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Roundtables

Looking South

ReNew Canada, in partnership with Morrison Hershfield, invites industry experts to discuss challenges and opportunities Canadian companies face in the U.S. infrastructure market.

Posted on November 12, 2013

Over the past decade, the Canadian public-private partnership (P3) market has been one of the most active in the world. Canada has more than 200 projects completed or underway in sectors as diverse as defence, education, energy, environmental, health care, justice and corrections, recreation, and transportation.

The Canadian market, although composed of projects undertaken at various levels of government, has benefitted from a standard approach to procurement processes and documentation. In the United States, the market is more fragmented. ReNew Canada’s September/October 2013 issue had a special focus on Canada-U.S. partnerships as they related to infrastructure development. To take a closer look at this topic, we gathered seven industry experts from all sides of the infrastructure landscape—law, financing, engineering, construction, and government—in late September to discuss the challenges and opportunities Canadian companies see when working in, or breaking into, the U.S. infrastructure market, as well as where successful collaborative P3 developments have taken root.

 

Trying to break through

In attendance were two representatives from the Consulate General of the United States, who were strong advocates of connecting Canadian experts and capital with American projects. “We are working, it seems like every week, with different economic development offices, to brief them as much as possible about what is possible in working with Canadian funds and Canadian companies that are experienced in infrastructure,” consul for commercial affairs Frank Carrico said at the outset. His office tries very hard to let them know that infrastructure development is one of the most important items for gaining some financing from funds here in Canada.

His colleague, commercial specialist Stefan Popescu, said the U.S. Consulate Commercial Service is always trying to convey the message and the knowledge to the states of what’s available in Canada. But one of the difficulties for Canadians breaking into the U.S. market is a different approach to infrastructure project financing: “In the U.S., people vote on projects, as opposed to the Canadian system,” where individual projects aren’t usually put to a vote.

Ansar Ahmed, VP of public-private partnerships with Morrison Hershfield, a multi-service engineering firm based in Toronto, said there’s an eagerness in the United States to learn from the Canadian experience on P3s. “Many firms, such as ours, have decided to make a concerted effort to leverage the experience we have north of the border and migrate that skill set into the states and establish a program of services.” He explained that many U.S. jurisdictions are just beginning to understand what P3s are all about—and in this sort of learning environment, are more likely to rely on firms with whom they have prior experience. “It’s similar to our experience here in Ontario,” he said. “We got involved in P3s because of our strong cache of experience working with Ministry of Transportation on traditional design-bid-build work, and it was that sort of proven experience that launched us into P3s. Because we don’t have that established market presence already, it’s tough to sort of leap forward into large mandates. As we did north of the border, we’ll have to start small and work our way up.”

 

A lack of consistency

Right from the beginning, the top concern was the lack of consistency some roundtable participants saw in the United States. In Canada, the three main P3 models—namely, those in British Columbia, Ontario, and Alberta—share many similar features and a relatively consistent view on risk allocation. In the United States, there are 50 different states (each with different legislative frameworks, priorities, and fiscal constraints), but also individual departments of transportation, counties, and municipalities.

“Canada took the U.K. (and Australian) model, and fine-tuned it to fit its purposes, whereas in the United States, they want to eke out their own model—recreate the wheel, and sometimes come up with a square one,” said Lee Clayton, VP of global strategic initiatives with PCL. “And this can cause problems.”

Michael Ledgett, a partner with Heenan Blaikie in Toronto and co-chair of the firm’s infrastructure and public-private partnership group, said American politics are influencing why individual states are making each P3 approach their own. “Politics is a tougher sport in the United States than it is in Canada. It’s fought closer to the ground, and I think each of the structures that emerges in each of the states is going to be unique to that state—and we’re just beginning to see that develop.” He admits the U.S. jurisdiction that has come closest to Canada’s model is Puerto Rico: “They’ve embraced a legal regime that’s supported by legislation and a procurement process that looks an awful lot like Infrastructure Ontario’s.”

In Canada, politics have also largely been eliminated from the P3 process, with a broad acceptance of the P3 model by both voters and politicians. In the United States, the political support has been less than consistent. “At the end of the day, P3 projects succeed down to having strong political leadership,” Clayton said. “If there isn’t that political support for a project, the project will inevitably wither on the vine and die, so there has to be that strong support. Even here in Canada, the projects that have struggled, or not done as well as they should have done, are the ones where the politics have gotten in the way, and we’ve seen that around some of the transportation deals in Canada.

“The U.S. market (and PCL has 25 per cent of its revenues from the U.S.) is a small big market: you have to have strong partner relationships, with other general contractors, sub-trades, suppliers and everybody else in the supply chain in the locations you’re looking to pursue projects. You have to work hard relationships locally to make deals happen.” Clayton reinforced the idea that states need to clearly show the market how they intend to procure. “The market can deal with something not being perfect. What the market wants to know is that there’s consistency, transparency, and that when you start the procurement process, you finish.”

Popescu understood, and believed everyone agreed, that a challenge is adapting to the different markets in the United States. “I think the problem, which is in the course of being solved, is that you have to have a real structure and certainty in a particular market, even if there are 50 different ones. I would think in the long run [...] we will learn from one another.”

 

The carrot-and-stick approach

The U.S.’s Transportation Infrastructure Finance and Innovation Act (TIFIA) program provides federal credit assistance in the form of direct loans, loan guarantees, and standby lines of credit to finance surface transportation projects of significance. Clayton was surprised the TIFIA program isn’t delivered in a more carrot-and-stick approach, where there’s a template, instruction of how to procure, and money attached to meeting certain conditions, “rather than, here’s some money, have at it and do what you like,” he said. “I think the federal government, even if it doesn’t want to dictate local politics, can do more in a gentle carrot-and-stick way.”

Ahmed also brought up the Transportation Investment Generating Economic Recovery (TIGER) grant program, which provided a unique opportunity for the U.S. Department of Transportation to invest in road, rail, transit, and port projects. “TIGER funding is really interesting in that it did use the carrot-and-stick approach,” he said. “It said, ‘Bring your projects in, we’ll evaluate them, we’ll rank them against all these other projects from different states, and we’ll decide what projects will get funded.’ I was quite impressed by the list of high-calibre projects.” (They can be found at dot.gov/tiger.)

 

Developing the right team

Justin Catalano, a VP at Fengate Capital Management—an asset management firm specializing in creating and managing investments in the infrastructure and real-estate sectors, with assets under management of approximately $1.5 billion—said that even once prospective projects in the United States have reached a point where a P3 procurement is being considered, the projects often experience significant delays. “To form a consortium at the onset of a potential P3 project and wait while a project is resigned to procurement land, in some cases for years, is very difficult from a business planning perspective,” he explained.

He said there are positive things happening in Oregon, where Partnerships BC is advising the state on P3s. Partnerships BC serves British Columbians through the planning, delivery, and oversight of major infrastructure projects and “has a great history of consistently procuring financeable projects efficiently.” Fengate views steps like engaging with an experienced procurement authority and advisory team as positive signs for the development of a jurisdiction that may represent a promising market opportunity. “We focus our efforts on jurisdictions we believe are investing in the right mix of advisors with the experience and expertise necessary to help a jurisdiction develop a strong financeable project structure and apply it to a strong pipeline. Otherwise, you could find yourself dedicating significant resources to a market without a clear understanding of future opportunities.”

This stability leads financiers such as Fengate to invest more capital and build the appropriate team. “There is a benefit to repeatedly bidding projects together as the same consortium,” Catalano said. “There is a lot of efficiencies to be had. [...]You’re in a new jurisdiction, you’re trying to understand the market and contractual structure, you don’t need the aggravation of trying to figure out how your team is going to work as well.”

Clayton echoed these statements: it’s all about maximizing what a company can bring to a project “rather than grinding through all the nuts and bolts of negotiating the deal structure and risk transfer amongst the team.”

 

Filling the U.S. infrastructure gap

“There’s high demand, there’s a lot of capital need out there—into the hundreds of billions of dollars—and there is a desire on the part of each one of those individual states and jurisdictions to get at it and get some work done,” Ahmed said. “And I think in the absence of one consistent legal/contractual-type framework, it can become somewhat chaotic.” He compares the United States right now to where Canada was about six years ago, but the difference being that P3s programs across Canada helped to inform each other, “whereas down in the states right now, you’ve got states with great experience—Virginia, Texas, California, Arizona to name a few—but there isn’t that one uniting thought process. That’s where Canadian firms have a distinct advantage in that we can bring to the local markets a wealth of lessons learned and best practices.”

Popescu interjected: “In Canada, there are 13 provinces [and territories] that have to find a common way, as opposed to finding the common way between 50 different ones. I don’t think it’s the same situation. It will take some time, and now, at this point in time, we are too many in the United States.”

To illustrate the need for outside investment, Carrico called attention to an American Society of Civil Engineers study, Failure to Act, which reveals that the total U.S. infrastructure investment needs will be $2.7 trillion by 2020. However, it is expected funding will be available to cover only 60 per cent ($1.7 trillion). “The other half just isn’t going to get done until we have a better way of doing infrastructure in the United States,” he said, adding that working with the different U.S. economic development offices is all about spreading the good word about what’s being done in Canada.

Several attendees believed more could be done stateside to bring consistency into the process rather than fighting it out over 50 different states. Clayton and Ahmed brought up P3 Canada as an example, which provides expertise and advice in assessing and executing P3 opportunities across the country, and how something similar in the United States could go a long way to boosting P3 success.

But looking toward the future, Ledgett was positive. “One of the most encouraging things, looking back on the past two or three years, is that there are a number of instances of real P3 leadership in the United States. You’re seeing more and more governors of states come forward as champions of P3s.”

Catalano also said there is capital ready to be invested in U.S. projects. “While we would like consistency across the United States as a whole, we recognize this is unlikely to happen, and so we are more focused on identifying strong jurisdictions, and we will focus on committing our capital and resources to these markets.”

Going back to his earlier statement about the somewhat chaotic nature of the U.S. P3 market, Ahmed added it also gives his company and others, 50-plus markets to make inroads into. “It’s an open market where we can be selective about which markets we think we’re strongest in, and which ones we think we can establish a good resource base in. Some markets are well served already by the local firms, while others are underserviced—and those are the markets we should focus on.”

 

Private sector holds the power

Ledgett said there are a finite number of organizations that can do P3s well, and a finite number of financial sources that will finance them. Meanwhile, there’s almost an infinite number of government leaders who want to take advantage of P3s. “And so what will happen is that the private sector will look at the projects coming along and they’ll tick the box: Is there a legal framework? Is there a procurement process that’s fair, open, and transparent, free from political interference? Is the risk transfer appropriate?”

Therefore, the real challenge of the public sector is to develop projects that are attractive to a critical mass of project consortiums that will come to the table. “Each [U.S.] jurisdiction will have to embrace their model, embrace their solution, make it their own,” he said. “Each state will have its own way of going about this—and only then will they get the private sector to play.”

 

Powering electrical infrastructure

Electricity also plays an integral role in the development of Canada-U.S. partnerships, as there are many cross-border physical infrastructure linkages in the electricity sector that make it a fundamental pillar of the flow of two-way trade. The linkages between the Canadian and U.S. grids—more than three dozen in total—offer several advantages to both countries, and opportunities to partner on critical projects. “There was a period of massive construction in the 1960s and 1970s, and since then, things have tapered off a little bit and it’s been a challenge to get the regulatory or public permission to build infrastructure in the recent years,” said Patrick Brown, director of U.S. affairs with the Canadian Electricity Association.

“Especially at a scale that population growth or demand growth or advances in technology have demanded. [...] There’s a big challenge out there—everyone knows it—and it’s just a matter of, in each market and each region, what are going to be the means of financing that investment? And is there going to be enough of a skilled workforce to be able to meet that demand?”

Brown also said the sector is unique in that there’s growing expectation and support—both on the part of the public and of electricity companies themselves—to implement energy efficiency programs and technologies. “So [utilities are] finding themselves in a position where they’re saying, ‘Here are great ways not to use our product,” which can yield important benefits in terms of greater efficiencies in energy usage, but can also in turn limit available revenue to re-invest in capital expenditures.

With more than 35 existing interconnections between the Canadian and U.S. segments of the power grid, there are numerous examples of successful Canada-U.S. electric transmission projects. And the trend is continuing, with new funding models contemplated in many instances. For example, the $300-million, 340-kilometre Montana-Alberta Tie Line (MATL) is a “merchant intertie”—a transmission line owned by private investors—that will run between the Lethbridge, Alberta area and Great Falls, Montana. The line, which Brown said benefitted from U.S. stimulus funding, is close to being fully operational.

He was also quick to highlight the relative success of the Champlain Hudson Power Express (CHPE) project (see sidebar), a 536-kilometre buried transmission line that will bring up to 1,000 megawatts (MW ) of renewable energy from Quebec to the New York City metropolitan area. Like MATL, the $2.2-billion project is financed completely by the private sector (New York’s Transmission Developers Inc.). “There’s been a lot more predictability and stability in [the CHPE permitting] process than in a lot of recent cross-border transmission projects,” Brown explained. “I think one thing that helps was getting the social license and public buy-in.” For example, the cables will be buried mostly underwater or along existing railroad rights of way and avoid the visual impacts common to overhead transmission projects. “But also it is a merchant project,” Brown added. “They assumed all the risk, so there was no risk to the rate payers. [...] Other people in our sector have looked to that as a model to emulate going forward.” If approved, the line is expected to be commissioned in 2017. (The Quebec section of the line would be built and operated by Hydro-Québec TransÉnergie, the transmission arm of Hydro-Québec.)

 

Determining a success

When asked if there were any notable successes with the P3s model, Ledgett brought up Michigan, where he said Governor Rick Snyder “really embraced the notion of public-private partnerships as he committed to the Detroit River International Crossing project.” Since a speech at 2012’s Canadian Council for Public-Private Partnerships conference in Toronto, Snyder has come out with requests for letters of interest for a number of potential projects. “And the list of companies that have responded to these requests of interest includes key P3 players in Canada. Clearly, where you’ve got political leadership and a will to move forward, then you can move quickly.”

When asked to describe a success, Popescu said it would be good to define the metrics of what’s a successful project, “so other players in a market know, ‘Hey, this is a good way to go.’ ”

Ahmed believes, since the world of P3s south of the border is comparatively new, to measure real success, one will have to follow project’s through the full life cycle. “You’ll only be able to measure success once a few of these projects go through a significant segment of their life cycle,” he explained. “At least [through] one maintenance period, then you can say, ‘Yes, this model works; taxpayers have received value for money; and most importantly, we have safeguarded the public’s trust.’ ”

 

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