Should contractors take an equity position in P3 projects?

When it comes to debating public-private partnerships (P3s), contractor issues are often more important than who chooses to express them. That appeared to be the case at the 20th annual conference of the Canadian Council for Public-Private Partnerships held in Toronto, where debate teams chose their positions on the toss of a coin before presenting their arguments.

One issue debated was whether third-party equity leads to better risk transfer than contractor equity in a Design Build Finance Maintain (DBFM) P3 contract.

“We all have our RRSPs and we all think we have some level of knowledge in equity,” says Greg Smith, managing partner, Global Infrastructure Advisory Group, Brookfield Financial Corp.

“What happens to a lot of design-build contractors is that they realize they need to raise equity in their own business, so therefore they believe they should also participate in the equity inside the transaction. That can lead to a limited benefit in a true partnership. Because you can do everything, should you? The idea of a partnership is that partners should do what they’re best at to create an effective result. It may look good at the outset but may not achieve what you want to achieve.”

Ruth McMorrow, executive vice-president, Parsons Enterprises notes that public sector clients are pursuing P3 contracts, not simply design-build (DB) contracts, for a reason.

“Most of the contractor equity that’s involved in these deals is an investment that perhaps takes them through a warranty period and then they exit,” she says.

“The public sector is looking for the long-term equity partner who is willing to commit to a quality asset for 30 or 40 years. In DB, there is money at risk at the contractor level, but that’s different from that equity box. They’re looking for someone to say, ‘here are the issues we have to deal with and how do we allocate them among the partners with the best capacity to deal with them over the long run.’ That’s the role equity plays.”

Pierre Anctil, president & CEO, Fiera Axium Infrastructure, on the other hand, argues that DBFM P3 contractors need to place real money on the line in order to fully participate in the contract’s risks and profits.

“That’s when you have real risk transfer,” he says.

“When the people who are managing the risk and can actually influence the outcome have their own money at stake. If they don’t, they may just leave the project in three or four years with something that does not operate as well as expected.”

Tim Murphy, partner, McMillan LLP, tells an apocryphal tale of a construction executive who commented on contractors taking on a P3 equity position.

“‘Of course they’ll take on equity,’ he said,” Murphy recounts.“‘Construction contractors will sign up for anything.’”

Murphy notes that having construction companies and their employees in the investment tent is actually welcome participation, not only to provide equity for P3s in Ontario, but also to simply show support for the financing model.

“They’ve helped train the market, helped people get to understand the market, created a bunch of companies that are encouragers of this behaviour in the marketplace and supported the political environment for risk transfer,” he says.

“The people construction companies employ are also investors in this asset class and they’re big supporters of this model as well. You simply get better risk transfer when construction contractors take an equity position.”