:
Thanks very much for inviting us.
Our president, Mr. Paul Moist, had hoped to be here, but he has to be at an important meeting in Toronto at this time.
I'm really glad that you're investigating this issue, one that I feel has not, despite the increasing number of P3s in Canada, been adequately analyzed in an objective way in Canada.
I'm also delighted to be here with Brock Carlton, Adam Thompson, and Michael Atkinson. We are all members of what's called the Municipal Infrastructure Forum, which is a body that the FCM set up develop some constructive solutions on the whole long-term infrastructure program that the federal government is planning.
I commend the FCM for setting up this organization. It's been a very constructive exercise whereby different sectors of society can get together to try to come up with constructive solutions.
We approach the issue of public-private partnerships very much from a public policy perspective. The overriding concern we have with P3s is concern for public finances and the delivery of quality public services.
I've worked as an economist at the federal, provincial, and territorial level, as well as in the private sector, and I dealt with P3s during that time. I approach this issue very much from an economist's perspective and in terms of the best use of the public's and taxpayers' dollars.
We also want to underline that this isn't about the public sector doing everything or about the private sector doing everything, but about the appropriate role for each.
In Canada, traditional procurement involves the public sector determining its priorities and requirements. It may contract for design and then contract to the private sector to construct infrastructure—the private sector constructs infrastructure in Canada. That's the way it works, and of course we accept that. We see those as appropriate roles.
The public sector provides financing because it can borrow funds at the lowest rate, and it owns and operates public infrastructure because it is a public good and government is ultimately responsible for it. If it fails 10 or 20 years down the line, government has to provide it and make sure that it's available to its citizens.
We are extremely concerned that Canada will soon follow the U.K., which was the model for Canada's P3 program, down the road of massive failures of P3s. These undermine the viability of providing quality public services because governments are under contract to pay billions in excessive fees for P3 projects.
Proponents in Canada claim that we have taken the best practices from elsewhere and that we are a global leader in P3s. From everything I've seen, the Canadian model may be good at promoting P3s, but it doesn't do a very good job of providing objective assessments and evidence, or accountability and transparency, for P3s.
There are many different issues here. You could probably be studying this for a year, but I don't think you want to. I'm going to focus on some economic aspects in the value-for-money reports. The value-for-money reports are key to P3s, and they're supposed to provide evidence for the benefit of P3s.
I and others would say that value-for-money reports are not credible. In fact, some proponents would say this as well.
Promotion and analysis of the value-for-money reports in Canada is done by P3 agencies. They involve both promotion and analyses, and those roles should be separated, as far as I'm concerned. There is very little transparency of key information in the value-for-money reports; high discount rates are used to minimize future liabilities, and I'm going to talk about that a bit later; and risk transfers are exaggerated. Auditors in pretty much every province in Canada have frequently found particular P3s to be bad deals, and in the U.K.—I don't know whether you're following this—there have been massive P3 failures in recent years.
To help you understand why the mixing up of promotion and advocacy is a problem, here's a quote from Larry Blain, a former CEO of Partnerships BC, which pretty much established the Canadian model for P3s. He said:
Public sector comparators won't do you much good anyway, because I can make the public sector comparator as bad as I want to, in order to make the private sector look good.
The public sector comparator is an essential part of a value-for-money assessment, because it's upon that basis that the costs of a P3 are compared. You can't have a value-for-money report without a PSC.
It is a remarkable admission. He is basically saying they are useless because they can change it with creative accounting.
I want to get into the way they do this. I'm sure some of you may be aware of the issue with discount rates. I am taking a hypothetical example of a P3 that runs for 30 years and pays $10 million. It could be a million dollars; the ratios are the same. Over 30 years the government would be paying $300 million in nominal dollars, assuming there was no cost escalator there. People use discount rates. The federal government can now borrow at 2.5% over 30 years. That's a yield on a 30-year bond. If you use a discount rate of 2.5%, you come up with a present value of $209 million. A lot of accountants argue that's what the federal government should use. Provincial governments in Canada can borrow at 3.5% over 30 years right now. That would give a present value of $184 million.
Unfortunately, in B.C. the government uses a present value of $7.5 million. They use a private sector cost of capital. What is actually a cost and a liability of $300 million would be more than that because usually there is an inflator there. Actually, in current dollar terms it looks like $118 million. It should be $184 million. That's a massive difference there.
The federal government's Treasury Board guidelines are for a discount rate of 8% real, plus inflation. That would amount to a discount rate of 10%. When you see the value-for-money assessment, that $300 million in future liabilities is reported as $94 million in liabilities. They are hiding these future liabilities by using discount rates. Unfortunately, the value-for-money assessments don't show those future liabilities. They just show the present value on that.
That's the first form of what I would call creative accounting on this. B.C uses it.
The second form of creative accounting that is used is assuming very high levels of risk transfer to justify P3s without evidence. I have a few examples here.
This is what Ontario uses. For instance, for the Bridgepoint Hospital in downtown Toronto, the traditional all-in procurement costs were supposed to be $452 million. The P3 cost was substantially more than that, but what the Ontario government assumed was that $352 million was transferred to the P3 operator.
Now, is there any evidence for this? There is absolutely no evidence provided for this. Even in Infrastructure Ontario's methodology, they just provide a short document. I have a copy of it here. They just have a little matrix. They don't provide any empirical evidence for why those risks should be transferred. Now, in Ontario, if you add it up, there is about $3 billion or $4 billion, probably about $5 billion now, that they assume is risk that is transferred to the private sector.
In the case of Bridgepoint, the risks transferred amount to over 60%. The average risk supposedly transferred to the private sector in Ontario is about 50%. There is absolutely no evidence for that.
As a former public servant, I'm appalled there is no evidence for this. People in California asked me.... Schwarzenegger was interested in pursuing P3s. They got some of the information and the methodology from Ontario. They were flabbergasted. I was embarrassed as a Canadian on that.
What does this creative accounting lead to? I'll just go back on the whole risk transfer. Typically with P3 projects, a private operator only puts up about 10% or 15% equity, and they set them up as what are called “special purpose vehicles”. That means that even though there are big companies behind them, they can walk away at any point and only lose that 10% to 15% equity.
As far as I'm concerned, there's absolutely no rationale for assuming any risk transfer beyond that, because private operators frequently do work away from that. It's happened here in Ottawa. It's happened all around the world.
I'm going to quickly sum up. I can talk later about what auditors in Canada have found, but the U.K. experience now is that there'll be massive P3 failures with what they call the private finance initiative.
The first of these was Metronet subway. It was a P3 failure that amounted to $2.7 billion and an extra cost to taxpayers of about $640 million. The real problem now is that more than 60 U.K. hospitals are in financial difficulty due to PFI debt payments. They need bailouts.
The total cost of the PFI now was recently calculated to be £300 billion or $480 billion. Those are big figures. That's about one-third of Canada's total GDP. In the U.K. it works out to about $20,000 per household.
The U.K. health minister, a Conservative, said that the PFI deals are millstones and have brought parts of the health system to the brink of financial collapse. Other people have described them as debt time bombs and staggering mountains of debt.
Thank you.
I'm sorry to go through this in some detail, but I think it's important to understand some of the accounting that goes on behind this. I'll be very happy to hear your questions.
:
Thank you very much, Mr. Chair. We'd like to thank the committee for providing the Canadian Construction Association, the CCA, with the opportunity to appear before you today.
Our association represents the non-residential sector of the construction industry, so we, in fact, build Canada's infrastructure. We have more than 17,000 member firms from coast to coast to coast, many of which are small and medium-sized businesses. In fact, if you use the definition that Industry Canada uses of fewer than 100 employees making an SME, then 99% of the companies that operate in our sector of the construction industry are SMEs, so when you talk about small business, you're talking about us. Given the fact that the construction industry in total employs almost 1.5 million Canadians or about 10% of the workforce, the old saying that “as construction goes, so goes the Canadian economy” is not far off.
Your subject matter and your review are extremely timely. We have the current Building Canada fund running out on March 31, 2014. The consultations that have been ongoing over the last year or so with some of my colleagues here to create the new long-term infrastructure plan are absolutely key. It's absolutely key that that plan be announced in the next federal budget in order to ensure there is no gap in funding when the current Building Canada fund expires and to ensure we don't miss a construction season in those circumstances.
There will definitely be a role for the private sector in that plan if it has the kind of flexibility that's required to ensure we meet the needs of Canadian infrastructure at all levels of government from coast to coast to coast in Canada, so your review couldn't be more timely.
From CCA's perspective we're neither for nor against public-private partnerships. We see them as a potentially effective delivery methodology for construction projects in the right circumstances, not unlike design-build, construction management, and a whole host of other methodologies that we have for delivering infrastructure.
For us, P3s are an important tool in the tool box and should be used under the right circumstances. What are those right circumstances? They are those in which both parties, the public sector and the private sector, seek to take the best advantage of the particular skills and abilities both bring to the table. There are three Ps in public-private partnership, and the key one is the last one, partnership.
In the case of the private sector, what we bring to the table is often the innovative, out-of-the-box approach to a complex project. From the public sector, what we're seeking is your ability to manage and mitigate certain project risks that are best managed and kept with the public sector.
P3s can be an extremely effective method, especially on larger, complex projects in which the private sector's innovative approaches can bring solutions that would not be permitted, would not be practicable, or would be highly complicated if delivered in a traditional crown construct model.
P3s also allow for the opportunity to look at the development of infrastructure that may not even be on the government's radar screen. A perfect example of that is the P.E.I. bridge, the Northumberland Strait crossing. That project was not on the radar screen for Public Works and Government Services Canada, or any other federal department, and was very much a proposal, an idea, that came from the private sector.
However, as I mentioned earlier, P3s are not a panacea, nor should they be viewed simply as a solution to fiscal pressures. P3s invoke a complex, multi-party legal web of contracts that is an expensive proposition for would-be participants. Transactional costs are extremely high, making the P3 option really only viable on the larger projects, typically in the $50 million range and above. In our view, P3s should be used to leverage additional funding from the private sector and not used simply to replace traditional public sector commitments.
We should also be concerned, and we are concerned, about the arbitrary bundling of construction projects simply to create a critical mass for viability of a P3 approach. The main reason is, as I mentioned earlier, 99% of our members, of the construction companies active in our industry, are SMEs. If projects are being considered to be bundled to create that viable mass, we believe that one of the criteria that needs to be examined before making that decision is the impact it has on the local domestic supply chain in those circumstances.
Another consideration is to ensure that there is a level playing field for Canadian firms and Canadian-based firms. Where the lead concession or financier is foreign, which has been the case in a number of our P3 projects, Canadian contracting firms are often at a disadvantage when it comes to performance security. The reason for this is surety bonding.
The use of surety bonds is something that's unique to North America and unknown to Europe, for example. Many of our construction firms do not have the healthy balance sheets required to get letters of credit. They've used the surety bond vehicle to leverage their balance sheets by as much as a factor of times 15, times 20, but this is foreign for European concession-holders and financiers, and it's created a problem for participation by some—not all—of our Canadian and Canadian-based firms, in that foreign concessions will not accept surety bonds as performance security. They want the liquid property and a letter of credit, etc. This causes a problem for many of our firms.
What has been helpful is the domestic powers given to EDC, Export Development Canada, as part of the stimulus package. EDC has played a role in some projects in enabling Canadian-based firms to participate in P3 projects through the kinds of guarantees and financial instruments they have.
In trying to sum up, it would be foolish to completely cross out P3s as an option in your tool box. P3s can be an extremely effective tool, but they cannot be the only tool in the tool box. There are many circumstances in which P3s are just not the right tool or the best tool.
One of the clear benefits of the P3 approach, from our perspective, has been that it forces a consideration of the total life-cycle operation and maintenance of a project. It puts a certain regimen or discipline on the public sector to ensure it has thought out the entire life cycle of that project—not just where the initial capital cost is going to come from, but how it is going to fund this thing over its 30-, 35-, or 40-year life in terms of operation and maintenance. Perhaps we need to also import that kind of discipline for all our major complex projects, regardless of how they're funded.
In closing, we believe that the P3 option can be extremely effective, but it's not necessarily the best approach in every circumstance. It can be an effective delivery mechanism where appropriate and where it truly is a partnership, not simply an attempt to relay all of the risk to the private sector. That's not even a P2.
With that, Mr. Chair, I will conclude my opening remarks, and I certainly look forward to your questions and discussion.
:
Thank you, Mr. Chair. We really appreciate the invitation this morning.
[Translation]
I would like to start by saying that the FCM is the voice of the municipal governments. We have 2,000 members from all over Canada. Our members represent 90% of the Canadian population. So we have some perspective on what is happening in the trenches all across Canada.
We believe that this morning's question about P3s is very important in trying to find a way to better deliver services to Canadians in their communities.
[English]
As Toby mentioned, we have a municipal infrastructure forum that has many discussions about infrastructure, this being one of them. With Michael, Toby, and a few other folks around that table, you can imagine that we have some really interesting discussions.
Finally, I should say that Karen Leibovici, our president and an Edmonton councillor, sends her warm regards. She couldn't make it into town for this morning, but she asks me to send those regards on to you.
We really think that over the years we the municipalities, the government, and Parliament have started to work more closely together to find the best ways to seek solutions that improve the quality of life for Canadians, and clearly the question on the table is infrastructure and P3s.
The economic action plan was a really important opportunity to demonstrate the value of those relationships and the capacity of orders of government to work together. As you may have seen, we estimate that around 100,000 Canadians were kept in jobs as a result of that economic action plan and the work that was done on infrastructure in continuing to build the economic foundations in this country's communities.
As Michael said, this is a critical moment. We are at a period when our infrastructure is crumbling, and we are having a very dynamic conversation on what to do about it. This idea that there should be a long-term infrastructure plan is an opportunity to continue moving forward with the job of rebuilding our municipal infrastructure to ensure that Canadians have safe drinking water, shorter commutes to and from work, and the other benefits of solid infrastructure that create a more competitive and productive society on the world stage.
Clearly there's a lot at stake here. A lot of resources are required to ensure that our infrastructure is in good shape. The question on the table really is this: is there more than public money available to leverage towards those objectives? We really do believe that a key element in any new infrastructure plan is to encourage private sector involvement. P3s are a way of doing that in order to build and maintain and finance municipal infrastructure.
Of course, as has been said by my colleagues, we know you understand that P3s are not a magic bullet. In and of themselves, they will not solve the municipal infrastructure challenges in this country. This is what our partners have echoed, and this is what we've talked about at the municipal infrastructure forum with these guys and others.
However, P3s are an important instrument in a variety of infrastructure projects at the local level if we do them right. If we do it right, P3s can strengthen the implementation of a long-term infrastructure plan.
[Translation]
In the last few years, we have learned a few things about P3s and how to use them to deliver better services to the community. We believe that there are three very important lessons to be learned from our experience.
[English]
We think the experience to date with P3s has taught us three really important lessons.
The first is stable, secure investments. Making stable, predictable investments is the most important thing governments can do to improve our infrastructure. These investments extend the life of our infrastructure by supporting regular repair and maintenance, which is the single most important factor in keeping infrastructure costs down, but they also create the necessary conditions for P3s by providing municipalities with the secure revenue streams they need to enter into 20- or 30-year P3 contracts. On their own, short-term funding programs cannot meet the needs of public or private sector partners.
The second lesson is to make the P3 option more accessible. The current approach presents municipalities with an either-or perspective. A municipality can apply for cost-shared infrastructure dollars through something like the Building Canada fund, or it can access P3 funding. That's it: it's either-or.
Future federal infrastructure programs must ensure traditional investments and potential P3 project funding are available and delivered under a single framework. This will allow, for example, a community to apply for an application-based program like the Building Canada fund while still considering the P3 option alongside their application. If it is determined that the P3 approach is the most appropriate, then it can follow that path, but if it's not, then the municipality has other options. It has project funding opportunities through the other vehicles.
The third and final lesson is that we need investment in knowledge, support, and training.
When to use P3 models should be up to the individual municipalities, but municipalities need the information and expertise to make an informed choice and the support to manage new and complicated partnership agreements.
Costly business cases, lengthy program application processes and upfront legal fees can discourage municipalities from pursuing the option. Current P3 programs do not provide the support municipalities require to do this. Without this, increasing the use of P3s in Canada will continue to be a challenge. Support for building this capacity should be integrated into a new infrastructure plan.
In summary, there are three things. The first is to make secure, predictable, long-term infrastructure investments the cornerstone of a new long-term infrastructure plan and your P3 strategy. Second, make the P3 option more accessible by delivering P3s and non-P3 programs under a single integrated policy framework: future programs must integrate support for P3 in a design for all programs, rather than segregating it as a dedicated fund and, as I mentioned earlier, creating that either-or position that municipalities find themselves in. Finally, invest in knowledge, support, and training so that communities have the resources to cover high front-end costs and the expertise to develop and manage successful P3s.
[Translation]
Once again, Mr. Chair, thank you very much for giving us the opportunity to make this presentation to you this morning.
:
Thank you for the invitation. We're really happy to participate.
Mr. Martin, I appreciate your encouragement for us to enter into debate, but I'm going to decide to reflect on some of our experiences and I'm going to do my best not to editorialize throughout that.
We'll share some of the background with you on our experiences with the Alberta schools alternative procurement program, and I'll refer to it as ASAP, or ASAP 1 and 2, because we've gone through two rounds here in Edmonton Public Schools.
In Alberta, the provincial government's analysis of the economic climate and evaluation process determined during the last five years that a combined procurement model was the most effective delivery approach for building new schools. In Edmonton Public, that included six K to 9 schools, and later three K to 9 schools. Edmonton Catholic also built three during the same period using the same model.
The key goals of the ASAP projects were to build a large number of new schools in developing and developed neighbourhoods; consolidate schools into a single package for design, construction, and maintenance; and use public/private partnerships—P3s—to design, build, and finance the schools and maintain them for 30 years. This means that the contractor will oversee the design and construction of our schools using designs already developed in consultation with school boards and municipalities. It means a contractor also finances and maintains the buildings for that 30-year period.
The design of these schools is called a core school design. The core school concepts incorporate a permanent central space that includes a gymnasium, library, administration offices, classrooms, and specialty classrooms such as a music room, art room, and career and technology study labs, or CTS labs. Additional classroom space is provided through the use of modular classrooms that can be added and removed in response to changes in enrolment. From the governance perspective, the use of core school designs can improve the efficiency of construction, creating optimal value of public funds for a large-scale construction project.
Another important feature relates to the fact that all schools meet high-quality provincial standards and are built to achieve LEED—leadership in energy and environmental design—silver certification, an independent rating system used to measure environmental efficiencies. LEED-based construction will result in up to 45% greater energy efficiency and provide a healthier environment through improved air quality and the use of natural light.
What role did our school district play? Since our initial involvement with a project at Edmonton Public Schools, district staff had some general input into the core design process, as did several other school districts. Once the final design for the three basic school models was approved, the government engaged in a tendering process to complete the DBFM approach. The school board reviews its capital plan on an annual basis, and the board had already determined its need for new school construction and reflected this in its plan. The priority listing for construction was adopted by the government, and we immediately had to take concrete action to finalize sites, secure appropriate permits, and support the contractor with access to the sites.
Edmonton Public Schools has a joint-use agreement, or JUA, with the City of Edmonton and Edmonton Catholic Schools to allow community use and access after school hours for organized recreation and community activities. These new schools had to allow for this kind of use, and this was permitted in both rounds of construction.
The challenge for the community arose when local community groups wanted to lease space for activities such as play schools and other community services. The initial project did not allow for any leasing of space to third parties because of the complexities and potential risks associated with a contracted agreement. The agreement was also very complex, and adding another party would have made it even more so. We are happy to say, however, that the second round of schools provided some flexibility in this area.
It is a jurisdiction's decision whether or not to make these facilities available for other community uses outside the traditional joint-use agreement. School boards were encouraged to consider joint school and community use and plans to ensure that schools are child- and community-focused. We have partnered with the YMCA to create before- and after-school programs, which provide valuable services within the community. The ability to lease commercial operations is subject to meeting the requirements of the school board's purpose as defined in the Municipal Government Act, and would include child care operators, daycare operators, and other community use operations connected to school use.
Although it is still limited, it's definitely a move in the right direction when we look back at phases 1 and 2.
I'll describe some of the challenges that we've seen with the ASAP projects. I'm happy that Toby's here today and I want to highlight that we've worked really closely with our CUPE staff groups.
We work with three CUPE staff groups, namely support staff, custodial staff, and maintenance staff. Each of the groups presented dissenting and concerning arguments for the board not to enter into these agreements, but the real and pressing need for new schools was great, and the board of the day chose to move ahead.
The one group most affected by the project is the maintenance group. Maintenance is provided through the 30-year agreement. All maintenance of the buildings is conducted by the external party, Honeywell. After some initial relationships and quality issues, all groups have moved much closer together to address immediate and pressing issues.
Second, any small changes within the building required a formal change order, adding considerable time to the process. Modification may be needed to address student need, making the process less responsive than it might be in a traditional construction school. This will continue to be an area of focus for the term of the agreement.
Finally, in this area, custodial staff provides all services except for heating, ventilation, and air conditioning management, as is the case in most district buildings. Again, adjustment to the HVAC system requires calling Honeywell to address it. The response times have improved dramatically, but of course when we use our own maintenance staff, we think we have the best maintenance staff anywhere.
In terms of design, some design challenges emerged, particularly around exterior drainage and sidewalk entrances, in addition to the main entrances. These were rectified in the second round of the design. Adjustments were made to the interior design in the second round, making some spaces slightly larger for special purposes, such as the CTS labs for career and technology studies. For slight modifications and improvements in designs, the parties worked to be accommodating and supportive.
Finally, I'd like to say how grateful we are to have these schools. The children in these schools are happy to have shorter commutes to and from school as well as top-quality buildings to learn in. I also want to say how proud we are of our staff and all workers who were involved in the construction and opening of these buildings. The projects were completed on time, and we were happy to fill these sites with students who are keen and who are working very hard, although they're probably still sleeping this morning.
That said, we'd be pleased to respond to any questions you might have.
Thank you.
It's an interesting way of looking at the issue. I would echo what Michael said: above all, when you boil all of this down, the need for stable and secure funding is what's paramount. Not only does it send the signals to the public sector that there are going to be investments continuing in the future, but it also sends the signals to the private sector, as Michael was saying, that they can plan their activities for the coming years as well.
The key there is that it has to also be for the long term, while being stable and secure. At the risk of being too repetitive, I'll say that the long-term nature is of critical importance.
On the question about risk transfer, this is exactly part of the reason that the goal of the federal government should be to build the capacity of municipalities to manage those contracts, which, as I said before, is a skill set that's relatively newer on the procurement side and will allow municipalities to have a greater understanding of what exactly a P3 entails.
When all the parties are at the table with the same level of information and with an adequate skill set, that's when P3s really shine as an example, but getting there is where we're at now. Especially at the municipal level, we have a little ways to go. That's why we so appreciate being here today to talk about it.
:
I absolutely agree that long-term infrastructure planning is extremely important. We'll work together with them.
On the issue of risk transfer, I think a number of studies have said that.... Well, first of all, in terms of construction, most of the risk is at the upfront stage. Unless you're dealing with somebody who is going to have toll booths, there actually isn't a lot of risk in longer-term operations and maintenance. I think the Vining and Boardman study from UBC basically said that a lot of that risk, frankly, is not transferred.
At the end of the day—and I haven't seen any of the risk analyses that have done this—it's always the public sector that's responsible for providing that service. Pretty much all P3s in Canada are set up as special purpose vehicles, as I said, which means that the private sector can either go bankrupt or walk away. In Ottawa here, there are two small P3s that are profitable, but the big companies that own them—they're in arenas—walked away because they weren't making enough profit. Actually, one of them walked away; one of them demanded more money from the government.
The issue of capacity is really important. There was an experience in Nova Scotia with P3 schools. The contracts were about 2,000 pages long. The auditor there found that basically nobody in government had a handle on these. Some of the schools were owed hundreds of thousands of dollars. They didn't know about it. Nobody in government.... That's the provincial government.
Therefore the issue of having capacity to deal with these is really important, but as a number of people have said—and this gets back to another question—it's really only the big projects that should be viable in any sort of way for that, because of such high transaction costs and the need to have that ability.
:
Yes, and there is a role for SMEs in P3 partnerships. If you look at a typical construction contract, with a general or prime contractor and a number of subcontractors and a number of sub-subs below them, and suppliers, etc., and you look at it as a pyramid, the group most affected by the contracting method or the delivery method, P3 versus the other, is the top tier.
Those same trades, specialty trades, sub-sub contractors, and suppliers will all be engaged. It may well be that they will just be working for a different contracting party than they normally would.
My comment vis-à-vis the ability of Canadian firms to compete and for SMEs to compete was primarily at that first level, the so-called prime contractor level. They are the ones that normally, typically, would be dealing directly with the government. That's the group that is most challenged, not just by P3s but by the complexity and size of projects we see in Canada now.
There's no question that we've seen a trend over the last five to 10 years in that projects in the infrastructure area are becoming much bigger and much more complex. That is going to tax and challenge that first level, that first contracting level, regardless of what the delivery method is, because you need the capacity to take those on.
It's extremely important, and I keep coming back to this, from a planning perspective. If you own one of those companies that typically has been bidding on $2 million to $3 million school projects and you hear that a provincial government is going to start bundling those and turning them into $30 million or $40 million projects, gee, I guess you'd better do something.
It would be nice to get some advance notice of the fact that this is where your market is going and to know that it's not going to be a market that's going to disappear overnight because a funding program has come to an end.
I'm probably going on too long.
To Mr. Atkinson, we hear your message loud and clear about long-term planning, but we live in a political world here. I've been a municipal councillor, which has a little more stability, technically. Federally and provincially, whether you're in a minority or a majority government, governments are short-lived, and plans are not....
Unless you lived in Ontario for a number of years, when we had a Conservative government for 40-some years or whatever it was, it's very difficult to plan long term. I understand the concept and I understand it would be great for us, but it's a very difficult piece.
My next question is really more of a comment. We got a “Building Canada Together” document just the week before. It's from Minister—who'd like to be premier, I think—Bob Chiarelli, a former municipal mayor. Part of that, a whole chapter, is on privatization and having the private sector involved.
The Province of Ontario says, as one of its recommendations, the following: “Promote the wider use of AFPs”—that's P3s at the provincial level—“across all federal infrastructure funding programs and jurisdictions when appropriate....” The message from the Province of Ontario—and I'm from Ontario—is that P3s do work.
Now, I would agree with you, and we've heard from every single witness, regardless of which office they're from, that P3s do not apply to every single project, but what would you say...?
You know, we're getting input from provinces, partners, that they want a national infrastructure project, and part of that funding mechanism is the private sector involvement. To me, it sounds as though they believe it's working, and I would like your opinion.
Mr. Sanger, I know you mentioned that you worked for the province as an economist. Under which government did you work? Would you have given them advice at the time to look at P3s?
:
My thanks to our guests.
I am speaking to Mr. Sanger directly. I just want to sum up what has been discussed in several of our meetings up to this point.
Historically speaking, in Italy, the bridges that the public sector built are still in place. But a number of years ago, it was decided to call on the private sector, supposedly to save money. Look at the Charbonneau commission at the moment and you see more and more wrongdoing. Look at the Olympic stadium. Everywhere you look, you can see problems.
The private sector is in a bit of a panic. The solution that has been found is to come up with contracts that are more and more complicated, and that rely more and more on the private sector. That is the solution to the problem. The contracts have walk-away clauses. In those contracts, if there are unforeseen risks, the fees go up. All this is supposedly to save money, although private companies exist to make a profit. I have a bit of a hard time accepting that concept.
Look at the projects. There may be no failure, but there is no success either. We are still studying the situation. But the figures do not lie.
We are talking about the future Champlain Bridge at the moment, but they are keeping the toll bridge on Highway 25, supposedly in order not to increase the taxes people pay, which are already too high. At the same time, you have to pay $8.50 or so to cross the bridge. They say it will be fine when it is handed over to us, because the bridge built by the first company is holding up and people are happy.
Yes, there is long-term planning. But I find it hard to understand why the company that built the bridge is linked to the company maintaining the bridge. I do not see how the risk can be shared. As a concept, it is a little odd.
Do you have any alternatives to P3s? Are there other formulas? Are we looking at other things or do we still think that they are the only way to go?
:
Thank you, Mr. Chair, and thank you, guests, for coming in today.
The biggest impacts of a P3 approach have been mentioned a few times. The biggest is the built-in desire to minimize the total life-cycle costs over the life of a project or an initiative. It's built in not because of good will but because of a contract.
Second, there's a built-in desire to deliver projects on time and on budget. Again that's not good will; it's because of a contract. Many people have identified that there's a transaction cost up front, that contracting is a real challenge.
We had a couple of people from the Canadian Council for Public-Private Partnerships on Tuesday of this week talking about how in Canada we've developed some unique expertise and some best practices in contracting compared with those in the U.K., where very often it takes four years after the selection of a preferred bidder to actually finalize a contract. In Canada we're able to get it done generally, on average, in 18 months.
It's a good thing that we have this intelligence in Canada. Maybe there's something good in our water, but it might also be our legal system and our engineering and contractual expertise that enable us to do that.
I want to make another point of comparison. In the U.K., there was a Treasury report—and this is under the Labour government, by the way, so it's not necessarily a partisan issue—that mentioned that 20% of P3 projects had been delivered late or had run over budget, but that was compared with 70% of conventional public projects, so again the incentive in the P3 contract is really what helped drive the human behaviour to get these things done on time and on budget.
Finally, here is a little quotation, again showing that the P3 approach is not necessarily ideological in that it spans different types of governments. In my province, Ontario— quoted this same report—Bob Chiarelli was saying:
Having private sector firms pay for cost or budget overruns creates the correct incentives to ensure that projects are delivered on time and on budget. Research demonstrates that AFP projects
—that's alternative financing and procurement—
have delivered substantial savings to Ontario, British Columbia, Alberta and Quebec.
I want to pose my question to Mr. Atkinson. From the point of view of a builder, could you talk about this incentive to get the projects done on time and on budget and how it differs under a P3 environment from the case under a traditional design and procurement and construction project?
:
Well, very often it's because of the additional risks or incentives that are in the contract. You may have a situation.... For example, if you have 18 high schools bundled, you must deliver those all at the same time and at the same opening date, and you take on the risk of any delay, no matter where the delay's coming from, whether it's a delay that is in your control or not.
We'll be honest: the private sector has one way of dealing with that risk, and that's to throw money at it. I am sure that faced with that kind of situation, you will try to mitigate the risk by ensuring that you can control anything you can, but at the end of the day you want to make sure that you don't lose your shirt.
So yes, the penalties can be pretty stiff, but at the same time this methodology gives you the ability, as part of the finance closing, etc., to ensure that you have done what you need to do as a private sector partner to ensure that.
Now, given the fact that the consortium also is going to be responsible for that asset over a 30-year life, everything that the Edmonton public school board gentleman said is absolutely bang on. You're going to ensure that for the 30 years or 35 years that you have this, you haven't set yourself up for a drain on your purse either. You're going to want to make sure that the school is properly designed and properly built, so that the maintenance and operation of that facility isn't a burden. Therefore there is that added incentive as well, because you are going to be controlling the maintenance and management of the facility.
I want to make a quick comment. I wish all of our major capital projects went through that kind of discipline and regimen to ensure that what we were going to do for the next 30 years had been thought out. It's one thing to say that we have a budget overrun with the initial capital cost; that means nothing in terms of a 30-year or 35-year life cycle.
I'll follow up on that because this was in part a response to a labour market that was getting very difficult to find resources in and it wasn't uncommon for individual projects to be a year late because of the unavailability of particular tradespeople.
The massing of a certain size made the project such that you could get the resources, you could plan the resources. As well, there was an encouragement that with costs escalating at 12.5% per year, if you were delayed a year, your costs just went up 12.5%. The cost control was in getting things done.
The cost control was also in making sure the design was buildable in the first place and making the contractor responsible for the ultimate design and the processing of any internal change orders and whatnot, which can cripple you. Going into the project, the best way to minimize risk, regardless of whether it's a traditional contract or a P3 contract, is to make sure you do your homework ahead of time. If you get caught in a project that is running late and you don't have time to do that, that's usually where a project runs into difficulty.
Therefore first of all, it's the process of getting the size, the size of the contractors, and the wherewithal in doing the advanced work that's required because of the specificity of the contract itself. You've got to sign a contract so that everybody knows where they're coming from, so you've got to know what you're talking about and you're not designing it as you go. I think that's probably one of the key reasons for getting things done on time.
The other is that because of the size, you're able to get preferable supply arrangements with some of your suppliers and your contractors.
:
I think that's the case. For one reason, the Edmonton P3 schools were modular; they were basically all the same design. That helped to accelerate it.
There's no secret to a lot of these things. If you bundle them like that, you can obviously move much faster. If you throw more money at a problem, you can accelerate those things. If you have life-cycle costing within government, that can deal with it. That can ensure some maintenance money as well.
Mr. Trottier raised some issues about the timing. One thing about P3s—and you didn't see this in that report—is that they require a lot more planning up front, so often when they're comparing P3s against traditional procurement, they're not doing it from the same baseline.
Another thing I wanted to follow up on, in terms of the Edmonton public schools, is that although you can see a lot of the contracts online and there's a lot of detail online, the key financial information is missing. A number of organizations went to court for two or three years just to get the financial information on the Brampton hospital, one of the first P3s in Ontario. Supposedly, it was saving hundreds of millions of dollars. That's an issue of transparency. Then the auditor looked at it and found that it actually cost $600 million more than it supposedly did, according to the value-for-money audit, and that if it had been done publicly it would have cost $200 million less. That's an independent assessment.
It's really important. It may be simple to say you need to fix the value-for-money reports and you need to have transparency, but it's a really big thing, a really important thing.
You all agreed when I said it would be a bad idea to ramp up P3 and correspondingly ramp down traditional funding. You all agreed with that. However, if I listen to Mike Wallace, that's what he's effectively saying, I believe, because he keeps saying how wonderful PPs are, or PPPs, and he's also said—
Mr. Mike Wallace: PPs are provincial parties, and there's a note saying that.
Hon. John McCallum: My main point is that you say long-term funding is politically very difficult, if not impossible.
Mr. Mike Wallace: Oh, yes.
Hon. John McCallum: I think that's totally wrong. I will give you two examples: the 10-year health accord under Paul Martin provided stable increases in funding for 10 years. It was health, but it could have been infrastructure. The second is the gas tax transfer. That's clearly long-term funding.
Mr. Atkinson and Mr. Carlton, in the remaining minutes, could you explain to us why, notwithstanding Mr. Wallace's comments, long-term funding is critical to you and whether you have any ideas for mechanisms through which it could be delivered?