Canada is set on a course for infrastructure greatness with a number of tangible commitments since Justin Trudeau was sworn in as the new Prime Minister of Canada just over a year ago. During his electoral campaign, Trudeau announced his intention to ensure over C$120 billion would be invested in infrastructure over the next 10 years. It seems one year after these ambitious goals were set, Trudeau has stayed true to his word from his post-electoral statements, the March 2016 Budget and more recently with the fall 2016 statement and announcements.
Trudeau is a year into his term, so what has he managed to achieve? Canada’s long history of successfully pushing deals across the finishing line gives Trudeau a great stepping stone from which to launch a new pipeline of projects. So far, what we do know is that the Government’s plan will be implemented in two phases with investments to be made in public transit, water, wastewater, green infrastructure and social infrastructure.
Throughout 2016, Trudeau signed bilateral agreements with most Provinces and Territories with each province listing a wish-list of shovel-ready projects. On 14-15 November at the 2016 Annual CCPPP National Conference, Infrastructure Ontario announced its list of projects for 2017 and the majority seem to be oriented towards shovel-ready projects with procurement models focussed on faster procurement (DB/DBF).
The latest addition to Trudeau’s plan is the establishment of a Canadian infrastructure bank that will provide low-cost financing to projects and remove any final barriers to getting deals off the ground.
Programs, funding and announcements
Prime Minister Justin Trudeau and his government understand that investing in infrastructure will help to sustain economic growth and create jobs. Given the rapid growth of Canada’s cities and concerns surrounding climate change, there are still a large number of infrastructure projects that require investment.
In his two-pronged approach, we know that Trudeau will invest in a number of sectors over the next two years. It is the second phase that takes up the bulk of the 10-year infrastructure plan with more long-term goals set, such as creating:
• a more modern, cleaner economy
• a more inclusive society
• an economy better positioned to capitalize on the potential of global trade
The main aim of the second phase is to transition to a low-carbon economy, making Canada’s largest cities better places to live, through cost-effective, sustainable, integrated transport networks. We saw a hint at this second phase very recently in Trudeau’s Nov 30, 2016 Pipeline announcement where he didn’t forget to praise the “leadership of Premier Notley, and Alberta’s Climate Leadership Plan – a plan that commits to pricing carbon and capping oil sands emissions at 100 megatonnes per year.”
With the rapid expansion of Canada’s cities, investment in public transit has not kept pace but the federal government is looking to remedy that. Budget 2016 proposes to invest up to C$3.4 billion in public transit, starting in 2016–17 with funding to be provided through a new Public Transit Infrastructure Fund. The following table shows the intended allocation of the Public Infrastructure Fund per Province and Territory.
Table 1: Public Transit Infrastructure Fund (PTIF) Allocations
Another fund that will provide short-term funding of C$2 billion is the Clean Water and Wastewater Fund (CWWF). Financing will be made available for the rehabilitation of:
• Water treatment and distribution infrastructure and existing wastewater and storm water treatment systems
• Collection and conveyance infrastructure
• Initiatives that improve asset management, system optimization, and planning for future upgrades to water and wastewater systems
The following table shows the intended allocation of the CWWF per Province and Territory.
Table 2: Clean Water Wastewater Fund (CWWF) Allocations
For social infrastructure, Budget 2016 will provide C$3.4 billion in funding over the next five years with investments to be made in:
• Expanding affordable housing (including shelters for victims of violence)
• Support early learning and child care
• Renew cultural and recreational infrastructure
• Improve community health care facilities on reserve
Allocations for Social Infrastructure remain to be determined.
In his Fall 2016 economic statement, Finance Minister Morneau also said the government is expanding its definition of infrastructure spending, adding two new categories to target specific needs: trade and transportation (C$10.1 billion over 11 years), and rural and northern communities (C$2 billion over 11 years). There is too little information to form an opinion on these two new segments of the Trudeau Stimulus other than it seems the amounts committed are additional to the previous announcements and should not divert attention from the three original priorities.
As pointed in a recent Financial Post publication, the federal government has not yet signed bilateral infrastructure funding agreements with all provinces. According to the Post, five provinces and two territories still haven’t ratified any agreement. These bilateral agreements are a key step before any federal cash can flow to projects underway across the country. Ontario, Saskatchewan, Alberta, Nova Scotia, New Brunswick, Nunavut and Northwest Territories have yet to sign funding deals.
According to Jay Teneycke, a spokesman for Saskatchewan Government Relations Minister Jim Reiter, the agreement with Saskatchewan could contain a sunset provision whereby any new construction or expansion projects would need to be completed by March 2018 to be eligible for funding. This provision has raised concerns that some municipalities may try to fastrack the planning phase, or may not be able to complete projects on time to receive said funding. This type of risk is symptomatic of any stimulus effort and will need to be carefully monitored throughout the planning and procurement phases.
The Canadian Infrastructure Bank (CIB)
According to the November 2016 economic statement, the CIB’s mandate will be to provide low-cost financing for new infrastructure projects through loans, loan guarantees and equity investments while also acting as a centre of expertise for infrastructure projects. In order to ensure this is sustainable, the federal government will leverage its strong credit rating and lending authority to make building projects more affordable for municipalities.
CIB will invest C$35 billion on a cash basis from the federal government into large infrastructure projects with C$15 billion to be sourced from the announced funding for public transit, green infrastructure, social infrastructure, trade and transportation, and rural and northern communities.
Private capital will also be brought in to multiply the level of investment. This could be through institutional investors, including Canadian investors, who are seeking to invest their capital in assets that provide stable, long-term and predictable returns.
According to the Advisory Council on Economic Growth, public and private pension funds currently hold circa US$170 billion worth of infrastructure investments globally and there is potential to increase this level of investment.
The CIB will work with private investors to identify a pipeline of investment-ready projects that provide the biggest economic, social and environmental returns. We understand the government may still be working on the final scope of the CIB and legislation won’t be ready until the March 2017 budget; letting time to further finalize the scope and mandate of the new entity.
Assessing the potential impact on the Canadian PPP market
With a significant amount of funding to engage within the next two years, Canadian provinces and territories are all tidying-up their lists of projects in an effort to engage their piece of the stimulus funding to the best of their ability.
As previously mentioned, the sunset provisions that come with the funding invite for swift action on behalf of the provinces, territories and municipalities in their planning and procurement phases. And as hinted by Infrastructure Ontario’s November 2016 market update and further clarified by an interview from Divisional President, Project Delivery Ehren Cory with InfraAmericas at the annual C2P3 conference, several Ontario projects valued at C$3 billion, will be procured as DBF or DB projects over the next 12 months. “They are shorter and snappier, and we want to get them into the upcoming construction windows” Cory added.
It is no coincidence that DB and DBF models are quicker and snappier to plan and launch into procurement when compared to DBFM procurements and the more traditional Design-Bid-Build models. Breaking-up larger projects in “early-works” independent procurements is another way to hasten the time it takes to get shovels in the ground. We would expect to see similar strategic shifts to be announced by other larger provinces in the months to come.
Determining key risks associated with the Trudeau stimulus
The primary risk driver here will be the capacity of the various market players to handle the surge in projects without compromising on quality. Typical risks include:
- Planning and procurement risks
Skipping on some of the planning steps typically increases project costs once at construction stage. This increases the risk of major changes after contract award, eroding the value for money and reduces the province’s ability to effectively transfer risk to the private partner.
- Workforce shortages
The increased volume of projects being delivered at once will create shortages, and new hires may be fast-tracked into training and on-boarding procedures.
- Procurement officials, Legal, Technical and Financial advisors’ capacity to deliver
The increased amount of projects being run simultaneously may result in Public procurement teams reaching capacity. This may also be the case for legal, technical and financial advisors.
- Use of private financing
The absence of private equity (in DB and DBF) and the absence of equity and private financing (in DB) will limit the amount of risks transferred to the private partner. This reduces the amount of oversight and long term planning a project will have during construction and throughout its lifecycle.
- Reduced planning beyond construction
DB and DBFs do not focus on long term quality and are often more driven by total construction costs. The absence of any lifecycle and O&M risks transferred to the private partner does not provide the incentive to design projects as cost-effectively as if they had the responsibility over the assets post-construction and limits the amount of guarantees the authority will have on its projects.
There is no doubt that the Prime Minister is eager to attract billions of dollars in investment from the private sector and is keen to turn the CIB into a magnet for foreign investment. According to Morneau’s latest statement, it is anticipated that by investing C$35 billion in the CIB, the private sector will spend $4 to $5 dollars for every $1 federal dollar spent.
But isn’t the CIB just another tool in the tool box to finance key infrastructure projects incorporating government financing? Canada has a strong financial plan, a pipeline of shovel ready projects, an up and coming CIB to facilitate the financing of projects and a strong fiscal policy so it would stand to reason that a number of global firms are considering getting involved on projects.
Only time will tell whether Trudeau’s ambitious agenda is achieved, given that he has just three more years to achieve all he has set after his landslide victory in the fall of 2015.
For more on the CIB please consider reading this paper and this publication.