Editor: Please describe each of your practice groups and a brief snapshot of your respective backgrounds.
Younger: I'm Co-Chair of FMC's National Public-Private Partnership practice group. I have been practicing law since 1984 in a variety of capacities, both in private practice in law firms large and small, and as European legal counsel to an investment bank in London.
Spector: I am the Managing Partner of our New York office, having previously been the managing partner of the Montreal office. I am a corporate finance attorney and my practice includes capital market transactions, mergers and acquisitions, and project financing primarily for energy projects.
Editor: Why is the firm especially well-suited to counsel on infrastructure and project finance activities all across Canada?
Spector: Each of the firm's offices actually has a long history in project finance acting on behalf of lenders, developers, sponsors, and borrowers. Our practice is interesting because some of these types of activities form a large part of Canada's history. If you go back to railway projects, pipeline projects, mining projects and energy projects, Canada is still very much a resource-based economy. So many of the massive projects that have been undertaken over the years have involved project financing and relationships with financial institutions. Our strength in Canada resides in the fact that we have had the ability to leverage the skill sets from each of our offices into a combined knowledge and competency which we believe is the finest in Canada.
Editor: Not only your natural resources such as Canada's mineral wealth but also hydropower and oil sands have been natural sources of wealth for Canada. Please describe any infrastructure developments regarding some of the renewable energy sources Fraser Milner Casgrain has been instrumental in developing.
Spector: We like to think that we were always at the cutting edge of this type of work. Our firm has a long history of working on hydro projects going back to the days preceding Hydro-Quebec. One of our first renewable energy clients was Shawinigan Light and Power, one of the forerunners to Hydro-Quebec. After Hydro-Quebec became a nationalized enterprise, our firm negotiated on behalf of the native communities to allow for the development in the far north of Quebec of some of these massive hydro projects. We have also had the opportunity to work with certain of our forestry product clients in the development of biomass, which produces steam for industrial purposes and electricity for sale to the electricity grid. When the first wind farm was being developed in Quebec, we got the call to act on behalf of the lenders to this project. So we have had this long historical understanding of the renewable power business.
Editor: Your firm has also been instrumental in bringing to closure many other projects involving renewable energy. Please describe the ownership model as well as the financing model for these deals.
Spector: Most of the projects that we have seen in Canada are, for the most part, financed privately. The private model is one where you have a developer or sponsor who takes the initial risks of securing the property sites and the environmental permits. Because the permitting process can be quite lengthy and complicated, this poses quite a risk to the developer - the initial stages being an area best financed by private capital. Even though everyone wants to promote green power, not everyone wants a wind turbine in their backyard. After the initial steps, a financial institution will normally come into the picture because most developers do not want to underwrite the entire cost of a project. Most energy projects are characterized by a long-term power purchase contract with a public utility: exactly the type of contract that financial institutions favor. In terms of public financing, we do not see government participating in these projects except to offer incentives to the purchasers of green power through green tax rebates or other tax credits.
Editor: Please describe the types of rebates or other incentives offered by the government.
Spector: There are primarily two sources. The first is the government's allowance of accelerated depreciation of the assets used to produce renewable energy. There is also a program that allows for a one cent per kilowatt credit for consumers of green energy. With those two incentives, there should be adequate provision for wind power and biomass to be competitive with other less environmentally friendly energy sources.
Editor: Where does Canada stand in promoting nuclear power?
Spector: It is my understanding that there are plans to take another look at the nuclear landscape. One of the ideas under consideration is the potential to establish a nuclear power plant in Northern Alberta in order to assist in the development of the oil sands project, which requires a tremendous amount of energy.
Younger: Also, it is likely that in Ontario we will see some considerable push in the direction of nuclear power. This is because the present government announced four years ago that it intended to shut down all of the coal-fired power plants in Ontario, in which case there is little option but to consider nuclear power.
Editor: As in the States, are you seeing venture funds or private equity investing in these projects?
Younger: I wouldn't say that private equity firms in Canada, because they aren't large enough, are particularly active in financing infrastructure deals. However, more broadly speaking, there are significant capital pools or fund managers who are actively involved. In the public-private partnership sector financial players like Plenary Group, Macquarie, a big Australian bank, Babcock and Brown, and Borealis (owned by the Ontario Municipal Employees Retirement System), have been very active in providing equity for infrastructure deals. Our pension funds, Ontario Teachers Retirement Fund and OMERS have been very active in investing in infrastructure projects in the UK and continental Europe.
Editor: Doug, as head of FMC' s National Public-Private Partnership Group, please describe the evolving Canadian P3 market.
Younger: When I returned to Canada to private practice in the middle of 2002, there was a lot of talk about P3 deals but very little action. British Columbia took the lead in setting up an independent agency to manage the public-private partnerships initiative and very quickly did a number of major projects, including the Sea-to-Sky highway and the Kicking Horse Canyon Highway, in both of which we acted on behalf of the BC government and were instrumental in helping establish what has become a standardized approach to P3 project agreements in Canada, dating back to 2003-2004. Since that time, with the election of a new government in Ontario, this province has become very active in P3 deals, in particular financing hospital projects and other municipal projects like courthouses and most recently a new data center. British Columbia is again becoming very active, in particular with respect to hospitals and transportation projects. Quebec as well has a couple of major highway projects that are either completed or close to completion and a couple of huge hospital projects in Montreal which are at the RFP stage. Alberta is becoming more active with its new government. Alberta is talking about bringing more P3 projects to market despite the fact that its treasury has substantial amounts of money with which it could finance infrastructure itself.
Editor: When we talk about public-private partnership projects, how much is publicly and how much privately financed?
Younger: The term "partnership" is a bit of a misnomer. The way these deals are structured, which follows the model that evolved in the UK, is effectively a concession-based project approach, so that if the government wants to build a new hospital, through a request for proposal process it will invite bids from various private sector bidders who want to act as the concessionaire, so there will be a long-term license or concession granted in favor of the winning private sector bidder; the winner will then design, build, finance, maintain and operate the hospital for a period typically of 30 to 35 years. The government doesn't retain any financial interest in the project itself, but it does retain ownership of the underlying real estate and building. At the end of the concession term, ownership of the hospital will revert back to the government.
Editor: What are some of the risk areas that you advise your private clients about who enter into the P3 joint ventures with the government?
Younger: There are a number of key risk areas in a public-private partnership that private sector practitioners tend to be concerned about. They would include such things as risk of change in the law, force majeure risks, risks related to events such as public or private strikes, earthquakes - things of that nature which can disrupt the project and interfere with the completion of construction or otherwise prevent the private sector concessionaire from being able to fulfill its obligations under the project agreement. Those are just a few of the key risk areas. Obviously, one of the fundamental risks in any public-private partnership project is ensuring the facility, whether it be a road, a hospital, a prison, or a courthouse, is built on time and on budget, because the way these deals are structured, the cash flow doesn't begin to be paid by the government until the project is completed. It has to be completed on budget because a fixed price has been provided, so any cost overruns are borne by the construction subcontractor.
Editor: How does the private investor mitigate these risks?
Younger: There is insurance, of course. As project finance transactions, what is being financed by a lender is a cash-flow stream. Because there are no assets and no corporate balance sheet to rely on, what the banks insist on is that the project company itself be a special-purpose bankruptcy-remote vehicle, whether it is a partnership, a trust or a corporation. As a result, that special-purpose vehicle - the project company - will necessarily have to subcontract almost all of its obligations under the project agreement to third parties, so the obligations principally fall into two main categories: one is construction, the other is operations and maintenance. The project sponsor will subcontract its principal contractual obligations to reputable and experienced subcontractors, whether on the construction side or on the facilities management side. That's the principal way the lenders and the project company will mitigate project risk. Of course, each of those subcontractors has to provide performance security of some kind, whether in the form of a letter of credit, a performance bond, or a parent company guarantee. These are highly structured transactions. Large amounts of money are being loaned, and typically these deals are financed 90/10 percent debt-to-equity, so they are very heavily leveraged, and as a result the lenders have a huge amount of money at risk. The lenders have to be as satisfied as they can, particularly in the current environment, that they are going to be repaid, so as a result they build all kinds of structural protections into the deal to mitigate risk.
Editor: How do you see the future for public-private partnerships in utilizing Canada's vast resources in people, capital, and natural resources going forward?
Younger: Public-private partnerships in Canada so far have been utilized to a large degree in financing social and public infrastructure - roads, schools, courthouses, roads and hospitals. Viewed more broadly, you could say that a type of public-private partnership has also been used in financing natural resource development. In terms of financing public infrastructure, public-private partnerships are going to be the wave of the future, the reason being that much of Canada's infrastructure was built in the '50s, '60s and '70s and is nearing the end of its useful life. Infrastructure demands are in the billions of dollars. Government has other budgetary constraints, particularly with respect to health care and education, and does not want to be running massive deficits or borrowing extensively in the capital markets, so building new infrastructure using a public-private partnership model has significant attractions. In addition there has been demonstrated value for money with respect to the public-private projects that have been completed in this country, and more particularly in the UK, where the market is long-established.
Published May 1, 2008.
