Indigenous and Northern Affairs Committee on May 14th, 2015

[The Chair, Conservative, Blake Richards]

We will call the meeting to order this morning. Welcome, everyone, to the 42nd meeting of the Standing Committee on Aboriginal Affairs and Northern Development.

We have with us this morning from PPP Canada Inc., Michael Mills, vice-president of investments.

Mr. Mills, you have the floor for 10 minutes to make some opening remarks. Then we will turn to questions from members.

[Michael Mills, Vice President, Investments, PPP Canada Inc.]

Thank you.

It's my pleasure to be here today on behalf of PPP Canada to answer any questions you may have with respect to access to capital and the challenges and opportunities therein on reserve, and to look at how the use of public-private partnerships could be a way of addressing some of these issues for first nations on reserve.

Let me begin today by explaining a little bit about what P3s are in general, and the role of PPP Canada in supporting P3s.

Public-private partnerships are a long-term performance-based approach to procuring public infrastructure that can enhance the government's ability to hold the private sector accountable and to transfer risk.

P3s transfer a major share of risk associated with infrastructure development, such as the costs associated with overruns, schedule delays, unexpected maintenance, and/or latent defects. This is accomplished by engaging the private sector in a bundled contract for the whole life of the asset. This contract connects ongoing operations and maintenance payments to the ultimate performance of the private sector partner.

PPP Canada's role is to facilitate the execution of P3 projects by acting as a source of expertise on P3 matters through knowledge development and sharing. The crown corporation also provides expertise and advice in assessing and executing P3 opportunities at the federal level, as well as leveraging greater value for money from Government of Canada investments in provincial, territorial, municipal and first nations infrastructure through the P3 Canada Fund.

The P3 Canada Fund was created to improve the delivery of public infrastructure and provide better value, timeliness and accountability through the effective use of P3s. The P3 Canada Fund is a merit-based program, designed to incent innovation in P3s as well as encourage inexperienced governments to consider P3s in public infrastructure procurements. It is the first infrastructure funding program anywhere in Canada that directly targets P3 projects.

To date, $1.3 billion in investments has been announced for more than 20 P3 infrastructure projects across 8 provinces and territories. These projects will, in turn, generate more than $6.5 billion in public infrastructure investments in every part of the country.

There's often confusion, when speaking of P3s, related to funding and financing of projects in particular. To be clear, financing a P3 project is not funding a P3 project. P3s are not a source of funding or capital for procuring authorities. Funding is the source of resources or money that will ultimately pay or be used to pay for such projects. These ultimately come from public sources such as fees and tolls, properly taxes, general tax revenues, and in some cases, private revenues and contributions from senior levels of government.

The P3 approach does replace a fiscal commitment to address infrastructure needs. There will always be an obligation to repay the private financing over the term of the P3 contract.

In Canadian P3s, the repayment of capital and maintenance combined are an availability payment that is subject to deductions for non-performance. In practical terms, this means governments do not pay for the asset until it is built, and a substantial portion is paid for over the life of the asset but only if the performance is met.

The costs are known up front for the life cycle of the asset, meaning that taxpayers are not on the financial hook for cost overruns, or subject to delays or other increases in cost over the life of the asset.

Security for the construction and operating period is achieved indirectly through private financing. During the construction period, the lenders can be expected to require bonding or security from their contractor. They will also perform a higher level of due diligence on projects. They will take action to complete construction and commence receiving capital payments if the contractor flounders. During the operating period, the lenders can be expected to ensure that the contractor's performance meets the project specifications and does not trigger availability payment deductions that could imperil the project and throw it into default.

A notable project in which PPP Canada is currently involved and which is creating direct economic benefits for first nations is the Kokish River hydroelectric project. This is a 45-megawatt run-of-the-river hydroelectric project on the north end of Vancouver Island, located within the 'Namgis First Nation of British Columbia. The project is a green energy project that generates enough clean and sustainable energy to power 13,000 homes, with electricity being sold to British Columbia Hydro under a 40-year electricity power purchase arrangement that provides a secure stream of payments, or funding, which are bankable.

PPP Canada's support in the form of a low-interest loan to the 'Namgis First Nation helped the 'Namgis obtain an equity ownership stake in the project. The 'Namgis own 25% of the overall project, with Brookfield Renewable Energy owning the remaining 75%. While the 'Namgis participated in the decision-making and focused on environmental safeguards and monitoring, they were able to leverage the expertise in hydroelectric development of their partner Brookfield.

The project also includes a community benefit fund for the 'Namgis with 40¢ paid into the fund for every megawatt of power that is generated by the project. This particular project created a unique arrangement between all parties involved, where PPP Canada provided a low-interest loan to allow the 'Namgis to accrue benefits sooner from its participation in the project. These benefits are also being reinvested in additional infrastructure for the community. By entering this long-term partnership agreement the 'Namgis has secured an active role as a partner in the project and this highlights how the public and private sectors can work together to improve energy and develop community infrastructure in the long term.

The success of this project is not to suggest that P3s are right for every first nation community or for every first nation project. Lenders are looking for opportunities to secure long-term revenues, which can be achieved through power purchase arrangements or other such secure mechanisms, such as first nations GST resource revenue sharing arrangements.

One of the challenges with realizing P3s in first nations communities is the inability to provide the same assurance of payment that other levels of governments can have. However, this could be achieved through looking at new mechanisms to securitize Aboriginal Affairs contributions. To help address these challenges faced by first nations, PPP Canada continues to do outreach with first nations communities and work with Aboriginal Affairs on new ways we can advance the P3 model in first nations communities.

On that note, I look forward to hearing from you and I welcome any of your questions.

[The Chair, Conservative, Blake Richards]

Thank you, Mr. Mills.

We'll now go to the first round of questioning from members. First we have Ms. Ashton for seven minutes.

[Niki Ashton, NDP, Churchill, MB]

Thank you very much.

Thank you for joining us today to discuss a very important issue for first nations across our country.

One of the recurring themes in our discussion so far has been the fundamental barriers that first nations face in terms of access to capital. I appreciate that your work is more focused in terms of the financing and development of projects, but I wonder if perhaps you could share your thoughts about how important it is for us to deal with some of those fundamental barriers, such as literacy, financial literacy, access to education, access to post-secondary, which I'm sure you appreciate is on all fronts much lower than for non-first nations across the country.

How might those barriers connect to a community's lack of capacity in terms of being able to develop key projects or push key projects that are necessary?

[Michael Mills]

Coming from the PPP Canada perspective, I think the way we could maybe look at an interface between your question and our own line of business is that these are very complex transactions and the financing structures are very complex. In order to pull these off, whether you're a municipality or a provincial government, it takes a very specialized skill set.

Anything that can be done in terms of promoting human capital development so that people can build those specialized skill sets—whether they be in public administration so that you can develop projects, having the ability to understand the technical requirements of projects, the ability to develop robust business cases, or having the business acumen to be a sound, credible counterparty to the private sector that you're negotiating with—anything that can be done in terms of education and human capital development that can help communities build those capacities would be very helpful and necessary to pulling off these transactions.

It's not a problem that's fully unique to first nations. It's a problem that many jurisdictions deal with in our line of business. That's a big part of why within the corporation we spend a lot of time working on expertise. Though we have the P3 Canada fund, which is an important source of funds and incentive for people realizing their projects, equally important is providing and serving as a source of expertise.

In the short term, while people are developing those capacities within communities, which is more of a long-term project, we would like to think that we could be there to help first nations address those kinds of expertise gaps.

[Niki Ashton, NDP, Churchill, MB]

Another barrier that's come up time and time again, certainly in terms of first nations that want to engage in private development and business development including infrastructure development, is the slow rate at which their land claims or treaty land entitlement is taking place. We've heard from a few first nations that have jumped through all the hoops and filled out all the paperwork. Their piece of land is approved as belonging to them and having reserve status, and the only barrier is the sign-off by the minister. That's a purely bureaucratic step when everything else has been done.

I know you gave an example about the island. I'm wondering if you can speak to how important it is to make sure that first nations land transactions are seen as priorities. Without that land, the kind of development that first nations want to commit to is simply theoretical.

[Michael Mills]

Sorry, I don't really have anything to add to that topic.

We haven't in our experience working with first nations really been focused on the land issues.

[Niki Ashton, NDP, Churchill, MB]

Okay.

It would seem that there may be some parallels given that a significant number of projects, particularly those that might involve partnerships and private investment, often take place in urban settings as well, on reserve land that is owed to first nations.

I might encourage you to look at that realm.

[Michael Mills]

Okay.

[Niki Ashton, NDP, Churchill, MB]

Finally, I've heard on occasion from officials with the federal government that first nations might want to look at P3 partnerships when it comes to building schools. I think that's a rather egregious proposal given that you wouldn't think of the same proposal in a non-first nation instance. I think it has everything to do with the fact that we're talking about some pretty dire circumstances in terms of the school infrastructure that does exist.

You mentioned that P3 partnerships aren't appropriate in all areas. Is there a double standard here so that we're pushing P3 partnerships in terms of certain projects on reserves when we wouldn't actually talk about them off reserves?

[Michael Mills]

I would say that first nations are looking at P3 schools partly because the United Kingdom had a private financing initiative program that was very successful and that has been modelled around the world. One of the key investment classes they used in the United Kingdom involved schools and building schools for the future. It has been used internationally.

In Canada it has also been used fairly successfully in the province of Alberta for delivering their schools. I believe people are looking at it because there is a precedent off-reserve context.

[Niki Ashton, NDP, Churchill, MB]

I think the Alberta example actually had some real challenges in terms of cost overruns. I'm not familiar with the U.K. example, but I did want to put that into the record.

I want to give my remaining few seconds to Carol Hughes.

[The Chair, Conservative, Blake Richards]

You have about 40 seconds.

[Carol Hughes, NDP, Algoma—Manitoulin—Kapuskasing, ON]

I'm just wondering if there are any potential financial risks for first nations that embark on P3s.

[Michael Mills]

Again this comes back to making sure that the difference between funding and financing is clear. Ultimately under a non-P3 or under traditional procurement, they're paying 100% of the costs in a typical project. It's the timing of those costs. If you're looking at a P3, you're paying those over the long term.

Again, you're paying on a performance basis, so the risk that some people can see is that if you were ever in a place where you had a failed P3, the project would come back and those costs would be more directly taken up by the community. Ultimately they would be paying that cost over the whole life of the project.

Would it create additional costs? If you had a failed project, there would be additional transaction costs. That's the real financial risk that exists in any project.

[The Chair, Conservative, Blake Richards]

We'll move right now to Mr. Seeback for the next seven minutes.

[Kyle Seeback, Conservative, Brampton West, ON]

Thanks, Mr. Chair.

I looked at the summary and I heard your testimony today, and it seems to me that there's been one project that PPP Canada has engaged in with first nations. Is that the only one that PPP Canada has been involved in?

[Michael Mills]

That's the only project that we invested in. We worked with many first nations in the early phases of developing projects, so in the earlier rounds of the P3 Canada fund we had a lot of interest. One of the challenges that we had, not just in the first nations context but also in the municipal context, was that the transaction costs of public-private partnerships are quite high, so there is a threshold. Some jurisdictions have set a threshold at $50 million. More recently, jurisdictions like British Columbia have actually raised that to $100 million. In a lot of cases people had an interest in pursuing them, but the projects didn't materialize and go fully to an investment stage because the business case wasn't there due to many of these costs in the context of their project.

In addition to that, we have been working with the Department of Aboriginal Affairs looking at water, providing water to all the first nation communities in the Atlantic region, as well as looking at schools and looking at different asset classes where the model may be deployed at a future time. We're not at the place where we have a complete robust business case and are moving to execution phase on those, but we've worked with many first nations looking at the idea. It will take time to find projects that fit with that model where the business case comes together and we can move forward to implement.

[Kyle Seeback, Conservative, Brampton West, ON]

Whereabouts do you see the low end of the threshold for a P3-type investment for a project on reserve?

[Michael Mills]

I would say it's very difficult below $50 million, so I would say $50 million to $100 million is probably the range that we're looking for, given the scale of typical first nation investments and the economics of P3 transactions.

[Kyle Seeback, Conservative, Brampton West, ON]

How does the financing work? Let's say there was a $50-million project on reserve. Explain to me how the P3 model is going to work. How much money are you going to put in? How does the rest of the funding flow? Who's responsible for making those long-term payments?

[Michael Mills]

If you were to take the typical Canadian model, which is called an availability-based deal, during the construction period the private partner would be responsible for providing 100% of financing the cost of construction. Once the project is completely constructed, there's someone called an independent engineer who comes in and certifies it as substantially complete.

[Kyle Seeback, Conservative, Brampton West, ON]

Done, yes.

[Michael Mills]

At that point, you would be looking at probably 50% of the capital cost being paid in what's called the substantial completion payment, and the private sector would long-term finance the remaining 50%. At the $50 million threshold, we'd probably be looking at something in the neighbourhood of $5 million to $10 million in equity capital. The balance of that would be long-term loans and the private sector would get paid two series of payments.

If we're looking at a full P3 where there's design, construction, operations, maintenance, and finance bundled into the transaction, then they would get two streams of payments for the 30-year term of the contract. They get one stream that would be an operations and maintenance availability payment that would cover their operations and maintenance. It would grow over time to reflect inflation, and there would be another payment, a fixed capital amount that would be paid every year for 30 years. The proceeds of that would be used by the private partner to pay back the principal and interest on the loan as well as the equity.

[Kyle Seeback, Conservative, Brampton West, ON]

What's the interest rate that's going to be in that second payment? What do you normally charge? What does a P3 charge?