High-speed trains whisking passengers from London to the Channel Tunnel wait at the platforms at St. Pancras International Station in London. Borealis Infrastructure and Ontario Teachers’ Pension Plan teamed up to win a 30-year franchise to operate the 109-kilometre line. The project was completed using the AFP model.LENNART PREISS/The Associated Press
Infrastructure Ontario (IO) is switching gears to launch major transit projects across the province after years of focusing on building new hospitals.
But changes in infrastructure needs haven't slowed the consortium of construction companies, property managers and financial backers who want to get in on the action. And the government's long-term financing system means that these private-sector companies will soon have billions of dollars of light rail and subway extensions on their books.
The system, called alternative financing and procurement (AFP) in Canada, is now a government standard for infrastructure projects in countries like Australia and Britain. And IO has spent about the last seven years developing this public-private partnership (P3) to attract the private sector to help build new hospital infrastructure.
Before that time, public projects didn't have a good track record in the province, according to IO's chief executive officer Bert Clark. Some new buildings were 200 per cent over budget. But the average age of a hospital was 42 years and it was growing harder to practise modern medicine. "New gurneys didn't fit through old doorways," Mr. Clark said in an interview.
The AFP model puts a consortium of builders, property managers, and financiers in charge of getting the building and maintenance process right the first time.
First, the government lays out its requirements – at a hospital that might include number of emergency rooms, building temperature, and external landscaping, among other things. Then a consortium of designers, builders and maintenance experts get together to bid on the project. The winners aren't paid a cent until the project is done, and even then are only paid half of the construction cost. The second half is paid back over 30 years, to ensure all promises of longevity and maintenance are met.
The program has been largely successful so far in the eyes of IO. By its numbers, more than $5.5-billion worth of construction has been completed on 30 projects, with all but one on budget, and all but two on schedule.
"If it's dirty, if it's not working, guys won't be getting paid. And we're building in 30 years of proper maintenance for that asset," Mr. Clark said.
Canada's pension plans are well-known global institutional investors, hungry for infrastructure projects to invest in. But they are not the players in the IO bidding and funding process.
"Those guys are looking for higher returns," Mr. Clark said. "Our projects attract the Canadian life insurance companies, infrastructure funds and banks." These groups can handle longer time horizons and step in to provide the upfront financing to a consortium, which acts as a sort of bond investment.
About $10-billion worth of private finance has been invested in Ontario's public projects in the last seven years.
Life insurers make a lot of sense as investors because the 30-year commitment balances well against their policy commitments. The government occupancy as a tenant in these facilities reduces risk, and bonds associated with IO projects tend to be A-minus rated.
Sun Life Financial Inc. likes the reliability of IO investments, since the deal structure holds all parties accountable to their roles.
"It's a win-win for all parties involved," said John Vincent, a senior managing director at Sun Life with a focus on infrastructure including P3s. He has $6-billion under management. "It does provide us at Sun Life with an investment with a long-time horizon to match our liabilities and help out our clients, like people who are retiring or pension funds."
But a better understanding of the pipeline of future projects would allow Sun Life to manage its resources better. From lawyers to independent engineers – it can be a challenge to know what level of active staffing to maintain. "We have to orient ourselves to where the opportunities are," Mr. Vincent said.
John Beck, CEO of construction company Aecon Group Inc., has a different view of the pipeline. There's more transparency now than ever, he said.
Mr. Beck has been involved in infrastructure P3s with the Ontario government since the late 1980s, from airport terminals, to toll roads. Over the course of that time, the process has been streamlined and become "commoditized," he said. And that's a good thing for the builder.
The process is still being refined, though. Mr. Beck says IO has increased its emphasis on choosing consortiums that have members with experience in the region where the project is being built. That gives Toronto-based Aecon a small advantage. In late December, IO declared two finalist consortiums to compete the Eglinton Crosstown LRT, and Aecon is involved in one of them.
Assembling the winning consortium is by no means easy for even the home-grown bidders. "There's a lot of competition out there," Mr. Beck said. "We're not overjoyed about that, but we understand it." He wishes more provinces across the country would adopt the model.