First Nations bond issue strategy to raise dollars for infrastructure and other purposes
First Nations could get access to millions of investment dollars
By Elizabeth Thompson, iPolitics.ca December 10, 2010
The Harper government is quietly setting the stage for a landmark move that could pump millions of dollars worth of investment into reserves across the country and mark a change in the relationship between Ottawa and Canada's First Nations, iPolitics has learned.
It would also pave the way for the first-ever First Nations bond issue — a precedent that could lead to future bond issues by other First Nations in Canada and the U.S.
"It's a game changer in that it is evidence that the relationship is changing," says Robert Shepherd, a professor of public policy and public administration at Carleton University in Ottawa and a former official at Indian and Northern Affairs.
"It's a game changer in the sense that you have now got a public sector willing to use private sector vehicles to assist with very public sector problems. In that sense, it's no longer government as the 'I'm the Dad and I'm watching over my kids.' It's very much, 'For years you have told us you want to be a partner, well, we're giving you all the toys the big boys have.' "
However, Shepherd warns it could also be a risky move if too many First Nations default on their payments or if investors suddenly decide to sell off their bonds. While it will likely benefit more prosperous First Nations which will be able to borrow money at a much lower interest rate and manage a more sophisticated financial instrument, he said it might not do much to help some of the poorest First Nations which are often those who most need to invest in infrastructure such as roads, sewers and water treatment plants.
The key to the move lies in a regulatory change the government is proposing that is designed to help the First Nations Finance Authority launch an $85-million bond issue.
Many First Nations have difficulty borrowing money from banks to finance infrastructure investment in their communities. Those who are able to get loans often face crushing interest rates 30 to 50 per cent higher than those paid by other orders of government.
The FNFA wants to raise money through a bond issue to allow First Nations to obtain the financing they need for those projects at much lower interest rates.
Currently, however, the First Nations Fiscal and Statistical Management Act only allows First Nations to put property tax revenue up as security for a bond — something the government estimates is worth $3 million. The proposed regulatory change would allow First Nations to use a much wider list of revenues to secure financing — revenues it believes are worth $82 million.
Revenues from leases, fees, oil and gas royalties, and businesses owned by a First Nation, transfers from provincial or municipal governments and, in some cases, even federal transfers could be used to secure financing.
Government officials estimate the change could save First Nations $49 million over the next decade. Once $10 million from the federal government for a Credit Enhancement Fund is taken into account, officials estimate the net benefit of the move will be $39 million over 10 years.
"These regulations will allow for access to affordable capital and flexible terms, thereby enhancing First Nations' ability to invest in infrastructure and strengthening the foundation for economic development and investment on reserves," the government wrote in the notice of the proposed change.
The move will also benefit investors, the government predicts.
"Investors will be provided with an additional investment product to diversify their portfolios. Pension funds and offshore investors have a large appetite for long-term subnational government lending because of its stability."
"Rating agencies look forward to rating an FNFA bond as it will be the first First Nation government subnational bond created and there is a known potential for more such activity in the United States."
One of those applauding the move and saying she is willing to invest in the new bond is Jean Crowder, NDP First Nations critic.
Crowder, a former municipal councillor, said the proposal will allow First Nations to have access to some of the same kind of financing as municipalities to address the huge infrastructure deficit on reserves — problems that have increased as the population on reserves has grown.
"It's about time," she said. "We have had this paternalistic, colonialistic attitude that says that First Nations aren't capable of managing money . . . this is a step towards self sufficiency."
Liberal critic Todd Russell also welcomed the move.
"It will provide First Nations the opportunity to obtain loans for infrastructure and investment at far better rates than they now get through large commercial banks."
Assembly of First Nations national chief Shawn Atleo said he was aware of plans to issue bonds but had not been notified of the proposed regulatory change.