Canada has emerged as a global leader in public-private partnerships as a means to procure, deliver, and operate infrastructure projects. However, the public-private partnership approach is not without challenges, nor is it the only project delivery method worth pursuing. We asked Lampros Stougiannos, Jana Mansour, Karen Martin, and Ilan Dunsky of Dentons to break down the advantages of these partnerships, explain their success, and provide us with ways they can be improved for both the public owners and their private sector partners.
Canada has developed a reputation for successfully delivering infrastructure projects using a public-private partnership (P3) approach. What are some of the features that have made the P3 model so attractive?
Canada’s success in delivering P3 projects can in large part be attributed to one factor: stability.
- There is a stable pipeline of projects, with nearly every province, territory and the federal government consistently bringing new projects to market.
- There is stability in the form of P3 agreement used across Canada. While differences remain depending on jurisdiction and project type, the contractual documentation issued by public authorities across the country has been and remains relatively consistent, both in regards to overall structure and more specific provisions, such as those governing indemnities, change in law, supervening events, or dispute resolution.
- A robust project financing environment is also present in Canada, with lenders that understand P3 structures and regularly finance P3 projects.
- Finally, Canada’s P3 projects have, for the most part, favoured payment mechanisms that provide for predictable payments to the private partner, generally based on the asset’s availability rather than the level of public use, which significantly de-risks projects.
In addition – a frequently overlooked point, though perhaps not as material as the foregoing – all P3 jurisdictions in Canada: (i) prequalify a limited number of bidders for each project, generally no more than three; and (ii) provide partial compensation to losing bidders who submit a conforming proposal, in the form of a bid stipend. These two elements together reduce the risks and costs associated with bid preparation to proponents, at least relative to pursuing projects in some other jurisdictions.
These factors have all contributed to ensuring P3 projects are procured, delivered and operated consistently and successfully in Canada. This is not to say, however, that P3 arrangements in Canada are free from challenges or the opportunity to evolve in response to such challenges.
What distinguishes the P3 model from other contractual structures used to deliver public infrastructure, such as traditional design-build and design-bid-build approaches?
We see two principal distinguishing factors in most P3 structures: a long-term at-risk performance obligation combined with a financing component, both of which are the private partner’s responsibilities.
For a project to truly be considered a P3 in the Canadian context, the private partner must be responsible for the design and construction of a project, as well as its long-term operation and/or maintenance. The private partner’s compensation and risk profile are therefore dependant on its ability to successfully deliver the “whole project”.
Public owners procuring a project as a P3 also typically require some form of long-term project financing. Public owners can thus take comfort from the involvement of lenders who agree to assume risk vis-à-vis the private partner, which is usually preceded by a due diligence review of the project’s commercial and technical elements. This initial due diligence exercise implicitly validates the project and its feasibility for the public owner. After the P3 agreement is signed, the public owner also takes comfort from the lenders’ continuing role, which typically includes the scrutiny performed by the lenders’ technical advisor.
In contrast, under more traditional approaches, a public-sector contracting authority will deliver the project using only public funds, and will separately engage multiple parties such as designers, construction contractors and equipment suppliers. The public owner may often leave operation and maintenance to its own employees, or to yet another separately retained counterparty. Various critical aspects of a project are therefore handled by different parties, leaving to the public owner the usual costs and challenges of managing interfaces, possible inefficiencies, etc.
Collaboration between public and private sector parties is increasingly viewed as an important component in the successful delivery of infrastructure projects. Why has collaboration between these parties been lacking in some cases, and is collaboration more difficult to achieve under a traditional P3 approach?
One of the key features of the P3 model is that it – at least in theory – requires collaboration among project participants in order to successfully deliver a project, both (1) between the public and private partners, and (2) among the various members of, and subcontractors to, the private partner.
This is in part due to the long-term nature of P3 arrangements and the early stage at which they are established. Indeed, many public owners recognize the value of engaging with the private partner earlier than later in their project development process. In so doing, the public partner relies on the private partner to come up with the best or most economical solution for the public owner’s needs, before costly decisions are made.
The private partner is expected to deliver a project that meets the contracting authority’s minimum output specifications, both with respect to the project’s design and construction and its long-term operation and maintenance. The private partner must consequently coordinate the activities of the design-builder and the operations and maintenance provider, requiring them to work together so that the project can be designed, built, operated and maintained to meet the contracting authority’s requirements throughout the P3 contract’s term. The long-term fixed-price nature of P3 contracts and subcontracts also motivates the parties to appropriately allocate project risks among themselves, with the goal of allocating each risk to the party best able to manage it.
However, this theory has not always been practiced by the parties when procuring, executing or managing P3 projects, resulting in a number of major disputes. There can be many reasons for this, including changes in the parties’ respective teams after the contract is signed, misunderstanding of the P3 contract and the risks borne by the parties, lack of experience by the decision-makers involved, the refusal to accept an outcome or an interpretation of a provision in the P3 contract that may impact other projects, reputational considerations, lack or loss of trust, political interference, etc.
In what ways might the existing P3 model be enhanced to allow for more collaboration? Would there be any risks or disadvantages from making these changes?
The parties to a P3 contract are often most challenged after pricing and schedule are agreed and the contract is signed, i.e., when the circumstances that existed at contract signing change in such a way that a party to the contract believes one or more conditions of the contract no longer aligns with the parties’ initial intent and therefore should be modified. The parties usually anticipate this scenario by including in the contract elaborate procedures to deal with variations, change of law, force majeure, delays by a counterparty or third parties, etc. This risk allocation, as well as the related schedule and price adjustment mechanics, is then “dropped down” among the parties that are expected to perform various components of the P3 project on behalf of the private owner.
Public owners often insist on a rigid application of such mechanisms, as doing so can avoid delays and result in savings that in turn help owners keep within governmental budgets. This rigidity is also applied by the private partner vis-à-vis its subcontractors, as it seeks to avoid incurring extra costs or delays unless those are ultimately accepted by the public owner. This rigidity inevitably leads to a less collaborative atmosphere, especially when trying to deal with changes that were not expressly contemplated in the P3 contract, third party risks, or issues that are not one party’s fault. As risks and change requests flow through the chain of subcontracts, and between the private and public partners, tension increases among all project participants. This can lead to project paralysis, particularly where the risk involved was not fully anticipated or clearly allocated by the relevant contracts. COVID-19 and the impacts of the pandemic are just one example.
Based on our experience, below are some approaches that can encourage collaboration at the outset of and throughout the P3 delivery process:
- When drafting and commenting upon the project agreement, carefully consider the necessity, placement and wording of general provisions or rules that may inadvertently cut across multiple provisions and undermine their effectiveness. This is perhaps inevitable in a contract as large and complex as a P3 project agreement, but poor drafting can lead to material uncertainties and disputes during implementation.
- During procurement, allow proponents to submit their own multipliers for profit and overhead on contract price changes and consider those when evaluating each proponent’s commercial proposal – instead of imposing the same mark-up percentage on all proponents. This would allow competition to play a role in how such mark-ups are ultimately agreed, while aligning such mark-ups more closely with the other aspects of the preferred proponent’s pricing. It would also encourage more candid discussion of the financial impact of changes when they inevitably occur, since the private partner would be assured to recover mark-ups that presumably align with its initial financial model. Providing for an overhead mark-up that more closely reflects the proponent’s usual costs of doing business may also avoid debates over the “direct costs” to which many contracts limit the private partner’s recovery.
- Consider providing for a standing neutral (or committee of neutrals) that is retained by both the public and private sector parties at the outset of the project to stay abreast of, and help resolve, potentially problematic situations. It may also be helpful to provide in advance for the appointment of multiple referees, each with a particular focus or specialty, e.g., scope disputes, financial disputes, etc.
- Before signing the P3 contract, have the parties’ respective legal advisors review the technical scope documentation to ensure it is written in plain language that does not contradict the contractual provisions in the main body of the P3 contract. It can be tempting to skip such review, especially where the contract provides for a hierarchy among contract documents. In our experience, the risk of technical disagreements that develop into major disputes can be further reduced by having the legal team search for internal contradictions within the schedules, troublesome general statements or other language that attempts to restate what is already clearly stated in the main body of the contract.
While adopting the above measures would likely involve additional costs, doing so should contribute to improving collaboration, increasing trust, accelerating the resolution of issues (and therefore reducing delays to the overall schedule), and reducing overall project costs for all parties.
There has been much discussion of alliancing and integrated project delivery approaches. Do you see those approaches being implemented under a P3 structure?
As noted above, long-term operation and maintenance (O&M) and private financing are two key characteristics of Canadian P3 structures.
The main perceived advance in Canada of alliancing and integrated project delivery (IPD) is their ability to align the respective interests of an owner and the various contractors required to design and construct a project. The parties basically accept to share more risk among them in exchange for more price certainty, faster execution and fewer disputes. As it is easier to form a team for shorter-term objectives, forming teams of owners and contractors willing to mix design, construction and O&M risks and rewards over longer periods of time, as would be required on a P3 project, may prove challenging, especially as politics and governments often change over the usual term of a P3 contract.
Public owners may conclude that setting up different teams for each of the design-build and O&M phases of the project will lead to better synergies while preserving the main benefits of alliancing and IPD. This could lead some to view these approaches as different enough from the usual Canadian P3 as to require its own name. While helpful lessons may be drawn from other jurisdictions, we expect that the Canadian P3 market may first need to see such structures repeatedly and successfully applied to shorter-term design and construction-only projects, before considering broader or more long-term applications.
To the extent alliancing and IPD require a public owner to share in the risks typically assumed by the private partner, a P3 based on alliancing or IPD may also prove initially more challenging to finance. The lenders could require the public owner to accept liability for part of the debt, which could be difficult for at least some public owners. A more cooperative relationship between the public and private partners could also render moot the role traditionally played by private lenders in the traditional P3 context.
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Ilan Dunsky is National Co-Chair of Dentons’ Infrastructure and PPP group and plays a leading role in the global Transportation and Infrastructure practice. Based in Dentons’ Montreal office, Ilan is both Civil Law and Common Law qualified, and is a member of the New York and Quebec Bars. Ilan represents both domestic and international clients in the development of infrastructure, public-private partnerships and project finance, particularly in the energy, transportation and health sectors. He also advises governments and government agencies on the procurement of major projects globally. Ilan also represents technology and data-driven start-ups, as well as more established companies, in the development and financing of their activities.
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Jana Mansour is National Co-Chair of Dentons Canada’s Infrastructure and PPP group, and is also a member of our Construction and Project Finance groups. Based in Dentons’ Vancouver office, Jana advises owners, developers and contractors from early-stage consideration through financing, construction, operation and disposition of large-scale infrastructure, power and energy projects. He represents owners and contractors in the negotiation of project agreements, including complex multi-phased engineering, procurement and construction (EPC) contracts, equipment supply contracts, construction management agreements, engineering contracts, operation and maintenance agreements and long-term service agreements. Jana has broad experience in the financing of projects, as well as the purchase and sale of equity interests in such projects, including assisting private equity funds in the assessment of operating assets. His project finance experience has featured a variety of lender syndicates, including commercial banks, as well as bilateral and multilateral agencies.
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Karen Martin is a partner who practices in the areas of Construction, Infrastructure and PPP and Litigation and Dispute Resolution and currently sits on the Canada Region Board and the Firm's Global Board. Based in Dentons’ Vancouver office, she provides strategic advice to clients to minimize legal risk during procurement and construction. Karen advises on the preparation of construction contracts to assist in the avoidance of disputes, and during the construction phase she helps clients to develop pro-active solutions to project issues. When disputes arise, she negotiates resolutions, and she acts as counsel in the mediation, arbitration and litigation of construction claims, including on P3, mining and energy sector projects. She has extensive experience in disputes involving tenders, RFPs, construction contracts, builders’ liens, engineering issues, and negligence claims involving architects and engineers.
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Lampros Stougiannos is a partner who practices corporate and commercial law with a focus on infrastructure, public-private partnerships and renewable energy, as well as on government contracting and procurement law. Based in both Dentons’ Montréal and Ottawa offices, Lampros advises private and public sector clients on the development, construction and operation of projects in a variety of sectors, including transportation and transit, municipal and social infrastructure, healthcare, energy, mining and real estate. He possesses strong, established regional and global knowledge on matters involving the structuring, procurement, financing, construction, operation and maintenance of projects implemented under a range of delivery models, both in Canada and abroad. His experience includes advising in regards to public-private partnership, EPC, EPCM, design-build, outsourcing, and operations and maintenance arrangements.