With billions of federal stimulus dollars rolling down the pipeline for various infrastructure projects, the time may be ripe to invest in the Canadian construction and engineering sector.

But it all boils down to timing, however. That’s because most of the federal government’s $4-billion infrastructure stimulus fund, which was announced in the 2009 federal budget, has yet to be doled out.

The program works as follows: provincial and territorial governments agree on short-term infrastructure projects, which are to be completed by March 31, 2011, with Ottawa. Projects suggested by municipal governments and other non-governmental organizations undergo an alternative selection process. Once the proposals are approved, Ottawa provides 50% of the funding for eligible costs related to provincial and territorial projects and 33% for municipal projects.

Since the stimulus package was announced in January, only 0.4%, or $14.1 million, has been rolled out. Also, many projects across Canada are waiting for the funding to get the go-ahead. These include:

> improving VIA Rail Canada and its performance on the Montreal-Ottawa-Toronto corridor, budgeted at $407 million;

> bridge upgrades across Canada, to cost $42 million;

> water treatment projects in the Yukon;

> the revitalization of Union Station in Toronto;

> a new $950-million transit line in Toronto. Ottawa is to kick in $316 million, and the Ontario and municipal governments are responsible for the difference.

Of the construction and engineering firms vying for these projects, it will be the publicly traded ones that are best positioned to win the bids, says Frederic Bastien, industrial equities analyst in Vancouver with Toronto-based Raymond James Ltd.

“In today’s environment, all public [construction and engineering] companies are coming off the past five years with solid fundamentals. They are awash with cash and have strong balance sheets,” says Bastien, which, he says, puts them in the perfect position to obtain “bonding” — a special type of insurance for securing government contracts.

“Winning the bid depends on whether they have the deep pockets to resist declines in other areas of their business,” says Alex Carrick, chief economist of Norcross, Ga.-based Reed Construction Data Inc. , who works out of the firm’s Markham, Ont., office.

Commercial project starts have dropped by 67%, to 5.1 million square feet, in the four months ended April 30 from 15.6 million square feet in the same period last year. A firm in a “cash-heavy” position should have between $100 million and $200 million of cash on its balance sheet, Bastien says, to cover its fixed costs during such slower periods.

This cash is also needed for obtaining the type of insurance needed to secure a $500-million public project, such as a hospital. “That [requirement] eliminates many mom-and-pop contractors right away,” Bastien adds.

Furthermore, many of the larger companies have already been pre-qualified for bidding on these contracts, whereas firms without experience on public projects simply won’t get invited to bid.

“These companies have not only done private work, but they’ve done public projects before,” says Carrick, adding that firms on the bidding list have specialized staff and experience in building bridges, highways and other types of public infrastructure.

This makes it unlikely that a firm that specializes in private industrial or commercial buildings could even compete for the same work, as they typically operate in one area or the other.

Of all the different types of firms waiting for public projects to get going, general contractors will benefit the most, says Bastien. One such firm is Toronto-based Aecon Group Inc., a general contractor that specializes in transportation and energy infrastructure.

“If you look at the infrastructure stimulus packages, a lot of the money is earmarked for transportation projects,” says Bastien, noting that most private general contrac-tors specialize in the construction of buildings, not bridges. “Aecon is the only one who has significant [public] construction expertise.”

For the quarter ended March 31, Aecon’s revenue increased to $340.9 million from $302 million for the same period ended the year prior; almost a third of its revenue in the quarter this year came from its public-infrastructure segment.

Although the company had a loss of $626,000 in the 2009 quarter, compared with net income of $276,000 for the same period in 2008, this is temporary, Bastien says: “Their business is highly seasonal, with a lot of the [public] construction happening in the warmer months,” adding that earnings typically turn around in the second and third quarters.

@page_break@Another firm that could benefit from the stimulus package is Montreal-based SNC-Lavalin Group Inc., which has a dual business structure: it acts as a design and engineering firm as well as a general contractor for public projects.

“SNC-Lavalin is much better positioned than other firms, since projects have to be designed as well as built,” says Anthony Zicha, an analyst in Montreal with Toronto-based Scotia Capital Inc. He points out that, much like Aecon, a third of SNC-Lavalin’s revenue comes from public-infrastructure projects.

For the quarter ended March 31, SNC-Lavalin’s revenue fell to $1.6 billion from $1.8 billion in the same period a year earlier. However, its net income rose to $77.5 million from $70.9 million due to a rise in income from its infrastructure and environment, mining and metallurgy, and infrastructure concession investments segments.

Another player worth considering is Montreal-based GENIVAR Income Fund, which specializes in project consulting and engineering for urban infrastructure projects, such as transportation.

“As these shovel-ready projects get off the shelf, people start looking at new projects to design — and that’s when they ask engineering and design firms to help out,” says Bastien. For the quarter ended March 28, GENIVAR earned $97.4 million in revenue, up from $70.1 million for the quarter ended March 29, 2008. Its net income rose to $6.4 million from $4.6 million a year earlier.

The returns on projects financed by the stimulus package will depend on how fast the federal cash gets doled out.

“If you’re investing in this business,” says Zicha, “I expect you’ll have to wait two years before you see any spending happen.”

Adds Carrick: “There’s still only a certain window of opportunity here — this year and next year. Usually, when the private sector takes a dive, the public sector feels it has to fill in for those lost construction dollars. But by the time the public sector comes around, the private sector has already recovered.”

He says that this can cause a multitude of problems, including labour and material shortages as well as a run-up in the cost of resources.

If the federal government hurries up and rolls out all the funds before the private sector picks up, the industry may not be able to handle so many public projects at once.

“The big risk here is that there is more available work than many people can handle,” says Zicha, which can make the margins on jobs too steep for some governments to handle. But with funds moving down the pipeline at a snail’s pace, he adds, shortages may not be so extreme.

There’s also the fear that gains in public work won’t be enough to offset declines in scheduled commercial and industrial projects; but, Bastien says, this won’t be the case for all companies. IE