- Many private-public partnership (P3) projects we rate have been hurt by the fallout from the pandemic, leading to project delays, increased costs, and decreased revenue resulting in contract disputes in some cases.
- A recent Ontario Superior Court of Justice recently ruled that the private parties in a light rail construction project are entitled to relief under emergency provisions.
- S&P Global Ratings is monitoring rated projects to determine what this judgement and the timely resolution of pandemic-related claims mean for credit quality.
In a May 17 landmark judgement, the Ontario Superior Court of Justice ruled in Crosslinx Transit Solutions General Partnership vs. Ontario Infrastructure that the private parties building the $5.5 billion midtown Toronto, Eglinton Crosstown Light Rail Transit (LRT) Project, are entitled to relief under the emergency provisions of the concession agreement for pandemic-induced construction delays and cost escalations. The court found the project's force majeure claims to be credible. This ruling is important because it has the potential to provide a legal avenue for other public-private partnerships (P3s) that are facing delays and cost increases and are finding their claims for relief are either stuck in protracted discussions (e.g., the Gordie Howe international bridge P3 project) or have been rejected (A30 Express project).
Because the pandemic has had adverse effects on some of the projects we rate (see table), this judgement could be important for credit quality if it leads to more successful force majeure claims.
Some P3s Face Pandemic-Related Fallout
The COVID-19 pandemic and its related containment measures, including stay-at-home orders and social distancing, have caused unprecedented disruption for P3s.
Construction P3s have higher costs and schedule delays. The pandemic has required construction crews to practice physical distancing and caused labor shortages. Supply-chain problems include the closure of nonessential businesses that led to some construction material shortages. One such example is the $3.5 billion Gordie Howe International Bridge project connecting Windsor, Ont. and Detroit, Mich., which is experiencing delays (see Bridging North America G.P. Is Seeking Relief Amid Continued Construction Delays, published May 17, 2021). Additionally, while the $1.9 billion Hurontario LRT project in Mississauga and Brampton, Ont., which is completing its design phase, has not experienced any delays to its completion date yet, it's experiencing some cost escalation related to the pandemic.
Availability P3s hit with higher deductions. For P3s that are operational and receive availability payments, most of the adverse financial pandemic-related impact stems from their inability to meet contractual requirements for service, resulting in higher deductions. These P3s have often also incurred additional costs related to health and safety mandates, and the lack of skilled labor and supply-chain issues.
Volume P3s declines in usage. For volume risk projects like toll roads that rely on consumers to use their services to generate revenue, the pandemic has caused obvious and significant traffic and revenue losses. For example, 407 International, a 108 kilometer (km) toll road in the greater Toronto area, experienced a 45% decline in traffic (measured as vehicle km travelled) and 41% decline in its toll revenues in 2020, compared to those achieved in 2019. Similarly, the 74 km A30 Express, which includes a tolled bridge in Montreal, experienced about a 24% decline in traffic and 12% drop in toll revenues in 2020 compared to 2019 results. Overall, the pandemic reduced traffic by 20%-25% and more than 20% decline in toll revenues across the U.S. and Canada toll roads we rate in 2020, relative to 2019.
Why The Court Ruling Is Important
While not true, one could argue the phrase "the devil is in the details" was borne out of P3 negotiations that often follow a claim under a P3 concession agreement. The concession agreement governs the P3s roles, responsibilities, and cost allocation of a P3 over its often 30-year or more life. Because of the need to articulate in detail the risks and identify who bears them, the agreements are often long and extraordinarily complex, leading to provisions that are subject to different interpretations. The lack of clarity can devolve into protracted negotiations and could have negative consequences on a project's credit quality (see table). Lengthy negotiations could ultimately result in irreparable rifts that set the stage for litigation and ultimately bad outcomes. This was the case with the 21-mile Purple Line LRT project in Maryland where the construction contractor exited the project after it was unsuccessful in resolving claims following stalled negotiations that lasted three years.
In essence, the question of who is responsible for bearing the costs related to the pandemic--the concession grantor or the project itself--is a multi-billion dollar one encompassing the P3 industry. Not all concession agreements make it clear how pandemic-related events are to be managed and how the costs of one are to be shared. One area of ambiguity is whether concession agreements consider a pandemic to be a force majeure event. For example, in the case of the Hurontario LRT project, the pandemic wasn't covered under force majeure provisions, while in the case of the Gordie Howe project, epidemic-related losses were deemed force majeure events defined in the concession agreement.
Change-in-law provisions also present problems in determining coverage under P3 contracts. The COVID-19 pandemic resulted in restrictive government actions including shelter-in-place and other other measures that limited mobility and economic activity. Most, if not all, concession agreements typically provide for protection to private parties against discriminatory changes in law but constrain its application to the project specifically or to changes in laws that impact P3s in a specific sector. So, it's not clear if the pandemic qualifies as a change in law in all circumstances.
Eglinton Crosstown Verdict
Eglinton Crosstown, a 19.5-km LTR project in midtown Toronto, is one of Canada's largest P3 projects. In 2015, Crosslinx Transit Solutions General Partnership (a consortium composed of ACS Infrastructure Canada Inc., Aecon Concessions, a division of Aecon Construction Group Inc., EllisDon Capital Inc., and SNC-Lavalin Capital Inc.) and Ontario Infrastructure and Lands Corp. (IO) and Metrolinx entered into a project agreement to design, build, finance, maintain, and rehabilitate a new $5.5 billion light rapid transit line.
The pandemic had significant detrimental financial repercussions for the project, even though it isn't yet operating. Based on published news reports, the project consortium estimates that Crosslinx incurred $134 million in costs as of last October as a result of workplace-safety measures, supply-chain problems, and increased absenteeism, and that was only about eight months into the pandemic. As a result, Crosslinx sought relief under the emergency-events provisions of the concession agreement, which were denied by the IO and Metrolinx, the transit authority, and concession grantor. While the pandemic isn't explicitly mentioned as a supervening event, Crosslinx claimed the pandemic qualifies as an emergency event under the concession agreement and that the pandemic's fallout required the project to implement additional health and safety measures. These additional measures--the project argued--qualifies as variation from the initial scope of the work and as such sought compensation for costs and schedule relief. The IO and Metrolinx rejected the claim, stating the pandemic wasn't an emergency event as defined in the concession and that the project is responsible for health and safety measures in performance of its obligations under the concession agreement despite the pandemic.
While the concession agreement provides for a dispute-resolution process, Crosslinx filed a case in October 2020 with the Ontario Superior Court of Justice for resolution of the matter because the typical process would have likely delayed a resolution. On May 17, 2021, the court ruled in favor of Crosslinx P3: The pandemic qualifies as an emergency event under its interpretation of the concession, and, therefore, eligible for costs and schedule relief. The parties will still need to finalize the ultimate costs compensation and schedule relief. At this point, it remains uncertain whether IO and Metrolinx will appeal the ruling.
While the ruling is limited to this pandemic, it emphasizes the requirement of collaboration and the need for addressing issues in a timely manner. The judgement sets precedence for other P3s seeking relief and paves the way around pending or potentially rejected claims. We're monitoring the projects we rate closely to determine what this judgement and the timely resolution of pandemic-related claims mean for credit quality.
P3 Risk-Sharing Events
P3s can best be defined as a long-term contractual agreement (concession or project agreement) between a public sector entity and a private participant to construct and/or operate an infrastructure asset. The project agreement defines the contractual responsibility and allocation of risk between the two parties, and typically it includes provisions regarding the responsibilities related to some unknown supervening events that could have a severe impact on either parties' performance. Sometimes the risks of these unknown supervening events are shared and sometimes they're absorbed by the public party. These events are typically classified as Relief/Compensation Events, Delay Events, "Act of God"/Force Majeure Events, and Emergency Events under the project agreement. Moreover, these terms have different definitions depending on the project.
The following is general overview of these terms.
- Delay events: Incidents that impede a project and require a schedule extension.
- Relief/compensable/reimbursable events: Circumstances for which schedule extensions and cost compensation will be provided such as a change in law whereby performance is disrupted due to revisions in existing laws.
- Force majeure/Act of God events: These could be considered a delay event or relief/compensable event. A pandemic is typically included as part of force majeure events that qualifies as a delay event only and therefore, only schedule relief can be granted. While it provides lenders protection by compensating financing costs related to the delay, it doesn't provide protection against other cost increases. These provisions also provide protection against certain contractual performance requirements and standards.
- Emergency events: Such occurrences give rise to an emergency situation, for example, that can potentially impede the health and safety of people, damage property, significantly impair operations, or be deemed a state of emergency by a contracting authority. These events provide compensation against costs and schedule relief.
The concession agreement also provides for a dispute resolution process, which the P3 parties are required to follow, for example, when there's a difference in view or interpretation of the agreement.
A Review Of The Impacts On Projects We Rate
We rate 44 P3 projects in the U.S. and Canada. These projects have been impaired in various ways and to varying degrees by the pandemic's repercussions, ranging from no impact to material impact. We consider a material impact to be one that results in a credit rating or outlook revision. Rated toll roads and projects under construction have suffered the most from the pandemic's fallout.
The table below provides a summary of the pandemic's impact on various projects we rate.
|The Pandemic's Impact On S&P Global Ratings Rated Projects|
|Project||Fallout from the pandemic||Claim||Status||Rating impact|
|Nouvelle Autoroute 30 (A30 Express)||The pandemic and related prolonged lockdown-like conditions impaired mobility, resulting in significant loss of traffic and toll revenues. Additionally, the project’s toll rate depends on traffic levels against the traffic threshold under its concession. Given lower traffic due to pandemic, the toll rate declined by 25% in 2021.||The pandemic is a force majeure event under the concession. A30 Express filed a force majeure claim seeking compensation for revenue loss and stay as per the provision governing its toll rates setting.||The project's initial force majeure claim was rejected by MTQ and is in arbitration to resolve the dispute.||We revised the outlook to negative given the delay in traffic recovery and a decrease in toll rates.|
|407 International Inc.||The pandemic and related prolonged lockdown-like conditions impaired mobility, resulting in a significant loss of traffic and toll revenues. The concession agreement includes provisions for congestion payment (for failure to reduce congestion on alternative routes), applied when the project’s traffic is below threshold and its toll rate is above threshold. Because of severe decline in traffic on 407 below the threshold requirement, there is potential for a significant congestion payment.||The pandemic is force majeure event under the concession. 407 Inc. claimed the provisions of congestion payment aren't applicable because of the pandemic as there is no congestion to remove from alternative routes.||MTO recently approved the project’s force majeure claim.||We placed the rating on CreditWatch with negative implications given the congestion payment exposure and delay in traffic recovery. We will review the rating soon given the recent approval by MTO.|
|Bridging North America (Gordie Howe Bridge)||The pandemic has caused construction delays and costs escalations.||The force majeure events include epidemic events but not pandemic and only qualifies for schedule relief. The project is seeking relief under the change-in-law provisions, which provides for both schedule and costs relief.||There is no formal resolution, though the pandemic-related claim has been submitted to a standing committee as a dispute. WDBA has requested additional documents as well.||None; we are closely monitoring the pandemic-related dispute process.|
|Mobilinx Hurontario GP (Hurontario LRT)||The pandemic has caused marginal costs escalations but no delays to it construction completion date yet.||The pandemic isn't covered as a force majeure event. The project has submitted interim costs responses, but no formal claim has been made.||IO and Metrolinx has not yet given a formal acceptance or rejection to interim costs filed by the project.||None; the impact till date has been marginal.|
|THP Partnership||The pandemic has affected the regular operation of the project.||N/A||The concession provider provided blanket deductions relief from March to June to help the project cope with potential impacts on operations stemming from the pandemic.||None|
|Other Rated Hospital Projects||Some hospitals faced increased costs because of additional health and safety measures. In some cases, the pandemic impaired the performance of the project against the requirements under the concession because of supply-chain delays and shortages in skilled labor causing a delay in addressing the relevant issue; e.g., elevator failure.||N/A||For some projects, costs were fully reimbursed by the concession provider while in some cases, additional costs were shared between the public and private parties. Similarly, deductions weren't applied because of the delay in addressing the issue.||None|
|MTQ--Ministère des Transports du Québec. MTO--the Ministry of Transportation of Ontario. WDBA--Windsor-Detroit Bridge Authority. GP--General partnership. LRT--Light rail transit. N/A--Not applicable. Sources: S&P Global Ratings and company reports.|
This report does not constitute a rating action.
|Primary Credit Analysts:||Dhaval R Shah, Toronto + 1 (416) 507 3272;|
|Anubhav Arora, Toronto + 1 (416) 507 3219;|
|Marianne Du, Toronto + 1 (416) 507 2543;|
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