Ratings agency Moody's on December 14 downgraded Ontario to Aa3 from Aa2 and changed its outlook to stable.
Moody’s said in its report that the downgrade reflects the fiscal challenges facing the province over the medium-term, highlighted by the anticipated $14.5bn deficit in 2018/19, equivalent to 9.8% of planned revenue. Exacerbating this are further deficits to follow, which Moody's forecasts will result in a deterioration of key financial metrics over the next three to five years.
Although the province has not presented a multi-year budget plan, Moody's expects that Ontario will post multiple years of material consolidated deficits, extending the current period of consolidated deficits that began in 2008/09.
On the one hand, Ontario's financially restricted position might indicate that the P3 model may appear even more attractive to the new government, as it seeks to cut costs, make good on its pledge to be more fiscally conservative, and still deliver the infrastructure that the province needs.
The province is currently undergoing a review of its use of the P3 model and held a market sounding exercise throughout November to obtain feedback. That same month, Infrastructure Ontario president and CEO, Ehren Cory, told P3 Bulletin that the province’s projects pipeline will only be released once capital budget reviews are complete and approved by the provincial government.
For years, the annual Canadian Council for PPPs conference in Toronto has borne witness to the release of that pipeline, with many delegates eagerly anticipating what new opportunities may emerge. This year, though, the market is being asked to be patient, with the focus on the model rather than the projects. However, this is not a market where nothing is happening. According to P3 Bulletin data, at this stage at least 20 P3 projects are in various stages of procurement in Ontario.
Nonetheless, the fact that Moody's has seen fit to downgrade the province’s rating could start to tip the balance away from any sort of infrastructure investment. The Progressive Conservatives are determined to burnish their credentials as a safe pair of hands when it comes to the province's finances, so cutting back on expenditure – whether that is via capital spend or through reducing the number of revenue repayments being made by cutting the number of P3 contracts – could be attractive. Cory suggests that the new administration remains open to the benefits of P3 investment, but given the financial position there will no doubt be arguments to rein in any and all public spending.
Furthermore, the Moody's announcement is unlikely to go down well with investors. The province has always been seen as a strong offtaker for P3 projects, so financial weakness may spook investors. Ontario may still not be the most risky place to invest, but investors will have to factor in the lower rating when making any calculations.
It remains to be seen what 2019 brings but the hope is that Ontario maintains its strength and stays in the lead for P3 procurement.
And speaking of 2019, we will now be closing up at the Bulletin this Friday (21 December), before starting back up on 2 January, with the first blog of 2019 emerging the following week when we've all had time to get our feet back under the table. Enjoy the holidays!