The uncertainties surrounding Brexit are too many to number, including that the terms of the withdrawal agreement are not likely be known until late 2018. There is a risk that the agreement may not be ratified by all sides, let alone have time for a transition period. According to a Guardian article, “Britain crashing out of the EU without a deal would inflict significant economic pain across Europe, leaving the region without any winners, the International Monetary Fund has warned.” Indeed, while developments are changing daily, the prospects of the UK “crashing out” and the EU standing firm are widely touted.
Brexit, stay or go, will be analyzed for years to come. In the meantime, Canadian lawyers dealing with procurement and Infrastructure, including the P3 model, are paying close attention to impacts on their global sector. For those lawyers working on projects in Canada, attention needs to be paid to Ontario also.
Premier Doug Ford was elected in that province on a platform of change, cost-cutting and finding financial efficiencies. There are reports that his policy staff are taking a hard look at Ontario’s Auditor General 2014 Annual Report, including the part that is critical of Infrastructure Ontario’s Alternative Financing and Procurement, or Public Private Partnerships provisions.
The UK think tank, Institute for Government, summarizes the UK procurement landscape (https://bit.ly/2LURiDd): “Public procurement — how the public sector organisations buy goods, works and services — is big business and is currently governed by EU rules. In 2015 the UK’s public procurement market was valued at over £260 billion — 13.6% of gross domestic product — excluding expenditure on utilities. The total public procurement market in the EU, to which UK firms have access as part of our membership of the EU, was worth £1.5 trillion in 2015.
“The rules that govern public procurement will change with the UK leaving the EU. That will in turn change how much market access UK businesses will have to procurement markets in the EU, and EU businesses to the procurement market in the UK.
“Public procurement in the UK is regulated by EU rules, covering different types of procurement, such as public contracts, utilities, and defence and security. These common rules are designed to prevent member states discriminating in favour of their own companies and help ensure a level playing field across the EU.”
But not everyone was a believer. “These rules,” the Institute for Government continued, “are often seen as controversial because they appear to prevent the UK Government ‘buying British’. For example, a row erupted in 2011 when Siemens, a German company, won a £1.6 billion public contract for Thameslink trains over Bombardier, a Derby-based train maker. On the other hand, they help ensure that UK companies can bid for lucrative government contracts in other member states on a level playing field.”
Be that as it may, there were spinoff benefits to Canada and other countries of this procurement system: “EU membership not only gives UK access to public procurement markets in 27-member states of the EU, but also other non-EU countries. The EU has free trade agreements with third countries that allow UK business to participate in procurement markets in countries such as Canada … and it is also a signatory to the World Trade Organization (WTO) Government Procurement Agreement (GPA) — a voluntary trade agreement within the WTO.”
And if the UK crashes out of the EU and reverts to the default position under the WTO? According to the British think tank, “there would be no mutual rights of access to public procurement markets. We could favour British companies but our companies could face discrimination in supplying the much bigger European procurement market.”
Canada in that scenario would lose its traditional entry into the EU via the UK. In October 2017, the Royal Bank released its report, “Brexit: A New Challenge to Canada’s European Traditions” (https://bit.ly/2LQweOe). RBC’s overall message was not completely bleak for the UK and considered that Brexit was “unlikely to have much impact on Canada.” Despite that overall message, RBC made it clear that “Canadian direct investment in the UK is most exposed to Brexit. Brexit will have a greater impact on Canadian firms that have invested directly in the UK than those that simply export goods and services across the Atlantic. Canadian pension funds have invested heavily in UK Infrastructure in recent years. Such deals will be less attractive going forward if Brexit reduces the flow of goods and people between the UK and Europe.”
Canadian real estate firms, RBC suggests, would likely need to make a shift. “Investors seeking a home base that provides access to the EU’s Single Market may turn to the remaining 27 EU countries where free movement of goods, services, people and capital are guaranteed, particularly if the UK does not replicate investor protections provided under CETA.”
Brexit does not mark the first occasion on which politics has loomed large over the Infrastructure sector. After all, most observers credit the invention of the P3 model to then UK Prime Minister Margaret Thatcher in the late 1980s.
Cut to 2018 and politicians in Ontario are again turning their gaze to P3s.
Sharon Vogel, a partner with Singleton Urquhart Reynolds Vogel LLP in Toronto, says a change in government can give rise to uncertainty for P3 projects.
“In Canada, we have seen P3s fall in and out of favour in various jurisdictions. At present, in Ontario, there is considerable uncertainty around the future of AFPs given both the recent change in the provincial government and the municipal elections,” says Vogel. “The new provincial government has yet to express a view on the future use of the P3 model. Infrastructure Ontario has only existed under a Liberal government in this province and it will be interesting to see whether there is a change in approach by the new government.
“In terms of the municipal elections throughout Ontario this fall, a number of P3 projects, including some in the transit sector, are unlikely to progress until after the election.”
Victor Choi, a former policy advisor to the Stephen Harper federal government, wrote in a recent blog post (https://bit.ly/2vrL8Aa) that in reviewing Ontario’s Auditor General’s 2014 Annual Report, Premier Ford’s staff are “closely examining” its attention to Infrastructure Ontario’s Alternative Financing and Procurement, or Public Private Partnerships:
“This report reviewed all the P3 projects Infrastructure Ontario has recommended to date, and found that the cost for delivering public Infrastructure through the P3 model, as opposed to the public sector delivering these projects, has been $8 billion higher. The report found major flaws in value-for-money assessments done by Infrastructure Ontario, and external firms it commissioned. Specifically, the risk premiums that private sector consortia estimated, which taxpayers ultimately had or have to pay for, were ‘not based on any empirical data,’ but rather on ‘their professional judgment and experience.’
“Based on this report, it appears that a clearly defined, accountable and empirically driven value-for-money assessment regime could save taxpayers billions of dollars over the long term.”
This sounds very similar to the tone coming from the UK’s National Audit Office, which in January 2018 released “A briefing on the rationale, costs and benefits of the Private Finance Initiative; the use of and impact of PFI, and ability to make savings from operational contracts; and the introduction of PF2.” (https://bit.ly/2n7Agnz).
Guardian editorialists concluded, “Whatever the initial claims, PFI schemes as they have evolved have simply not worked. The NAO report shows, with great clarity, how future generations have been landed in some PFI cases with billions in extra costs for little clear public benefit. Part of this can be explained by government’s poor record in contract negotiations, which should caution against any assumption that publicly owned bodies will inevitably do things better.
“Yet, where once the argument for private capital’s role was that competition would help to provide better public services for less cost, now the reality is that competition can often provide worse for more. What was once trumpeted as a more efficient process for building the roads, railways, hospitals, schools, prisons and public offices that Britain needs, has in many cases become its opposite, bad value for public money. ‘Our vision is to help the nation spend wisely,’ says the NAO. Its report says the nation is spending a lot without knowing if it is good value.”
In Canada, as the Canadian Council for Public-Private Partnerships details, there are myriad projects that recommend the model.
CCPPP CEO Mark Romoff says, “The changing global political landscape has generated both uncertainties and opportunities across all sectors, including Infrastructure, from which no country is immune. Within Canada, however, investment in Infrastructure continues to be a high priority and the P3 pipeline remains steady with projects coming to market from both traditional and new jurisdictions.”
Says Bennett Jones LLP partner Paul Blundy, “We see a number of governments in Canada moving away from P3 procurement that includes long-term financing, but the recognition of the benefits achieved through P3 models remains. These include life cycle costing and optimization of capital and operating costs. As a result, more design-build-maintain projects may be coming.
“Regionally, British Columbia is coming back to the forefront in Infrastructure. The province has a number of transit, road and health-care projects coming to market in the second half of 2018. All are structured to include design, construction and maintenance but no significant long-term finance component.”
For law firms, Blundy speculates, “The Infrastructure gap remains and governments must recognize the need for additional Infrastructure investment. This trend away from financing may work against law firms that specialize in financing but will not impact firms with depth in construction and project delivery. As a law firm we’re investing in these trends. We’ve more than doubled the number of lawyers in our national construction practice and in British Columbia over the last year.”
Davies Ward Phillips & Vineberg LLP partner Greg Southam brings an interesting perspective on the P3 model from his busy practice that includes clients working on US-based projects. “Everybody thought there was going to be a massive gold rush,” after the election of President Donald Trump, “but it hasn’t really happened that way.”
However, there are “significantly more transactions in the US.” He predicts the “success of the procurement model will continue at a steady pace.” His firm having a New York office is of considerable value in it securing mandates.
Analogies can be drawn to the impact of political change in the UK, and Ontario. P3s are highly sensitive to political pressures because of their very nature. However, there will continue to be deals where they are the most sensible model, and business people will find ways to build them within new paradigms.