Government Operations Committee on Oct. 4th, 2012

[The Chair, NDP, Pat Martin]

We will call this meeting of the government operations committee to order. We're meeting today to begin at least an overview of a study we wish to undertake on public-private partnerships.

We're very pleased today to welcome the CEO of PPP Canada, Mr. John McBride.

Thank you for taking the time to be with us today. If you'd like to begin with a brief presentation, then we'll open the floor to questions.

[John McBride, Chief Executive Offiicer, PPP Canada]

Thank you, and thank you for the invitation to appear today. It's my pleasure to be here on behalf of PPP Canada to speak about P3s and the Canadian P3 market.

As members of Parliament, you're acutely aware that Canada faces a great need for infrastructure renewal. According to the Federation of Canadian Municipalities, in 2007 they identified a potential infrastructure deficit for all levels of government of between $350 billion and $400 billion. As a consequence, governments across Canada are pursuing ways of getting the best results for their infrastructure dollars. Many have recognized the value of engaging private sector expertise and innovation through public-private partnerships, more commonly known as P3s.

P3s are a means to inject greater accountability, whole life-cycle cost optimization, and financial discipline into governments' contractual relationships with the private sector. In Ontario these types of deals are known as AFP, or alternative financing and procurement. In the U.K. they are known as PFI, or private finance initiatives.

Broadly speaking, P3s refer to an umbrella of concepts related to the role of the private sector in procuring public infrastructure. PPP Canada defines P3s as a long-term, performance-based approach for procuring public infrastructure, where the private sector assumes a major share of the responsibility in terms of risk and financing for the delivery and performance of the infrastructure, from design and structural planning right through to long-term maintenance.

In practical terms, this means that governments do not pay for the asset until it is built, and a substantial portion is paid over the life of the asset only if it is properly maintained and performs. The costs are known upfront, meaning that taxpayers are not on the financial hook for cost overruns, delays or any performance issues over the asset's life.

For example, imagine that the company that built your house was also responsible for any repairs and maintenance over your 25-year mortgage. Given the amount that you will pay them every month once it is constructed is agreed to before the house is built, your payments do not go up if something breaks or needs replacing. Because of this, your builder would consider the most cost-efficient way of doing something: perhaps installing a metal roof rather than shingles—more expensive to install but more durable and thus easier and cheaper to maintain. Furthermore, if your air conditioner breaks and it isn't repaired in the agreed upon timeframe, you can deduct from the amount of your next payment to them.

P3s are not privatization. Rather, they are contractual relationships with the private sector for the designing, building, financing and maintaining of public infrastructure. Ownership of the asset remains with the public sector.

P3s quite simply are a tool in the tool box to deliver public infrastructure investments Canadians need. They're not always the right solution, but when applied to the right projects, they can provide many benefits, including greater money for value for taxpayers, on-budget and on-time delivery of public infrastructure, greater accountability and performance standards, greater consideration of the whole life cycle of a project, and fiscal planning certainty. And they allow the government the ability to focus their efforts on what they do best, defining the services Canadians need instead of prescribing how they should be delivered.

P3s do involve costs. The cost of private sector financing is higher, but the involvement of private sector finance is critical to achieving the benefits as it ensures risks are transferred and the disciplines and incentives to achieve better results exist. P3s also involve greater upfront planning and bid preparation costs as the private sector must commit to a long-term undertaking and put their money at risk.

However, P3s are the right solution when the benefits exceed the cost. This requires thorough, upfront analysis. Our experience is that this upfront work produces better projects, even if a P3 approach is not ultimately the preferred option, as it requires a more systematic consideration of costs, risks, and performance expectations.

In general, P3s are more suitable for larger, more complex projects where performance expectations can be clearly specified and are stable over time. Canada is recognized as a global leader in P3s. While P3s have a long history in places such as the United Kingdom and Australia, increasingly people are looking to the Canadian experience.

With the ability to draw on experiences of other jurisdictions, Canada has been able to apply best practices and lessons learned to create a market that is now leading the way. In May of this year, PPP Bulletin, an industry trade publication, conducted a survey to determine the top P3 markets. Canada came out on top.

Why exactly is Canada leading the way? There are a few reasons. Canada does P3s for the right reasons. The priority is about value for the taxpayer. It isn't about off balance-sheet financing, but rather an in-depth value-for-money analysis to determine if P3 is the best procurement option.

Canada has developed strong public sector institutions in the field of P3s. Public corporations and agencies have been created in Alberta, British Columbia, Ontario, Quebec, New Brunswick, and federally, which has contributed to a sustained project pipeline; imposed the application of accepted methodologies, documentation, and deal structures; and, more importantly, has helped educate and bring awareness to the P3 model.

Canada has deep and cost-effective capital markets. Canada is not reliant on long-term bank financing for projects, which has become less available and costly since the financial crisis. Rather, Canada has been able to employ bond market solutions, which has allowed projects to close at competitive rates of financing.

Canada is also open to strong competition creating a highly competitive market. This ensures best value for taxpayers. The Canadian market has both strong domestic and international players that partner together to produce excellent results. Canadian success is increasingly making P3 an export business for Canadian industry.

Canada has a diverse and growing pipeline. The strong historical deal flow from leading provinces is now being supplemented with projects at the federal and municipal levels. The use of P3s is also broadening to new asset classes. This growing and diverse pipeline is increasing experience and is attracting more competition, which results in lower costs for taxpayers.

In 2007, the Government of Canada saw an opportunity to leverage its role to generate better P3 solutions through the creation of our organization, PPP Canada, a federal crown corporation. In addition, the government has appointed a very seasoned board of directors, whose members all have considerable private sector experience.

PPP Canada has been operational since 2009, and its business priorities are threefold.

First, we act as a source of expertise and advice on public-private partnership matters through P3 knowledge development and sharing.

Second, we have a mandate to carry out evaluations and provide advice regarding the execution of P3 projects undertaken by the federal government.

Third, we work with provinces, territories, municipalities and first nations to build public sector expertise.

In that context, the corporation administers the merit-based $1.2-billion P3 Canada Fund, which focuses on innovative P3s, thereby supporting economic and job growth.

PPP Canada is a knowledge organization. We have developed tools and materials to support our work and that of our clients. We have formed relationships with procuring jurisdictions across all levels of government in order to share lessons learned and experiences.

We look for opportunities to increase knowledge and capacity, while working towards shaping the Canadian P3 market by fostering a P3-friendly culture and sharing best practices.

Recently, the Government of Canada has closed two of its own P3 deals: the Communications Security Establishment Canada Long-term Accommodation project here in Ottawa and the RCMP “E” Division Headquarters project in Surrey, B.C.

Budget 2011 created a new federal P3 screen, whereby federal departments and agencies are required to evaluate the potential for using a P3 for federal infrastructure projects with capital costs of $100 million or more and a life cycle of at least 20 years.

Our corporation is currently acting as lead P3 advisor to Transport Canada on the new bridge over the St. Lawrence and the Detroit River International Crossing, as well as working closely with other federal departments and agencies as they apply the screen and assess their projects for P3 viability.

In addition to our work with our federal clients, we focus on advancing the P3 market at the provincial, territorial, municipal, and first nations levels. The $1.2 billion fund allocated over five years is a merit-based program that supports P3 infrastructure projects that achieve value for Canadians, develops the Canadian P3 market, and generates significant public benefits.

As a result, to date the government has announced P3 Canada fund commitments to a total of 12 projects of various models, sizes, and infrastructure classes, for a total funding contribution of over $387 million. These investments will, in turn, leverage more than $1.5 billion in P3 infrastructure investments across Canada.

PPP Canada's mandate is to improve the delivery of public infrastructure by achieving better value, timeliness, and accountability to taxpayers through P3s. At PPP Canada we are committed to working with all levels of government to ensure that Canadians get the best value for their infrastructure dollar.

Thank you. I look forward to your questions.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. McBride.

We have a list of questioners. The first, for the NDP, is Linda Duncan. You have five minutes please, Linda.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Thank you very much, Mr. McBride.

I've noticed in the materials, in your presentation, that there has been more than a billion dollars committed to the end of this fiscal year. Can you provide to the committee—and you don't have to give us all the details right now—the breakdown in the money spent on establishing this P3 unit, the amount of money that is actually committed to building infrastructure, and the amount of money that is actually given to all the government departments to manage P3 facilities?

[John McBride]

Our budget has three components: to develop knowledge around P3s, to work with the federal government, and to deliver the P3 Canada fund.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

I understand the mandate. You don't have to give me the figures right now, but I'd like the breakdown.

Could you provide information—we'll have further witnesses—on whether any of this federal money that's committed for developing and managing long-term P3 projects is actually allocated to the departments that have to manage those projects?

You mentioned there has been experience with P3s in Canada and a great deal of success. I'm afraid there are some exceptions in the province I come from, Alberta. The Bovar P3 has been an abject disaster, costing Albertans half a billion dollars to bail out the company. So understandably there's a high level of skepticism for any P3 at any level of government in Alberta because of that.

Could you provide to us any audits done of any of the P3 projects the federal government has been engaged in, and where the period of the audit...? For example, would it be correct for me to presume that your office is not only developing the system and helping to train departments, but also auditing whether the system is really saving the money they have professed to save taxpayers?

[John McBride]

On that last question, we certainly do value-for-money analyses on these kinds of things. Obviously the role of auditing the federal government falls to the Auditor General. Our organization is subject to audit, both special examinations and audit by the Auditor General in terms of his responsibilities.

On your first point, I would point out to the committee that the term “P3” is broadly and loosely applied by many people in different contexts, ranging from any kind of engagement with the private sector to situations where significant long-term private capital is applied. I would note to the committee that when calling witnesses, people have different definitions of a P3.

I wouldn't want to speak particularly about the project you identified in Alberta, but they have had significant success in the construction of ring roads. Edmonton has P3s, delivering them on budget, on time, and faster.

I can't speak specifically to the project at hand. But if there were, in fact, significant private sector capital at risk in a way that a P3 project should be constructed, then they wouldn't be on the hook for bailing out the company, because their money would be the money at risk.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

That is a question that I wanted to ask you. It's been brought to my attention, as you mentioned in your presentation, that the P3 screening requirement is being imposed on every federal government department. As a result of that, Minister Duncan proposed P3 for building first nations schools. I understand—I think it was yesterday—it was roundly rejected by all the first nations.

So it's a twofold question. What is the decision-making process? Who actually makes the final decision whether or not P3 will be pursued? Who decides on the terms of those undertakings? You have spoken about the risk of the private capital, but where is the protection in those agreements for the risk of the public investment if that project goes under or if there are cost overruns?

[John McBride]

On the first question of the $100 million screen, that's a Treasury Board policy. As a source of expertise, we advise departments on the application of the screen.

I would point out that the screen is only to identify whether P3 is a viable option. If it is a viable option, then a full-blown P3 procurement options analysis would have to be done.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Who decides if it's viable? Is it the minister, each department, the P3 office, or cabinet?

[John McBride]

The departments apply the screen themselves. They can consult us. We provide them advice on whether or not we share their view. It is a requirement to consult us. At the end of the day it's the responsibility of the department. Ultimately departments are accountable to the Treasury Board for the application of its policy.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Are there safeguards in the agreements?

[John McBride]

On the question of the structure of agreements, I can speak to the two from the RCMP and the Communications Security Establishment Canada. Both of those projects have significant private sector capital at risk. The project agreements involve no payments to the private sector until the project is complete and certified by an independent engineer. So all of their money is at risk. No federal money is at risk until they have delivered. If something happened in the course of those projects—it hasn't yet—it would be first the equity investors and then the debt investors who would be responsible for remediating the situation, or they would lose their money and the federal government would take over the asset and would not have paid a nickel into the project.

That is why it's important for these types of contractual structures to be well established. Private sector capital is at risk. That is what underpins the discipline for performance and actually ensures that risk is transferred. Some people call something a P3, but if there isn't significant private sector capital at risk, then I would argue it's not really a P3. It would be an outsourcing relationship. There are lots of contractual relationships that governments have with the private sector, and some people broaden the definition of P3 to include those. My view is that something is a P3 only when there is significant private sector capital at risk; otherwise it's a P2.

[The Chair, NDP, Pat Martin]

Bernard.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Thank you, Mr. Chair, and thank you, Mr. McBride, for coming in.

Before asking a couple of questions, I just want to salute the chair. We're really working across party lines in a general spirit of inquiry. We're trying to examine P3 investments as a long-term critical challenge for Canada. So we'll always be advocates. We are partisan in our way, but we really try to understand the advantages and disadvantages of P3. What are some of the pitfalls and what can we learn?

You mentioned that there are Canadian firms that have developed a lot of expertise. The Confederation Bridge is a great example of a P3, a big engineering challenge, a big financial challenge. I like to think of some of the firms that were involved in getting that construction project brought to fruition. Strait Crossing Development Inc. is using the expertise it's developed to do P3 projects around the world. They are working on the metro transit tunnels in Seattle and the Gdansk Grain Terminal in Poland. Another of the partners was Borealis Infrastructure, which is an interesting entity because they are owned by OMERS, the Ontario Municipal Employees Retirement System. They have about $50 billion in P3 assets that they are investing in about 20 projects around the world. Their portfolio includes things that are not traditional infrastructure, like a satellite that is providing North American distribution services, and life labs, providing diagnostic services.

So what is it about Canada that makes us a world leader in P3s?

[John McBride]

Those are great points. I appreciate that there is a lot to learn about P3s. It's an excellent area, so I'm really delighted that the committee is spending some time on it and trying to understand this.

Canada has emerged as a global leader, you're quite right. Its companies now, both as investors and as engineers, have taken their expertise internationally.... As I said, one of the things that has made Canada a global leader is that we're doing P3s for the right reason. That's to the point that was made before that not all P3s are a success. They're not a success if you do them for the wrong reasons.

If you look at it internationally, and in fact even if you look back at Canada, there was a big drive 20 years ago. P3s were actually a way for some governments to do things off budget. Canada has been very clear about its public accounting standards: P3 projects are on budget. It's not a way of avoiding the capital budget discipline. It's about efficiency and effectiveness. It's not about trying to skirt budget rules. In some circumstances it has been, in some countries, and that's particularly in the European context, but it's actually a technocratic question of whether or not this will deliver better value for money. Therefore, if you're driven by better value for money, you'll end up with the right result.

Canadian capital markets are strong, so we have significant life insurance, bond market.... We have, unlike other countries, created institutional capacity, so you'll see organizations like Infrastructure Ontario and Partnerships British Columbia. These are complex projects. They are complex commercial deals. It's not the kind of thing that an average department does on a regular basis, because they tend to be the larger and more complex projects. By consolidating and bringing in the right expertise to actually execute these deals, there has been significant success.

The build-out of the health system in Ontario through P3 has been an enormous success, as has the Sea-to-Sky Highway. You can go through a number of examples. It's true in Alberta, where they have built a unit within their treasury board. That institutional capacity has been quite effective.

Also, there's competition. Very strong competition and very clear rules for competition have made Canadian companies stronger, because they have been able to partner with other people, so some of that experience.... They've partnered with international firms, they have learned, and they have developed. They've been able to use that as a springboard into other projects. It's one of those ones...if you actually have a competitive market, it makes the domestic industry stronger and gets you better value for taxpayers.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

What I'm hearing is that it's the different components of that knowledge economy. You talked about the legal system, the financial system, engineering expertise, and those competitive markets. That's what makes it a vibrant reality, I guess, when it comes to building not just for Canada but for other projects around the world.

You mentioned Australia and the U.K. in your comments. Are certain jurisdictions or certain entities known as the real leaders that we could learn from?

[John McBride]

Both the U.K. and Australia and to an extent France and other European countries.... There are 75 countries with P3 programs. I think there are lessons to be learned from all of them, both good and bad. We've learned about value-for-money analysis. We've learned about how to deal with operating and maintenance through the life cycle of these kinds of things.

We've also learned other lessons. You have to make sure that you keep it as a tool in a tool box and you don't say that P3s are the solution to everything. They're not the solution for everything. It's like any tool: if you try to apply a hammer to the wrong kind of situation, you'll get the wrong result. There's nothing wrong with the hammer; you just didn't use it in the right circumstances.

I think the U.K. is going through that. I think they've learned that they've done it for some projects that were too small, frankly. So where it works and where it doesn't work...those are some of the things that we can certainly learn. In Australia, it's very much at the state level, in the State of Victoria and the State of New South Wales, so Partnerships Victoria is a place to learn from.

I think the experience the U.K. is going through in their initiative, where I think they're realizing that they have probably gone too far in the PFI, is another good lesson for Canada as well.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Thank you.

[The Chair, NDP, Pat Martin]

That concludes your time, Bernard. Thank you very much.

Next, for the NDP, Denis Blanchette. You have five minutes, Denis.

[Denis Blanchette, NDP, Louis-Hébert, QC]

Thank you, Mr. Chair.

Good morning, Mr. McBride. I'm glad you're with us today.

In the beginning, I was a bit disappointed by your presentation. You spent a considerable amount of time extolling the virtues of PPPs in an ideal world. But I wanted to hear more about what you have done, at the end of the day. You said, for example, that you were a leader, a model for others, but I wish you would have explained what makes you a leader. I have yet to see or hear anything in that regard. You also said that you're protected when entering into PPP contracts because of the solid deal structure in place. I wish you had elaborated on that as well.

Would you be able to provide us with documentation outlining your deal structure, to show us that when the government enters into PPP contracts, taxpayers are well protected? I would very much appreciate that.

You indicated that so far you've funded 12 projects for a total of $387 million. What kind of funding is it exactly? What elements does the funding cover? Is it meant to provide cash flow or to bring down interest rates? I would like you to talk about that.

[John McBride]

Thank you.

As regards deal structures, it's tough to share details about specific contracts or deal structures because they are extremely complex. They are legal agreements. I can give you examples of structures. A deal structure involves a number of parties. It's incredible how much you learn when you see how the whole thing works, if you're patient enough to go over a draft agreement from start to finish.

On the issue of funding, we have a $1.2-billion fund. Initially, we tried to figure out how we could add value to the PPP market. We spoke to private and public stakeholders. I'd say the feedback we got is very much in line with the reality: the private sector doesn't need government assistance as far as PPPs go. The PPP industry has extensive expertise and the capital markets are deep and competitive. So our focus is on the public sector. Our contributions and investments go to provinces, municipalities and first nations.

Our role in a project is to provide expertise to provinces and municipalities—especially municipalities given their lack of PPP experience. We also help by making projects more affordable. Our contributions go to provinces and municipalities.

[Denis Blanchette, NDP, Louis-Hébert, QC]

So none of your funding goes to the federal government, just the other levels of government.

[John McBride]

Precisely.

[Denis Blanchette, NDP, Louis-Hébert, QC]

The 12 projects you mentioned, then, aren't federal projects; they're projects undertaken by other levels of government. Is that right?