World credit crunch makes local P3 projects risky propositions

Provincial officials said this week they remained confident those projects will be unaffected by the crisis, primarily because the contracts remove significant risk from the government and place it on the private consortiums in charge of delivering the projects.

But a review by The Vancouver Sun has shown several of B.C.’s privately financed public infrastructure projects — both those under construction, and those about to begin building — are connected to international lenders facing serious problems due to the world financial meltdown.

In Australia, the high-flying Macquarie Group was dubbed the “Millionaires Factory” because the company made gobs of money investing in and operating toll roads.

Like so much else in the recent financial crisis, the never-ending growth projections and the success those projections delivered turned sour almost overnight.

About one week after attending a lavish $500,000 office Christmas party in late November, Macquarie’s well-paid staff were shell-shocked to see the company hand pink slips to an estimated 1,000 employees.

Despite the shock, there had been warning signs trouble was looming.

Macquarie, which operates more than 30 roads worldwide, slashed the value of its toll-road portfolio from $10.2 billion to $6.5 billion in the last four months of 2008, according to Australian newspapers.

In a statement, Macquarie blamed “the recessionary environment” and “higher assumed financing costs.”

Babcock, an Australian-based investment firm, lost 98 per cent of its market value due to the credit crunch, and since Jan. 8 has temporarily halted the trading of its stock while determining how to repay its sizable debt.

A response from Babcock’s creditors is expected this Monday, a company statement says.

The troubled Australian investment firm is the parent company of London-based Babcock & Brown Public Partnerships Ltd., which the B.C. government announced Jan. 12 was an equity partner in one of three consortiums shortlisted to build the $1-billion South Fraser Perimeter Road P3 project.

That isn’t the only project Babcock and Brown was looking to fund in B.C.

Babcock was also initially the equity partner in one of two consortiums short-listed last year to build the $268-million Fort St. John Hospital P3 project. However, Blain told The Sun this week Bilfinger Berger now has joined that project — essentially bailing out Babcock — and many Babcock employees in Vancouver are now working for Bilfinger.

Thomas Ross, a senior associate dean at the University of B.C. with an extensive knowledge of P3 projects, said the current economic crisis — and the higher cost of borrowing that accompanies it — should spark a rethinking of how big public projects are financed.

“What’s kind of happened is a concern for some existing deals that might come unravelled because everybody thought the banks that were lending the money were fine, and now it turns out the banks that were lending the money aren’t fine,” he said, citing the Port Mann Bridge as a possible example.

“It may be that some of them are difficult to finance in these times, and it may be that the only people that can really borrow are governments, and so we go back to the more traditional model of procurement until financial markets settle down.”