The current climate for infrastructure investing is certainly a seller’s market with a dearth of capital chasing fewer and fewer assets. In Canada, given that the market is relatively small, compared with other industrialised countries, investors are looking at alternative options and procurement models to fill their revenue needs in that sector.
One area that is emerging as a potential new frontier for institutional investors in the country (and from elsewhere) is within the indigenous or First Nations population. According to the Canadian Council for Public-Private Partnerships, First Nations communities in Canada face an infrastructure deficit of C$30 billion ($22.7 billion; €20.2 billion).
In Ontario alone, Canada’s largest province, the First Nations infrastructure deficit stands at nearly C$9 billion. And unlike other municipalities or sectors that have mature partnerships, organisations and procurement models, First Nations communities are still relatively far behind in their efforts and sophistication to attract investment. But that is changing.
WHERE TO BEGIN?
As institutional investors look to First Nations infrastructure, there are essentially two areas of interest to consider: social and economic infrastructure, according to Michael Ledgett, a partner in the Toronto office of global law firm Dentons and a leader of the National PPP/Infrastructure Group, where he advises governments and their agencies, as well as private sector developers, operators, lenders and investors on PPP projects in Canada.
He defines social infrastructure as areas such as building broadband networks, for example, whereas economic infrastructure represents areas such as pipelines and energy projects.
“Social infrastructure is the area that the P3 community has been looking at and trying to figure out how they can use the P3 model that has been developed in Canada to develop social infrastructure in remote First Nations communities,” he says.
The problem, according to Ledgett, is that, despite a lot of good will among participants or potential investors, the projects themselves can be too small, by investment standards, too remote and as a result, too difficult to get off the ground. “The challenges are difficult, and the need is great but at some point, there will be a window open for institutional investors,” he comments.
The other investment opportunity is economic or business infrastructure. “These projects are not necessarily driven by First Nations’ needs, but by other mandates or needs in the economy, in general,” Ledgett explains.
“The role that First Nations have, is they have claims to necessary elements of that project and one of the best ways to get consent is to partner with them, so that means structures will be put together that are accommodating to both First Nations and investor partners.” Ledgett notes that in this scenario, First Nations are no longer just “add-ons” but are true partners that will invest alongside larger institutional investors.
CANADA INFRASTRUCTURE BANK
One of the ways to encourage investors in any form of First Nations infrastructure projects has been through the creation of the Canada Infrastructure Bank.
In its last budget, the Government of Canada created the CIB as “an additional tool that provincial, territorial, municipal and Indigenous partners can use to build infrastructure across Canada”. The CIB has been given C$35 billion from the federal government to invest in infrastructure projects, out of a budgeted C$180 billion over the next 10 years.
Nicholas Hann is the new head of investments for CIB. He says, as far as First Nations initiatives go, the bank will look at so-called standardised investment for scalability. “A lot of what CIB will do is very bespoke structuring of very large projects but we’re also looking to fill gaps in the market […] through programmatic investments which will allow for smaller-scale projects to be undertaken,” he says.
“Our mandate is to act as a catalyst to private sector investment, so we are looking for a multiplier effect of our investment in terms of the private investors we attract,” he adds.
Specifically, Hann says CIB is looking towards areas such as lower cost but higher quality power and a reduction in reliance on diesel generation as well as water and wastewater treatment, and connectivity (land and digital).
And, similarly to Ledgett’s point about partnership, Hann notes the Bank will work with the indigenous community on projects that take place on protected lands. Despite being focused across the infrastructure spectrum, Hann adds the CIB will focus on green infrastructure, trade and transportation corridors, and public transit. “Some of these sectors lend themselves to more isolated and rural areas of the country.”
A problem, however, with smaller projects, especially for larger investors, is “to ensure the operational capacity and long-term viability of a project,” says Jeff Frank, senior vice president for development, lands and infrastructure with British Columbia-based Castlemain Consulting Group.
However, the interesting point to note is the way in which larger investors can overcome that problem and invest in smaller, often geographically difficult projects in such a way that is beneficial to their bottom line. One suggestion has been to bundle several smaller projects into one larger investment pool.
“You can aggregate or link water treatment plants together, for example,” says Frank. He adds that the Atlantic Policy Congress, a policy and research advocacy secretariat for 30 chiefs, nations and communities in Atlantic Canada, Québec and Maine, is doing that by aggregating its very own water treatment facilities. “It’s a totally new concept for the indigenous world. “
Mark Romoff, president and chief executive of CCPPP agrees that opportunities for institutional investors will arise from First Nations that partner and create larger opportunities vis-à-vis a bundled approach. “The opportunities for institutional investors in off-reserve infrastructure are where First Nations are either leading or looking to partner with the private sector and are interested in taking an equity piece in the project.”
Another example, similar to the Atlantic Policy Congress, is the Kenney Dam Project in northern British Columbia where a group of four First Nations and BluEarth Renewables, a Calgary-based private company focused on commercial-scale renewable energy development and operation, are looking for equity partners to move forward on the large hydroelectric power project.
Similarly, last spring the Government of Canada and the Government of Ontario announced funding for the Wataynikaneyap Power Transmission Line Project in the aggregate amount of C$1.6 billion. The funding framework allows for a viable transmission business with First Nations and Fortis participating as the equity investors. The project will connect remote First Nations in Northwestern Ontario to Ontario’s power grid, provide for savings associated with avoided diesel costs, and socioeconomic benefits to the communities.
The Wataynikaneyap Power partnership consists of 22 First Nations, which are leading this project and equally own 51 percent, while industry partner, Fortis owns 49 percent.
Besides the above-mentioned projects, First Nations have successfully used the PPP model in the past. According to Infrastructure Canada, the ’Namgis First Nation partnered with Brookfield Renewable Energy Partners to develop a $200 million, 45MW hydroelectric generating facility. The special purpose vehicle that developed the project, the Kwagis Power Limited Partnership, is 25 percent owned by the ’Namgis First Nation and 75 percent owned by Brookfield Renewable Energy Partners. BREP operates as one of the world’s largest publicly traded renewable power platforms.
What is important to note is projects such as the Kenney Dam are a pilot of the First Nations Major Project Coalition. Several First Nations, spread across Western Canada and the Yukon, have formed the FNMPC “for the purposes of examining: (a) how ownership of major resource projects on their lands could be facilitated, and (b) how environmental practices can be improved to meet their needs. The work of the FNMPC is directed through feedback received from the First Nations participating in the Coalition.”
Similarly, the First Nations Financial Authority was developed as a standalone organisation, separate from the federal government, to provide First Nations governments investment options and capital planning advice, as well as access to long-term loans with preferable interest rates.
According to Indigenous Services Canada, the FNFA issued its inaugural debenture in June 2014 for C$90 million followed by C$50 million in July 2015, C$110 million in May 2016, C$126 million in October 2017 and C$138 million in September 2018, for a grand total of C$514 million. The last debenture issued in September was sold to 12 buyers – including insurance companies and pension funds – from British Columbia, Alberta, Ontario, Québec, the US and internationally.
The FNFA has 73 borrowing members; however, only 46 of these First Nations have accessed financing to date. Financing has been used predominantly for infrastructure and economic development purposes.
Overall, as First Nations within Canada gain the financial sophistication, bundling and scaling of projects, as well as incorporating PPP into their structures, large institutional investors will have more opportunity to come on board and participate in what was previously smaller and harder to finance deals. It’s a new frontier that will likely expand the current crowded infrastructure market.