Interim Evaluation of the Structured Financing Facility

2. SFF Program Profile

2.1 Funding

The initial budget of SFF was $30 million per year over five years; $5 million, or $1 million per year was reserved for operating costs. The program was expected to leverage approximately $200 million of shipyard sales annually.

In January 2003, the SFF budget was re-profiled, and $20 million was removed from the SFF budget. The average annual disbursement was thus lowered from $29 million to $25 million; the target average annual sales volume for the life of the Program was also lowered, from $200 million to $180 million. It is noted that the SFF budget is being further reduced, another $15 million from this year's budget, and $24 million from next year's, for a total reduction of $59 million from the original allocation of $150 million. The target annual sales volume will also go down as a consequence.

2.2 Components

The IRS component is delivered in the form of a non-repayable contribution to the institution that provides financing for a Canadian-built vessel, which can then lower the cost of borrowing to the buyer of the ship, in a manner determined between the lender and owner. The contribution is made to the financing institution at the time of the delivery of the vessel. Interest expense incurred during the financing of the construction of the vessel is also eligible for support. It can be paid directly to the buyer at the time of vessel delivery in order to reimburse them for interest already paid.

The IRS can never buy-down more than three-quarters of the interest payment obligation without requesting a Ministerial exemption. In addition, in cases where vessels are built for export and financed by a fixed–rate loan, the interest rate cannot be bought down below the relevant Commercial Interest Reference Rate (CIRR) as per the Organization for Economic Co-operation and Development (OECD) guidelines.

The credit insurance element of SFF is designed to permit companies to obtain credit in circumstances where they would otherwise have had difficulty. The Canadian government would be able to insure all or part of the loan or lease for a Canadian-built vessel. The Department of Finance requires the SFF Program to set aside from its budget a sum of money equal to the loss provision in the credit insurance, and leave this money in the government's consolidated revenue fund to apply to any losses that arise from this insurance. The SFF contribution to this loan/lease 'set aside' or loss provision cannot exceed 10% of the value of the vessel.

2.3 Project Approval Process

Energy and Marine Branch assigns an officer to an applicant based upon the geographic location of the yard; an officer in Ottawa handles Ontario, the Halifax office deals with yards on the East Coast, the Montreal office handles Quebec applications and the Vancouver office deals with the West Coast.

An application is first checked to make sure it matches requirements: eligible product, which is financially and technically feasible; to be built in a Canadian yard in existence in 2001; owners need to prove that SFF is needed to build the ship in Canada; the project meets applicable federal environmental acts; SFF support will be consistent with Canada's international agreements. Project approval is simpler than with other federal programs such as TPC, but Industry Canada does need a few weeks for ADM/DM/Minister signatures.

If any owner applies for CIS or CIC, Industry Canada, as required by the Department of Finance, hires a third party to assess the risk. On the one project where CIS was requested, approximately $25,000 was spent on the third part risk assessment. In that case, the loan was ruled extremely risky and turned down.

Programs and Services Branch (PSB) performs a program integrity review of each SFF project with contributions of $500,000 or above including clarification of terms and incrementality (assurance that project not already undertaken or built by shipyard for its own use). Contributions under $500,000 are approved by Energy and Marine Branch (EMB) without having to seek PSB support. PSB would normally supply its comments within two days. The Branch review goes to the Senior Management Advisory Board of Industry Canada, which meets biweekly, and is comprised of six ADMs and six DGs, chaired by the ADM (Comptollership and Administration Sector).