A Ledcor-led consortium has completed financing on the third PPP deal to close in Canada - and the first to close since 1999 - the Sierra Yoyo Desan road. PPP in the country has long held out promise - and long been short on results. This C$40 million ($32 million) deal should be the stimulus the market needs - particularly in British Columbia, which now has the country's most ambitious programme.

The concession is an unusual one - unusual in that it already operates under a form of partnership with the private sector. The Sierra Yoyo road runs for 188km in the far north-east of the province, in a sparsely inhabited region. Its main users are the oil and gas producers that operate in the area. They pay the Ministry of Mines and Energy to use the stretch, but their vehicles have worn the road.

The provincial government began to bid out a new concession on 26 June 2003, issued a request for proposals on 29 September, and selected a preferred proponent on 15 December 2003. Ledcor Projects, the ultimate winner, has a 16-year concession, including a 2-year construction period, to operate the road. Partnerships British Columbia, which has been established to further PPP in the province, assisted in the selection process.

The bulk of the concession involves the building of a bypass around Fort Nelson, the largest settlement in the area, which sits on the Alaska Highway. A 15km section of this is under the jurisdiction of the Ministry of Transport, while the remainder, although open to the public, is largely a means of opening up the far north-west to oil and gas exploration. Indeed, the genesis of the PPP lies in British Columbia's Oil and Gas Strategy.

The Road Users Group, an organisation of 50 oil and gas players, is one of the most enthusiastic users of the road - their demands on the surface since 2001 have been one of the main reasons for the new concession. And while the government has laid off to the sponsors the $40 million upfront cost and $2.5 million yearly maintenance costs, it will be reimbursed by fees paid by the corporate users. In turn, the users will receive a rebate on royalty payments.

The new 21km bypass will be accompanied by a widening and upgrading of the existing road, as well as the construction of new bridges. These are essential for year-round access, although during winter a more direct route can be taken over the thick ice that covers this part of the province. The road has a gravel surface, since a paved surface would be extremely vulnerable to the elements and almost impossible to maintain.

The risks related to design, construction, and environmental permitting are now assumed by Ledcor. Force majeure and regulatory risk are still in the hands of the province, while operations and maintenance costs above an agreed limit are also Ledcor's responsibility. At the end of the concession the road reverts to the government. The existing contract with Walter Construction, which built the road, ended in November 2003, while construction of the road surface has already started.

Ledcor ran a competition for an advisory-to-arranging mandate, and CIT was named as the winner. CIT has thus been involved in the creation of the concession structure and gains a useful advantage in future bids. Indeed, the BC government's shortlist system, while requiring banks to line up behind consortiums in advance, at least ensures as much lender involvement in concessions as possible.

The concession, loosely based on that for a UK road PFI, is one with which CIT would be familiar. While the BC government could claim that its share of the concession payments would be funded by private users, as far as the lenders are concerned the project is a provincial credit. Given that the project has achieved a reasonable level of risk transfer, the deal will probably be off the government's balance sheet.

The financing gives an indication of how the Canadian PPP funding market will develop. CIT placed the debt backing the concession with itself and Sun Life Assurance Company of Canada. The debt, according to published reports, has a 16-year final maturity, an average life of 9.5 years and is priced at 125bp over the comparable Government of Canada 10-year bond.

For a first deal this pricing is keen, and illustrates the hunger for quality infrastructure assets at Canadian institutions. Since banks are not likely to go beyond seven years in tenor, those arrangers with a convincing private placement capacity, or foreign banks with Canadian dollar holdings, will dominate the market. Canadian banks are likely to be confined to advisory-to-bond mandates, according to the (admittedly self-interested) outside players.

And the concession is likely to be replicated on future deals, particularly the tripartite discussions between government, sponsor and lender. The Sea-To-Sky, Okehaugan Bridge and resurrected RAV financings may borrow from the deal. And on its first PPP deal, British Columbia has demonstrated the will to go ahead with the scheme.

The next deals, however, are likely to be in Ontario, where CIT is preparing financings for the William Osler and Royal Ottawa Psychiatric hospitals. Lenders and sponsors wait for a final approval from a provincial government that is much less enthusiastic about PPP than British Columbia.

Sierra-Yoyo-Desan Road

Status: closed 30 June 2004

Size: C$40 million

Location: Fort Nelson, British Columbia

Description: 188km road concession, based on user fees from oil and gas producers

Sponsor: Ledcor

Debt: $34 million

Underwriter: CIT

Independent engineer: Amec

Financial advisers to province:

KPMG, Partnerships British Columbia

Legal counsel to province: Fraser Milner

Legal counsel to lenders:

Blake, Cassels & Graydon