The federal government must be bold with a new policy to give Indigenous Peoples a stake in resource projects.
by Shaun Fantauzzo, Mark Podlasly, Niilo Edwards. Originally published on Policy Options
February 26, 2024
Canada’s road to a net-zero economy runs through First Nation lands. The recent rise in Indigenous equity participation in the natural-resource sector is evidence of that. First Nations are progressively asserting their rights and deservedly gaining recognition as strategic business partners.
Therefore, the clean-energy transition must include meaningful opportunities for First Nations to determine and shape what is built, operated and decommissioned on their lands, as well as to receive a fair share of the economic returns.
The alternative is the status quo, where the value that First Nations bring is discounted or even disregarded while governments and industry continue to face challenges getting major projects across the finish line at all – much less in a good way or on time. The status quo today will be much worse tomorrow.
Economic reconciliation can become one of Canada’s biggest competitive advantages.
The federal government’s commitment in its fall economic statement to launch an equity loan guarantee program that supports Indigenous equity participation in major natural-resource projects (which should work in a way similar to mortgage insurance for homebuyers) is a long overdue step in the right direction.
But important details are still unknown and it is time for the federal government to be bold. There are five steps that Ottawa can take in the spring budget to accomplish this: 1) make the program affordable; 2) base it on existing models in Ontario and Alberta; 3) make it sector-agnostic; 4) assume a bold risk mandate; and 5) adopt a learning-by-doing mentality.
Why First Nation equity investment and ownership is important
Commercial success in the natural-resource sector can be difficult without First Nation support and partnership. Project proponents must also mitigate the impact on First Nation rights and interests as a condition of most regulatory permit and approval processes.
Examples abound of projects where proponents failed to secure that support, where regulatory and permitting approvals were delayed and denied, or where projects were held up by court challenges (e.g., the Trans Mountain expansion project).
The recent rise in First Nation equity participation as a leading industry model was predictable in this respect. Ownership means being informed and having a voice at the table, which is precisely why equity is such a powerful tool for fostering partnerships and aligning interests.
However, many First Nations lack the financial resources to invest in major projects and cannot access the competitively priced capital needed to finance larger investments.
One reason is that Section 89 of the Indian Act prohibits First Nation governments and status individuals from pledging land and other reserve-connected assets as collateral to lenders.
In most cases, they must borrow 100 per cent of their investment as an equity loan, causing lenders to charge higher interest rates that approach the expected financial return and eat away at whatever remains for First Nation shareholders.
A chance to forge a fiscal relationship with Indigenous peoples
The alternative is accepting a smaller position or nothing at all, which are all-too-familiar realities that motivated the 2017 formation of the First Nations Major Projects Coalition (FNMPC, where the authors work). One catalyst for that was when a group of First Nations was forced to forfeit an equity option for a 30-per-cent stake in the Pacific Trails Pipeline due to financing challenges. The project was financeable but our equity investors were not.
First Nations with modern treaties and comprehensive land claims can face similar challenges in collateralizing their non-reserve lands, such as fee-simple treaty settlement lands that may have associated governance rights. Lenders can be reluctant to accept such lands as collateral because they are culturally or politically sensitive.
These legal constructs are partly responsible for why the narrative around First Nation economic participation has centred on compensation instead of partnership and shared prosperity.
Another consequence is that First Nations are held back from developing the sophisticated transactional experience required to negotiate a complex commercial deal and establish creditworthiness with lenders.
Equity loan guarantees can help break this vicious cycle
Several of FNMPC’s more than 150 members have viable opportunities for equity participation despite lacking the means to finance their investment.
In a typical project finance structure, project revenues are used to repay debts, cover expenses and provide a return to shareholders. For First Nations unable to self-finance their equity investment, returns are lower and sometimes uneconomical because of the additional cost of borrowing, which usually spans lengthy terms at high interest rates.
An equity loan guarantee commits the guarantor to repay all or some of a loan if the borrower’s ability to repay is impaired (e.g., if equity distributions are lower than anticipated). This commitment enables and encourages lenders to soften terms and lower interest rates.
Without such a guarantee, First Nations may not see returns for many years until the debt is repaid. For major natural resource and energy infrastructure projects, the difference can be upwards of tens to hundreds of millions in benefits over the financing term.
The details in the next budget will determine success or failure
While federal officials mull over the program’s final parameters in anticipation of the follow-up announcement in the budget this spring, it is important to keep a few things in mind.
First, equity loan guarantees are not the same as loans. Mortgage insurance is a better parallel. When prospective homebuyers cannot make a sufficient down payment, banks may ask for mortgage insurance as additional security. That’s why the Canada Mortgage and Housing Corporation is mandated to provide this to make buying a home more affordable for more Canadians.
The purpose of the federal Indigenous equity-loan guarantee program should be similar – to make equity investments in major natural resource and energy infrastructure projects more affordable for First Nations.
Second, there are proven examples of Indigenous loan guarantee programs in Ontario and Alberta that can be modeled by the federal government.
In 2009, Ontario launched its Aboriginal loan guarantee program to support Indigenous equity investments in the province’s renewable-energy sector. The program has the authority to provide up to $1 billion in equity loan guarantees, up from $500 million just a few years ago.
The Alberta Indigenous Opportunities Corporation was created 10 years later to do the same thing in the province’s key economic sectors. In 2023, the Alberta government raised the program’s limit to $3 billion from $1 billion due to its success in the previous five years.
Both programs have already unlocked $1.5 billion in equity investments and created long-term revenue streams for nearly 50 First Nations. Replicating and building upon these successes would make sense. Federal-provincial collaboration would be even better, especially given British Columbia’s announcement it will launch a First Nations Equity Financing Framework.
Third, a truly federal program needs a sector-agnostic backbone and a nationally geared mandate that reflects Canada’s regional energy diversity and the individual needs of First Nations across the country.
In a recent survey of FNMPC’s members, more than 80 per cent of respondents indicated the federal program should be sector-agnostic. The economic opportunities facing First Nations vary widely, so taking a narrow sectoral approach runs the risk of excluding many of them from commercially viable equity investments of their choosing.
Concentrating loan guarantees in one or a few sectors can increase portfolio risk. Canada’s many environmental assessment frameworks should be more than sufficient to preserve federal climate objectives.
While it may be politically tempting to exclude oil and gas infrastructure or give preference to new projects over legacy assets and infrastructure, economic reconciliation and Indigenous self-determination must be prioritized. Consideration should be given to supporting Indigenous equity investment and ownership outside of the natural resource sector for the same reason.
Be bold
Fourth, the program should be mandated to take on commercial risks that are proportional to the significant potential for transformative growth. A risk-averse approach would miss the mark. The federal government can still be bold without being careless.
For example, the Ontario and Alberta programs require Indigenous applicants to show that investments are economically viable and commercially sound (i.e., projected revenues meet industry standards and financial ratios are robust). British Columbia’s recent announcement establishes the same parameters.
Industry is expected to put value at risk. Guarantee fees are assessed to cover program expenses and offset fiscal impacts from potential future defaults. Contract provisions are included to ensure that debt is repaid in a predetermined manner. Capacity supports are available for Indigenous applicants to make informed decisions (e.g., to conduct financial or legal due diligence).
These very same features and parameters can be adapted to the federal program to mitigate risks and make a strategic investment in the business-readiness of Indigenous Nations across the board. More than 90 per cent of FNMPC survey respondents indicated that capacity support would be necessary to make full use of the forthcoming federal program.
Start sooner rather than later
Finally, the federal government would be wise to adopt a learning-by-doing mentality to start the program – a paradigm shift from its typical approach. It does not need to be perfect on Day One. No program is. A flexible and adaptable mandate that prioritizes Indigenous needs and interests would also have a bigger impact.
It is more important to start sooner rather than later, point it in the right direction, endow it with sufficient resources and give it time to acclimate and space to grow. This approach was taken in Ontario and Alberta, where each program was amended several times after launching.
Since its formation in 2017, the First Nations Major Projects Coalition has been promoting the idea of a federal equity-loan guarantee program. Many opportunities have passed by already.
FNMPC’s internal research shows approximately $525 billion in capital investment is projected in the next 10 years in the natural resource sector as Canada transitions to a net-zero economy. This effort will require First Nation support and partnership every step of the way. Equity participation and ownership will be an important tool.
As the federal government says so often: “No relationship is more important than the relationship with Indigenous Peoples.” Now is the time to prove it.
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This article first appeared on Policy Options and is republished here under a Creative Commons license.