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We're levering a legacy that's been under construction by Graham since 1926. This group has built thousands of projects of every type, including large infrastructure and P3s. Gracorp isn't focused on building a brand name for itself. We're focused on organizing multi-discipline teams that are brought together for specific projects that will be owned by the public and operated on their behalf. We're focused on executing these projects successfully, and operating them responsibly. We have a track record of successful project design and execution in the P3 environment.
The traditional tendering process always drives towards the low cost - but not necessarily the best value. Public infrastructure projects are going to be around for a long time. There's not only the up-front capital costs, but design requirements, operations, maintenance and life-cycle costs. You put all those together and sometimes the up-front capital costs ought to be a little higher because it allows you to reduce future maintenance and operating costs – and thereby optimize your overall costs. The P3 approach turns all those issues into numbers to which we agree to be held accountable. This approach gives you access to a consortium that has not only technical capability but "skin in the game" to maximize long-term value. In addition, we have to satisfy project lenders and rating agencies. Those folks are very careful about protecting their own risks, and in doing so they also protect the risks that the public sector faces.
There hasn't been a P3 project failure in Canada - not one. If a failure occurred, it would happen at the contractor or lender level, but the public is protected from that. If a P3 developer were to fail, it would prove how the process protects the public. When the traditional contracting process fails, the taxpayer just coughs up the whole cost overrun. As an equity provider in a P3 project, Gracorp looks for as much debt as we can put into these projects, because it's lower-cost capital than equity. This requires us to contract our consortium members to accept project risks and provide a robust security package to lenders. That substantial list of covenants and guarantees demands contractors who are financially strong. Those layers of financial accountability – the P3 structure itself, the guarantees, the calibre of company needed to operate in this space – all protect the owner and the public. Graham has operated since the 1920s and has bonded and/or supported the financing of numerous large projects. In Gracorp itself there's a lot of financial strength plus a track record of stability, responsibility and standing behind what we do.
Most P3 projects in Canada receive a financial contribution from government, usually 20-50 percent of the value of the project, typically occurring upon substantial completion of construction. That contribution "buys down" the cost of the private-sector risk capital. The government gets the best of both worlds –- its own low cost of capital matched with private sector at-risk capital that provides efficient risk protection. Of course, it's not just the risk protection that government pays for. It's the long-term cost optimization.
This is what it's all about! There are multiple opportunities. When we submit a competitive design for a health care facility, for example, we show the sponsors what it would be like to operate their health care programs in our facility design. They'll assess their costs to operate within that design. Over the whole life of a facility, operating costs in health care can easily be 20 times the capital costs of a new facility. When we demonstrate the advantages to our design, and the owner compares it to competing options – the owner can then select the design that will allow them to operate most efficiently. That's outstanding value.
Another advantage is the whole capital versus maintenance cost issue. There's always a trade-off whether to spend more or less money up front, understanding that this usually affects maintenance costs down the road. In a traditional contracting model, those decisions are made intuitively, and usually focus on reducing up-front costs. But in a P3 process, we fully price the various options, compare them and present the actual low-cost solution in our proposals.
A third way: when you have repeatable components, such as 23 similar bridges in a freeway, you create opportunities for economies of scale. We can build those multiple bridges at a far lower unit cost – and faster – than you could get if you competitively tendered 23 separate bridges.
There's always a cost for the public sector to deliver services, and the project sponsor has financial objectives other than just capital costs when they go to the market to procure a project. We have the financial accountability to manage that project towards many objectives beyond construction cost. That's very hard to do in traditional bid-build contracting.
One of the best is the Government of Alberta's 28-school alternative procurement program, currently underway in phase two. Gracorp organized the winning solutions for both phases of this social infrastructure P3 project in competitions that attracted interest from around the globe. Equity financing is coming from the Gracorp-managed funds as well as other external investors, with construction led by Graham. Both phases have gone extremely well – on-budget and on- or ahead of schedule. Alberta Infrastructure independently evaluated the value it achieved from this method of contract and concluded that it had saved a huge amount of money. Similarly, most of the P3s in B.C. and Ontario have had independent economic evaluations, and in all cases the DBFM has either matched or exceeded the value that would be created traditionally.
I think any public-sector institution planning to procure substantial infrastructure in the future ought to be creating a DBFM procurement methodology that will get applied to all projects that fit this model. Get buy-in to the procurement method first, before you start talking about projects. If you keep considering DBFM versus bid-build on a one-off basis with every project, you get bogged down in evaluating the process instead of planning the best possible project.
Yes, it very much is. When we start preparing a project proposal, we're typically investing real money in the methodology and the design. It takes cash to work up these proposals, get a team organized and sustain the talented people involved and to get all the contracting and funding organized. If our team does not win, we would have to write off that whole cost. We take it very seriously from the start, because it's directly in our interests to come up with the most efficient solution. Once we're in a project, our own personal equity is at risk if we fail to meet the agreed-upon performance criteria. We can't make money unless the project operates successfully and meets the client's requirements. We certainly don't want to lose our equity, and that clearly puts us on the client's side of the equation.
It does depend on the project and the owner. The DBFM approach provides a clear mechanism for looking at and incorporating the long-term costs of operating the facility. That will appeal to some clients more than others. If a third party is going to pay all future variable costs, then the DBFM model isn't as compelling to the developer. But anyone who's taking a long-term view and stands to benefit by optimizing their project's full life-cycle costs should be paying attention to the principles and benefits of DBFM contracting.
Yes. A great example is a developer who has multi-site requirements. That's an ideal opportunity to create value by assigning a team that will capture economies of scale by executing at multiple sites, and additionally will provide clients with a higher level of service than if they pursued those projects on a one-off basis.
It's our job to thoroughly understand the client's needs for the project and the performance requirements the private-sector provider needs to fulfill. So our teaming decisions are carefully customized to each project. We have the experience we've gained from Graham – delivering over 400 projects per year. We know a lot of other companies; we know their capabilities. Obviously we don't do it all ourselves. We're in a great position to put together the right team that contains the right partners matched to the unique requirements of the client and project.
We're careful, thorough and diligent – that's our commitment. But we are taking risk. These are private equity types of risks, and this type of investment is not as safe as putting your money in the bank or buying T-bills. When we take risks we do it in a careful and deliberate way. It's important that we maintain a reputation with investors that we take care of their equity and manage risks responsibility. The members of Gracorp's management team are also personal investors in the funds, and so our interests are aligned with those of all the investors who invest with us. Successful investment outcomes are as important to us as they are to every other investor.
Yes. Gracorp's primary focus is excellent planning and execution of projects, not the fundraising process. We realize we need more equity than we have amongst our employees, so we formed a relationship with Connor Clark & Lunn Financial Group. We're very happy with this relationship, which is extensively described on the website. CC&L has many clients across Canada who are interested in the risk-reward profiles of public sector projects. We formed a fund together, and it's funded by a combination of Graham's employees and CC&L's clients, which has been great for us. In addition, there are accredited investors who participate alongside of us in our private equity fund, including friends and family of Graham and Gracorp. We're really pleased to have financial partners who understand what Gracorp is doing.
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