Babcock & Brown-affiliated fund closes C$634m PPP deal

The public private partnership represents the largest development of schools in Canadian history and the second such project for Babcock & Brown Public Partnerships in that country. The fund has a 75 percent equity stake in the 32 year design, build, finance and maintain contract.

A consortium of investors led by Babcock & Brown Public Partnerships, a London Stock Exchange-listed social infrastructure fund, has closed on a 32-year concession to design, build, finance and maintain 18 schools in the province of Alberta, Canada for C$634 million ($594 million, €413 million).

The project marks Babcock’s second public private partnership (PPP) project in Canada and also the largest school development project in the history of that country, with estimated total capacity of more than 12,000 students.

Though not new to Alberta, PPPs – in which public entities typically transfer the risk and rewards for building and/or managing a project to private investors in exchange for a long-term concession fee – are gaining popularity in Canada. The Canadian Council for PPPs, which keeps track of such projects, counts nearly 80 PPPs in Canada either in proposal stage or financial close.

The Alberta Department of Education had previously awarded the concession to Babcock’s consortium in July on the condition that they reach financial close with respect to the contractual arrangements outlined in their bid. The consortium had beat out two other teams – one led by infrastructure developers Carillon Canada and Acciona and another led by Plenary Education Canada.

Babcock will have a 75 percent equity stake in the project. The remaining interest will belong to Gvest Infrastructure and Development Fund, a local investment vehicle affiliated with Graham Construction. Graham, along with local contractor Bird Construction, will build the schools, which will be owned and operated by the local school boards just like conventional schools.

Thomson Financial has previously reported that Babcock will be investing about C$30 million in the project.

For Babcock – which targets an eight percent IRR for its investors – the project represents a low-risk, infrastructure-like investment that fits with its broader portfolio of hospitals, courts, police stations and other so-called social infrastructure projects.

“PPPs are the securest type of [infrastructure] transactions. The cashflows come from a government counterparty, the debt is secured over the life of the contract, the interest rate is hedged so there is no inflation risk and revenues are linked to inflation,” said a spokesman for the fund.

However, for Babcock’s partner, the greenfield development project – whose construction is estimated to last 22 months before the schools open to students in 2010 – represents a different risk-reward profile.

“Babcock & Brown’s perspective is slightly different than mine because a lot of risk is transferred and some members [of the consortium] are absorbing more risk than others,” said Tim Heavenor, president at Gracorp Capital Advisors, which manages the Gvest fund. Heavenor said that the construction companies, Graham and Bird, are shouldering the largest part of the risk. It was Gvest that originally approached Babcock as a partner for the project.

Babcock & Brown Limited – the Australian Stock Exchange-listed infrastructure specialist fund manager – advised the consortium on its bid. It also created and listed the fund in October 2006, but aside from an 8.3 percent equity stake in Babcock & Brown Public Partnerships the two firms function as separate companies, according to a spokesperson.

The fund has a market capitalization of more than $800 million and has a diversified portfolio of about 50 PPP projects, including about 100 individual schools.