New sources of long-term concessions are emerging in Canada. The federal government has closed two deals, while cities, including Calgary and Toronto, are moving forward with their own municipally procured projects. Provincial authorities, while they may still rule the public-private partnership (PPP) market, are no longer sponsors’ only source of projects.

There are at least nine non-provincial concessions either in development or procurement in Canada. The Toronto Port Authority has an outstanding request for proposals for its roughly C$50 million pedestrian tunnel project, while Calgary is awaiting final approval to launch its C$400 million ($413.8 million) package of recreation centres. Together, the cities of Abbotsford, Ottawa, Toronto and Victoria, as well as the federal government, have more than C$7 billion worth of projects in development.

“Municipal is the area for the biggest potential growth,” says John McBride, chief executive of P3 Canada. “Municipalities are particularly very pragmatic at looking at what is the best value for money solution for their taxpayers. If you’d told me 12 months ago that Toronto would be looking at doing subways as PPPs, I would have told you – not possible. [The pipeline] is multiplying the conversations that are happening.”

P3 Canada is the federal crown corporation charged with advising governmental entities on PPPs as well as administering grants from the C$1.2 billion P3 Canada Fund. It advised Defense Construction Canada (DCC) on the C$1.13 billion Long-Term Accommodation Project (LTAP) in Ottawa and has awarded three grants of a total of C$75 million to the C$109.6 million Chief Peguis Trail extension in Winnipeg, the roughly C$200 million Maritime Radio Communications initiative in New Brunswick, Nova Scotia and Prince Edward Island, and the C$119 million Lachine Train Maintenance Centre outside Montreal. While not a grantor, the crown corporation has become the de facto go-to agency for advice on PPPs for grantors outside provincial governments.

Market participants see the federal government and municipalities as two big potential sources of concessions. The federal government, for instance, is set to enact a fiscal year 2011-2012 budget that includes a stipulation that all capital projects over C$100 million be screened for their suitability for procurement as PPPs.

Federal screen

Prime minister Stephen Harper’s inclusion of language re­quiring a PPP screen in his budget is potentially significant. McBride estimates that the federal government launches five to 10 projects that cost more than C$100 million annually. This means that if just 20% of those are found suitable, there could be at least two big-ticket projects coming out of Ottawa every year.

“It’s a sensible way to do things,” says one Canadian project lender on the proposed screen. The process, notes the lender, is similar to how British Columbia’s provincial government enacted a screen before its concessions pipeline picked up. P3 Canada will conduct the federal screen, and McBride says he expects to begin reviewing projects in the third quarter. He adds that defence, federal corrections and border control projects are, at least initially, likely to be the most suitable for PPPs.

The screen comes on the back of two successful deals – LTAP and the C$195 million Royal Canadian Mounted Police E division headquarters. The market received both projects well, with LTAP setting a new low for PPP project bond pricing. Sole underwriter Royal Bank of Canada priced the C$839.6 million 33-year tranche at 200bp over the equivalent government of Canada bonds and the C$167.4 million five-year tranche at 113bp over GoC, the tightest spreads since 2008. The deal closed on 31 January.

DCC awarded the 33-year design-build-finance-maintain (DBFM) concession to Plenary in October 2010. The project includes construction of a new 84,000 square-metre office building and 800-space car park for the Com­mu­ni­ca­tion Security Establishment of Canada in Ottawa. In addi­tion, the project is notable for its security restrictions that stipu­late that all investors and bondholders be from so called Five Eyes nations – Australia, Canada, New Zealand, the US or UK. Despite the restrictions, the bonds were extreme­ly popular in the market, with more than 30 investors coming in at close.

The first project on P3 Canada’s desk, however, will prob­ably not involve internal or external security. It is likely to be the $2.2 billion Detroit River International Crossing (DRIC), also known as the New International Trade Crossing, between Windsor, Ontario and Detroit, Michigan in the US.

Transport Canada has offered to lend $550 million to Michigan for its contribution to the project. It did so after it became clear that the bridge could not move forward without a financial commitment from the US state. How­ever, state legislature must still approve the PPP. Even if it is approved, it is not believed to be viable as a real toll concession and an availability payment stream has yet to be identified.

DRIC would connect the Windsor Essex Parkway in Ontario to a new US immigration facility and I-75 on the Michigan side of the Detroit River. Whether the Michigan Department of Transportation or Transport Canada would procure the project remains to be determined. The Windsor-Essex Parkway was procured as a provincial-level PPP, and a project company sponsored by Acciona, ACS and Fluor is currently building the road.

Whatever happens with DRIC, Canadian federal avail­ability-based projects will be well received. The federal government has a AAA/Aaa sovereign rating from Fitch and Moody’s, respectively, which allows spon­sors to close on competitively priced non-recourse project debt. While few expect any innovative concession or financ­ing structures for these deals, one Canadian banker who looked at the LTAP deal noted that the grantor insisted on a flat annual availability payment stream. This requirement added some complexity to the final financial terms.

Municipal hodgepodge

“Municipal deals are more of a hodgepodge,” says one sponsor that is active in Canada. While the local-level entities build significantly more projects – many more than the federal government could ever procure in a year – many are too small or lack the necessary guarantees and docu­mentation to be procured effectively as a PPP.

Lenders estimate that a project needs to be at least C$80 million to C$100 million to be cost-effective as a long-term concession. They say the cost of advisers and contract preparation is prohibitive.

Water and waste assets are probably best suited to long-term concessions. Many market participants point to the ease of setting up user-pay revenue streams, proven risk allocation models and their total cost. For example, Moncton, New Brunswick, closed a design-build-finance-operate (DBFO) concession with Veolia for its primary municipal water treatment facility in 1999. Today’s pipeline includes pending projects in Abbotsford and Victoria, British Columbia.

Abbotsford wants to procure the proposed C$284 million Stave Lake water supply and treatment project as a PPP. The local city council approved an application for a P3 Canada Fund round two grant, valued at roughly C$66.5 million, for what would be a long-term design-build-finance-operate-main­tain concession, in April, and the status of that application could be known as soon as this month. Following that decision, procurement could begin. Deloitte is advising the city.

Victoria is further from the market. Local officials are de­bat­ing how to procure the roughly C$250 million McLoughlin Point secondary wastewater treatment plant and a roughly C$227 million biosolids processing facility at the city’s Hart­land landfill facility, both of which are are part of its Core Area Wastewater Treatment Programme. The Core Area Liquid Waste Management Committee recommended that McLoughlin be procured as a design-build contract and Hartland a long-term DBFO concession in 2010.

However, a market-sounding study by financial adviser Ernst & Young earlier this year found sponsor interest in a bundling the facilities in one long-term concession. The grantor has yet to make a decision on how to proceed, though it is expected that Partnerships BC would handle the procurement if the PPP model were selected. Alberta Infra­structure, is seeking proposals for the Evan-Thomas water treatment project, located in Kananaskis county.

Other municipal assets, like a recently-proposed sports stadium project in St Catherines, Ontario, can be difficult to structure as PPPs. At C$56 million, it is likely to small to be procured cost-effectively as a long-term DBFO concession and probably better suited as a municipally-funded DB project. Transit projects are similarly difficult, due to their high public visibility and need for significant levels of public subsidies. While many point to British Columbia’s Richmond-Airport-Vancouver rapid transit PPP as a good template, no similar projects have since closed in Canada. Toronto’s proposed C$4.15 billion Sheppards Avenue subway extension PPP is already struggling.

Gordon Chong, chief executive of Toronto Transit Invest­ment, the municipal entity created to manage the Sheppard project, has said that the city could only expect private investors to contribute up to 40% – or up to C$1.66 billion – of the extension’s total cost. Metrolinx, the regional transportation authority, could make a C$650 million contribution, but Toronto mayor Rob Ford has repeatedly said that the city will not raise or implement any taxes or tolls to finance the project, so the project faces at least a C$1.84 billion funding gap. While a P3 Canada Fund grant could cover another roughly C$1 billion, another C$800 million or more would still need to be found. That Toronto, Canada’s largest city, faces such significant financing difficulties does not bode well for transit projects elsewhere, included rumoured light rail PPPs in Ottawa and Victoria.

On top of it all, financing for municipal projects will not be cheap. Lenders see them as riskier counterparties than provinces or the Canadian sovereign. This is likely to trans­late into shorter maturities and wider spreads.

Provincial leverage

Provincial PPP bodies can help municipalities procure more unusual or untried assets. Alberta, British Columbia, Ontario and Quebec all have lengthy track records struc­turing long-term concessions and both sponsors and lenders are used to working with them.

Calgary has adopted this strategy for its recreation centre package, for which Deloitte is adviser. Karen Young, mana­ger of the PPP recreation facility project for the city, says it has adopted the documentation used by Alberta for its road and school concessions in order to ease the process. “The [Calgary] deal is big enough to get a lot of people interest­ed,” says a lender. “The provincial documents provide some additional comfort.”

The 25- to 30-year availability-based DBFOM concession includes four recreation centres located throughout the city. Two are small facilities valued at roughly C$50 million each and two are large ones valued at roughly C$150 million each. Calgary has allocated C$150 million towards the pro­ject and applied for a P3 Canada Fund grant of up to C$100 million. Regular availability payments for capital and oper­ations and maintenance costs would be made to the concessionaire, though programming would be split into a separate contract where a non-profit entity, such as the YMCA, would bear full revenue risk for activities at the centres. A request for qualifications could be issued in the third quarter if the city council approves the PPP on 29 June.

Calgary and Abbotsford are the most likely to enter procurement this year, with a targeted 2012 close. Victoria will not come to market until the city decides upon a deal structure. At the federal level, progress on the DRIC is dependent on action from Michigan, and the PPP screen is unlikely to produce projects until 2012 at the earliest. n