Financing Long-Term Projects

Canadian infrastructure projects attract international investors, as the market shifts from facilities and roads toward transportation and transit projects
With an internationally recognized model for public-private partnerships and no shortage of projects, the Canadian infrastructure market is going strong with no signs of abating.

 Making long-term projects possible is long-term finance and debt. 

“It’s typical that the life insurance companies are engaged in providing long-term debt for these projects … while long-term financing is also made available through institutional investors, private equity and so on,” says Mark Romoff,  President and CEO of The Canadian Council for Public-Private Partnerships, from his Toronto office. 

Public-private partnerships by their nature tend to be long-term, created for infrastructure projects such as public transit and hospitals, and “the private sector takes on responsibility for designing an asset like a hospital building and arranging for some of the financing and maintaining the assets,” says Romoff. While the project agreement may last 30 years, the infrastructure itself is usually designed to live for much longer. 

A major infrastructure project is the Gordie Howe International Bridge, which is currently under construction, and the only binational project that Canada has at present. That bridge is projected to have a lifespan of 125 years and cost $5.7 billion to design, build, operate and maintain over 30 years. Healthcare facilities such as hospitals may have a shorter lifespan, “but the financing and the project agreements themselves are designed to last for around 30 to 35 years,” he says. 

Investing in Canadian Infrastructure
There continues to be a strong appetite to invest in Canada, and there’s no shortage of capital, but investors naturally look for stable long-term returns. Canada has developed a good track record for investing in infrastructure, which has created “lots of confidence on the part of the international market,” says Romoff. This includes building infrastructure through public-private partnerships (P3s), of which transportation and healthcare facilities account for the vast majority of P3 builds in Canada, he says.

 “There’s been a robust interest in Canadian infrastructure for a long time,” says Ilan Dunsky, a Montréal-based partner in Dentons Canada LLP’s global Transportation and Infrastructure practice. Over the past few years he has seen an increasing amount of Canadian entrance into the market; internationally, Spanish companies have been involved for a long time, as well as German, American and British, among others, who invest as developers of a project.

 More new foreign investors may be coming into the Canadian market because of the shift in the types of projects that are being undertaken in Canada, Dunsky adds, with the market shifting away recently from facilities and roads to transportation and transit projects, bringing in a variety of players who are experts in transportation and transit. Many companies are ahead of Canada in their use of concession agreements in P3s, for example, having been involved in these projects in many countries around the world, and have expertise in operating transit systems.

 “P3 is a vibrant market,” agrees Mark Bain, a partner in Torys LLP in Toronto who specializes in infrastructure and project finance. “We’ve seen the entire world land on the Canadian doorstep to get a piece of that market.”

 Canada currently has 286 P3 projects in operation or under construction valued at approximately $140 billion, he notes. Many of Canada’s infrastructure projects only proceed via a government sponsor, and governments have an enormous appetite for more and more infrastructure in Canada, says Bain; that runs across all political parties. “More and better infrastructure is a great economic booster as well.”

 Strategically, Bain says, Canada is seen as a springboard to the US markets, which have the opportunity to become much larger given that their need for infrastructure corresponds to their population size (approximately 10 times that of Canada). Although he is seeing P3 deals in the US, “we’re watching for it to become much more active.” 

 International investors are coming to Canada today, seeing the United States as being the market of tomorrow, he says; in the United States the market for P3 and other private participation is less robust because they don’t have the centralized procurement agencies that exist in Canada. “The political influence in the US tends to be more localized than in Canada.”

A traditional P3 approach to financing an infrastructure project is for the private sector to deliver the infrastructure, then arrange its own financing to pay for the construction costs and amortize that construction cost over the life of the asset, says Paul Blundy, a partner in Bennett Jones LLP in Toronto and leader of the firm’s public infrastructure projects practice. 
“The project vehicle would finance that [cost] by issuing bonds or any long-term debt. And there’s a very healthy market for that long-term debt.”

 The Fort McMurray West 500-kV Transmission Line, which now runs from Fort McMurray to southwest of Edmonton in Alberta, produced Canada’s biggest infrastructure bond offering to date, Blundy says: a $1.4-billion bond offering, for an estimated project cost of $1.6 billion. “The [financing] structure there was that the project vehicle went out and borrowed all the money they needed to build the project, and are paying it back over a period of 25 years to … bondholders. That’s more the traditional model for P3.”

But in Ontario, at least, the pricing of that long-term debt by the design-builders has been perceived as too high relative to the cost for the province to raise the money independently, says Blundy; this has led to a model in which the government pays most of the capital cost as the construction proceeds. Infrastructure Ontario’s Highway 401 Expansion Project, for example, has been set up to have three “milestone payments” to the piece, he says, “so that basically the project vehicle just does short-term construction financing, and the bulk of the financing is done directly by the province.”

 Projects costing more than $200 million were traditionally financed by bonds rather than bank debt, but more recently the new Canada Infrastructure Bank has been financing a subset of these projects, Dunsky says. Last year a $1.28-billion investment by the Infrastructure Bank and CDPQ Infra completed the $6.3-billion financing of the Réseau express métropolitain (REM) light rail in the Montréal area through an “ultra-low interest-rate loan.” 

 The Bank’s mandate is to provide grants or loans to finance large public infrastructure projects, helping to attract investors by absorbing some of the financial risk. In June, the federal government announced that the Bank would help to develop Via Rail’s multibillion-dollar high-frequency rail project between Toronto and Montréal, at least in financing further studies for the project. 

 And a discussion is starting as to who is the appropriate payor for infrastructure, says Bain. Traditionally the payor would pay for facilities such as hospitals, and users of infrastructure such as toll roads, power and water systems. There may be a little more user-pay in future, he says, in part as consumers expect to pay something for their transit and utilities.

 “We had a long run of projects that were financed purely by government, such as power plants, and then other projects that were largely privately financed on the back of government’s commitment to pay,” such as hospital projects, he says. Canada has now gone from this binary model to a hybrid one, blending private and government finance. This includes telecommunications projects in ex-urban areas, which are underpinned by a public policy imperative “to make sure everyone has good internet.

 “Those sorts of projects have some revenue associated with them, but the Bells and the Teluses of the world aren’t going to build their own systems,” Bain points out. “The solution to those kinds of projects is some kind of government subsidy or contribution” to make the project viable financially, particularly, for example, in more remote regions with a smaller pool of users.

 The government-funded model may be less popular for shorter-term projects, where in British Columbia, at least, there has been a slight shift in the market towards the design-build, or build-finance model where there is no long-term component to the infrastructure projects, says Samantha Cunliffe of McCarthy Tétrault LLP in Vancouver. In this model a single contractor with design, construction and facilities management expertise funds, designs and builds the project and then operates it for a period of time. The project is then leased to the client over an agreed number of years.

Creating Community Equity
In June, when Canadian Utilities Limited (CU) and its partner Quanta Services Inc. sold its interest in Alberta PowerLine (APL) - the design-builder of the Fort McMurray West 500-kV Transmission Project - CU offered an opportunity for Indigenous communities along the transmission line route to obtain up to a 40-per-cent equity interest in APL. “This model will provide a long-term stable investment and further enable economic development in the local communities,” CU said in a press release.

The final ownership mix of APL will be determined upon close of the purchase option for Indigenous communities, says Blundy. “It’s an opportunity for them for a high-returning equity” on the powerline that runs through their communities. 

 Bain also describes the 97-kilometre Tlicho All-Season Road (TASR) project in the Northwest Territories that will improve urban access for members of the Whatì, Gamètì and Wekweètì communities, which have relied on a winter ice road to leave the region -- made all theharder with climate change shortening the winter season.

 A plan was developed to build an all-season gravel road, which would give residents year-round access to other destinations in the Northwest Territories and Alberta, and provide access to mines to the north. The First Nations piece of the project is multifold, says Bain -- whose firm acted for the government of the Northwest Territories in the deal – including creating local jobs, obligations to hire local trades, and economic participation requirements

 “The [Whati] First Nations community was allowed to invest up to 20 per cent equity in the project; they are partners, so they share in all the ups and downs in the project,” says Bain.

 “That, I think, is a bellwether [for] things that you’ll see coming along. … Trans Mountain, every [infrastructure project] that goes ahead, there’s clearly a strong desire to have some indigenous participation – not just to accommodate the project, but to have some economic participation in the project.

 “I’m not an optimist generally,” he says, “but I’m certainly an optimist in [the infrastructure] space. We’ve got a good thing going, and I think there’s more to come.”