Delegates attending a recent panel discussion on innovative financing schemes for global P3 projects were told there are often valuable lessons Canadian P3 participants can learn from international projects no matter how exotic the foreign financing strategies seem to be.
Two panellists addressing delegates on day two of the Canadian Council for Public-Private Partnerships conference held in Toronto Nov. 19 and 20, Matthew Jordan-Tank, a director with the European Bank for Reconstruction and Development (EBRD) and Mike Discenza, CFO of Transurban North America, discussed recent P3 financing experiences in Turkey and the U.S. state of Virginia respectively.
Jordan-Tank laid out a complicated financing arrangement orchestrated by the Government of Turkey to get the Eurasia Tunnel under the Borphorus Strait in Istanbul built in the early part of this decade. A key piece of the build-operate-transfer deal on the tolled tunnel was a unique component of the P3 contract that guaranteed minimum revenue and profit-sharing for elements exceeding guaranteed revenue. Another part of the puzzle was how the Turkish government, keen to keep the project on track amidst foreign exchange uncertainty, agreed to absorb that exchange risk.
Those aggressive commitments from the public owner spoke volumes to its project partners including the EBRD, said Jordan-Tank.
“That type of approach by the Turkish government shows strong backing for an essential piece of infrastructure,” he said. “What I have seen at this conference is there is a lot of concern about how to handle risk. When it comes down to it, it is all about the long-term trust in your public partner.”
Discenza discussed two frustrating experiences his firm had recently as it tried to put together financing for two highway projects in Virginia, and also compared notes with another panellist, Canada Infrastructure Bank (CIB) president and CEO Pierre Lavallee.
Two projects Transurban previously worked on obtained federal TIFIA (Transportation Infrastructure Finance and Innovation Act) financing and recently the firm contacted TIFIA officials to work on financing packages for two other projects linked to the first two builds, the extension of the I-95 Express Lanes and the Capital Beltway.
In both instances, the experiences were similar, with TIFIA proving to be rigid, inflexible and slow-moving. In the end, Transurban gave up and went to private sources.
“After many, many months it felt like we were moving goalposts on the credit underwriting standards, and there was an uncertain timeline to get to a definitive answer, so we ultimately just said life’s too short, we have to get to the end, and we ended up doing a private activity bond instead,” Discenza said of one of two frustrating outcomes.
Transurban is becoming active in Quebec and so, Discenza said, he was interested in how the CIB conducts its business.
Lavallee contrasted the CIB model with that of TIFIA.
“We have the flexibility to inject our capital where it makes the most sense for each individual project, from equity up to senior debt, as opposed to having a template that we try to replicate 20 times,” he said, explaining that not only is CIB financing variable but the bank is willing to negotiate on other elements of a P3 package.
That earned praise from Discenza.
“You can’t beat their rates,” he said of TIFIA, “but it’s the other commercial terms and conditions that mitigate that benefit of a headline rate and compresses the value delta between the alternatives you can get in the debt market and TIFIA. So, it (the CIB) is a little more nuanced and I am glad to hear you are not just focused on rate because that is only part of the story.”
Later, panel moderator Vickie Turnbull, a managing director with RBC Capital Markets, asked Andrew Hay, senior principal for infrastructure with the Canada Pension Plan Investment Board (CPPIB), if innovations in financing would expand the P3 market in Canada.
Hay looked to Australia as he described three reforms that could be taken in Canada to attract large institutional investors like the CPPIB.
One, he said, create a defined pipeline of projects — he was talking about 10, 20 or 30 similar projects coming to market.
“That can bring a lot of talent and capital to the region who are analyzing for the longer term and there is a greater commitment to it,” Hay said.
Another step could be reassessing risk transfer — getting risk into the hands of the party that can best manage it. Australia has a model called asset recycling where the government acquires property, de-risks it, sells it and uses the proceeds to buy the next property.
“It doesn’t go into general revenues so the people can see that the sale of the businesses is going to benefit society,” Hay explained.
A third and most important step Canadians could take, Hay said, would be to create a predictable, long-term regulatory regime. The initial focuses should be on how developers’ interface with parties like TIFIA or the CIB, he said, and on creating rule-of-law legislation and taxation reform.
“All of these issues go to creating a stable, attractive investment platform for large-scale equity and capital,” said Hay.
Follow Don Wall on Twitter @DonWall_DCN.