Developing the North

In the cash-constrained North, public-private participation partnerships can be especially attractive, but they will not work for every project

In a land
of ironies, perhaps none is more striking. Despite their storied relationship with their environment, the people of Nunavut are, by some calculations, among the most emissions-dependent populations on the planet.

The entire territory relies on a fleet of 90-plus diesel-fired electric power generators, most of which are several decades old. In 2011, Qulliq Electric Corp. (QEC) reported that six of its generators were 40 to 50 years old and another 11 were 30 to 40 years old. All require nearly constant maintenance that one resident famously likened to putting lipstick on pigs.

Facing an estimated $145-million cost over five years just to keep the existing fleet running, QEC has been urged by some ratepayers to find alternative financing methods to build zero-emissions hydro plants. But hydro generators and transmission lines would cost additional hundreds of millions, at least.

“Everything is amplified in the North,” says Paul Blundy, infrastructure expert with Bennett Jones LLP in Toronto. Projects are more costly to build and operate, and very short shipping and construction seasons multiply the costs of the smallest delay or procurement oversight.

“Everything that makes P3s a good idea in the South is amplified in the North,” Blundy says. In a vast, remote landscape with a tiny population – some 35,500 people in all of Nunavut – government revenues are stretched to breaking. And debt financing for needed infrastructure is rarely an option because Ottawa imposes debt caps on the territorial governments of Nunavut and the Northwest Territories (NWT).

In the cash-constrained North, public-private participation (P3) models – where private investors fund up-front design, procurement, construction, operations and maintenance in return for an annual government reimbursement over 20 or 30 years – can be especially attractive, Blundy says. In a typical P3, government off-loads risk by locking in a contracted annual payment for the life of the project. The contracting government avoids lumpy capital outlays and acquires private-sector operating and maintenance expertise it might otherwise lack.

Blundy says the big challenge to Northern P3s is always identifying a significant, long-term revenue stream, either from user tolls or government funding.

“The heart of the northern infrastructure challenge is money,” says Scott Northey. “The more they need the infrastructure, the less money they have to fund it.”

Northey is COO of the Nunavut Resources Corporation (NRC), a wholly owned subsidiary of the Kitikmeot Inuit Association, formed in 2010 to find innovative ways to fund resource development projects in Nunavut. In its effort to prime the pump of Northern development, he says, NRC uses a modified P3 formula.

“If you’re a mining company, you [typically] put in a $3-billion project with a $1-billion road,” Northey explains. If NRC takes on the road as a separate project, it suddenly makes the mine a lot more likely to proceed, with all its jobs, training and taxes. NRC finds a private-sector partner to invest in the road and seeks to access government funds for its own share of project costs. Then the mining company is contracted to pay for the road, plus a profit margin, over the life of the mine. “As the mining company, you don’t have to pay anything until we complete the road.” And having the Inuit corporation as a backer demonstrates local support to regulatory agencies, he suggests.

“Besides, if the mine owns the road, only they can use it. If we own the road, anyone can use it,” he says. In one such case, the proposed “road goes straight into the interior and it opens up many other opportunities.” It’s what he calls a “Field of Dreams approach,” referencing the film version of WP Kinsella’s novel Shoeless Joe, in which a baseball diamond in a cornfield attracts the ghosts of famous players.

“If you build it, they will come,” Northey says. Or, as baseball fans would have it, Ya gotta b’lieve.

But, like most things, believing is a little harder in Nunavut. The Building Canada Fund and the P3 Canada Fund, federal initiatives to assist infrastructure projects, have special regulations to support Aboriginal development. The trouble is, those regs, as originally written, define eligibility in terms of treaty status, says John Donihee of Willms & Shier in Ottawa.

“Inuit don’t have treaties,” Donihee says with evident frustration. “Basically, they’ve been told, ‘You’re not on the list.’ Two years ago we were told, ‘Oh, this is silly. We’ll deal with it.’ And here we are two years later…”

Silly or not, Northey says, P3 Canada money remains out of reach. Building Canada has changed its rules to include Inuit organizations, but due to what he calls a bureaucratic oversight, P3 Canada was left out of that change. When the P3 application deadline passed in June, he says, Inuit groups missed another year of eligibility for some $250 million in P3 funding allocated to Nunavut and another $4 billion in allocations for “projects of national significance.”

The Iqaluit Airport, scheduled to begin construction this summer, stands to become one of the shining examples of P3 development in the North. Under the agreement, the Arctic Infrastructure Partners (AIP) consortium will front capital costs, design and build the new airport and provide ongoing operations and maintenance over 30 years. The Government of Nunavut will make a milestone payment of $68.7 million during construction, while P3 Canada will pay $72 million. AIP will pay the rest of the $298.5-million project cost, as incurred, and the Nunavut Government will pay it back, plus profit, over the life of the project. Expressed in terms of net present value, the project cost is $418 million — or about $100 million less than a pure government project, according to a report by Borden Ladner Gervais LLP (BLG), which helped assemble the deal.

“In the North, there can be some unique needs,” says construction lawyer Sharon Vogel of BLG in Toronto. The sea-lift window, for moving material and equipment to Baffin Island, is very short and “if you miss anything, you know you’re going to face the expense of having to air-lift it in,” she says.

The project agreement commits AIP to local hiring and training of 15 per cent of the construction workforce, as well as an initial 20 per cent of the operating contingent, rising to 60 per cent in five years. “It’s a preferential-treatment type of policy and those are always tricky to implement,” Vogel says. But it means more trained and accredited tradespeople will be locally available for the next project.

Michael Ledgett, co-chair of Dentons Canada LLP’s P3 and Infrastructure Group, says the North has “huge projects that need to be done,” and P3s will be part of the solution, eventually.

“They’re a great alternative for the North because they don’t rely on local capacities.” But he predicts they’ll be “few and far between” until a P3 model is crafted that works to meet the needs of disparate groups with scarce funds.

Project proponents need to find a partnership model that binds together federal, territorial and various Aboriginal interests with those of the corporate sector, Ledgett says. And even participating federal departments can come to the table with conflicting expectations that undermine projects.

A key requirement for P3 success is that projects be large enough to attract investors and builders from the private sector. Then there has to be a revenue model that works, in spite of the small population, to fund all or part of a large project. “It’s not free money,” he observes.

“P3s work really, really well in highly populated areas,” Ledgett says. “They work less well in the North.”

From his own experience in Northern water and wastewater projects, he says, he knows that bundling together similar small projects from several communities helps provide critical mass that will attract the private sector. But huge distances between Northern communities strain the economic viability of bundling. And working out a single governance model for several communities can prove to be the undoing of the project.

“You can imagine wonderful P3 projects in the North that are never going to happen [because] no one party has enough jurisdiction and enough money,” Ledgett says.

He says the Iqaluit Airport is a major victory for P3s in the North, but in the end, success relied on the federal government writing a big cheque. He says it’s a model that may work in one or two other cases, but it won’t provide the magic formula.

The underlying problem, says Erik Richer La Flèche, co-head of the P3 practice group at Stikeman Elliott LLP, is the lack of a master plan for northern development, designed with the involvement of all stakeholders. The only exception is Quebec’s Plan Nord.

“Canada has a huge, vast Northern world and Canada doesn’t know what to do with it. We can do little one-off projects but I don’t think that’s the way to proceed,” Richer La Flèche says. “The biggest need in the North is long-term, holistic planning,” he asserts.

He says the US, Russia, Denmark and Norway have all shown far greater interest in planning and developing their northern territories. He notes that Canada’s North has vast resources and China has recently been very interested in investing in the development of the resources of its northern neighbours. He suggests that if Canada can’t or won’t articulate a vision for development in the North, then locals will seek to attract “foreign powers” to the task.

“The Chinese are influencing countries that are part of the Arctic club,” Richer La Flèche says. As one example, they’ve achieved permanent-observer status on the Arctic Council. “There’s a real geo-political story going on up there.”

He adds that a master plan with broad public involvement would help greatly to clear stumbling blocks to development, such as regulatory delays and changes of political leadership. To those who say a master plan for the North would be far too time consuming and costly, he offers the example of Quebec’s Great Whale hydro project, which went tragically wrong in the 1970s and, in his view, led to Plan Nord.

“You never have time to plan the first time,” he says. “You only have time to plan the second time.”

Blundy says the federal government’s current concern to demonstrate sovereignty over the region should assist Northerners in negotiating for infrastructure.

“Periodically, they become the darlings of federal policy,” he says. “That’s the time to press for long-term commitments.”

Brian Burton is an energy and legal-affairs writer in Calgary.