John Ivison: The case for backing Indigenous loans

Site of the Tu Deh-Kah Geo-thermal project near Fort Nelson.

OTTAWA — Canada was formed by glacial erosion and federal government policy moves at much the same pace.

Consider a hypothetical critical minerals project on First Nations land in Canada. If an Indigenous proponent signed a guaranteed supply agreement with the U.S. government, the Americans would underwrite the loan required to secure capital under title 3 of the Defence Production Act. Yet, Ottawa offers no such loan guarantees.

The need for First Nations to secure competitive capital rates to participate in big natural resources and infrastructure projects was the subject of a major lobbying effort on Parliament Hill on Wednesday, led by the First Nations Major Projects Coalition (FNMPC), a grouping of 140 First Nations from across Canada.

An indication of how important the issue is to the rest of Canada can be gleaned by the fact that other members of the delegation briefing officials from the Prime Minister’s Office, the Privy Council Office and Finance Canada came from Canada’s biggest private sector hitters — Rio Tinto, Cenovus, Enbridge, CIBC, RBC and Hydro One.

Why? Because many of the 470 major resource projects under construction or planned over the next 10 years — worth an estimated $520 billion — are on Indigenous lands.

Those companies recognize that seeking First Nations consent is no longer optional, having lost in court time and again. The best way to obtain that consent is by involving First Nations as equity participants in those projects. As John Stackhouse, a senior vice-president in the Office of the CEO at RBC, put it: “Ownership does not equate to consent, but it is a significant indication of consent.”

He said that Canada will not achieve Indigenous reconciliation or reach net zero carbon emissions without Indigenous equity participation.

More than half of the country’s critical minerals opportunities, 35 per cent of its potential solar sites and 44 per cent of its wind sites are on Indigenous land. “We are not going to mobilize that without Indigenous share equity,” he said.

The problem for First Nations that want to take equity stakes in big projects is that they struggle to raise capital. The Indian Act bars First Nations from borrowing against their assets and land. This has resulted in missed opportunities, such as the Pacific Trails natural gas pipeline project in B.C., where 16 First Nations negotiated a stake a decade ago but failed to get the money because they had no security to offer.

The federal government recognized the problem of accessing capital in the 2022 budget, allocated $103 million over five years to develop a framework to help Indigenous communities get early access to resource development.

But the 2023 budget failed to take the next step of a loan guarantee schedule, similar to those offered by provincial programs in Ontario, Saskatchewan and Alberta.

FNMPC has three major projects worth $14.5 billion that it says need equity financing in the next 18-24 months — and none are in provinces that support First Nations equity ownership. (They are a geo-thermal project in Fort Nelson, B.C.; a 10 per cent Indigenous stake in the Coastlink pipeline, again in B.C.; and a 50 per cent equity stake in Hydro One’s Chatham to Lakeshore transmission line in southwestern Ontario).

Chief Sharleen Gale, chair of the FNMPC, said many First Nations don’t want to spend money on litigation; instead, they want meaningful participation. “The conversation is really changing in our territory about how we need to move forward, about how we get access and that’s Indigenous participation,” she said.

Niilo Edwards, chief executive officer at FNMPC, said the central challenge his members face is they don’t have a downpayment or the risk capital required and are forced to go to banks and seek a 100 per cent loan, with no guarantee.

Stackhouse said the capital is available but that money markets are still hesitant about the lack of track record of many First Nations. Without a federal loan guarantee, capital costs between 100 and 150 basis points more. “It’s a real barrier,” he said. “This is a fairly straightforward opportunity for the federal government.”

There is already one Indigenous organization with a record of prudent lending — the First Nations Finance Authority — a native-governed institution that has raised money from institutional investors for over a decade and has never had a default. Borrowing members of the pool are granted loans using their own revenue sources — property taxes, mineral rights or gaming revenues — as collateral.

Bay Street has welcomed the FNFA’s bonds as bona fide and Moody’s credit rating agency has affirmed its Aa3 investment grade status.

However, the FNFA’s model requires members to have sufficient revenue-raising capacity to repay the loans, which has drawn criticism that it favours communities that are already doing well.

Edwards said that the FNFA is a “very good model” but that some First Nations might not meet the borrowing requirements threshold or might not want to commit other revenue sources as collateral. “Some might want to look at financing options on the strength of project revenue streams only,” he said.

The Canada Infrastructure Bank is another source of low interest loans but it can’t finance carbon-emitting projects. “We have two LNG projects in our portfolio, one needs financing next year. The CIB is not an option,” he said.

Edwards said First Nations are looking to de-risk projects, rather than receive government handouts. “(Loans) are recorded as contingent liabilities on the books. That does not mean money out of the door,” he said.

As usual, the U.S. has roared ahead, giving the green light to native development, while Canada is still sitting at amber. President Joe Biden’s Inflation Reduction Act establishes US$20 billion in loan guarantees for tribal energy projects.

Edwards said the federal government has started to take the issue seriously, now that the FNMPC has a project portfolio worth over $40 billion.

“We have projects that have an immediate need for financing that have a good risk profile. Canada says it is serious about helping Indigenous nations advance and this would be a serious signal. But it needs to happen soon. There’s a huge cost to doing nothing,” he said.

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