Back in 2006 the First Nations Fiscal Management Act (Canada) (FNFMA) came into force and established a framework that would enable First Nations to leverage tax and other revenue streams and access long term private capital through the First Nations Finance Authority (FNFA) at low rates to finance infrastructure and other qualifying projects through a pooled borrowing program with other First Nations.
On May 7, 2015, the Federal Government introduced Bill C-59 (Economic Action Plan 2015 Act, No. 1.) which includes proposed amendments to the FNFMA to accelerate and streamline participation in the scheme established under that Act, reduce the regulatory burden on participating First Nations and strengthen the confidence of capital markets and investors in respect of that scheme.
Both lenders and First Nations will want to be aware of the FNFMA and the proposed amendments.
The FNFMA was created to enable First Nations that were collecting government-like revenues (such as property taxes imposed on reserve lands) to borrow against these revenues to access capital for infrastructure and other needs. The FNFA is a non-profit corporation that is established by the FNFMA for the purpose of securing long-term and short-term financing for its borrowing members. The FNFA can issue debentures to certain investors in the market to raise the funds it lends to its borrowing members.
In 2011, regulations were created that allow other types of revenue streams to be leveraged, including for example, certain royalties; revenues from leases, permits or other instruments authorizing the use of reserve land; revenues otherwise payable to a First Nation under certain contracts; and interest earned by a First Nation on certain deposits, investments or loans. The money borrowed against these “other revenues” may be used to secure financing for any purpose that promotes the First Nations’ economic or social development, which according to the regulations includes becoming an owner of a corporation created to own, operate, manage or sell products of power generating facilities, waste or wastewater treatment facilities or other public service utilities or facilities.
In short, the program has evolved over time and has included revenues from commercial activities as revenues that can be securitized and enables a First Nation to use the borrowings for a range of purposes, including ownership of commercial Projects.
Mind the Gap: The FNFMA and the Commercial Mainstream
Parties should be informed as to how the FNFMA is connected to the commercial mainstream and also where potential gaps exist. From a legal perspective, the FNFMA needs to better dovetail with all other legislation and regulation that apply to commercial activities generally. The FNFMA currently lacks connectivity with the other legislation and regulation that apply in respect of lending transactions. For example, although the personal property security acts in force in provinces and territories across Canada already provided an established law in respect of priority among creditors, the FNFMA contains provisions that are designed to give the FNFA special priority over certain collateral.
It is unclear how the FNFMA will interact with the personal property security acts and insolvency and restructuring legislation in Canada. This presents numerous complications and challenges for a lender (other than the FNFA) who wishes to understand its rights in respect of collateral of a First Nation that is – or seeks to become – a borrowing member under the FNFMA because it will require the lender to conduct additional, more complicated due diligence in respect of the applicable First Nation. Such additional due diligence increases costs in respect of the financing, which in turn could lead to greater costs for the First Nation as a borrower.
The FNFA is one of many lenders that are in the market to provide access to capital to First Nations. First Nations that are participating or that wish to participate in the program will want to consider certain requirements and restrictions set out in the FNFMA and question how borrowing from the FNFA may affect other financing needs or obligations they may have. They also need to consider any restrictions imposed by contracts or other agreements that govern the stream of revenues itself and how the various parties involved, including the FNFA, will come to agreements in respect of these revenues.
So far 158 First Nations have chosen to opt-in to the FNFMA and 44 of those First Nations have been accepted as borrowing members thereunder. On June 20, 2014, the FNFA issued its inaugural debenture in the amount of $90 million Canadian dollars. This debenture raised capital for 14 First Nations, which pooled their borrowing requests together to access such capital for various purposes. Recent media coverage suggests that another $100 million bond issue is forthcoming. As the program continues to gain momentum, it is important to build awareness of the FNFMA and the FNFA and consider how they fit in the broader landscape of commercial lending, and it is crucial that from a legal perspective, the regime is better integrated with legislation and regulations that apply in respect of lending transactions and commercial activities generally.