Infrastructure Insider: What essential news and transactions occurred in the infrastructure market?

October 26, 2018

infrastructure-market

1. Setting up the Autorité des marchés publics — Practical consequences on the call for tenders process in Quebec

The Autorité des marchés financiers is now replaced by the AMP for the authorization to contract with a public body.

This new body, which is responsible for overseeing all public contracts, also has the power to audit, investigate, order and recommend.

2. The latest news in the infrastructure market

Among the highlights from the last few months:

The production of more than 2.305 GW of renewable energy, confirmed in new contracts
3 major transportation projects are progressing rapidly in North America
The Olympic Stadium Roof Rehabilitation Project is moving forward
The PPP model is considered for the implementation of 2 new transportation projects
A major bank ceases to finance coal, oil and gas energy projects

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Written by

André Vautour
Partner, Lawyer

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September 19, 2024

Financing Quebec’s Energy Transition: Unlocking the Potential of Flow-Through Shares

Quebec has set ambitious energy transition and industrial decarbonization targets. The shift to greener practices has to be taken in a context where our energy consumption could rapidly grow under the combined effect of a number of factors, such as the reindustrialization of our economy, population growth, transport electrification and the potential for artificial intelligence to consume vast amounts of energy. Investing in the development of energy infrastructure is therefore critically important, as an abundance of energy is key to economic prosperity. The problem is that public finances are already stretched to the limit with the need to renovate our aging infrastructure, among other things. Encouraging private equity investment is thus vital, and tax incentives can be very effective in this respect. The American example In 2022, the United States passed its Inflation Reduction Act (IRA), with the goal of stimulating investment in the renewable energy sector, in particular. More specifically, the IRA altered or created a number of tax credits to encourage private investment.1 Over the past two years, US businesses have announced a total of almost US$276 billion in new investments in clean energy generation and the capturing or elimination of carbon dioxide and other forms of industrial decarbonization, an increase of 34% on the two years previous.2 The IRA is effective in that it takes the respective situations of various energy sector stakeholders into account in a creative, flexible and pragmatic way, especially where taxation is involved. Energy project promoters often have to wait many years for their projects to generate income and profits, even though the banks and other investment funds they solicit financing from can be presumed to be operating profitable businesses. The tax losses that occur in the years during which such projects are designed and built are therefore of little interest to developers, but of immediate interest to investors. And so, a tax equity market has emerged, in which businesses subject to taxes can invest in the shares of entities set up to develop such projects so as to benefit from tax credits and faster depreciation. Typically, the entity that cashes in the investment and develops the project distributes 99% of income, losses and tax credits to investors until a predetermined return is achieved. Once that return is achieved, the investor’s share of the benefits decreases, and the developer has the option of buying out the investor’s residual share. The IRA has transformed how federal clean energy tax credits are monetized, and it is now possible to buy and sell such credits without having to make a long-term investment. For businesses, this new way of doing things is an additional and attractive way to participate in the growing tax credit market.3 In 2023, the volume of the tax equity market for American projects was around US$20 to 21 billion, up about US$18 billion from the previous year.4 It appears that the trend will continue. It is estimated that the value of the current market, which is particularly attractive to banks, is set to double to US$50 billion a year by 2025.5 The equivalent of flow-through shares The Quebec and Canadian tax deductions mechanism that most closely resembles the US tax equity market is probably flow-through shares. Through these, businesses in the mining and renewable energy sectors can transfer their mining exploration expenses and other expenses—specifically designated as eligible—to investors, who can then deduct them from their own taxable incomes.6 These businesses can thus issue shares at a higher price than they would receive for common shares to finance their exploration and development operations. Investors are willing to pay a higher price in return for the tax deductions afforded by the eligible expenses incurred by the issuing businesses, which can amount to a maximum of 120% of the equity invested in the shares.7 Investors can also claim a 15% or 30% federal tax credit. However, because tax incentives cannot be transferred, our mechanism is more rigid than the American one, and it can only be applied to mineral exploration and development expenses and certain specific expenditures related to renewable energy and energy conservation projects, such as electricity generation using renewable sources like wind, solar energy and geothermal energy.8 With ambition and innovation comes the need to take action Quebec could draw inspiration from the IRA to increase the attractiveness of flow-through shares and broaden their scope of application, thereby creating a new tool to finance the energy transition. The renewable energy sector is similar to the mining sector in many respects, not least in terms of the considerable amount of capital required to build the infrastructure needed to operate a mine or energy generation facility. The flow-through share mechanism, which is well-established and popular with investors,9 could be just as successful in our energy transition context. Making such incentives easier to transfer would also drive the emergence of a market similar to the US tax equity market. A number of Québec flagship companies, such as Hydro-Québec,10 Innergex11 and Boralex,12 are also very ambitious when it comes to developing large-scale energy projects. They face major financing challenges, as do those in the industrial decarbonization and infrastructure renewal sectors. Innovation is necessary to meet these challenges and make the transition to a more sustainable, but just as prosperous, world, and to do so in good time.13 Link Rhodium Group and MIT’s Center for Energy and Environmental Policy Research (CEEPR), Clean Investment Monitor, link Brandon Hill, How to take advantage of tax credit transferability though the Inflation Reduction Act, Thomson Reuters Institute, April 16, 2024, link Allison Good, Renewables project finance to keep pace in 2024, but tax equity rule looms, S&P Global, January 12, 2024, link Lesley Hunter and Mason Vliet, The Risk Profile of Renewable Energy Tax Equity Investments, American Council on Renewable Energy, December 2023, link Link, page in French only Link Link Prospectors & Developers Association of Canada, Flow-through shares & the mineral exploration tax credit explained, link Link Link Link The authors would like to acknowledge the participation and the work done by Sophie Poirier in this publication

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August 2, 2021

Transportation infrastructure: A pillar of economic recovery

Like many other governments, the Government of Quebec decided to invest in infrastructure to help mitigate the impact of the COVID-19 pandemic and stimulate Quebec’s economy. A significant number of investments will be made in the transportation sector, and the government wants to accelerate the realisation of several previously announced transportation infrastructure projects in the greater Montréal area. This focus on construction as a way of speeding up the recovery from the crisis arises in a context where construction contractors’ and professionals’ interest in public contracts has fallen sharply. According to a recent study conducted by three Raymond Chabot Grant Thornton professionals1, mandated by six major players in the Quebec construction industry, this lack of interest in public contracts can be explained by a number of factors: poorly structured payment terms, unappealing contract clauses, issues related to the tender process, cumbersome contract management, and, as far as construction professionals are concerned, hourly rate ceilings set out in existing government regulations. The Quebec government is acutely aware of this decline in interest for public contracts and tabled an action plan for the construction industry in late March 2021 to address it. Four categories of measures are included in this action plan. First, the government has reiterated its desire to accelerate the realisation of a number of projects already included in the Québec Infrastructure Plan and to implement this plan more effectively. The Act respecting the acceleration of certain infrastructure projects introduced in June 2020 and adopted in December 2020, even before the action plan was tabled was a concrete example of the government’s intent. The other two categories of measures in the action plan aim to implement solutions to reduce the current labour shortages and to increase productivity in the construction industry. The Act respecting the acceleration of certain infrastructure projects covers approximately 180 projects, most of which are in the transportation, education and health and social services sectors. It focuses, in particular, on a number of transportation infrastructure projects in the greater Montréal area, such as the projects that will link the east, northeast and southwest of Montréal to the city’s downtown area by way of an electric public transit system (including the REM de l’Est and the first phase of the pink metro line), to improve access to the Port of Montréal, to rebuild the Île aux Tourtes Bridge, to build the Longueuil tramway, to extend the REM to Laval and to implement an express bus service in Laval. The Act focuses onfour main areas. First, if expropriation required to carry out a particular project, its procedure has been simplified. Second, in connection with compliance with environmental legislation provisions, the requirement of a certificate of authorization will waived for certain projects; for others, the BAPE project assessment procedure has been simplified. An expedited process to authorize the use of governmental property is provided for projects where such use is necessary. Lastly, city or municipal authorizations have been simplified for projects that require such an authorization. Extraordinary measures were required to deal with the unique situation caused by the COVID-19 pandemic. We applaud the Quebec government’s efforts to address the impacts of this pandemic. The chosen approach, however, is not without risks. Some critics have warned the government about the risks of possible collusion between tenderers, as collusion is thought to be more likely to occur in a context where projects are being accelerated. To mitigate this risk, the Actconfers on the Autorité des marchés publics more oversight functions, and in clear cases of collusion, the power to suspend the performance of contracts. Concerns have also been raised as to the quality of the constructed works, thereby underscoring the importance of maintaining and not ditching adequate public consultations. Finally, the Act addresses the issue of delays in payments by the government that was not only raised in the Raymond Chabot Grant Thornton report, but also during public consultations preceding the adoption of the Act. The Act extends the existing pilot project to facilitate payment to enterprises applicable to all projects covered by the Act. Hopefully, the Act respecting the acceleration of certain infrastructure projects, paired with the other measures announced in the government’s action plan for the construction industry, will make infrastructure a key component of Quebec’s economic recovery, as we finally start to see the end of the COVID-19 pandemic. A short version of this publication was published as an open letter in La Presse. Click here to read it. Plante, Nicolas, Jean-Philippe Brosseau and Marie-Pier Bernard, Consultation visant à évaluer le niveau d'intérêt des entrepreneurs et des professionnels envers les marchés publics [French Only], Montréal, Raymond Chabot Grant Thornton, April 2021, 85 p. (see in particular pages 17 to 34).

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October 29, 2019

Bill 37: What changes can be expected for Public Contracts?

On September 18, 2019, the Minister Responsible for Government Administration and Chair of the Conseil du trésor introduced Bill 37, An Act mainly to establish the Centre d’acquisitions gouvernementales et Infrastructures technologiques Québec1 As its name suggests, this bill is intended to implement the restructuring of government procurement announced in the 2019–2020 budget2. If the bill is passed, the Centre de services partagés du Québec (CSPQ), as well as some other procurement organizations, will be replaced by two bodies: the Centre d’acquisitions gouvernementales will be the organization responsible for meeting the government’s general procurement needs, and Infrastructures technologiques Québec will handle its digital procurement. In 2017–2018, information technology contracts accounted for 17% of public body contracts3. Some administrative functions of the CSPQ would also be transferred to the Agence du revenu du Québec and the Conseil du trésor. Bill 37 also makes a number of amendments to the Act respecting contracting by public bodies, CQLR c. C-65.1, and its regulations, two of which are noteworthy. It is planned that, as of April 1, 2020, information relating to contracts involving an expenditure of more than $10,000, whether reached by mutual agreement or following a call for tenders, will have to be published in the electronic tendering system. The current limit is $25,0004. The bill also provides that, as of the date its assent (currently scheduled for the end of 2019), the imposition of a penalty for a final reassessment under the general anti-avoidance rule regarding an abusive tax avoidance transaction5 on the part of a company or related person will be recorded in the Register of Enterprises Ineligible for Public Contracts for five years. Such penalties will also be considered by the Autorité des marchés publics in its decision to authorize a contract with a public body. A 60-day transitional period is provided for in Bill 37, during which a taxpayer may make a late preventive disclosure to the Minister of Revenue6 by filing the form Mandatory or preventive disclosure of tax planning (TP-1079.DI-V). However, this type of disclosure will not be accepted if an audit by the Agence du revenu du Québec or the Canada Revenue Agency is already ongoing with respect to such a transaction. This measure is part of the current fight against aggressive tax planning7. Quebec (National Assembly), Bill 37, An Act mainly to establish the Centre d’acquisitionsgouvernementales and Infrastructures technologiques Québec, 42nd Legislature, 1st Session. Quebec (Conseil du trésor), 2019–2020 Budget Plan (Quebec, Off. Publ., March 2019), p. H.61. Québec (Conseil du trésor), Statistiques sur les contrats des organismes publics 2017–2018 (Québec, Direction de la reddition de comptes et du soutien à l’encadrement des contrats publics, March 2019), p. 1. Sections 22 and 23 of the Act respecting contracting by public bodies, CQLR c. C-65.1; sections 39 and 39.2 of the Regulation respecting supply contracts of public bodies, CQLR c. C-65.1, r. 2; sections 52 and 52.2 of the Regulation respecting service contracts of public bodies, CQLR c. C-65.1, r. 4; sections 42 and 42.2 of the Regulation respecting construction contracts of public bodies, CQLR c. C-65.1, r. 5; sections 73 and 75 of the Regulation respecting contracting by public bodies in the field of information technologies, CQLR c. C-65.1, r. 5.1. Sections 1079.13.1 and 1079.13.2 of the Taxation Act, CQLR c. I-3. Section 1079.8.7.1 of the Taxation Act, CQLR c. I-3. See, in particular, Quebec (Conseil du trésor), 2019–2020 Budget Plan (Quebec, Off. Publ., March 2019), p. D.81.

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April 16, 2018

Latest developments in the Canadian infrastructure market

The Canadian infrastructure market has had a busy few weeks! The industry's latest news, from new funding policies to major transport and energy projects, is identified in this edition of the Infrastructure Insider. 1. The latest developments in the Canadian infrastructure market New developers admitted to SaskPower’s 200 MW wind energy call for tenders Colas acquires Miller McAsphalt Corporation DONG Energy forms a partnership for the British Columbia offshore wind project SNC-Lavalin invests in the Carlyle Global Infrastructure Fund InstarAGF acquires Skyservice Northland Power refinances a portfolio of solar projects in Ontario A hyperloop link contemplated between Montréal and Toronto ... and many more Click here for all the latest developments 2. Hyperloop: Hypercool? Or Hyperflop? A system like this installed between Los Angeles and San Francisco would make it possible to connect the two cities in less than 30 minutes, faster than a plane that travels the same distance in 35 minutes at a speed of 885 km/h. Eventually, this mode of transport could connect multiple countries, even the world, by connecting the biggest cities like a kind of subway, but on a global scale. Read the full article here 3. Renewable energy: an update on market trends For several years now, renewable energy can no longer be considered as developing technology, but rather as a mature industry, competitive with fossil fuels, subject to economic cycles and consolidation movements, which is gradually moving away from the backing of public authorities. Discover the industry’s main trends

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