A traditional P3 approach to financing an infrastructure project is for the private sector to deliver the infrastructure, then arrange its own financing to pay for the construction costs and amortize that construction cost over the life of the asset, says Paul Blundy, a partner in Bennett Jones LLP in Toronto and leader of the firm’s public infrastructure projects practice.
“The project vehicle would finance that [cost] by issuing bonds or any long-term debt. And there’s a very healthy market for that long-term debt.”
The Fort McMurray West 500-kV Transmission Line, which now runs from Fort McMurray to southwest of Edmonton in Alberta, produced Canada’s biggest infrastructure bond offering to date, Blundy says: a $1.4-billion bond offering, for an estimated project cost of $1.6 billion. “The [financing] structure there was that the project vehicle went out and borrowed all the money they needed to build the project, and are paying it back over a period of 25 years to … bondholders. That’s more the traditional model for P3.”
But in Ontario, at least, the pricing of that long-term debt by the design-builders has been perceived as too high relative to the cost for the province to raise the money independently, says Blundy; this has led to a model in which the government pays most of the capital cost as the construction proceeds. Infrastructure Ontario’s Highway 401 Expansion Project, for example, has been set up to have three “milestone payments” to the piece, he says, “so that basically the project vehicle just does short-term construction financing, and the bulk of the financing is done directly by the province.”