SOFIAC, accelerating the pathway to net zero for public and private sector buildings
An Interview with Stuart Galloway, Executive Vice president / Ontario and Western Canada
Marie Cresswell, President, TCI
Stuart Galloway, Executive Vice president / Ontario and Western Canada
Marie Cresswell
Who is SOFIAC and what do you do?
Stuart Galloway
SOFIAC – we’re enablers. Through our truly innovative investment solution, we enable clients to accelerate their energy transition and pathway to decarbonization. Simply put, GHG and energy reduction today rather than tomorrow. We invest time, resources, and we invest money.
Marie
How do you differentiate yourselves from other Canada Infrastructure Bank (CIB) aggregators?
Stuart
We were the first and are the largest CIB aggregator in Canada . Being first gave us the advantage to lead on developing program solutions for the market alongside the CIB as they developed their own internal approach. We make the CIB financing available to pretty much all clients by taking the role as aggregator (performance risk, target reduction risks, size of projects, equity injection etc.)
Another key differentiator is that our approach to net zero is truly unique to Canada, never been done before in such a complete all-encompassing manner. And I hate using the word unique because everybody says, oh, we’re unique or world famous or whatever. but it is a very different platform. The client never has to bring its owns money to the table. Our solution is completely turn-key and we work in a complementary manner with the client’s in-house and advisory. We invest in the full design development and the construction and when the project(s) completed we handover 100% ownership to the client without any hold over title. We retire our investment through a portion of the shared savings, typically 85:15 ratio, as demonstrated by an independent third party. This means that if there are no savings then the client retains full ownership and pays nothing to SOFIAC.
In addition, the 15% savings portion provides our clients with positive cash flow to put back into their operational budget. This is over and above to any carbon credits, avoided maintenance cost, planned asset renewal programs. Another differentiator for the SOFIAC model is that we ourselves are independent and agnostic to the technical solution, we find the experts (contractor) that can develop the optimal solution for the defined client outcomes and the client ultimately chooses who they want us to appoint and work with on the delivery. The way we invest in the project and the agreement we sign with a client, based upon a shared savings approach, also means that the project implemented does not adversely impact the client’s Debt Service Cover Ratio (DSCR) or their ability to borrow money.
This form of structure is extremely important to any client, but particularly the developer and public sector markets, the former in the aspect of cash liquidity, the latter in maintaining their statutory headroom for their debt ceiling. Simply stated, if you can borrow $100 today before the project, you can still borrow $100 once we have delivered it, and it remains a contingent liability on their balance sheet. Again, combined with all of the above, an all-encompassing solution that has never been attained in Canada before.
Marie
Excellent. Positive Cash Flow. Sounds very enticing. And what is it that you found that enticed you to become a part of SOFIAC? What drew you to this organization? And why did you want to provide this service to building owner/operators?
Stuart
Well, I have to say that it was through my previous work with Energy Performance Contracts (EPCs) in Canada, I believed (and still do) that they are a valuable model to delivering risk mitigated energy savings and performance measures, but I struggled to understand a number of the barriers that prevented large scale take-up in Canada. But it hasn’t been a vastly popular model like it has in other jurisdictions.
So, when I was presented with the SOFIAC model I thought it’s like the next evolution, it really was a no brainer. It’s seems too good to be true is the usual response from clients, certainly at the beginning as we were rolling the program out, but now that we have a lot of projects signed up now, with recognisable names, that have done the due diligence, the program is snowballing. We only launched Rest of Canada in July 2022 and already we’ve booked a little over $200 million.
To answer the question though, the reason I came here is I thought this was the solution for Canada in contributing to our net zero targets. We can unlock capital for projects and get them as close to net zero as we possibly can, without any client investment. The goal to net zero for clients, spend as few of your own capital dollars to achieve the end goal.
Marie
Wow. Without any client investment. Yeah, that’s key. And so that probably comes from your passion for structuring renewal deals for buildings, using energy savings to help fund renewal and or clean technology?
Stuart
I have my own personal views on Net Zero and reducing out footprint on this world with our finite resources, but I can’t get away from I also enjoy the deal and the interaction, I providing a real solution for clients faced with so many competing demands, I like the fact I have the tools to make it easier for them to meet some of those demands. I use the expression ‘we explore the art of the possible together’ to expand the client’s horizons in a risk free (for them) manner.
For example, instead of reaching net zero in 2035 or 2040, I can get you 70% of the way to net zero in three years … for free! So why would you not do it. When compared to paying rising energy bills and exposure to carbon tax. Effectively there is no downside, it’s all upside when clients get informed and educated on the model.
Marie
That’s just unbelievable. I like that. And I think you have such an interesting mind for structuring things, you’ve always had that capability. In terms of, you know, the structuring of the deal. Can you just tell me a little bit more about the structure?
Stuart
Well, that’s probably done better in a graphic.
SOFIAC stands contractually and more importantly, risk-wise between the client and the contractor. We sign a shared savings agreement with the client and we sign a performance guarantee with the contractor. We appoint and we pay for all of the design, all of the construction, so the client never has to worry about putting their hand in their pockets. The client remains the decision maker for the final scope of work, but does not assume responsibility for performance risk. If for some reason the project is underperforming, then the client still only pays for its portion of the actual demonstrated savings (no savings no payment) and we work with the contractor to get the promised savings and get the project back on track.
The contractor is required to make SOFIAC whole in the interim. Unlike a traditional EPC model, we jointly appoint an independent third party to monitor and measure the monthly savings and payment is made on their determination of such. Measured monthly it means that any underperformance is quickly identified and addressed and remains so for the entire duration of the contract. Basically, it de–risks the entire process for the client with the real risk remaining with the parties best suited to assuming it.
Marie
So SOFIAC signs a performance guarantee with the contractor and the client signs a shared savings contract with SOFIAC?
Stuart
Yes – a Shared Savings agreement. And that Shared Savings agreement is structured in such a way that it doesn’t affect the client’s debt service coverage ratio. This has never been done before in Canada and is a real game changer.
Marie
The debt service coverage ratio – I gather that doesn’t affect the client’s ability to borrow capital?
Stuart
Correct.
Marie
It’s unique and has never been done! And that’s why you’re getting traction. Can you share some of the clients with whom you’re working with?
Stuart
Yes. We’re working with private and public companies at various stages of development. We can’t share too many of the names in print just now, due to confidentiality and the stage of the project, but our first project, which is up and running is a college in Quebec, but we are also working with IBM, Montreal Airport, Calgary Airport, Group Mondial, a major high street retailer, leisure center, large pulp and paper company, several REITS, MURBs, Industrial plants, 2 Ports, a few post secondaries, hospitals etc.
Marie
So, across a multitude of sectors?
Stuart
Yes, across all sectors as well as public sector practically anybody that has an existing building pretty much qualifies. However, projects must have a contract value of a minimum value of $1 million dollars (or several smaller projects that amount to over $1 million) with GHG reductions of 25% or more. Initially we will qualify a project with a review of a client’s portfolio or building at our risk and our cost. This also enables us to put back a business case to the client for them to consider if they want to move forward or not.
Marie
Excellent. We like the added qualification of 25% greenhouse gas reductions. Can you tell us what your overreaching business objective is today?
Stuart
We now have a track record and proven success, our objective is delivering on what we started and to actually to expand the fund and make $ billions available to future clients, as we roll more and more projects through with the idea of delivering net zero targets sooner, rather than talking about them and getting stuck with how we can afford them. SOFIAC has removed that barrier of entry into the market both for clients and the contractor market.
For more information about how SOFIAC helps companies reduce their energy costs and achieve ambitious GHG emission reduction targets without requiring any financial contribution visit https://sofiac.ca/ or contact Stuart direct at sgalloway@sofiac.ca , 4163571198