Infrastructure has traditionally taken a back seat in Canadian project finance ? with the utilities and oil sectors providing the most deals. But changes now underway at both federal and state level may pave the way for a surge in infrastructure-related deals over the next few years.

It is tempting to think that the implementation of initiatives such as Public Private Partnerships (PPPs) mean that there will be an explosion of opportunity for project financiers in Canada, but that may be being overly optimistic. ?We are only a small country [the total population is around 30 million, 10 million of which live in Ontario],? warns one financier. ?There are only so many deals to be done.?

To date, there have only really been four infrastructure deals of any size in Canada. They include the C$2 billion redevelopment of Toronto's airport, the C$4 billion development of Highway 407 in Ontario, the construction of Confederation Bridge, which links Prince Edward Island with New Brunswick and the C$3 billion privatisation of NAVCAN, Canada's air traffic control system. NAVCAN was the first of these deals to go through and was signed off in December 1996. It was a landmark transaction ? marking the first ? and still the only ? privatisation of an air traffic control system worldwide. The structure was fairly simple. NAVCAN raised finance via a non-recourse term loan, which enabled it to buy the air traffic control system from the government. There was no equity participation in the deal. The debt was secured on certain income flows to NAVCAN ? namely terminal charges and navigation and communication charges. During the first two years of private control, the Canadian government guaranteed revenue of C$1.44 billion to NAVCAN. The deal was arranged by Royal Bank of Canada and sold down to nine co-arrangers ? all big name project finance banks: Bank of Montreal, CIBC, Societe Generale, Chase Manhattan, JP Morgan, Bank of Nova Scotia, Toronto Dominion, National Bank of Canada and Dai-Ichi Kangyo Bank.

Confederation Bridge was completed in 1997 to provide a 13km connection between Prince Edward Island and the mainland. It was built, managed and operated on a 35-year concession by the Strait Crossing Development Company, sponsored by GTMI (Canada), Strait Crossing Inc and Ballast Needam Canada. The deal was an early example of the implementation of PPP deals in Canada, as the federal government makes an annual subsidy payment for the full 35 years of the concession. This payment services the repayment obligations on the project bonds that were issued to finance the original construction.

The privatisation of Ontario's Highway 407, which was signed off in October last year, was an altogether more ambitious project. Highway 407 is the first all-electronic open access toll highway in the world. A private consortium bought the existing 69km of Highway 407 and will design, own and operate an additional 15km eastwards and 24km westwards. The 99 year concession was bought by a consortium known as ETR International, which includes SNC Lavalin (23%), Concesiones de Infrastructuras de Transporte (Cintra) (61%) and Capital d'Amerique CDPQ (a subsidiary of Caisse des Depots et Placement du Quebec) (16%). Initial financing involved a C$2.45 billion bridge facility which was split between a C$2 billion senior bridge loan, a C$300 million senior bridge loan and a C$150 million subordinated bridge facility. The tranches were co-arranged by Bank of Montreal, Royal Bank of Canada and Citibank Canada. Two C$400 million fixed rate bonds and a C$300 million fixed rate bond were lead managed by Nesbitt Burns. The deal is hailed as the start of PPP (or P3) in Canada, but was more a straightforward privatisation. ?This was a clear monetisation of an asset,? says Adam Newman at TD Securities in Toronto. ?It was very well-received in the market.?

ETR replaced its short term bank debt in March 2000 with longer term financing. It raised C$430 million seven-year debt with a coupon of 6.9% to replace the bank debt, which was priced at between 6.3% and 7.8% for the senior tranche and between 9.55% and 9.6% for the junior tranche. The 2007 bonds were sold as structured notes, under which the investor has an option after one year to exchange to 2030 paper if they so wish. The financing was managed by Colleen Campbell, executive managing director debt capital markets at Nesbitt Burns, who reckoned that the deal would have been impossible five years ago as there wasn't the depth of interest in corporate securities in Canada.

The redevelopment of Toronto's Lester B Pearson Airport is an enormous exercise, and one which could throw up a number of new infrastructure projects in the future. This is certainly not the only airport development deal in the country ? indeed there are a number of privatisations of the smaller Canadian airports now underway. Halifax International Airport was privatised in a C$85 million deal in December 1997 and Quebec Airport is now following suit with a C$40 million transaction. Both consortia were advised by PriceWaterhouseCoopers. PriceWaterhouseCoopers is also advising the $15 million sale of the tiny Regina Airport in Saskatchewan. The province of Ottawa is also in the process of selling its main airport ? the MacDonald Cartier International Airport for C$85 million. C$14 million financing for the deal has been arranged through CIBC. The Toronto project involves the complete redevelopment of terminals one and two at the airport by the Greater Toronto Airport Authority (GTAA), which took over control of the airport on a 60-year lease when the airport was privatised in 1996. Redevelopment of the terminals will entail the reconfiguration of the two highways leading to the airport ? highways 409 and 427. There is a third terminal, which was purchased by GTAA in 1997. Initial financing for the project was raised via a C$950 million GTAA bond issue at the end of 1997. A further C$500 million was raised through an issue of 30-year bonds at a coupon of 6.45% in July 1999. Bookrunner for that deal was Nesbitt Burns and it was sold down to a syndicate of seven banks. As the redevelopment of the airport progresses, however, it is in danger of turning into a political hot potato as costs begin to escalate.

The deal could set a bad precedent as the relationship between the GTAA and its stakeholders breaks down. The full costs of the expansion now run to between C$4.4 million and 5.8 million, much to the fury of the airport's biggest tenant, Air Canada. The airline went as far as filing a lawsuit against GTAA in February 1999, saying that they had abused their monopoly position. Its position was supported by IATA, which said that the GTAA had not adequately involved the airlines and seemed unconcerned about the cost of the project. The row about Toronto's airport could have a negative impact on future projects, as it starkly reveals the inability of the government to regulate privatised airport authorities. ?They are spending a lot of money on the airport and they need to justify it,? says Cliff Inskip, managing director of debt capital markets at CIBC World Markets in Toronto. ?The amalgamation of Air Canada and Canadian Airlines is causing airports across the country to assess their optimal level of infrastructure spend.?

The airport redevelopment has raised the possibility of another large infrastructure project in Toronto: a high-speed rail link between Union Station and the airport. ?This project is still at the discussion stage and there is no firm proposal as yet,? explains Philip Lieberman, associate director investment banking at Scotia Capital. Canada's transport minister, David Collenette, has said that since the costs of redevelopment of the airport are being met by the private sector, then so should the costs of the rail link. Collenette says that he has already been approached by several private sector groups and finance houses for the project.

Infrastructure deals may not be the bread and butter of many project finance departments in Canada today, but one decision could change all that overnight. Toronto is bidding to host the 2008 Olympic Games, and if it is successful the business environment will change overnight. ?If Toronto gets the Olympics there will be a huge number of infrastructure projects as a result,? says Lieberman. Another catalyst will be the proposed redevelopment of Toronto's Waterfront district. The City of Toronto has created a task force to assess the requirements of the area, and the project could generate some large private infrastructure projects. ?This project is in its early stages and will encompass a widescale redevelopment incorporating transportation links and condominiums,? says Inskip at CIBC. ?The expectation is that there will be private money involved. The latest figures for the size of the whole project run to $14 billion.?

The potential for infrastructure projects has also been greatly improved by the implementation of PPP (or P3) in Canada ? although the process is still some way behind the UK. The Province of Ontario has embraced the initiative with the most enthusiasm. In its 1999 Budget, it announced the formation of the SuperBuild Corp. This is a body that has been created to oversee the distribution of public funds for infrastructure projects. The idea behind SuperBuild is that the corporation will match private funds with public money in order to get infrastructure projects off the ground. SuperBuild plans to inject C$20 billion into capital spending over the next five years. In many ways the role of the SuperBuild Corp can be seen as similar to that of the controversial Partnerships UK (PUK) body that has recently been formed in the UK. ?While SuperBuild Corp can be seen as similar to PUK, it is anxious not to be seen as a fund,? explains Philip Lieberman at Scotia Capital. ?The corporation will not go out and source deals, it will wait for projects to approach it. It will then assess whether the project is suitable for the infusion of province monies.?

In addition to SuperBuild, there are signs that the government in Ontario is taking a more proactive stance in infrastructure development at the federal level. It has recently launched a new Canada Works programme designed to leverage federal, provincial and private money targeted specifically at water, sewerage and highways. Leiberman, who has met with representatives from the new programme, describes the government as ?open to variations on the P3 concept.?

SuperBuild Corp has already financed a couple of small P3 deals for Universities and Colleges that meet its criteria. But its very existence demonstrates the potential and need for infrastructure spending in the province. Other projects can also apply to the corporation for money ? for example, The Municipality of Kincardine has submitted a request to the SuperBuild Corp for C$100 million infrastructure investment to bring natural gas from Canada's main pipeline near Barrie to the Bruce Energy Centre in Ontario. In Nova Scotia, the City of Halifax has drawn up a C$315 million scheme to clean up its sewage-choked harbour. The deal will be a P3 project, and three private consortia have already been shortlisted. The plan entails building up to five water treatment plants over 10 years with ownership transferred to the municipal government through a payment schedule. But there have also been some small P3 deals coming through all over Canada. For example, the first P3 drinking water partnership was recently concluded in the City of Moncton in New Brunswick with the construction of a C$23 million water treatment plant. The plant was built by USF Canada and The Hardman Group, and has been leased to the city for 20 years. A public-private partnership has also been announced that will bring high-speed internet access to rural Yukon communities.

There are also signs of some innovative deal structures coming through. Scotia Capital markets launched the country's first special purpose trust to securitize cash flows from infrastructure projects last June, known as the Borealis Infrastructure Trust. The first deal under the programme was for the construction of 15 new schools in Nova Scotia. It was a C$162 million issue which carried a 6.35% coupon. The deal was rated triple-A, as agreements with the government make the rental stream unconditional and irrevocable. Lieberman, who worked on the deal, expects to see more of the same in the future. CIBC World Markets expects to sign the first pooled financing for Ontario school boards at the end of the first week in June. The C$200 million deal is being issued by the newly-formed Ontario School Boards Financing Corp (OSBFC), which should become a regular issuer. The bonds run for 25 years and are priced at 7.2%. ?The objective is to create larger, more liquid issues by pooling the issuers,? explains Inskip. This deal involves nine separate school boards.

But P3 does face problems in Canada. ?The reality is that the UK is much more advanced than Canada in driving the P3 concept,? says Lieberman at Scotia Capital. He adds that Canada has the problem of dealing with many provincial governments rather than just one national government [as in the UK]. At the recent conference arranged by the Canadian Council for Public-Private Partnerships, many local businessmen lamented the slow pace of progress in Canada. ?We are being outpaced by countries who recognise the advantages of private participation in infrastructure, either through foresight or necessity,? declared Jacques Lamarre, president and ceo of SNC Lavalin. Indeed, the consortium that built highway 407 has had to go overseas for another such sizeable project ? to Israel. There have been calls for more government involvement ? and the establishment of a ?Team Canada? approach to reinvigorate the programme. There is a strong resistance to the programme in the country ? many cynically refer to such deals as ?Public-Patronage Partnerships? and CUPE, the Union of Public Employees is outraged. Indeed, during PUK representative Adrian Montague's speech to the conference, a protest was being staged by CUPE employees outside the conference hotel.

?We expect that there will be numerous transactions involving the private sector in areas of traditional government delivery,? says Inskip. ?But this does not mean that there is going to be a huge groundswell in these projects in the same way as there has been in the UK.? The main problem is the many layers of government that Canadian transactions involve. Inskip explains that this, together with the differences in legislation from province to province, make P3 deals very complex.