(Editor's Note: This article is one of a two-part series that explores the Canadian provinces' health care infrastructure investments and funding, including risks and benefits related to P3s and performance of our rated health care P3 universe. The companion piece, "Canadian Health Care P3s: Robust Performance And Risk Mitigation Outweigh Challenges," explores the performance of our rated health care P3 universe, whereas this article takes in-depth look at the Canadian provinces' health care infrastructure historical and future investments and funding, including risks and benefits related to P3s.)
Key Takeaways
- COVID-19 has provided a catalyst for renewed health care infrastructure spending by Canadian provinces.
- Given provinces' need for balancing priorities, the public-private partnership (P3) model could play a more important role in delivering increased investments in health care.
- Canada's P3 activity peaked in 2015. Since then, health care P3s lost steam compared to transportation sector investments. Our rated Canadian health care P3's construction and operation performance has been robust so far, although P3s are exposed to unique challenges.
In a 2014 speech, President Obama said "There may and likely will come a time in which we have both an airborne disease that is deadly, and in order for us to deal with that effectively we have to put in place an infrastructure, not just here at home but globally, that allows us to see it quickly, isolate it quickly, respond to it quickly, so that if and when a new strain of flu like the Spanish flu crops up five years from now or a decade from now, we've made the investment and we're further along to be able to catch it."
His timeline was prescient. The world indeed faced a global pandemic that had a crippling effect on global health care infrastructure and economy, as existing health systems in most countries were overwhelmed by the multiple pandemic waves. Now there's a renewed focus on health care infrastructure spending, and a need for robust global health care infrastructure to effectively tackle future pandemic risks.
Canadian provinces have announced ~C$62 billion of investments toward the health care infrastructure (albeit over different periods), which includes spending on long-term care facilities to address an aging Canadian population, which has been significantly impacted during the pandemic.
Chart 1
In the recent provincial budget announcements, Ontario earmarked C$30.2 billion for health care over the next decade, while Quebec will allocate C$20.55 billion to the sector by 2030-31. Not too far behind is British Columbia, which announced C$7.8 billion for new and upgraded hospital projects over next three years. Revised aggregate capital outlay earmarked by provinces for health care capital expenditures (capex), including explicit additional investments towards hospital beds and long-term care facilities capacity, was ~C$5 billion or close to 10% higher in 2021 versus 2020, spread over different time periods.
Chart 2
Historically, as per National Health Expenditure Canada, Canadian provinces spent C$22.8 billion and C$64.6 billion on health capex between 1990-2000 and 2000-2010, respectively, with a compound annual growth rate (CAGR) of close to 7.6% over the two decades. Total capital spending between 2010-2019 grew to ~C$91.3 billion, albeit at a slower pace (with annual capital spending growth (CAGR) of negative 0.65%) as Canadian provinces were addressing other priorities caused by the Great Recession. Additionally, health care capital investments per annum per capita improved from C$200 during 2000-2010 to C$260 during 2010-2018. More importantly, as shown in Chart 4 below, mortality per 100,000 of population in Canada is significantly lower than in the U.S., indicating a better outcome despite fewer dollars invested. The U.S. spent ~C$378 per annum per capita on health care capital spending between 2010-2018 at CAGR of 3.4%.
Chart 3
Chart 4
COVID-19 Has An Unprecedented Impact On Canadian Economy
S&P Global Ratings estimates the global economy shrunk by 3.4% in 2020 (see "Economic Outlook Q4 2021: Global Growth Is Steady As Delta Spurs Wide Regional Swings," Sept. 28, 2021). Canada's economy shrunk by around 5.3% in the same period, and our economists do not expect it to recover to pre-pandemic forecast levels, even under baseline scenario, for the foreseeable future (see "Economic Outlook Canada Q4 2021: Growth Delayed, But Not Derailed," Sept. 24, 2021). This may challenge Canadian provinces as they try to balance health care and other economic investment priorities. That said, we believe every dollar invested in health care infrastructure, if done wisely, could boost productivity and add multiple dollars to Canada's economy. As such, this large health care spending could help economic recovery.
Chart 5
The $62 Billion Dollar Question: How Should It Be Funded?
There are two ways to fund this expenditure; either direct government/public funding or through alternate delivery models. While infrastructure delivery through direct investments are more dominant, provincial infrastructure agencies utilize the alternate delivery approach for reasons such as risk transfer, and the potential for better long-term asset management.
Going forward, the public-private partnership (P3) model may play a more important role for health care infrastructure delivery. While the P3 model provides unique advantages in building infrastructure in time and within budget and our rated P3s have generally demonstrated robust performance, some of the unrated P3s were not immune from significant delays and large cost overruns, and are inherently tied to counterparty creditworthiness.
The P3 Approach
Table 1
| Types of PPPs | Description |
|---|---|
| Build-Finance | The private sector constructs an asset and finances the capital cost only during the construction period. |
| Design-Build-Finance-Maintain (DBFM) | The private sector designs, builds, and finances an asset and provides hard facility management (hard FM) or maintenance services under a long-term agreement. |
| Design-Build-Finance-Operate-Maintain (DBFOM) | The private sector designs, builds, finances, and provides hard FM or maintenance services under a long-term agreement. Operation of the asset is also included in projects such as bridges, roads, and water treatment plants. |
| Alliance Model | Opportunity and risk is shared between project owner and non-owner participants through an integrated project delivery team. |
P3s can best be defined as a long-term contractual agreement between a public sector entity and a private participant to design, build, finance, operate, and maintain an infrastructure asset (or an option of these as presented in the above table). When using this model for infrastructure delivery, the contracting authority lays down performance standards and design specifications for an asset, and invites bidding consortiums to propose detailed delivery plans, including alternative design solutions, construction technique and schedule, maintenance, and lifecycle plans. The responsibility of financing lies on the private sector while contracting authority is responsible to make periodic payments during construction and operation to cover the financing costs of infrastructure, equity return of private entities, and operation and maintenance (O&M) expenses, if the private entity is responsible for performing O&M. This process allows the contracting authority to agree to a plan for delivery of the asset on a defined schedule and for risk transfer associated with construction delays and cost overruns during construction and operation (if applicable) to private participants.
Canada's P3 Journey
Canada's P3 market is one of the most buoyant globally, with 244 active projects and a combined market value of $101.61 billion. Deals reaching financial close grew from $4.1 billion in 2005 and peaked at $13.98 billion in 2015, following which P3 activity stagnated. Leading the way in Canada's P3 market are Infrastructure Ontario and Partnerships British Columbia Inc., with the lion's share (~69%) of financial closed P3 projects.
Chart 6
Provincial infrastructure agencies have used the P3 model extensively on health care projects, and there are 96 closed health care P3s valued at ~C$30.00 billion, mostly concentrated in Ontario, British Columbia, and Quebec. But while Canada's P3 market was initially dominated by the social infrastructure sector--and particularly health care--transportation P3s have been more prominent in the last decade. In the period from 2006-2015, projects from the health care sector accounted for nearly 46% of the overall P3 transactions. However, in the last six years this trend has reversed in favor of transportation projects.
Chart 7
Chart 8
Table 2
| Key Benefits And Challenges Of P3s | |
|---|---|
| P3 Model Key Benefits | P3 Model Key Challenges |
| Risk transfer to private sector, leveraging on their experience and efficiency. | Some large projects have faced significant delays and/or cost escalations and prolonged disputes, specifically surrounding which entity the responsibility lies with. For instance, Eglinton Crosstown LRT (unrated) was delayed owing to deficiencies and challenges with existing infrastructure; and Montreal University Hospital Centre (CHUM; unrated) experienced defects, operational challenges, and deficiencies leading to cost overruns. |
| On time and within budget execution as private sector absorbs delay and cost overrun risks. Our rated portfolio of hospitals has performed extremely well in delivering health care infrastructure. Of our rated projects, 80% achieved service commencement on time. Two projects were delayed by a month due to external factors, and additional costs were covered by the contractor. | Counterparty creditworthiness risk weighs on P3s. For example, construction contractor Bondfield’s (unrated) financial collapse stalled the redevelopment of three hospitals in Ontario as surety backed off from guarantee citing corruption allegations; and Carillion’s (unrated) liquidation triggered cross-default provisions on three rated hospitals requiring the appointment of a replacement facility manager and lifecycle contractor. CHS (CAMH) Partnership was impacted as the replacement contractor resulted in a 15% premium. However, we have not lowered the rating because the project has been able to absorb these costs. |
| Cost savings through competitive bidding process. | While a P3 contract’s appeal is its fixed-price, date-certain structure, variations or changes, particularly to large/complex assets, can induce a higher cost burden on public sector and delay risks. |
| Infrastructure delivery through whole project management including long term asset maintenance. | Lengthy disputes. For example, SNC-Lavalin Innisfree McGill Finance Inc. and Plenary Healthcare Partnership Humber LP were involved in disputes spanning over a year with their respective authorities during ramp-up over operational challenges, which led to large deductions being assessed against the projects. |
At S&P Global Ratings we analyze the creditworthiness of P3 projects across multiple sectors. For more information, please refer our Project Finance Framework Methodology, published Sept. 16, 2014.
This report does not constitute a rating action.
| Primary Credit Analysts: | Dhaval R Shah, Toronto + 1 (416) 507 3272; dhaval.shah@spglobal.com |
| Siddharth Bhatia, Toronto + 1 (416) 507 2514; Siddharth.Bhatia1@spglobal.com | |
| Vedika Mehta, Mumbai; vedika.mehta@spglobal.com | |
| Secondary Contact: | Trevor J D'Olier-Lees, New York + 1 (212) 438 7985; trevor.dolier-lees@spglobal.com |
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