North America: Infrastructure Ontario takes new approach to break in P3 participants

12 October 2018 - 12:00 am UTC

In an attempt to address a hegemony of funds in the North American P3 market, Infrastructure Ontario has taken a progressive new approach to procurement. Abigail Miller and Jon Berke analyze the barriers to entry that have caused this hegemony and look at how IO plans to change it. 

The public-private partnership (P3) market in the United States and Canada has become dominated by a handful of funds, which appear in nearly every project. Barriers to entry into this competitive sphere has paved the way for this hegemony.

Available capital, while a significant qualifying factor, is not the primary qualification, as an analysis of data from InfraDeals looking at a range of projects across North America makes clear. In fact, prior experience and a successful track record are at least equally imperative for a winning bid. As a result, StarAmerica, Meridiam, Plenary, Ellisdon, ACS and Fluor are examples of companies present at some point in the procurement process in nearly all new P3 projects.

As participating parties boost their résumés’ with each successful procurement, the barriers to entry outside of capital continue to grow as well. Teams experienced in procurements are more likely to be chosen for that reason alone, and new teams attempting to break into the space have little chance of competing without a comparable lengthy and impressive résumé.

However, Infrastructure Ontario (IO) has taken a new approach to P3 procurement which has given firms without prior experience a competitive edge by encouraging they team up with more experienced bidders.

The Situation in Ontario

The dominance of parties in Ontario P3s have as of late spurred a new progressive approach to procurement throughout the province which aimed to keep the bidding process as competitive as possible and encourage new companies to compete for projects.

For many projects, Ontario has started shortlisting and awarding teams that have at least one member that is new to the market, Greg Kitscha, Senior Vice President at John Laing said in an interview with Inframation. With a huge capacity of active contractors in the market, Ontario feels it is better to increase the number of parties able to genuinely compete in the bidding process, he noted.

Jensen Clarke, Vice President of Fengate Capital, said that for a long time the Ontario LRT Market has been “dominated by firms that won the Eglinton LRT Project, as, accordingly they come in with Ontario-based LRT experience.”

But in a move that he said Fengate finds “encouraging,” the province has “started to recognize the limited options gained with previous procurements and accordingly, are opening up opportunity.”

Clarke said that before Ontario’s new approach was adopted, such high barriers to entry were keeping out firms that had LRT experience outside of Ontario or Canada, thus missing out on unique local insight. While those firms might lack the Ontario-specific experience, the experience can be made up by including smaller, local sub-contractors in the consortiums, Clarke added.

“One example would be with the Ottawa Light Rail Transit (LRT) Stage 2 project where Fengate’s shortlisted consortium with ACCIONA includes partnership with Thomas Cavanagh, a local Ottawa civil contractor, and a strong design partnership including CIMA+,” Clarke said. This project specifically for Trillium LRT portion of the project.

A similar phenomena was occurring in the social infrastructure market, according to Clarke, where he said it is no secret that roughly 80% of the projects have been awarded to the same few parties.

To counter this trend, IO started encouraging new entrants to team with experienced partners to pose a competitive advantage. Clarke seemed encouraged by this approach, explaining that it “ramps up both innovation for the projects and competitive tension,” in this part of the market.

An example he gave in that market is the Halton Courthouse RFP. The Fengate consortium, he said, also includes Pomerleau, as a local general contractor, and HOK and Cumulus as design partners.

“We feel this innovative design approach will be the key to shortlisting,” he said.

The following chart show Canada P3s awarded for both social and transport, respectively, in the past three years, according to InfraDeals.

Transaction name Financial close date Equity Providers Contractors Total Equity
Ontario Provincial Police Modernization Phase 2 P3 16 August 2018 EllisDon, SmithGroup JJR, WSP
West Park Healthcare Centre P3 10 August 2018 EllisDon (100%)  Cannon Design, Montgomery Sisam CAD 29.30
Abbotsford Courthouse 31 May 2018 Plenary (80%), PCL Construction (20%)  PCL Construction, Smith + Andersen, WZMH Architects CAD 150m 
Brockville Hospital Redevelopment 1 March 2018 EllisDon
New Toronto Courthouse 22 February 2018 EllisDon EllisDon, SNC-Lavalin, Norr Architects, Renzo Piano Building Workshop
Michael Garron Hospital 6 February 2018 B+H Architects, Diamond Schmitt Architects, EllisDon
Corner Brook Long-Term Care Home 15 December 2017 Plenary Macro Services, Montgomery Sisam, Smith + Anderson, WSP CAD 100m
Niagara Falls Entertainment Center 3 August 2017 Bird, DIF Infrastructure IV Bird Construction CAD 130m
Groves Memorial Community Hospital Replacement 14 June 2017 EllisDon
Mount Sinai Hospital Phase 3A 8 June 2017 EllisDon

 

Transaction name Financial close date Equity Providers Contractors Total Equity
Gordie Howe International Bridge 28 September 2018 Grupo ACS (40%), Fluor (40%), AECON (20%) Dragados, Fluor, Moriyama & Teshima Architects, Smith-Miller + Hawkinson Architects, Turner Construction CAD 93.04m
Finch West Light Rail 7 May 2018 CRH (33.3%), Grupo ACS (33.3%), AECON (33.3%) Dragados, Dufferin Construction CAD 24.90m
Kipling Bus Terminal 22 March 2018 Buttcon, Grascan, Obrascan Huart Lain (OHL)
GO Transit Stouffville Corridor Station Improvements 8 March 2018 EllisDon EllisDon, Architecture 49
Highway 401 Rail Tunnel 14 December 2017 EllisDon, Strabag SE
Cooksville GO Station 3 November 2017 EllisDon
Ottawa LRT Stage 1 Extension 27 September 2017 EllisDon, Grupo ACS, SNC-Lavalin
Highway 427 Extension 10 March 2017 Grupo ACS (50%), Miller Infrastructure (50%) BOT Construction, Dragados, Miller Infrastructure CAD 11.60m
Southwest Calgary Ring Road 16 September 2016 Ledcor (10%), Kiewit (32.5), Meridiam North America II (32.5%), Connor, Clark & Lunn Infrastructure (25%) Graham, Ledcor CAD 51.60m
Stoney CNG Transit Bus Garage P3 13 September 2016 PCL Construction (20%), Plenary (80%) PCL Construction

North American market

Headlining the infrastructure market these days is mega-funds led by Stonepeak, I Squared and others, but they are not sized to address greenfield projects in North America projects. The equity portion of these projects are not big to begin with and get reduced often due to state, provincial or federal subsidies for these project.

Barriers to entry are higher in greenfield than brownfield projects, Kitscha explained, because a successful bid for a greenfield project requires expertise as well as capital. On the most basic level, the teams looking to be competitive in a P3 procurement need resources, a team of experts, and investors who are willing to take on development risks, explained an industry source. Those aspects, along with credentials and references, add value beyond capital that will make a team stand out at the RFQ stage.

“Without a résumé proving development experience it’s hard to demonstrate that the team has the expertise needed,” Kitscha said.  “This also makes it harder for those companies to find others, perhaps with more experience, to partner with because each group wants to put together an experienced team to create a competitive submission.” 

There are exceptions to this. In June, Chicago Mayor Rahm Emmanuel announced that the O’Hare ‘people mover’ project will be done by The Boring Company, founded in 2016 by Elon Musk. Musk’s team won the concession to DBFOM an express transportation system linking downtown Chicago to O’Hare International Airport.

The company was chosen over a traditional P3 consortium which included Meridiam, Antartica Capital, JLC Infrastructure, Mott MacDonald and First Transit.

US Challenge

The political atmosphere in the US adds an even more difficult barrier which distinguishes itself from the Canadian market. Despite the size and available capital of the United States P3 market, there are some of the fewest concessions in the developed world. For comparison, in the past five years 91 greenfield P3s have reached financial close in Canada, while just 33 greenfield P3s have reached financial close in the United States.

There are hundreds, if not thousands, of different authorities in US which can all carry out procurements from the municipal level up to the state level. This differs from Canada which has authorities such as Infrastructure Ontario that handle P3 procurement for the entire province.

The source explained that this vast number of authorities makes it much more difficult for a project to be approved – because it has to go through a gauntlet of approvals by groups with differing priorities. This gives many agencies an opportunity to kill any given project.

This risk is taken on by firms hoping to be competitive in the North American P3 market. The willingness to take on the risk of the long and changing timeline that could be killed at any point is another barrier to entry that competing firms must hurdle. ​​​​​

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