The Covid-19 pandemic is causing massive cost overruns and very costly delays in public infrastructure projects across the country.
The Canadian Construction Association estimates cost overruns adding up to as much as five per cent of the construction budget. Ontario’s 24 AFP projects currently under construction could see cost overruns of $360 million dollars. Delay damages could be another $60 million a month. These costs will stretch the construction companies that have to bear them to the breaking point, putting the companies at risk of insolvency at exactly the point when they will be needed at the front lines of economic stimulus.
To be clear, the problem exists across all public construction projects and not just those procured through a public-private partnership.
The Canada Infrastructure Bank (CIB) has $35 billion in its kitty. Its existing mandate is likely too restrictive to get projects underway to help the economy in the immediate aftermath of the Covid crisis. However, the CIB can help save current projects and the companies delivering them through an innovative injection of its capital resources and expertise.
The attached article outlines a proposal to do just that. The concept is simple. The CIB provides a ready-made, off-the-shelf, package of financial support for incremental Covid-related delay costs and cost overruns, measured against project scope in the form of a grant or long-term loan to the public sector authority building the project. The private parties agree to waive claims for such delays in return for a fixed-price deal for the delay and cost overruns. The public authority gets a new fixed price and completion date, freedom from a long-running dispute and a source of money for the additional costs.
This means that the CIB will be bailing out municipalities and provincial governments, which are responsible for the vast majority of public sector infrastructure procurement. But the hard truth is that this is likely to happen down the road in any case as they are facing astonishing fiscal challenges. However, the risk can be limited by restricting the support to those projects the federal government is already supporting, either in the form of direct federal procurements or those in which it is investing through a cost-sharing mechanism.
This step gives the CIB an important role to play now, helping it build up its expertise, its involvement in the infrastructure market and its credibility – all things it needs to work on. While not what was contemplated when the CIB was created, the pandemic requires creative responses from all government agencies.
The federal government has already taken massive steps to support the economy and individuals in these uniquely challenging times. This proposal could be one more creative way to help workers to stay employed, companies to remain solvent and projects to be built that are investments in our long-term future.
Tim Murphy is a Managing Director of McMillan Vantage, infrastructure and project finance lawyer at McMillan LLP and the author of Public-Private Partnerships in Canada: Law, Policy and Value for Money – Canada’s only textbook about P3s.
Drew Fagan is a Senior Advisor at McMillan Vantage, a Professor at the Munk School of Global Affairs and Public Policy, University of Toronto and was formerly Ontario’s Deputy Minister of Infrastructure.