Billion Dollar Babies
August 1, 2015 by JIM BARNES
To paraphrase the old one-liner, spend a billion dollars here and a billion dollars there, and pretty soon you’re talking about real money.
Canadian contractors can be excused if they are feeling a little sticker shock. Ten years ago, to see a billion-dollar project coming down the pipeline was extraordinary. Just a decade later, these billion-dollar babies seem to be commonplace – happening across the country and in many sectors.
Even a large contractor can get a feeling of vertigo when bidding on a billion-dollar project for the first time. We went to experts in the industry to get some idea of how the environment has changed and how Canadian construction contractors are adapting.
Billion-dollar projects are possible because massive funding is available in the marketplace to spend on them. Federal, provincial and municipal governments have joined forces to address Canada’s notorious infrastructure deficit, and jurisdictions across the country are throwing considerable weight behind infrastructure investment. Large energy organizations, too, are putting shovels in the ground on projects that are of historical significance.
It has to start with the municipalities, notes Raymond Louie of Vancouver B.C., president of the Federation of Canadian Municipalities in Ottawa.
“Canada’s municipalities own approximately 60 per cent of public infrastructure in Canada and are responsible for planning projects of all sizes, including some of the country’s largest infrastructure projects and including public transit expansions,” says Louie.
“These large projects and require a funding partnership between all orders of government. When it comes to managing and delivering these projects, municipalities are best-placed to determine the right level of private-sector involvement,” he adds.
“Regardless of the private-sector role, a full one-third contribution from the federal government is critical and FCM was very pleased to see this affirmed in the new Public Transit Fund.”
Permanent, dedicated funding allows municipalities to consider these investments. As cities become involved in these projects in a consistent way, they can build up local expertise to manage it.
GROWTH OF P3s AND BUNDLING
Another factor making the billion-dollar babies a reality is growing private-sector involvement, often in the form of alternative financing. While Public-Private Partnerships may be more expensive in the long run if you set no value on allocating risk to the builder, they often ease the short-term financial burden on local government. Both federal and provincial governments are encouraging local government to consider the P3 approach.
They are singing to the choir. Many local governments embrace the concept and bundle projects together to take advantage of P3 benefits. Saskatchewan recently awarded a large contract for nine schools to the JUMP consortium. While the approach eases the management, financial and risk burden on government, it cuts the list of qualified bidders down to a very few.
The risks avoided through alternative financing are real. In Toronto, some city-owned transit projects have gone badly awry, leading Mayor John Tory to say that he was “furious” and that “We have lurched from one fiasco to another, costing taxpayers … tens of millions of dollars, and just as important, delaying the day we get desperately needed transit service.” P3 proponents emphasize that if alternative financing had been used, that risk would have been the contractor’s.
There is no question, says David Bowcott, senior vice-president and national director of Large/Strategic Accounts at AON Reed Stenhouse Inc., Toronto, that when a consortium assumes the risk, they manage projects differently. “To me, that’s one of the magical aspects about a P3. Sure, they cost more, but they’re performing to a higher level of certainty than any other asset.”
Marni Dicker, executive vice president, general counsel and corporate secretary of Infrastructure Ontario (IO), Toronto, agrees on the benefits regarding risk. “Our model makes sense. We are on budget, we are on schedule and in the unlikely event that we are not, the public purse does not absorb the cost.”
Provincial infrastructure agencies such as Partnerships BC and IO have a role to play in facilitating these projects. “Some of these agencies have a proven ability to manage larger projects – P3s or not,” notes Canadian Construction Association President Michael Atkinson, Ottawa.
Business is good. “We are at a monumental time in Ontario, with historic infrastructure investment,” says Dicker. “This past year has been the busiest one in our history. We closed 14 massive projects – that’s more than a project a month… We have already completed 48 projects worth more than $13.5 billion dollars.”
“We have been an advisor on the Ottawa LRT and the Waterloo LRT. Many other municipalities are now talking to us for a variety of roles around the province,” says Dicker. “We are doing due diligence with the city (of Toronto) right now on two very large projects, the Scarborough subway and the Gardiner Expressway,” she says. More than 40 other jurisdictions have studied IO’s methods, including international infrastructure organizations.
One recent initiative is IO’s Spring 2015 Market Update, a list of major projects the organization has on its plate. It is intended to level the playing field for potential bidders with transparency on IO’s requirements.
The breakdown is revealing. The current list of 23 projects has two estimated at over a billion dollars in value – the Finch LRT and the Hurontario LRT. Two more projects are listed between $500 milllion and a billion; the Mackenzie Vaughan Hospital project and the Toronto Regional Courthouse.
CO-VENTURES AND PARTNERSHIPS
There is strength in numbers. When faced with a risk that you can’t or don’t want to handle, partnering or joint venturing makes sense. “We’re seeing a lot of joint or co-ventures occurring between long-standing Canadian-based firms,” notes Atkinson.
Risk isn’t the only factor: sometimes it’s a capacity issue. Besides partnering, some firms have shown an interest in mergers and acquisitions to beef up their resources. Some acquisitions today seem to be more about acquiring staff than the client list, notes Atkinson.
It has to be a concern as project size ramps up. “If your market is primarily the public sector, and you are seeing these projects getting larger, obviously you could have capacity problems,” says Atkinson.
“The public sector faces the same challenges that the construction industry itself faces, in terms of demographics and experienced people,” he adds. That could be a factor in the move toward bundling.
BONDING, SURETY, LEGAL, PREQUALS
Resources aren’t the only constraint in approaching these jobs. Surety and bonding might well be factors, too.
If internal growth or acquisitions seem unlikely, then joint venturing and partnerships may be the only viable alternative.
“In the Canadian marketplace, we usually see that jobs in excess of $300 or $400 million go to joint venture,”
says Bowcott. “That’s partly because either their surety partners or their debt that’s putting money into the deal wants to see the risk spread out over more than one balance sheet.”
“A lot of owners are migrating toward a model where they’re trying to RFQ, which hopefully separates those who understand the risk they’re taking on from those that don’t,” says Bowcott.
You have to pay attention to the prequalification process. “In the old days, there was a handful of Canadian-based firms that could bid on these projects. Now, the Europeans are here. There’s more competition; today, it’s no longer a slam-dunk,” says Atkinson.
Be prepared for a more complex legal environment. “The entire project is more complex,” says Dicker, “Therefore, the legal documentation, the project agreement, and all the corresponding schedules are much more complex.”
After a decade of experience, Dicker notes that IO’s documents are largely templated.
“(The major law firms) have gotten used to our program, and in fact all of our deals follow the prior deals in the same asset class,” says Dicker. “We’re doing that very intentionally… We’re doing anything we can to make it easier for people to bid our projects, to gain a larger amount of interest from the market.”
Expect an ongoing stream of billion dollar projects over the years to come. “As long as the economy stays buoyant, the projects are going to continue to get larger,” says Bowcott.
Ontario alone is committed to investing more than $130 billion in infrastructure over the next 10 years. “There’s 10 years worth of transit, transportation, and other infrastructure being built,” says Dicker. “It’s not going to slow down. It’s going to be a new asset class that we will be talking about in 10 years.”
Jim Barnes is On-Site’s contributing editor.