Infrastructure Ontario We build, manage, finance, and enhance the value of Ontario s public buildings, lands and assets

Transcription

1 Infrastructure Ontario We build, manage, finance, and enhance the value of Ontario s public buildings, lands and assets Pension Investment in Infrastructure Ehren Cory Divisional President, Project Delivery International Centre for Pension Management Forum June 10,

2 Discussion topics 1. Overview of the infrastructure asset class 2. P3s and the role of the private sector in infrastructure delivery and operation 3. The Ontario availability-based P3 model 4. Defining an infrastructure investment strategy 2

3 1. Long-term trends in infrastructure investment Infrastructure investment in OECD countries such as Canada is reverting to historical levels, while it continues to ramp up in the developing world. Public infrastructure investment in Ontario (% of GDP) Emerging markets account for half of current global infrastructure spending 6% 5% 4% 3% 2% 1% 0% Long-term horizons Require significant up-front capital Sources: Ontario Ministry of Infrastructure, Statistics Canada; PWC, Capital project and infrastructure spending: Outlook to 2025,

4 1. What can infrastructure be (or not be)? Ownership: public or private Funding: general/indirect sources vs. user fee-based Financing: public or private sector, through a combination of debt & equity Use: industrial vs. social 4

5 2. Spectrum of private sector involvement in infrastructure New Infrastructure development Existing infrastructure Traditional construction/ operation Availabilitybased P3s Concessionbased P3s Privatesector role Construction execution Potentially subcontracted for O&M No financing Project management and integration (over the useful life of the asset) Financing (enough to create aligned incentives for owner ) End-to-end ownership for the life of the asset Own/manage all risk (cost and funding related) Full ownership (purchase of brownfield assets) Publicsector role Asset ownership Project integration Potential O&M Financing Funding Some financing take-out of private capital Funding Set regulatory environment, rules for revenue (e.g., rates of return for regulated utilities) Some funding typically in the form of backstops/risk sharing 5

6 3. The Ontario availability-based P3 model Build Finance (BF) Design Build Finance (DBF) Design Build Finance Maintain (DBFM) Project Type New Construction or Renovations New Construction New Construction Role of Private Sector Construction Financing Design Construction Financing Design Construction Financing Maintenance/Lifecycle Role of IO Manage the procurement process Request for Qualifications (RFQ) Request for Proposals (RFP) Negotiate with bidders and award contracts Manage project delivery 6

7 3. 47 AFP projects completed in Ontario As of March

8 3. Track record on AFP projects Third-party assessment of IO s performance for the first 37 AFP projects to reach substantial completion 37 AFP projects had reached substantial completion by March 31, 2014, approximate capital value of $10 billion 36 of the 37 projects were completed on budget (within the contract award plus post-contract contingency) 27 of the 37 projects were completed on time or within one month of scheduled completion date 8

9 3. The Ontario infrastructure project pipeline 2015 Provincial Budget commits $130 billion provincial investment over 10 years Projects listed on the IO market update are estimated at $7.55 billion (design and construction cost) $4.43 billion civil projects $3.12 billion social projects Project** Model Issue RFQ Issue RFP Highway 427 Extension DBFM Jun 2015* Oct 2015* Brockville General Hospital Mental Health, Continuing Care & Rehabilitation Phase 2 BF Jun 2015* Mar 2016* Mount Sinai Hospital Surgery, Critical Care, Emergency Department Phase 3A BF Jul 2015* Jan 2016* Groves Memorial Community Hospital Replacement Project DBF* Sep 2015* May 2016* Toronto East General Hospital Phase 1 Tower DBF Oct 2015* Apr 2016* Finch LRT** DBFM* Fall 2015* Spring 2016* OPP Modernization Phase 2 DBF* Winter 2016 Summer 2016* West Park Healthcare Centre Patient Care and Main Building Renovations DBFM* Feb 2016* Aug 2016* Toronto Regional Courthouse DBFM* Apr 2016 Oct 2016 Highway 401 HOV Lanes** TBD* TBD* TBD* Highway 7** TBD* TBD* TBD* Hurontario LRT** TBD* TBD* TBD* * Model types, dates, and costs are subject to final approvals ** Projects and/or IO/AFP delivery subject to approval by Treasury Board/Management Board of Cabinet Note: Projects in procurement, such as Eglinton LRT, and potential projects, such as Regional Express Rail, are not listed 9

10 3. Typical DBFM structure 10

11 3. Public sector payments Substantial Completion payment is used to reduce private sector financing Fixed portion consists of payments to debt and equity, and facilities management costs Payments made by the Province for rehabilitation payments are more in line with the required rehabilitation (or life cycle) expenditures by Project Co expected over 30 years $160,000,000 Public Sector Payments $140,000,000 $120,000,000 Capital (Debt & Equity) Payment Rehabilitation Payment Facilities Management Payment Substantial Completion Payment $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $

12 3. AFP debt Financing solutions Since 2007, AFPs in Ontario have seen projects financed using bullet bonds, narrowly placed private bonds, and quasi-public broadly marketed bonds Sudbury BF 2007 North Bay Hospital BFM 2007 Niagara Health System DBFM 2009 CAMH DBFM 2009 St Joes Hamilton DBFM 2010 Humber River Regional DBFM East DBFM 2012 Ottawa Light Rail DBFM 2013 Waterloo LRT DBFM 2014 Peel Regional Hospital DBFM 2014 Joe Brant Hospital DBF E Phase II DBFM 2015 East Rail Maintenance Facility DBFM 2015 Model Year Short Bullets Long Bonds Long Bullets Priv. Placed 12

13 3. A (low) credit spreads on long-term debt Long-term financing for A- rated transactions reached an all time low with 407 Phase II closing at 167 bps Movement of Long Term A Category rated Bonds spreads on DEX ( Broadly Marketed Bonds) Original Issue Spread Spread -May ' NWAH BPH RCMP CRCHUM FSCC McGill SJHH CSEC ITSSJ HHS HRRH NEAH 407E ASAP RH IA PCH NI 4072 Source: Casgrain: Spreads on PPP Projects in the DEX since 2008 (Reds are Ontario Trasactions) 13

14 3. Financing trends Long-term bond issuances 2015 will be a unique year that will see some mega deals being financed in the P3 Canadian market PPP Long Debt Issuance - Rated / Index Eligible 3,500 $ 3,000 2,500 2,000 1,500 1,000 East Rail Milton 407 East P2 Pointe St Charles Champlain Eglinton LRT North Battleford Regina Bypass Saskatchewan Schools Stanton Edmonton LRT Saint John Water Saskatoon Bridges Vaughan E 2016E Q1 Q2 Q3 Q will be a stand out year with approximately AFP/P3 transactions being funded in Canada Of these, 3 to 4 transactions are mega transactions with $500+ million in long-term bond issuance expected This is the first time that comparisons can be made across provinces/sectors/companies to understand premiums/discounts commanded. Also, this will be the first time credit terms (such as security packages) and ratings will be also be compared across projects. Source: Casgrain 14

15 3. Pension funds activity Debt & Equity Long Term Debt: Over the years there has been less reliance on the traditional buy and hold investors Pension funds have been steadily active since 2008, with around 14% - 16% in overall debt investments in P3s December 2009 to July 2010 Money Managers, 4% Pension Fund, 14% Mutual Fund, 7% Money Managers, 29% Other, 6% July 2010 to Today Pension Fund, 16% Mutual Fund, 17% Insurance, 73% Insurance, 31% Hedge Fund, 1% Equity Investments: Source: Casgrain Pension funds have participated in over 50% of the equity invested in Ontario AFP projects since 2008 (note, this does not include activity in the secondary market) Some active equity Investors include: Plenary Health, Concert Properties, Fengate Capital Management, Meridiam Infrastructure, Fiera Axium Infrastructure 15

16 4. Key questions to consider in defining an infrastructure investment strategy Where, within the overall asset class, do you want to play on the risk/return spectrum? Exposure to revenue risk versus availability based Exposure to macro factors (geography, currency, etc.) How will you play in the market? Equity versus fixed income Direct investment versus participation in pooled funds Development of key partnerships (e.g., with design-build companies) What capabilities do you need to be successful? Understanding and pricing risk appropriately Building key relationships 16