The Canadian market for financing public projects through private partnerships is a complex one. It is still highly insular with little space or opportunity given to non-Canadian organisations to get a foothold in the market. In addition, deals must overcome political dog-fights and a skeptical public in order to have a chance of going ahead.

Nonetheless, interest in PPP is growing and a number of projects are under way in a variety of sectors by all levels of government, from the municipal to the federal.

Only very few outside players have a presence in the market, most notably CIT, which bought Canadian group Newcourt Credit in 1999 giving it a route into the market. Otherwise, few outside firms have a chance of participating, as one US adviser describes: "These deals are by and for Canadians. The market is serviced almost entirely by Canadian firms. Although token RFPs are sent this way, it is quite clear that unless there is a strong Canadian presence on the ticket, you have little hope of winning a deal."

But he adds that this will have to change: "As the market grows and larger projects come along, the Canadian market will not be able to sustain itself, it will need to look outside for the financing and consequently also open its doors to foreign contractors."

In addition, as a country with strong socialist roots and much of the infrastructure still publicly owned and operated, any such projects are very much politically driven - be it federally, provincially or municipally. But being so driven, most projects must overcome politically-motivated antagonism and stand up to a public that can be quite opposed to anything that smacks of privatization.

But the concept is thriving nonetheless, with a number of deals now completed and quite a few in the works. And as PricewaterhouseCoopers explains in a report on the market: "Interest in this model [PPP] in a number of provinces and at a federal level now suggests there is a substantial regional market developing."

As one market participant says: "Ageing infrastructure and increasing fiscal pressures in combination with a growing population has led all levels of governments to explore new attitudes towards ownership, funding and operation of public infrastructure."

Many provinces have, or are considering the development of an independent agency to promote and evaluate potential P3 projects - including the Ontario Superbuild Corporation and Partnerships BC - and to maximize the value of public assets.

Projects are under way in the transportation; electric power; and water/wastewater sectors; and for hospitals, schools, and other social institutions. Nationally, the Canadian Council for Public-Private Partnerships champions the case for P3.

Transport upgrading

One of the big areas of development within Canada is that of transportation - including road and rail - projects. After the highly successful and much-touted $3.1 billion Highway 407 Electronic Toll Road project in Ontario, a number of other projects are following suit. In British Columbia, Partnerships BC is in the Request for Qualifications stage for the $600 million Fraser River bridge crossing between Surrey and Langley BC, with an RFP to be issued in March.

A new five-lane bridge across Lake Okanagan on Highway 97 is also in the works. The project is expected to come in at $120 million, and Partnerships British Columbia sent out requests for expressions of interest in a design-build-finance-operate contract for the new bridge in late October. An RFP should be issued in the spring.

In Central Ontario, the most advanced plan right now is the York Rapid Transit Plan (YRTP) - a C$1.6 billion project to improve the transit system within the York region, which will include new buses and trains, extended subway lines, and station and other infrastructure improvements. The York Consortium - made up of nine firms from Canada, the US, the UK and Germany - beat five other teams to win the tender. A number of projects are also being evaluated, including extension of the Niagara Parkway in Southern Ontario and the extension of other major highways in the Golden Horseshoe area surrounding Toronto. The Golden Horseshoe - around the southern tip of Lake Ontario - is the most densely populated part of Canada, holding almost 7 million of Canada's 30 million inhabitants. In addition, the Pearson Air Rail Link in Toronto and the $1.5 billion Richmond Airport Vancouver Link in BC are in the works.

The province of Quebec - led by the Institut pour le partenariat public-privé (IPPP) - is also evaluating road projects. Studies are under way for the A25 Toll Road project and the 40km A30 project, among others. A conference to discuss other potential areas for Quebec PPP development was held in May in Montreal.

In the rail arena, the biggest deal under way is that for BC Rail. The province has just agreed a C$1 billion rail infrastructure partnership with CN Railway, under which CN will take responsibility for maintenance of infrastructure and cars while rights-way, railbed and tracks remain publicly-held. Under the deal, BC Rail's C$500 million of debt will be paid off.

Hospital projects are also increasingly big users of private financing, with a number of projects now under way in Ontario, BC and other provinces. In Brampton, Ontario, William Osler Health Centre selected The Healthcare Infrastructure Company of Canada (THICC) as its partner to design, build, finance, and operate the new hospital facility in Brampton under a 25-year concession. After an extensive RFP and procurement process, four companies were selected for the shortlist, and THICC - which incorporates Borealis Infrastructure Management, Carillion Canada, and EllisDon Corp - was selected in April 2003. Details of the project agreement will be made public by the end of December 2003. The hospital and the community must come up with 30% of the total construction cost of the new hospital and the Province of Ontario will provide the remaining 70% over the lifetime of the project. The Royal Ottawa Hospital mental health facility in the federal capital is also in the works.

Out west, the 55,000-square-metre new-build Abbotsford Hospital and Cancer Centre will be the first major Public-Private Partnership (P3) acute care hospital and cancer centre in British Columbia. The project will be a design, build, finance, maintain and operate scheme and is expected to come in at around $210 million.

Political infighting

One of the many challenges faced by public entities looking to use private financing is that of political manouevring. The average Canadian citizen is very protective of the Canadian social net - with most major infrastructure - including healthcare, roads, rail and more - still publicly owned and financed. Most major P3 projects - approved on a federal, provincial or municipal level depending on the types of entity - must contend with political opponents who are keen to label it privatization and raise the masses against it.

This is generally intensified near election time. Privatisation and the use of private funding for public entities is always top of the agenda for any election campaign, and with recent municipal and provincial elections across the country, P3 projects in the province have faced serious fire, and how they will be viewed under new leadership is still up in the air in many jurisdictions.

One of the charges leveled at hospital developments using P3 or any type of private funding is that it will create a two-tiered medical system - again pointing to the evils of privatization - where those with the funds get good care while the average person has second-class attention. As Paul Hindo, Chair of the Board of the Royal Ottawa Health Care Group (ROHCG) explains: "If this is two-tiered medicine, then we have been practicing two-tiered medicine for several years - here at the Royal Ottawa Hospital, at many other hospitals across Canada, community health centers, and in the offices of private practitioners who typically lease space owned and operated by the private sector," he says. "Despite the fear mongering, which we all expect unfortunately in an election, this is a public hospital, and for anyone to say otherwise is simply not true."

But that is not the only concern. In British Columbia, where the Abbostford Hospital project is going ahead, some market participants have expressed concerns over whether there will be any cost savings using the PPP model at all. In a report Ron Parks, an accountant at Kroll Risk Consulting, lambasted the Abbottsford project, saying actual savings may be minimal if not non-existent, and that the deal is being pushed ahead primarily as a political move.

Of course, not all infrastructure deals fit in with the P3 model, and a number of deals that evaluated the PPP framework have since been deemed unsuitable for that funding mechanism, or have been canned as a result of strong opposition. One such was for the Coquihalla highway in British Columbia. The BC government's P3 organisation, Partnerships British Columbia, began the process of tendering out a 109km section of the Coquihalla highway between the towns of Hope and Merritt at the beginning of 2003, with requests for expression of interest already under way and a full timeline worked out. However the project was cancelled earlier this year as the public-private partnership approach was seen as the wrong strategy for that particular project, according to a spokesperson.

Popular with municipals

However, it is clear that public-private cooperation is increasingly popular, especially with municipalities. Many Canadian cities face a similar challenge, the need for heavy infrastructure investments across a range of assets with little or no funding available form the provincial or federal governments. And some, as is the case with Moncton New Brunswick, have turned to public private partnerships as the answer.

The city of Moncton has wholeheartedly embraced PPP, concluding three major projects in the last five years, including a water treatment facility, a new arena and the city municipal buildings. With the water treatment facility the city agreed to sell the rights to concessionaire USF Canada to supply finished water. The city agreed a 20-year DBOF contract with USF. The city will buy the plant once the lease period is finished and USF will sell water exclusively to Moncton at a pre-determined price for 20 years. The project offered Moncton expected savings of C$12 million over the 20-year concession period.

Al Strang, city manager for the city of Moncton, explained in a presentation in September the reasoning behind Moncton's use of P3s. "USF assumed all the risk and built it for $23 million, or $91/residential unit/year, while a city-build would have cost $32 million, or $111/residential unit. We know costs for 20 years - and the city retains ownership."

"It is not the answer for all municipal operations. It requires an investment up-front for professional services and due diligence," said Strang. "Before heading into negotiations, know what is sacred and protect it, assume the worst case scenarios, have expert advice and use it, conduct research, and gather information."

Other water projects are also being considered on a municipal level, following the example of Moncton and that of Hamilton in Ontario, which launched a 10-year deal in 1995 with Azurix to operate and maintain a number of water and wastewater facilities.

With bigger deals, such as some of the transport deals, in the offing, the key question is how the markets will respond to the need for larger-scale and longer-term financing. In the past, most deals looked to the bank market for financing during their construction phase and refinanced in the bond market. This is primarily because domestic banks generally only offer relatively short maturities, of 10 years or less even in the case of infrastructure deals.

With deal flow on the increase, the question is whether this will signal the opening of markets and the creation of a competitive environment, as is seen elsewhere, or whether the market will stagnate and new deal flow slow down.

Says the US adviser: "The next year sees a number of deals being looked at. That will be the turning point for the market. Already a few transactions are involving outside players, and it may be the beginning of much-needed broadening of the market."