6/12/12

P3 bank crisis: Are we really transferring risk to the banks?


Canadian banks have usually preferred to limit their P3 (public private partnership) involvement to [a]  financial advice, and [b] financing over the construction period for the public facility being built (i.e. two to three years of financing rather than the twenty to fifty years of P3 financing required after construction).


European banks (whose problems you may have been reading about lately) however have been a major player in the long term financing of P3 deals in Canada. 

The 2008-9 financial crisis raised more questions over the claim by the banks and the rest of the P3 industry that the extra costs associated with P3s (compared to normal infrastructure procurement) was offset by a “risk transfer” to the private sector.   (To offset the large financing cost advantage of normal government infrastructure development, P3 supporters have to claim that considerable risk is transferred to the private sector  -- and that the public should pay a LOT of money for the risk transferred to the private sector.)

Project Finance Magazine reports that the "Niagara hospital project in 2009 demonstrated that the province was not immune to financing difficulties. When Plenary's (the p3 corporation's) institutional relationship with Deutsche Bank came under strain and it was reassessing its debt solutions, the province stepped in and offered an increased contribution to the project in the form of extra milestone payments, which might be charitably described as a soft loan, assuming the province can get the payments back in a refinancing".

Blakes (the corporate law firm) adds that as "the most recent financial crisis continued through 2009, the various Canadian P3 agencies introduced some form of milestone payments during or at the end of the construction period to reduce the level of long-term debt financing required. Although the financial markets have been more stable, we continue to see milestone payments utilized in most Canadian P3 transactions."

The $125 billion bailout of the Spanish banks announced this week raises more questions, once again.  Are these banks reliable partners? Is the public actually transferring risk to them?  (Or are they transferring risk to us?)  Is the high cost to the public for the alleged risk transfer to these organizations justified?  What will the bank instability do to the cost of P3 financing?  

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