Editor: Would you give our readers an overview of Fraser Milner Casgrain's work in infrastructure and project finance across Canada?
Spector: The two practice areas - infrastructure and project finance - have always been connected in the Canadian context, where there has long been a tremendous effort to build railways, highways, airports, hospitals, and so on. Looking back over the past 150 years or so, however, there has been a clear divide between what was financed through the public sector and what was handled through private investment. In recent years that line has become somewhat blurred with the introduction of the P3 - public-private partnership - but one of the constants in this area of practice has been the presence of Fraser Milner Casgrain from the very beginning of these undertakings, going back even prior to the establishment of the Canadian Confederation in 1867.
As a consequence of its long-standing presence in this area, the firm is well placed to address the issues that arise in connection with the P3 vehicle. We have six offices across the country, including offices in all of the major business centers, and this is important because the type of project may vary from city to city and province to province and the expertise and experience required may likewise vary. At the same time, the resources of the entire firm - in terms of expertise and personnel - are available for any particular project, and our Montreal office, for example, is able to call upon Vancouver for support on an as-needed and regular basis. This constitutes one of the real strengths of the firm.
Editor: Does the firm have a dedicated group for this work, or do you draw upon different practice groups on an as-needed basis?
Spector: We have identified a distinct group of attorneys for the P3 and infrastructure group, and they tend to reside in our Vancouver, Toronto and Montreal offices. Many of these projects are very large, and invariably involve other related fields including, for example, construction law and environmental issues so we call upon our construction lawyers and environmental lawyers on a regular basis. The same is true of the large highway projects, where we have a need for land permitting and zoning expertise.
Editor: Please tell us about some of the projects that the firm has handled recently .
Spector: Among the high profile projects we have handled recently is the Sea to Sky Highway which connects Vancouver with Whistler. This commitment on the part of Vancouver was essential to its bid for the 2010 Winter Olympics, and it has been structured as a P3 project. Another is the Kicking Horse Pass project, which is a provincial project to re-build a highway pass through some very beautiful parts of British Columbia and Alberta. In Quebec we are engaged in one of the largest P3 projects to date, involving the construction of the Highway 30 project, one of the missing links of Montreal's ring road. This is particularly complicated because of the overlapping jurisdictions that are involved: federal, provincial, the St. Lawrence Seaway and the various municipalities around the Island of Montreal.
Outside the P3 area there are a number of interesting projects underway. We worked with one of Canada's leading financial institutions to finance a major wind farm in the Gaspé region of Quebec.
Renewable energy projects appear to be increasing in importance at a pretty dramatic rate. We are also engaged in very large wind energy undertakings in Ontario and British Columbia, including one off the BC coast which has some important First Nations and transmission issues.
Editor: What types of financing models have you seen for these projects?
Spector: There is no single model for these types of projects. In a relatively straightforward private sector energy project most developers will consider a model that is 20 percent equity and 80 percent bank financing as typical. With respect to an "average" project for a wind turbine, per megawatt costs run somewhere between two and two-and-a-half million dollars, and these projects are usually between 10 and 100 megawatts. With the midsize type of project, say, 30 to 50 megawatts, the overall cost of development can easily exceed $100 million. The developer could be looking at some very steep soft costs at the outset of one of these projects, including costs for planning, permitting, public hearings, negotiating agreements and pursuing various financing options, and this is before a shovel ever hits the ground. Only when these aspects of the project have been navigated - and the risks identified and, to the extent possible, quantified - will the developer be in a position to approach the financial institutions for financing. The financial institutions, of course, will not respond to a call for financing unless and until they are certain that the financial risks they are being asked to assume have been properly assessed.
You should note that with P3 projects there is a fairly standard financing model. They are financed on a project finance (i.e., non-recourse) basis using a special purpose partnership, with the debt/equity ratio typically being 90/10. There may be variations on this theme - such as a layer of subordinated debt that replaces a portion of the equity - but the fundamental approach does not alter. Many of the Canadian P3 projects to date have been financed by way of bonds or private placement. In the current financial climate, however, this may change in favour of bank financing as monoline wraps are largely unavailable.
Editor: And ownership models?
Spector: As with financing models, there are various ownership models that are utilized, and very often a political feature is determinative. In a P3 bridge or highway project the government often grants a concession to a consortium which, in turn, is obligated to build, operate and maintain the project. The ownership models are diverse, depending on what the politicians perceive the public will tolerate at that particular time. To date, in Canada, the ownership rights have been retained by the government as it is currently not politically feasible for governments in Canada to transfer ownership - or even long-term lease rights - to private sector participants.
Editor: When we last spoke you described some of the incentives that the government was offering to encourage this type of undertaking. Would you summarize what has been available to date?
Spector: From an infrastructure perspective, the connection between government and the private sector goes back many years. Competitive bidding was, at least in part, an attempt to avoid the situation where a contract would be awarded by the government to the organization most supportive of its policies. Over time we have evolved to the point where bidding is transparent and model contracts - which are voluminous and meant to cover a multitude of issues - are already in place. That does not leave much room for the type of discretion that, in the past, may have been used by the government to reward its friends.
A significant amount of money is involved in these projects, and that gets a great deal of attention. As but one example, in the renewable energy area the federal government is offering up to one cent a kilowatt under their green program as a direct rebate to the producer, which sometimes is then passed on to consumers. This is a direct incentive to the producer to develop and sell renewable green power. There are also tax benefits - accelerated depreciation for certain assets used to produce renewable power and the possibility for a producer to pass through losses at the early stage of a project to the investors, permitting them to reduce their taxes and lower the cost of capital.
Editor: With a federal election scheduled for mid-October and the possibility of a new government in Ottawa, what do you think are the chances of
this type of support continuing?
Spector: In this regard, the most predictable scenario would be for Stephen Harper's Conservatives to be returned as a majority, in which case I think things will remain pretty much as they are now. If the Liberals get in, we may see more of a focus on clean power and renewable energy. The Canadian electorate has been moving in this direction for some time. The NDP is something of an unknown here, but they too are conscious of the public's increasing environmental concerns. My sense of the upcoming election is that support for this type of undertaking will continue irrespective of the party in power.
Editor: Would you share with us your thoughts with respect to the development of Canada's infrastructure through public-private partnerships over the long term. Is this the model for financing hospitals, schools, highways, and so on, over the next generation?
Spector: The P3 model is still being tested, of course, but I think it offers some very strong advantages to a government that wishes to convey a belief that less public spending is a good thing. Shifting the cost does involve losing a certain degree of control, but as with so many areas where the public and private sectors overlap, this model does not represent an irresponsible abandonment of control altogether on the part of government. There is no question but that the private sector is more efficient when it comes to building and operating bridges and highways, port facilities, hospitals and schools, prisons, and the like, but that does not mean that the running of an entire school system ought to be turned over to a private contractor. There are a number of very interesting social issues being addressed in the implementation of this particular model. One thing is clear - using the P3 approach allows public infrastructure projects to be built now rather than 10 or 20 years from now, which would be the case if such infrastructure were to be procured conventionally.
Editor: We are talking about a great deal of money in these projects. Assuming not all of it is going to come from the Canadian private sector, what are the opportunities for American investors here?
Spector: The opportunities are tremendous. Many of the bidders with whom our firm has worked are not Canadian, but rather American, Australian, or European - financial institutions, infrastructure funds, developers and large construction companies - that have cut their teeth elsewhere. Many of the European companies are particularly well positioned to compete in Canada because the P3 model has achieved pretty wide acceptance in Europe in recent years.
To date we have seen in Canadian P3 projects international equity funds and developers - such as Macquarie, Babcock and Brown, Plenary Group, and Innisfree - and, on the debt side, major international financial institutions - such as Société Générale, Dexia, Depfa, Royal Bank of Scotland and Deutsche Bank. So this is a field where there is great opportunity for American and other international investors and financial institutions to play a significant role.
From a Canadian perspective, we are seeing a tremendous build out, both in terms of infrastructure and access to our energy resources, with the financing and ownership models being developed at present. This is a very exciting time to be practicing in this arena.
Published October 1, 2008.
