Infrastructure has long been source of opportunity for
governments making the pivot from an economic crisis management
mode to an investment mode.
It is unsurprising that, as the world works to recover from the
economic shock of the pandemic, many countries are looking to
infrastructure spending as a key priority.
In Canada, well before the crisis, infrastructure had become an
imperative endorsed by political parties across the spectrum as
significant aspects of Canadian infrastructure were in need of
refurbishment and expansion. The disruption of COVID-19 will be an
agent of change for the infrastructure sector, as well as sharpen
the focus on policy issues that already existed before the
pandemic.
In this article, we look at five trends we expect will influence
the infrastructure landscape in post-pandemic Canada.
User-pay and revenue-generating projects will be
considered
User-pay or revenue risk projects (whether P3 or full
concessions) are common globally across all the economic
infrastructure sectors including power, water, telecom and
transport. Compared to the United States, which has long made use
of tolled roads and managed lanes, user-pay projects have been only
infrequently seen in Canada beyond the regulated public utility
context.
But with the impact of COVID-19 straining government fiscal
capacity at all levels, some speculate a further shift towards user
pay seems inevitable. Governments are becoming more open to
user-pay, while lenders and developers with activities in both
Canada and internationally (including the U.S.) have been
comfortable accepting some revenue risk in the past for core
economic infrastructure with historically stable demand. The
pandemic has challenged this thinking though as some tolled roads,
for example, recently saw unprecedented drops in demand and
revenue. While government enthusiasm for user pay projects is
likely to rise, in the near term we may see private investors with
reduced enthusiasm or possibly taking a more conservative view of
demand forecasts.
Getting revenue modelling right is empirically a tricky task. As
user-pay projects are increasingly considered, those projects that
will be piloted in a post-pandemic Canada will benefit from the
experience of user-pay projects in other sectors and regions on how
to best structure, procure, develop, finance and maintain or
operate such projects.
Dynamics will shift among levels of government
Most Canadian infrastructure stock is at the municipal level,
followed by provincial and then federal levels—but financial
capacity is in the inverse order. COVID-19 has materially
challenged provincial and municipal fiscal capacity, but the
federal capacity is still (relatively) healthy. As a result, we
expect to see not just more federal financial support, but also
more federal influence over project selection and prioritization by
lower order of government to suit federal policy goals. The Canada
Infrastructure Bank is likely to play an increasing role in
delivery of federal projects and federally funded projects.
All levels of government in Canada appear to recognize the main
infrastructure weaknesses revealed during COVID-19, including
seniors’ health care and ex-urban broadband. These are likely
to become high-priority sectors for stimulus programs. Green
initiatives that were priorities before the crisis, such as clean
transit and clean energy (including transmission of clean energy),
are also likely to remain priorities.
New models will emerge
As the priority of infrastructure rises, we expect governments
will increasingly look to public-private partnerships (P3s) and
other modern approaches that consider whole-life cost and also
supplement government capital with private capital.
The P3 model has had a good run in Canada, delivering almost 300
major projects valued at almost $150 billion, and consistently
demonstrating good value for money. But as the procurement
approaches and contract terms have been progressively tightened, it
is becoming more challenging to procure and deliver P3 projects in
as timely a way as governments are likely to require of their
stimulus programs, while also incentivizing innovation and allowing
for efficient transfer of risk.
For post-pandemic infrastructure projects, we expect to see an
evolution of today’s P3 approach to introduce procurement
approaches and contractual models which are nimble and
collaborative, such as co-development, alliances, integrated
project delivery and joint ventures.
Private investors will call more of the shots
With finite opportunities to invest in core infrastructure
assets, private investors in the past would often capitulate to
government expectations for procurement approach, risk transfer and
deal structure. As that dynamic now shifts to a more collaborative
procurement, revenue risk and higher private capital proportions,
private investors will be tempted to flex their negotiating
power.
What will private investors be looking for when selecting
infrastructure projects? The world is not short of capital, but in
choosing where to deploy it, private investors will be looking for
projects with reasonable risk-adjusted return profiles. Private
capital will continue to be attracted to “core” projects
with monopoly or essential service features, and stable,
predictable cash flows. And with rising prices and declining yields
for infrastructure assets in the secondary market, we expect to see
some funds looking to embrace more greenfield development risk to
boost their returns and avoid auction processes for mature
assets.
Relationships with Indigenous peoples will be crucial to
project success
With infrastructure seen as a mechanism for economic recovery,
“shovel-ready” projects with near-term job opportunities
and efficient deployment of capital will be attractive to both
governments and project proponents. Even with
“shovel-ready” projects, there will be a need to ensure
that consultation with any Indigenous peoples involved has been
properly carried out.
The principles of consultation remain the same. Know the
communities with which you are engaging and the realities that they
currently face post-COVID-19. Take the time to understand their
objectives and how they can be met, including, for example, through
Mutual Benefit Agreements and/or equity participation which can
also address economic reconciliation—ensuring that a
substantial share of the benefits of economic recovery flow to
Indigenous groups. Meaningful two-way dialogue is key to building
relationships genuinely based on respect and trust.
There is a real opportunity for developers who are committed to
meaningfully engaging affected Indigenous communities in their
projects to capitalize on the economic recovery incentives in a
COVID-19 context and to bring projects to successful completion in
a timely and cost-effective manner.
Conclusion
Choosing the right infrastructure projects and delivering on
them in improved ways will be of paramount importance to investors
and the Canadian economy at large. While timely stimulus will be
desirable for many, it is important to invest wisely for the long
term by focusing on “shovel-worthy” projects rather than
over-weighting “shovel-ready” projects. This aligns well
with the overall policy objective to rebuild the economy in the
years ahead in a way that drives enduring value and economic
benefits.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
