dominate the next wave of projects in Canada? While much remains to be seen, it is clear the common interest in getting projects built is already stirring creative thinking and innovation in the sector.
1 “The Evolution of an Industry”. ReNew Canada, September/October 2020. Available here.
This article was originally published by Canadian Mining Magazine.
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