British Columbia is instituting a series of temporary financing measures to keep public-private partnership (PPP) projects going in the Northwest Canadian province.
The province aims to make it easier for PPP deals to reach financial close by making public loans available to PPP projects, sharing in their refinancing risk and welcoming a larger proportion of equity in their capital structures.
The measures were outlined in a recent presentation by Partnerships BC, the government-owned PPP implementation body. “We view them as temporary credit measures that take advantage of the province’s credit rating in order to reduce the cost of project finance in these credit markets,” Larry Blain, chief executive officer of Partnerships BC, told InfrastructureInvestor.
We're just facing market realities. To do PPPs, we have to make sure that they are within our affordability
The province has a AAA credit rating and a much lower cost of borrowing than the private sector, thus making it possible for project sponsors to achieve a lower overall cost of capital for their projects if they involve the province in financing.
“We’re just facing market realities. To do PPPs, we have to make sure that they are within our affordability,” Blain said. He added that credit spreads overall are getting better but financing projects remains difficult for many banks – especially for multi-billion dollar PPP deals.
Earlier this year, negotiations stalled over the province’s Port Mann bridge project because banks were unable to syndicate all of the C$2 billion (€1.25 billion; $1.75 billion) of debt required for the concession-based procurement. So the province stepped in and offered to co-lend with the banks on the same terms, providing 49 percent of the debt required, or about C$1.1 billion.
“As it turned out we couldn’t consummate the deal there,” Blain said. The Port Mann highway project eventually proceeded, but as a traditional design-build procurement as opposed to a concession.
The next project in Partnerships BC’s pipeline, the C$300 million Fort St. John Hospital and Residential Care Project, will also benefit from these temporary credit measures. That project, which is expected to reach financial close this month, features a 30-year concession agreement, which, means that its sponsors would face refinancing risks for shorter-lived seven-year debt over the term of the agreement.
The province offered to share some of the refinancing risk, Blain said, but was not able to reach agreement, so it reverted to another temporary credit measure – providing capital to the project directly through so-called “milestone” payments. The payments are periodic grants given to a project by the province over the life of the concession. The Ft. St. John project will feature milestone payments as well as a larger-than-usual equity contribution of 20 percent from the preferred proponent, as opposed to the usual 10 percent, Blain said.
Partnerships BC terms this financing structure “wide equity”, and says it is being considered for other projects currently in procurement. “By doing this, we are increasing probability that we can bring in banks and lenders and meet our affordability constraints,” Blain said.
The goal is to return to a traditional private equity and senior debt capital structure for these kinds of projects, he added.
To date, Partnerships BC has helped implement 30 PPPs under various agreements collectively worth $10 billion. Of that, $4 billion has come from the private sector.