March 16, 2015 by Sara Tatelman
Ottawa is only a three-hour flight from Iqaluit, but the moment you disembark from that First Air or Canadian North plane, you’re in a different world. The Macdonald-Cartier International Airport is well equipped with latte purveyors, miles of seats and nearby hotels. The Iqaluit International Airport, which isn’t named after any politician (yet), houses a single baggage belt, and passengers are bussed from the terminal to their planes.
So the time had come, locals said, to expand the territory’s main airport, and through 2012 and 2013, three consortiums bid to undertake the project through a public-private partnership with the Nunavut government. Because financial risks are shared by all partners, and because they provide longterm revenue streams, public-private partnerships are one of the least risky endeavors many businesses can embark on. It helps a lot that the government, your key business partner, is reasonably stable and not going anywhere—you know where they live.
The winning consortium, Arctic Infrastructure Partners (AIP), is rdesigning, building and financing the airport, as well as maintaining it for 30 years postcompletion. The territorial government puts the costs at $419 million, almost $100 million less than if the government had undertaken the project solo. The government also paid the runner-up consortium $500,000. When asked about this hefty consolation prize, Jim Stevens, Nunavut’s assistant deputy minister of economic development and transportation, explains, “This ensures that the bids are substantive and well-documented.”
Not all governments cough up half a mil for the silver medal, but most still take their time with the selection process. When expanding the Medina airport in Saudi Arabia, which is used by millions of Muslims each year making the required pilgrimage to Mecca, Saudi Arabia’s General Authority of Civil Aviation (GACA) and Danish consulting firm COWI spent nearly three weeks selecting its consortium. COWI first rated hundreds of elements in the four shortlisted candidates’ technical plans on a scale of one to five, with many elements weighted differently. “It was basically that they did a design of [what] the new passenger terminal should look like,” explains Karen Hanne Petersen, a project manager at COWI. The consortiums needed to reach a minimum score on the technical evaluation before their financial bids would be considered. The bidding process, of course, goes both ways. Not only do governments select consortiums, private companies also choose which public-private partnerships they’ll bid on.
The winning consortium, TIBAH Airports Development Company, is led by Istanbul-based TAV Airports Holding. It decided to bid on the Medina project because of Saudi Arabia’s “strong national economy and stable political regime,” Serkan Kaptan, TAV’s deputy CEO, wrote in an email.
Iqaluit isn’t the geographic cornerstone of a major religion, but its airport still sees more than 200,000 passengers a year. Passenger planes also share the airport—and runways—with cargo carriers and military planes. That’s enough development potential to win interest all the way from the UK and the U.S. “There were multiple community benefits, and it was also a good investment opportunity,” says Sonia McMillan from her New York office. She’s the investment director at Britain’s InfraRed Capital Solutions, one of the project’s main equity investors.
Stevens suggests that given Ottawa must also keep an eye on neighbouring Russia,“planning always takes [that] into consideration. If Mr. Putin gets aggressive, how would they react to that? Obviously, Iqaluit Airport provides broad coverage…. I think the fact that we have a forward operating base here already plays heavily into their planning for any situation like that.”
Meanwhile, the Saudi government wants to ensure a few things of its own, like the integrity of their deal, meet its strict Wahhabist criteria. Public-private partnerships must always meet strict standards, and face severe financial penalties if they fail to do so, even more so in a sharia-compliant system. To work with Riyadh, TIBAH structured a deal for the expansion that made it the first public-private partnership to be fully funded through Islamic financing. The consortium procured $1.2 billion U.S. from three Saudi Arabian commercial banks, which receive an ownership stake in the airport. In lieu of interest, the consortium and the Saudi government will pay the financiers rent.
Although AIP—a secular consortium working with the secular Nunavut government—is free to pay interest to its financiers, it must still follow “a very complicated contractual document that sets out obligations for design, construction, operations and maintenance rehab and financing,” says McMillan. She adds that payment is based on performance and “if there is bad performance, then payments are withheld.”
Clawbacks can be triggered if construction doesn’t finish on time, or if maintenance is substandard once the project is complete. “If a runway is not available and the situation is not rectified within 15 minutes,” the Nunavut government writes in a project report, “the payment to Arctic Infrastructure Partners could be reduced by up to $4,500 for each 15 minute interval depending on the time of day.”
“The agreement allows for penalties to be applied in a number of areas … and some may actually be applied in the near future,” says Stevens. He declined to give out further details, citing privacy clauses in the project agreement.
Falling behind on construction or maintenance isn’t the only thing that can rack up non-compliance charges for private partners. AIP must have 15-60 percent of its hires be Nunavut Land Claims Agreement beneficiaries. They must also buy a certain percentage of goods and services from Inuit-owned businesses. If they don’t, they’ll have to dig into their wallets.
AIP is also responsible for providing treaty beneficiaries with job training and apprenticeships in vocations like carpentry, plumbing and firefighting. “One of the priorities … was to provide training to local labour,” says McMillan, “so that there could be a defined career path at the airport, recognizing that the airport is an important piece of infrastructure in Iqaluit, and could provide opportunities for long term employment.”
Hitting 60 percent can be hard— although it’s 60 percent of the 180-400 employees and not of total salaries paid—since the consortium doesn’t provide training for treaty beneficiaries hoping to enter engineering, architecture and other professions essential to developing an airport. The absence of universities in Nunavut means a lot of the degreed workforce, including all engineers and architects, will be coming from elsewhere. “What we try to do is promote overall Inuit employment,” says Stevens. “If we do get some senior management trainees, all the better, from my perspective.” Iqaluit’s isolation means planning is critical—all equipment and materials must be brought in via sea lift.
“Yeah, there’s a limited window,” says Stevens. “… A lot of it is subject to ice conditions here in Iqaluit, but typically we can expect delivery from some time in July through to the midpoint of November with some certainty.”
No such problem in Medina, where winter temperatures average 20°C, but it has different complications. For starters, the airport expects to see passenger flow grow from 5 million to 8 million a year, mainly due to Muslims making the hajj. And since pilgrims travel to Mecca during the last month of the Islamic calendar, the Medina airport’s high season will constantly fluctuate. “They have a special way of processing these groups of hajj passengers,” says Petersen, “so they process with some agents that take care of all their transporting and out of the airport. So they are really grouped [as] you would group a group of kids.… You convey them into the system, and they are previsa… and they are pre-tagged on the bags… so you can process these large groups of people.”
Then there’s the partnership aspect. When working on multi-million-dollar projects with dozens of requirements, it’s essential to trust your colleagues.
The Nunavut government chose AIP for their “prior P3 experience, ability to raise the capital or financing, construction experience, experience in the North,” says Stevens. In exchange, the government helps the consortium navigate territorial red tape.
“The consortium is responsible for applying for a Nunavut Water Board license,” says Stevens. “…Ultimately, it’s a Water Board decision how they attribute that license, but we’ve provided the partnership with basically the best information.”
For its part, InfraRed chose its partners, including Bouygues Building Canada, because of “a prior working history together, and an identification of local partners who had the expertise to carry out the obligations of the project company,” says McMillan. “…There was a long due diligence process to make sure we assembled the right team.”
But risk can skyrocket if any partner doesn’t pull their share of the weight. AIP’s construction team includes Sintra, a firm that allegedly colluded with three other companies to inflate asphalt prices in Laval, Que. building projects for decades. Former president Normand Bedard and former executive Gilles Théberge gave bombshell testimony at the Charbonneau Commission, Quebec’s public inquiry into potential corruption in public construction.
Neither McMillan nor Stevens had heard of these allegations, although others involved in the expansion project are more in the loop. “Those issues were examined,” Iqaluit airport director John Hawkins told CBC News last July. “They are past activities. And we’re comfortable and confident that those issues [are] resolved in the company now.”
Copyright 2014 Rogers Publishing Ltd. This article first appeared in the March 2015 edition of Corporate Risk Canada magazine
This story was originally published by Canadian Insurance Top Broker.