Public-private partnerships help fund municipal infrastructure projects

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regina-wastewater-plant-aerial-construction-shot
The City of Regina’s wastewater treatment plant under construction. Photo by EPCOR.
By Daniel A. Ford

Public-Private Partnerships (P3s) are an indispensable procurement model which should be in every municipality’s toolbox. While it seems clear that the required “P3 screen” of the prior federal government will most likely be dispensed with, it is also clear that the model has been, and will continue to be, supported by both provincial and federal governments.

With decades of under-investment, infrastructure is now a policy imperative of governments at all levels. Substantial commitments have been made by the provinces and, more recently, the federal government toward infrastructure investment. While some of that investment will be directed toward the jurisdictional priorities of those governments, there have been clear indications that municipal priorities will also be a focus for these infrastructure dollars.

The federal Liberal Party Infrastructure Plan, which contemplated a two-fold increase in federal infrastructure spending to $125 billion, is an example of that focus. The Plan envisions the establishment of a Canadian Infrastructure Bank to assist municipalities with their infrastructure funding needs. It also contemplates transfers to municipalities of unutilized federal allocations as top-ups to the Gas Tax Fund. There is also guidance on sector focus, with a notable emphasis on “Green” infrastructure. This will almost certainly include water and wastewater infrastructure, often a municipal priority and responsibility.

Even with these funding sources established, how can municipalities use these infra dollars, and their more limited property tax revenues, to achieve the best value for money (VFM) when making infrastructure investments?

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Public-Private Partnerships have an enviable on-time and on-budget track record, with over 230 projects to date and $94 billion invested. In addition, the experience gained from those projects has helped foster best practices and, more importantly, streamline the model, making it more accessible to municipalities. Lastly, the model has demonstrated “savings”, with billions of dollars in VFM achieved over conventional procurement.

The case for water and wastewater public-private partnerships

One of the infrastructure sectors in dire need of investment is water and wastewater treatment. By some estimates, its infrastructure deficit is in excess of $85 billion. A 2012 national review indicated that approximately 15% of municipal drinking water systems were rated “fair” to “very poor” for the condition of pipes, plants, reservoirs and pumping stations. Approximately 30%-40% of wastewater systems were rated “fair” to “very poor” for the condition of wastewater plants, pumping stations, storage tanks and pipes.

With those daunting numbers, and water and wastewater systems accounting for approximately 30% of Canada’s municipal infrastructure stock, municipalities, with limited sources of funding, have learned to take advantage of the P3 model.

Many would be surprised to learn that there is a long history of using P3s in the development of water and wastewater treatment facilities. To date, there have been at least 16 such “conventional” P3 water/wastewater projects in Canada. Though historically smaller in size, the model has been employed more recently in larger projects. These include the Regina Wastewater Treatment Plant Upgrade Project (Regina Project) and the Saint John Safe, Clean Drinking Water Project (Saint John Project). Torys LLP had the opportunity to work on behalf of those municipalities to bring these projects through a successful P3 procurement.

The support of the prior federal government, in providing up to 25% and then 33% of capital cost funding through PPP Canada, has also served to advance the proliferation of the model.

Most of the water/wastewater Public-Private Partnership models employed to date have been of the design-build-finance (DBF), design-build-operate-maintain (DBOM), and design-build-finance-operate-maintain (DBFOM) variety. The DBF model is the shortest in duration, being limited to the construction period. The DBOM and DBFOM models are longer in duration, with post construction operational and maintenance elements and terms ranging from 20-30 years.

Although each public sponsor will have its own imperatives, which may dictate the form of P3 model employed, and while views will vary, many believe that risk transfer is optimized through use of the DBFOM model. The models can also be utilized discretely within the same procurement to address different elements of the plant. As an example, a public sponsor may elect to employ the DBF approach for transmission, and the DBFOM model for principal facility components. This was done in the Saint John Project.

Risk transfer

Subject to certain exceptions for events which are beyond a private contractor’s control (which are codified in the project agreement and typically known as “Supervening Events”), they bear key risks, relating to design, financing, equipment procurement, cost overruns, schedule delays, and disclosed infrastructure. This typically consists of known utilities by reference to, or properly inferable from, disclosed data and background information made available by the public sponsor and with relevance to the project. Other risks include permit compliance, commissioning, availability and performance, life cycle rehabilitation and facility hand back.

Facility sizing (treatment capacity) and source water availability, as they are both elements outside of the control of the private contractor, are risks which are retained by the public sponsor. In addition, undisclosed infrastructure, determined again by reference to the disclosed data and background information, and which typically consists of unknown or mis-located utilities, is a retained risk of the public sponsor.

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