Issue link: http://clhia.uberflip.com/i/333350
6 At the most basic level, governments in Canada need to ensure that infrastructure projects are brought to market in a timely and predictable manner. Undue delays and uncertainty around decisions regarding whether a project will proceed, hinder the private sector's ability to play a strong partnership role in helping to finance infrastructure projects. In addition, we believe that structural reform to 1) increase the supply of P3s to the market and 2) further increase the attractiveness of this asset class for institutional long-term investors is needed. 3.3 Shifting the Balance between Short-term and Long-term Financing Prior to the 2008 financial crisis, P3 projects done on a design, build, finance, and maintain basis generally had a private capital structure consisting of long-term debt and equity. However, during the financial crisis, partially in response to the shortage of long-term capital, a shorter term milestone and completion payment was introduced into the capital structure of P3 projects. These shorter term milestone and completion payments are funded from the public sector. The practice of structuring the capital structure of P3 projects with both the shorter-term and longer-term capital structure continues today even though there is no longer a shortage of long-term capital in the market. Long-term debt plays a key role in the P3 process. By holding the various stakeholders accountable to the risks and obligations they have assumed through the construction and operation phases, it ensures that public interests are met and that the projects are maintained and handed back to the public sector consistent with expectations. In particular, with more long term capital, there is more risk transfer to the private sector of life cycle risk. In the higher risk operating period years (i.e. years 20+ when the majority of the life cycle work is performed) more long-term capital is at risk, ensuring that the projects are operated and maintained for the long-term with a view to handing back to the public sector assets in the appropriate condition. As well, a higher component of long-term private capital reduces the initial financial burden on the respective governments. This allows for a larger number of projects which, as noted above, will be required if Canada is to address the significant existing infrastructure deficit. Procurement authorities should therefore consider increasing the mix of long-term capital within their P3 projects. 3.4 Harmonization of P3 Documentation for P3 Projects under $50 million One of the key challenges to further developing the P3 market is to facilitate P3 structures for smaller sized deals. Some of the challenge to developing a robust P3 market for smaller sized deals relates to the complexity and lack of standardization of P3 project documentation. The lack of standardization in documentation limits the attractiveness of smaller P3 projects for potential investors, as the size of the potential deal may not be adequate to compensate for the up-front and ongoing management costs that investors incur. While some standardization has taken place, in particular in Ontario and British Columbia, there is room to do more, including bringing documents and processes into alignment between provinces. The complexity of structuring smaller P3 deals is also a barrier to potential issuers. Currently, smaller municipal or other issuers struggle to issue P3s due to this complexity and lack of standardization. Given the fact that a significant percentage of the existing infrastructure gap (both greenfield and brownfield) is at the municipal level, looking for ways to make smaller deals more attractive is critical.