The Province of British Columbia's mania for financial secrecy has not yet dented competition to fund its public-private partnership, or P3 projects. The recent financial close for the Okangan Lake Crossing project, a 27-year private placement, demonstrates the keen competition between foreign banks and domestic institutional lenders.

The C$157 million ($130 million) deal re-establishes Canadian institutions as viable lead lenders, and further marginalises Canadian banks as influential players in Canadian P3. Initial assessments of the Canadian market had suggested that domestic underwriters would be a requirement for most institutional financings. However, this placement closed without the services of an intermediary and a strong rating – it gained an A from Standard & Poor's.

Exact details of the financing are likely to leak out further down the line. The province prefers to have its own numbers for the savings compared to a traditional procurement route on hand before subjecting financing costs to any scrutiny. But the outline suggests that a private placement – the preferred choice of CIT for financings for Sierra Yoyo in BC and two Ontario hospitals – might be applicable to a wider range of assets than previously thought.

Recent financings in BC have steered clear of the route – the two hospital financings used ABN Amro's debt and equity model, while the RAV financing and the Sea-To-Sky deal are progressing through the bank market. Indeed, the sponsor appointed two banks – Depfa and Nord/LB – to look at a possible bank debt solution.

Okanagan Lake Crossing, recently renamed the William R. Bennett bridge, is a floating bridge that runs from Knox to Kelowna. It was built in 1958, and carries Highway 97 over Lake Okanagan to Kelowna, a town of 100,000 inhabitants and a tourist destination in its own right. The route is the most congested in the province outside of the southwestern corner and Vancouver. The new structure would be five lanes wide.

The province issued a request for expression of interest on 28 October 2003, with a deadline of 25 November that year. It then issued a request for qualifications on 30 December 2003 and a request for proposals (RFP) on 1 June 2004. The RFP was open to Bouygues Travaux Publics, Okanagan Bridge Group (led by Flatiron Constructors) and SNC-Lavalin, although Bouygues pulled out by 8 December and the final shortlist.

The formal announcement of a selection came, as is British Columbia's habit, at the same time as financial close, although according to sources familiar with the financing, SNC-Lavalin had at least a month before the announcement to act as a de facto preferred bidder. It worked on both a bond and a bank solution in parallel, since a range of possible ratings between that of the sponsor (BBB) and that of the province (AA), were possible, and only those in the upper reaches would be suitable for the institutional market.

Between the initial request for expressions of interest and the final announcement, the cost of the bridge increased from an estimate of C$100 million to $C144 million. The Provincial government expects to pay the consortium C$179 million over the 30-year concession, and says that it would have cost it C$195 million using the conventional method. It says that the higher price tag can be explained by rises in the price of concrete, steel, and fuel.

The province's public sector unions have been vociferous in their criticism of the deal, and have pointed to smaller listed increases in the prices of raw materials. Certainly, simplistic criticism of the relative costs of sovereign and project finance borrowing seems to be behind both union criticism and the province's reticence.

There are certainly some technical challenges to overcome, starting with the bridge being a floating structure. There are few of this type in existence in North America, and the sponsor has had to put up more equity, and agree to stricter distribution tests, than would normally be the case for a transaction such as this, according to a (heavily redacted) report from Standard & Poor's.

The report also notes, however, that upon completion of construction, 80% of the expenditure of the project company goes towards fixed-rate debt service, with the remaining 20% on ongoing maintenance and operations. Thus is 20% of the availability payment from the province indexed to inflation. Availability payments make up 84% of the province's obligations, with 14% linked to volume and 2% to performance. These last two thus are primarily concerns for the equity provider.

Construction on the bridge is thus entrusted to a joint venture of SNC-Lavalin and CMI OKB, backed up by a letter of credit from a highly-rated domestic bank. The joint venture will be responsible for putting the new bridge in place by late 2008, and for decommissioning the old structure.

The high rating as well as, it should be noted, the relatively small size of the concession, was the main factor in approaching the institutional market. Nord/LB and Depfa received compensation for their services in the form of co-financial advisers, along side SNC-Lavalin Capital. Sun Life, which subscribed to the largest part of the issue, took the title of administrative agent on the 27-year issue.

The project closed at roughly the same time as the 23-year bank financing of the Sea-To-Sky project (search 'Sea-to-Sky' for more details), also in BC. Sea-To-Sky is much larger, at well over C$500 million, but there is every indication that the competition on both price and tenor between the two is very keen. The sponsor has not released the names of the legal and technical advisers on the deal, citing the province's policy on financial disclosure.

Okanagan Lake Concession LP
Status: Closed 29 June 2005
Size: $144 million
Location: Kelowna, British Columbia
Description: P3 financing of floating bridge
Sponsor: SNC-Lavalin
Debt: $157 million
Administrative agent: Sun Life
Financial advisers: SNC-Lavalin Capital, Depfa Bank, Nord/LB