Canada Line (RAV): A long track

The Richmond Airport-Vancover rapid transit project, formerly known as RAVLink, entails a 35-year DBFO concession of a light rail link. RAV, now known as the Canada Line, has had a protracted history and that it has financed is symptomatic of the progress of P3 in Canada in general.

The genesis of the Canada Line began with initial feasibility studies in April 2002, through to two consortia at final bids stage in March 2004. In May 2004, the project looked in jeopardy after Translink pulled the plug due to cost concerns. In July, after looking at alternatives without private funding, and changes to the concession that shaved costs, Translink re-approved the project. The SNC-Lavalin/ Serco consortium eventually beat out the RAVxpress consortium (Bombardier, AMEC, Bilfinger and Bouygues) in the BAFO stage and was awarded the concession in November 2004.

The line will cost about C$1.9 billion ($1.6 billion). Of the project's total cost, C$120 million is equity, C$600 million is debt, C$421 million comes from the Federal Government of Canada, C$235 million from the Province of British Columbia, C$303 million from the GVTA, C$223 million from Vancouver International Airport Authority (VIAA) for the airport line, and C$48 million from VIAA for common costs. The minimum average base case debt-service coverage ratio comes in at about the 1.25x range.

C$152 million of BC's contribution will be recovered by InTransitBC through performance payments during the operating period. Together with a contingency, the province's total contribution is $435 million.

The project's engineering, procurement and construction (EPC) contract cost is C$1.647 billion and SNC-Lavalin is sole EPC contractor. The EPC contract as agreed between RAVCo, the public sector counterparty formed to oversee the Canada Line P3, and the project company InTransitBC is a final, fixed-price, date-certain contract. Virtually all cost overruns will be the responsibility of the project company.

The deal is often compared with the Sea-to-Sky road transaction – the largest recent Canadian transport project. But the terms of the Canada Line were set in summer 2004 in a new market (rail rather than roads) with no Canadian project as precedent – the lead arrangers were benchmarking against Europe and then adding some for Canada. According to participants the debt is priced slightly higher but "in the same ballpark". The 25-year Sea-to-Sky debt is priced at 115bp over the CDOR during the 4.5-year construction period, with the margin dropping to 105bp post-completion, and then stepping up to 115bp after year 14.5, and 125bp after year 24.5.

The principal differences in the risk profile between the two are that Sea-to-Sky has slightly lower average debt coverage; the technical construction difficulties are generally accepted to be greater on the Canada Line (technical problems have beset light rail construction projects in the past – such as the difficulties of rail integration on Nottingham in the UK); and Sea-to-Sky does not have the same 'multiplication effect' for lenders to the project.

The multiplication effect – the debt to overall project cost ratio – is low on Sea-to-Sky with about C$500 million project debt against C$600 million total project costs. But with the Canada Line it is far higher due to provincial, federal and other agency support. This has large risk implications, particularly during construction, because of the risk transfer if anything goes wrong the sponsor and lenders take the first hit.

As is the norm during construction, payments to the project company are made according to a milestone regime. The construction period is split into 1,000 milestones and partial milestones with a pre-assigned value, and at the end of each month a certificate of completion is redeemable for work complete.

What is new on this project is that just over 100 of these milestones are rectification milestones. These rectification milestones mitigate the multiplication effect by providing a guaranteed stop-loss or creeping insurance throughout the construction period. This means that if say a tunnel has been built and passed a rectification milestone and the project is terminated and the tunnel subsequently collapses, any claim for compensation from the state cannot take into account damages from the tunnel collapse.

The government money is contributed in the form of grants, although each slice is dedicated to a particular part of the project. Most of the agency payments are front-ended, and the bank debt back-ended, although there has already been a drawdown of debt prior to syndication. Fourteen banks joined the three MLAs at syndication, with commitments received subject to documentation on 14 October (see box).

During operation the public sector will make payments to the province based on availability, quality and ridership. As in Sea-to-Sky there will be a component of 10% based on volume – this means if there is a 20% drop in passenger numbers, revenue to the project company will only decrease by 2%.

It is estimated that the system will carry about 100,000 passengers each day and 20 million people a year when it is up and running in 2010 and that about 3.7 million people are expected to travel to the airport each year using the new transit line. Once completed, TransLink will own the line and set the fares.

In all, lenders are taking similar risks during construction to a comparable transport deal in Europe, but with slightly higher margins. This would make sense given that the Canadian bank market is new to such a complex PPP transport project and to such long tenors. P3 participants will keep a close eye on how the financings for Kicking Horse and Golden Ears unfold now that there is seemingly a solid market for long-dated bank debt, and see how far the market has come since summer 2004 when the terms for the Canada Line were put in place.

Canada Line

Status: Syndication closed
15 November 2005
Description: Financing for C$1.9 billion light rail
Sponsors: SNC-Lavalin, British Columbia Investment Management Corporation (bcIMC) and the Caisse de Depot et Placement du Québec (CDPQ)
Mandated lead arrangers:
Bank of Ireland; NordLB; SG
Lenders in at syndication:
AIB; Bayerische LB; Calyon; Commonwealth Bank of Australia; Depfa; Dexia; Fortis; KfW-IPEX; Lloyds; Mizuho; Natexis; RBC; RBS; Scotia
Financial advisers to the Province: PwC
Legal counsel for sponsors:
Davis & Company
Legal counsel for lenders: Cameron McKenna; Davis Ward Phillips & Vineberg
EPC contractor: SNC-Lavalin
Independent engineer: RW Beck