Canadian Lawyer InHouse

31 CANADIANLAWYERMAG.COM/INHOUSE JANUARY 2017 I n d u s t r y S p o t l i g h t "These projects are some of the biggest initiatives any of the individual people in- volved will work on, there's a tremendous sense of pride. They are closer to the proj- ects than if you are working for a larger agency. For some of these people, these projects are in the neighbourhoods they live in and they feel a tremendous sense of responsibility and accountability . . . and I don't think that's going to go away." And the fact that municipal legal and procurement teams are new to the private sector model means there's a steep learning curve for all concerned and often a bigger role for outside counsel. "They have different questions, they challenge certain assumptions that we think of as bible in the P3 world," Smith says of her partnership with public authorities' le- gal teams. "They are experienced in-house procurement and construction counsel, but they just have not done a P3 project before. While it is not the structure that they tra- ditionally are used to, it carries some of the same protections, and in some cases is de- signed to drive better risk allocation than on a traditional municipal project." The most common model for P3 projects in Canada is the DBFOM model, which stands for design, build, fi nance, operate and maintain. The Canadian government describes it as the "most comprehensive P3 model and the one that transfers the most risks from the public sector to the private sector." Provinces such as Ontario and Brit- ish Columbia have established templates for this model, which are designed to reduce the risk of unpleasant surprises and make the bidding process more predictable. But Doug Younger and Heidi Visser, partners at Aird & Berlis LLP, say some municipalities are trying to cherry pick the elements they like from provincial P3 tem- plates or attempting to pare costs by inviting bids that don't include a fi nancing element. In theory, that's cheaper, because the private sector pays more to borrow than the public sector does. But Younger and Visser say the reality could be more complicated, because it may remove an incentive for the bidders to make sure a project works long term. "If there is no long-term private sector debt or equity once construction is com- pleted, the question for the municipality or the government agency is how do you incentivize the private sector company to operate and maintain the project up to the requisite standard and assume the risk that you want to transfer to it? With no skin in the game, the question is how do you keep the private sector partner committed for 20 or 30 years," says Younger. "As new jurisdictions get involved in doing P3s, like municipalities, those deals probably are more complex. We saw this, for example, with the Edmonton rapid transit project. The city, instead of simply sticking to a known template, tried to bash a whole bunch of documents together with the toughest and the worst provisions for each. It was a Fran- kenstein of a document and it resulted in a huge amount of additional time for all the bidders and all the participants in each bid team to review the document and comment on that document and try to get rid of the provisions that were effectively unbankable." And while a municipality will retain overall responsibility for something such as a water plant, regardless of who operates the facility, there are often strong public reservations about having something such as drinking water in the hands of for-profi t private corporations. "For water and waste water, there's a pub- lic perception against the private sector," says Dan Ferguson, partner at WeirFoulds LLP, who stresses that a P3 water project does not mean a city is selling its water to the private sector. "The water is still owned by the municipality, the municipal- ity still has accountability for there being safe drinking water. By getting the private sector involved, you can get good facilities built, good maintenance and the municipal- ity still manages the contract." One additional challenge for munici- palities is that many of their infrastructure needs are simply too small for a typical P3 tender, which tend to start at $50 million, or even $100 million. That has prompted some authorities to work with their neighbours to create a package of projects that the private sector can bid to build and run. That also increases the need for close co-operation be- tween authorities, who then need to iron out any differences before a contract is signed. "The toolbox for municipalities is get- ting larger, for funding and addressing their infrastructure needs," says Ferguson. "One tool is what we call bundling, where . . . two or three municipalities with the same need can bundle their projects together and pro- cure them on a bundled basis as if they were one project. It requires a degree of collabo- ration between municipalities and they are pooling resources and ideas. But we do see that happening." Another crucial element of the process is to fi nd someone in the public sector who will champion the project and be involved at every stage of the operation, he says. "For a municipal project to really work, it needs to have a public sector champion, someone who works in the municipality, who has the respect of the staff of the mu- nicipality, who has the respect of the coun- cil and has the respect of the private sector, and who is involved in the project at the procurement stage, at the entering into the contract stage and then when the contract is up and running." Pooli from Edmonton agrees that com- munication is the key to success. "We had a special board that was approved by council that was the sounding board for the project team on business decisions. They were appointed by council as an expert panel and I think that helped a lot. They could take the politics out of the project," she says. "In a municipality, people are really close to these sorts of projects and there is going to be a million questions from the public, and unless you have a mechanism to address that you are going to be swallowed up in terms of resources and will not be able to focus as much on the actual project." IH With no skin in the game, the question is how do you keep the private sector partner committed for 20 or 30 years. DOUG YOUNGER, Aird & Berlis LLP

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