Public-private partnerships (PPPs) are taking hold in Canada as an alternative form of public sector asset procurement, says a report released today by Standard & Poor’s Ratings Services.

S&P says, after a lengthy developmental period in which a variety of obstacles slowed the progress of PPPs, the signs of PPP traction appear to have taken hold in late 2004 and early 2005. The rating agency estimates that large-scale PPP projects in Canada could require, in aggregate, upwards of $1.8 billion in debt financing in the next 12-15 months.

“It is unclear if this funding requirement will be met through the domestic public bond market or if the issues will be primarily procured through the domestic or cross-border private placement or bank loan market,” it says. “It is worth noting that in Canada, the large domestic financial institutions that dominate the banking landscape do not typically lend on a long-term project finance basis. European banks that have provided significant capital to the PPP market in Europe might present an additional form of debt funding for Canadian projects if these institutions can offer cost-effective Canadian dollar-denominated funding.”

To date, the majority of projects under PPP consideration are primarily focused on transportation and health care. Since these public services are within the provincial constitutional domain, the provinces or a designated ministry will be the government counterparty that lenders to a project company will look to for receipt of unitary payments to service debt obligations, S&P says.

“In a developing market, such as Canada’s PPP sector, our analytical scope might include public ratings, but could also span private credit assessments for bidding consortiums, private placements, and even bank loan ratings,” said S&P credit analyst Paul Calder.

In future, key trends to monitor would include the depth of the Canadian debt capital markets, as several large-scale projects are likely to seek long-term debt capital in the next 15 months, and the extent to which financial guaranty companies (monoline bond insurance firms like Ambac, MBIA, and FSA, for example) might be permitted to operate in Canada under a license that must be granted by the Office of the Superintendent of Financial Institutions.