The paradox of the credit crisis is that debt financing for P3s became more difficult to secure at just the time governments were promoting infrastructure spending as an important tool for short-term stimulus. As we saw in Chapter 2, the second wave of P3 projects in Canada has a strong record to date in terms of cost certainty and time performance. Although these large infrastructure projects can take years to prepare for procurement, the infrastructure stimulus imperative suggests that the projects already in the pipeline should not be delayed. If anything, these projects should be accelerated, provided the quality of the project is not compromised and the spending is expected to occur during the current downturn.
There is little doubt that the increased cost and reduced availability of credit slowed the process of closing certain P3 deals from mid-2007 through to early 2009. Bond markets were closed from mid-2007 to mid-2009, and the number of bank lenders available to Canadian P3s dropped to a fraction of those available before the credit crisis. However, P3 projects have continued to reach financial close during the credit crisis in all four jurisdictions examined here.12
Credit market conditions have improved substantially over recent months, and bond markets have reopened for P3s and other types of corporate financing. However, there remain substantially fewer bank lenders to P3 projects compared with the number active in the Canadian market before August 2007.
Governments and P3 agencies have responded in several ways to move the P3 transactions already in the pipeline through to financial close and to ensure that other planned P3 projects can continue to benefit from this type of procurement tool. These initiatives included:
◆ reducing the level of private debt financing required in individual projects to more manageable levels, while ensuring that incentives and penalties remain to guarantee performance over the term of the project. As indicated earlier, this is being done through increased reliance on contributions by governments at key milestone dates at or before completion of construction;
◆ shortening the period between the selection of the preferred bidder and financial close, in order to reduce the period during which credit spreads need to be locked in (i.e., guaranteed) before financial close; and
◆ attracting new types of lenders to P3 markets, such as Canadian pension funds.13
Other potential solutions have been considered and even implemented in a few P3 projects, but many of these either compromise the incentive properties of P3s or create other problems and costs. For example, some analysts have suggested relying on semi-permanent debt financing based on five- to seven-year terms (instead of 20- to 30-year terms that match the P3 contract term). However, this could compromise the performance incentives inherent in debt financing, because under-performing P3s could have difficulty renewing their loans, thereby leading to a default by the project consortium.
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Many potential solutions either compromise the incentive properties of P3s or create other problems and costs. |
Some observers have suggested that governments could act as commercial lenders to P3 consortia. However, this is tantamount to governments lending to themselves indirectly (with the added cost of extra advisory fees for arranging the loans), rather than simply issuing sovereign bonds and making their contributions to projects as per the agreed milestones.
Other potential solutions include obtaining credit from federal institutions, such as the Export Development Corporation or the Business Development Bank of Canada, which have recently been mandated to provide credit to commercial entities that have been unable to obtain secure credit from banks. This could also be characterized as governments lending to other governments, even if some of these institutions have their own access to capital markets. However, these lending institutions tend to operate on a more commercial basis and hence are more likely to behave like private lenders and impose a similar discipline on project delivery.
In summary, it appears that the most viable interim solution to the problem of credit availability is for governments to increase their contributions to P3 funding while retaining sufficient private capital at stake to maintain the powerful performance incentives that appear to have worked well for the second wave of Canadian P3s.
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12 For example, Infrastructure Ontario brought seven AFP projects worth approximately $2 billion to financial close between October 2008 and November 2009.
13 Pension funds have occasionally participated as equity providers to P3 projects (e.g., by buying into P3 projects after construction has been completed), but they have not generally provided debt financing at project inception.