Private Equity: Bridging the First Nations infrastructure gap using a P3 model

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March, 2017

Indigenous communities across Canada face a deficit of on-reserve potable water, wastewater systems, water distribution, and wastewater collection infrastructure. They are challenged by archaic procurement and financing models that drive up costs.

When you examine the numbers nationally, it would appear that the situation has progressively worsened. As of October 2016, there were 133 drinking water advisories in First Nation communities across Canada (not including B.C.); whereas, ten years earlier in March 2006, there were 54 fewer drinking water advisories across Canada (including B.C.).

In September 2005, the Commissioner of the Environment and Sustainable Development released a report detailing on-reserve water treatment and that enforceable regulation for water and potable water treatment on reserve did not exist. They still don’t. While training programs such as Train the Trainer and the Circuit Rider Training Program have proven to be effective in some regions, their positive impact does not offset poor design and performance criteria, or the under-funding of operation and maintenance programs.

While no catchall exists to correct all water infrastructure issues on reserve, there is an approach that could apply to 75 per cent of the water and wastewater systems in Indigenous communities. This method would pair the knowledge, capacity, ingenuity, and expertise found in the private sector with Indigenous need. Currently, infrastructure on reserve tends to deteriorate at a faster rate than non-Indigenous communities, because on-reserve operation and maintenance (O&M) are underfunded. Often the community lacks adequate, consistent training or is unable to retain trained, qualified employees, to operate the facility.

“Having the private sector and Indigenous communities work together for the lifecycle of treatment systems will not only help supply essential infrastructure, but it will also give First Nations necessary market-based skills to secure the (sustainable) future of their communities.”

A role for the private sector

Connecting the private sector to a treatment system for its designed life cycle, governed by the associated performance criteria, would significantly reduce the number of drinking water advisories on reserve. Procurement processes—such as public-private partnerships (P3) and alternative service delivery (ASD) models—create the necessary environment where delivery of the service becomes the primary outcome. With both models, the private sector is responsible for ongoing operation and maintenance of the asset, and payment is incentive based on contractual performance criteria. In basic terms, if the industry does not deliver the customer does not pay.

The private sector is financially motivated to build Indigenous capacity, expertise, and retention. Ensuring capacity building, knowledge transfer, and ongoing technical support are at the forefront of design, construction, operation and maintenance plans—or they risk not meeting the requirements of performance-based contracts. Having the private sector and Indigenous communities work together for the lifecycle of treatment systems will not only help supply essential infrastructure, but it will also give First Nations necessary market-based skills to secure the (sustainable) future of their communities.

Financial risk

Financial risk serves to regulate private-sector activity in First Nations communities under this collaborative approach. It incentivizes appropriate design, financing, and construction methods and necessitates a sustainable and realistic O&M program.

Naysayers of ASDs and P3s in Indigenous infrastructure projects cite high development costs, insufficient project capital expenditure size, and unknown support from the federal government as common barriers. Though P3s will have higher development and transaction costs than a traditional design-build (DB) project, construction, operation, and maintenance costs can be much lower. As well, the retained risk to Indigenous communities in a P3 would be minimal compared to the DB model.

The integration of design, build, finance, operation, and maintenance into one contract encourage better up-front planning and integration. P3s have a longer procurement time, but that is more than made up for through a consequently well-planned construction phase. P3 procurement processes can shave years off the projected completion date of a project. Long construction phases have typically been one of the biggest issues with traditional procurement models used by Indigenous and Northern Affairs Canada (INAC).

Size up

While it is true that infrastructure projects that are $30 million or less in size are less attractive to the private sector market, bundling projects is an option. Bundling similar projects provides buying power leverage to First Nations communities, shares the administration burden, and has the potential to be sufficient in size to attract the private sector market.

To date, one of the greatest impediments to implementing ASD models has been the bureaucratic ranks within INAC. Their existing procurement policies do not lend themselves to modernization and innovation, despite mandated policy and implementation edicts from the Treasury Board and Minister of Finance. As a minimum, a new O&M funding model is needed at INAC. The current model is not just a barrier to ASD models; it is a barrier to better outcomes for all infrastructure on reserve.

Shining examples

Although there are few examples in First Nation’s where industry has played a long-term role in ensuring that performance criteria are maintained through the project lifecycle, there are a few shining examples. One of these is the Nanoose First Nation (NFN) Wastewater Treatment Plant project on Vancouver Island that was completed in 2006.

Prior to the construction of the new treatment plant, sewage treatment was by way of septic tanks and tile fields. The majority of the tile fields were in a stage of failure, and raw sewage flowed overland to the foreshore and polluted the intertidal area. The land was not suitable for ground disposal, and there was no municipal or regional sewage system available to connect to. The only option available to NFN was to construct a sanitary sewage collection system and a sewage treatment system with an ocean outfall. This idea was initially rejected by the Department of Fisheries and Oceans due to an objection by the Underwater Harvesters’ Association. But the objection was overcome after a marine environmental survey and mitigation plan was developed that satisfied all parties.

A sewage treatment plant was designed to deliver 10/10 effluent standard and has consistently delivered below that. The ocean outfall effluent attains one of the highest standards on the west coast of Canada. The sewage treatment process selected was a proprietary system supplied by ECOfluid Systems Inc., an Upflow Sludge Blanket Filtration (USBF). The plant was contracted as a Design-Build-Operate (DBO) project, one of many ASD models available. The ASD model has proven effective not just in treatment, but in its connecting First Nations to the private sector. The treatment plant’s O&M contractor was hired for the project lifecycle, and they have hired local band members and trained them under a certification program to provide the operation and maintenance of the system. In this case, the band petitioned INAC to pay the full cost of the O&M, instead of the standard  80 percent of the formula based O&M costing allowance.

This example highlights the benefits of utilizing an ASD model to meet some of the strictest effluent criteria in Canada, while delivering the project on time and budget, and further, delivering essential skills and capacity to a First Nations community. The NFN project and its funding model are a roadmap to delivering ASD models over conventional procurement for First Nations, and it shows that collaboration between the private sector and First Nations can provide clean water and prosperity.

By Jeff Frank, Senior Vice President at the Castlemain Group.

Read more from WaterCanada March/April 2017 issue HERE

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