Government Operations Committee on Oct. 23rd, 2012

[The Chair, NDP, Pat Martin]

Thank you very much.

Alexandre, I'm sorry to cut your time short, but it was such an interesting panel that we all went a little bit over in our questioning.

We'd like to thank very much Mr. James Paul and Mr. Siemiatycki. I'm sorry to see you go, Mr. Siemiatycki, because we've just learned how to pronounce your name properly and now we have to say goodbye. But thank you very much for time very well spent and for a very useful contribution from both of you.

We'll suspend the meeting briefly while we invite our next witnesses to come forward.

Thank you very much, gentlemen.

[The Chair, NDP, Pat Martin]

Ladies and gentlemen, we will reconvene our meeting of the Standing Committee on Government Operations and Estimates and our study of public-private partnerships.

We are very pleased to welcome our next panel of witnesses. First of all, I'd like to introduce and welcome the mayor of Canada's sixth largest and, some would say, most beautiful city, certainly on the prairies, His Worship Mr. Sam Katz.

We're very pleased to have you here, Your Worship. It's a great pleasure.

[Sam Katz, Mayor, City of Winnipeg]

A very objective opinion, as you always have.

[The Chair, NDP, Pat Martin]

I never promised objectivity.

Also with Mayor Katz is the press secretary, Rhea Yates—welcome, Rhea.

We have Mr. Drew Fagan from the Government of Ontario, deputy minister for infrastructure. It's very important and very valuable to have you here, sir, and also Mr. Bert Clark, from Infrastructure Ontario, which keeps coming up in all of our deliberations on this subject, so it's very timely and appropriate that you could be with us here today as well.

You folks know the format, I believe. We invite five to ten minutes of opening remarks from all of you, as briefly as you can. Then we like to leave as much time as possible for questions from committee members.

The order on my agenda is to begin with His Worship, Mr. Sam Katz, Mayor of Winnipeg.

[Sam Katz]

Thank you very much.

First of all, I'd like to thank the House of Commons Standing Committee on Government Operations and Estimates for choosing to study the opportunities, advantages, and the effectiveness of using public-private partnerships in the delivery of federal government services.

The City of Winnipeg has found PPP or P3 projects, as they are called, to be phenomenal tools. They are not the right fit for every project, but for major infrastructure renewal, they make good sense for municipalities that need to stretch their infrastructure dollars further.

Like most other Canadian municipalities, the City of Winnipeg is faced with a pressing need to maintain and replace its critical infrastructure. At current levels of funding, the City of Winnipeg's infrastructure deficit is projected to reach $7.4 billion by 2018. Many of our roads, bridges, water and sewer systems, and community facilities require major upgrades and repairs, as they were built more than 60 years ago.

When we look at how to fund these projects, however, we come up short. As you know, municipalities are heavily reliant upon federal and provincial funding. We have few options for raising revenue outside of property taxes, fees, and permits. As members of city council, our challenge is to keep the budget balanced, maintain essential services to citizens, and reinvest in crumbling infrastructure, all at the same time.

P3s have offered one solution, allowing us to replace critical infrastructure while making wise use of taxpayer dollars. In essence, P3s allow the public sector to focus on defining the output—which may be better traffic flow or upgrading facilities—while leaving it with the private sector to provide the most productive way to deliver these outputs. From the city's perspective, P3s have four major benefits.

One, P3 projects provide the City of Winnipeg with long-term budget certainty, as all costs are determined up front.

Two, P3 projects encourage contract discipline, since there is no benefit to the contractor from incurring cost increases.

Three, P3 projects provide maintenance guarantees. City-owned assets will be turned over to the City of Winnipeg in good condition 30 years after the project is completed.

Four, P3 projects encourage innovation. Contractors are motivated to complete the project in the most efficient and sustainable ways, as they have responsibility for the long-term maintenance.

City of Winnipeg taxpayers have benefited from the P3 approach on several projects. The Chief Peguis Trail extension project, for example, marked the first time a Canadian municipality received a PPP Canada grant, and positioned Winnipeg as a municipal leader in P3 projects. This project involved extending a four-lane divided roadway for nearly four kilometres.

Completed on budget and one full year ahead of schedule, the Chief Peguis Trail extension project provided Winnipeg residents with early access to a roadway that took through-traffic off residential streets and onto a major thoroughfare. The project also included the construction of landscaping, multi-use pathways to encourage walking and cycling, and noise walls and berms to reduce traffic noise. This was a $108 million project. The design-build-finance-maintain approach is expected to bring value-for-money savings of approximately $31 million compared to a traditional procurement. Remember, the City of Winnipeg will have no maintenance risk on this project for the next 30 years.

The Chief Peguis Trail extension was named the province's best managed project for 2012 by the Project Management Institute of Manitoba.

This year, the City of Winnipeg is seeing the same success with the Disraeli Freeway and Bridges project, the city's largest bridge project and a P3. This major roadway connects the northeast part of the city of Winnipeg with downtown. Approximately 42,000 people travel these roads and bridge structures every day. One of the project’s major successes involved keeping four lanes of traffic open during all peak travel times during construction.

This new infrastructure will have a life of 75 years. By choosing to develop the Disraeli project as a P3, the city has been able to protect taxpayers from cost overruns, update a critical piece of aging infrastructure, and ensure that a well-maintained asset is transferred back to the city in good condition after the 30-year term. An independent, value-for-money assessment of the Disraeli Freeway and Bridges project determined that the City of Winnipeg will save approximately $47.7 million as a result of the P3 approach.

So when is a P3 not appropriate?

They’re not the best choice when the municipality already has a good track record of delivering projects of similar size and scope. In essence, a P3 is like an insurance policy: a premium is paid and the risk is transferred. If the risk transferred is greater than the premium, this represents positive value for money.

As you likely have gathered, the City of Winnipeg brings in a third party to assess the value for money in order to ensure that a P3 is the right choice.

I hope I have demonstrated the value the P3 model offers the City of Winnipeg. Our citizens gain from new infrastructure and from the cost certainty that P3s provide. We should never forget that it’s our public infrastructure that keeps us safe as we travel from work and back again each day. Our infrastructure forms the very foundation of our cities.

Unfortunately, most Canadian municipalities are at a tipping point. As the Federation of Canadian Municipalities has recently stated, our choice is to invest in infrastructure or stand by as the repair bills increase along with the possibility of serious infrastructure failures.

I have no doubt that in 30 years, when the future Mayor of Winnipeg takes a tally of all the major infrastructure projects being turned back to the City of Winnipeg in top condition, he or she will say, “Thank goodness for P3s.” That's why, as Mayor of Winnipeg, I will continue to be vocal about the benefits of public-private partnerships.

Thank you for having me here today.

[The Chair, NDP, Pat Martin]

Thank you, Mayor Katz.

It will be of interest to some people in Winnipeg that you don't intend to be the Mayor of Winnipeg 30 years from today. That's a newsworthy little tidbit.

[Voices]

Oh, oh!

[The Chair, NDP, Pat Martin]

Thank you very much, Mayor Katz.

Next, then, in the order that we have in our agenda, is Mr. Bert Clark.

[Bert Clark, President and Chief Executive Officer, Infrastructure Ontario]

We're going to reverse here; Drew is going to start.

[The Chair, NDP, Pat Martin]

The deputy minister for infrastructure for the Government of Ontario, Mr. Drew Fagan, will be next.

[Drew Fagan, Deputy Minister, Ministry of Infrastructure, Government of Ontario]

Thank you, Mr. Chair.

I appreciate the opportunity to speak today about the Ministry of Infrastructure and the ministry's central role within the Ontario government to oversee capital infrastructure investment. The ministry is integral to modernizing Ontario's infrastructure, and also has responsibility for overseeing Ontario's growth planning policies and Ontario's large portfolio of real estate assets.

In this role, the ministry has legislative responsibility for Infrastructure Ontario, the agency of the government that manages delivery of major infrastructure projects. I should note that IO's responsibilities have increased since the June 2011 merger of the agency with the Ontario Realty Corporation, which managed the realty portfolio I just mentioned.

Well-maintained public infrastructure is the backbone of a strong economy and the cornerstone of healthy communities. But from the mid-1970s until the turn of the century, developed economies typically underinvested in infrastructure. Over the past decade, however, there have been significant increases in international infrastructure investment.

In Ontario, the province has been making historic investments in public infrastructure. In total, Ontario invested about $75 billion in infrastructure from 2004-05 to 2011-12 and plans to spend another $12.9 billion in this fiscal year.

As the province committed itself to increased investment, there was also recognition of the need to modernize our approach and reform our methodologies around infrastructure expenditures. In other words, in order to enhance economic competitiveness and improve delivery of social programs, the Ontario government updated procurement processes to get more bang for our buck.

That’s why Infrastructure Ontario was established in 2005—a single, dedicated infrastructure agency that uses the alternative financing and procurement model, or AFP, for capital projects. This model delivers value for money by involving the private sector. It leverages private sector expertise to build public infrastructure on time and on budget, letting the private sector take on the market risks that it is best able to manage. IO’s track record has proven highly successful, delivering 24 major AFP projects, virtually all of them on time and on budget, with value-for-money savings of more than $600 million.

The Ministry of Infrastructure works closely with IO in an oversight capacity. The ministry provides the policy framework, and all projects deemed suitable for AFP delivery are assigned to IO through the direction of the Minister of Infrastructure. Those AFP projects must demonstrate value for money and are procured by IO through a standardized process.

Because of IO’s track record, the Ministry of Infrastructure is expanding the use of AFP. Ontario’s long-term infrastructure plan, Building Together, was released in June 2011. It outlined a number of key initiatives, including a broad focus on improved asset management and the expansion of IO’s role. The Ministry of Infrastructure will make recommendations to the government on the procurement method and delivery of all infrastructure projects valued at more than $50 million owned by the province and for hospital and college infrastructure. Building Together also noted that recipients of provincial infrastructure funding in excess of $100 million will consult with IO to determine whether IO can assist with their procurement.

A few weeks ago the Government of Ontario submitted recommendations for the federal long-term infrastructure plan to succeed the 2007 Building Canada plan. The submission mirrored Building Together and advised the federal government to build on the establishment of the P3 Canada Fund and to promote greater use of AFPs, where appropriate, across jurisdictions.

Our economy and quality of life depend on the modern public infrastructure. In the current climate of fiscal restraint, it matters all the more that public infrastructure projects are well-managed to maximum impact. This committee's hearings are important in this regard, as attention focuses on the size, means and benefit of public infrastructure expenditures.

Thank you.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. Fagan.

Finally, to wrap it up, from Infrastructure Ontario we will hear the president and CEO, Mr. Bert Clark.

[Bert Clark]

Thank you, Mr. Chair.

I appreciate this opportunity to share with you information about Ontario's approach to investing in infrastructure using AFPs, or P3s. AFP is the terminology we use in Ontario at IO.

IO is a crown agency of the government. It was created in 2005 to manage major projects on behalf of the government. It was created in response to two things: one, a very ambitious plan to rebuild the province’s capital stock, beginning with hospitals, but also the poor track record Ontario and other governments had at delivering large, complex projects on time and on budget.

Modern projects require modern delivery methods. IO works closely with the Ministry of Infrastructure. While the ministry is focused on policy, IO is focused on delivery. So we’re not a policy agency. IO is assigned the role of delivering projects on time and on budget and in a manner that’s consistent with the following principles—and these are taken seriously. They're in our enacting legislation, and my board certainly takes them very seriously.

First, the public interest is paramount. Second, there must be appropriate public control, and in certain instances—for example, hospitals—public ownership must also be preserved. Third, value for money must be demonstrable. And fourth, accountability must be maintained and processes must be fair, open, and transparent.

In the years prior to IO's creation, the province undertook a limited number of new hospitals. This compares with six hospitals, on average, per year that have been built since IO's creation. Prior to IO's creation there were problems with budgets and timelines on projects. For example, in Peterborough, Sudbury, and Thunder Bay, the hospital projects delivered using traditional methods had major challenges. The traditional delivery method was not working for the Province of Ontario.

Overall, IO has brought more than 60 projects to market, valued at $23 billion in capital construction. This is the largest expansion and modernization of social infrastructure in Ontario's history.

We've constructed state-of-the-art hospitals in every region of the province, delivering 20 health care projects at or below budget. More than 16 million new square feet of modernized space has been built. This simply could not have been done using traditional delivery methods.

IO is now working on a range of transportation projects, such as the Windsor-Essex Parkway and Highway 407 East, and IO is entering into the transit space. IO is involved in regional transit projects such as Toronto's Air Rail Link, the Ottawa LRT, the Waterloo regional LRT, and the Metrolinx projects.

The track record of IO and similar agencies across Canada is clear. A 2010 Conference Board of Canada report that assessed the performance of P3 projects executed in Canada found that large infrastructure projects delivered through public-private partnerships resulted in lower costs, quicker completion, and higher service levels. With our partners, we’re participating in a follow-up study that will be released later this fall.

I'd like to explain why our approach to P3s, or AFPs, has worked.

The first is risk transfer. Under the P3 model, the public sector establishes the desired outcome—for example, a hospital with a certain number of emergency rooms, bedrooms, operating rooms, and so on. The private sector bids to provide the building at the lowest certain cost over the entire life of the building. In this way the public sector transfers design risk, construction risk, and life-cycle risk to the private sector. It gets a building on time, on budget, and one that’s well maintained over its entire life, or it doesn't pay. This is the core of why governments ought to use public-private partnerships in certain instances. Risk is transferred and public payments are conditional on performance.

Each of our infrastructure projects undergoes a rigorous third-party value-for-money assessment to determine if the P3 model offers better value than traditional procurement. Infrastructure Ontario's value-for-money methodology was developed by a group of external and government experts and has been independently reviewed by a professional consulting firm and Ontario's internal auditor. These experts have found that our methodology is sound and yields fair and accurate results. We don't use alternative finance in procurement to deliver a project unless a value-for-money assessment establishes that this methodology makes sense.

For procurement, an important part of our methodology has been the development of a standardized and efficient procurement process. It has shortened the procurement timeline, lowered bidding costs, streamlined the project delivery schedule, and promoted competitive tension between bidders. This sort of efficiency is good for the bidders, and it also translates into more competitive bids and lower costs for government.

Finally, concerning transparency, we make every effort to ensure transparency and maintain accountability throughout our procurement process via regular public updates at each procurement stage and through the release of key documents, including detailed project agreements and third-party value-for-money assessments. Each procurement is monitored by a third-party fairness monitor to ensure an open and fair process.

In a nutshell, partnerships with the private sector can be an extremely effective means of delivering large and complex projects in a way that avoids many of the issues that arose with traditionally delivered projects, such as cost overruns and poorly maintained facilities. Ontario has been an extremely attractive infrastructure market over the last seven years because we are viewed as a leading jurisdiction in which modern, efficient, and fair processes are used to deliver public infrastructure assets.

Thank you again for the opportunity to appear before you.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. Clark. That's very helpful.

Thanks to all the guests for keeping their remarks concise. That leaves more time for us to ask questions.

But we are limited, so I would ask people to keep in mind that the five-minute slots include questions and answers. That way we can get everyone on.

Starting off for the NDP, we have Mr. Alexandre Boulerice.

You have five minutes, Alexandre.

[Alexandre Boulerice, NDP, Rosemont—La Petite-Patrie, QC]

Good morning, everyone. Thank you for being here today.

One of our previous witnesses, a professor at the University of Toronto, told us that the bonuses related to the transfer of risk do somewhat change the rules of the game and that they put conventional public projects at a disadvantage in an obvious way.

First, I would like to know whether the transfer of risk truly exists. I will give you two examples. My questions are for Mr. Katz.

Where is the risk transfer when the private company or consortium responsible for the P3 goes bankrupt? It is still the responsibility of the government and the public to pay the bills and to continue to provide the service. So there is no transfer of risk in the case of bankruptcy.

Mistakes are also made during projects. I can give you the example of a sports centre in Sherbrooke. Since the roof had been poorly constructed, water leaked in. One might think that, given the transfer of risk, the private consortium would pay for the repairs. But this is rarely the case. These things generally end up before the courts. That's what happened in Sherbrooke, among other places.

P3s may seem worthwhile, even if they are actually a trap for taxpayers, who then have their hands tied for 30 or 50 years. However, it is often a paradise for lawyers, given the legal proceedings.

[The Chair, NDP, Pat Martin]

Would you like to begin, Mayor Katz?

[Sam Katz]

Thank you very much for that question. I certainly understand where you're coming from.

As with any agreement, the realities are that it's all in how the deal is put together. I'm sure you've heard it said that the devil is in the details. It's up to you to make sure you cover all these types of circumstances off. That is part of due diligence.

You've given me an example in which things may not have gone right. I can only speak for the projects with which we've been involved at the City of Winnipeg. We've completed three specific projects—the two I mentioned, the Disraeli Bridges project and Chief Peguis Trail, as well as a police station, with another one under construction. If you do your due diligence and you cover that off, there are securities that you can put in place, such as bonding that can be done, such as letters of credit that can be done. All these things can be done to make sure....

As you've heard before, if it's not done properly, they don't get paid. You always have a holdback, so you can still protect yourself. It's a matter of putting these measures into place. If these measures are not put into place, I understand what you're saying, but whose fault is that?

[Alexandre Boulerice, NDP, Rosemont—La Petite-Patrie, QC]

Mr. Katz, I would like to ask you a question about a project you are familiar with.

What is the interest rate on the funding for the Charleswood bridge project, which was completed in your city as part of a P3?

[Sam Katz]

Let me share this with you, because that is something that those who do not support P3s use as an example. Unfortunately, it's a very false example to use, and I'll tell you why.

First, the Charleswood Bridge was done before my time. It was the first one done. It is the best-maintained structure in the province of Manitoba. That's just a fact.

The interest rate is higher than normal. Why is that? It is because that's what the politicians, the elected officials, chose to do. The elected officials decided they wanted a ceiling on interest. They got the ceiling, but when you get a ceiling you also get a floor, and that's how that happened.

I can emphatically state to you that this was the fault of the elected officials who did not do their due diligence; it had nothing to do with the Charleswood Parkway. But I thank you for asking that question.

[Alexandre Boulerice, NDP, Rosemont—La Petite-Patrie, QC]

Thank you very much.

My next question is for Mr. Clark.

I understand very well that a P3 can be beneficial for a municipality. In fact, rather than go on the market and secure a loan that then appears in the accounting books as a debt, you sign a contract that is so long-term that you voluntarily move from being an owner to a renter.

I would like to know if you agree with the professor from the University of Toronto. According to him, it isn't that we can't afford to carry out a project or build an infrastructure; it's that we are deciding to do it on credit by giving a profit to a private company that has a guarantee for investment and profitability over a very long period of time, which is really quite advantageous for them. We are talking here about a guaranteed contract over 25, 30 or 50 years. The loan does not appear on the municipality's books and, so, it never goes into debt, but in fact becomes a very long-term tenant.

Do you think that is a good way to use public funds?

[Bert Clark]

I'm happy to see the discussion has moved away from the concept that P3s are about financing and accessing sources of capital, that the government can't afford to do things, so the private sector is going to do them. We're still paying for the hospitals we're building. We're paying for them over a longer period of time.

The truth is we couldn't afford to deliver them the way we were previously delivering them. There's no question that financing costs are embedded, and involving the private sector has a cost. The track record of the government in delivering projects in the traditional fashion was something we couldn't afford to do. When IO was created, there was a project in Sudbury, a hospital shell sitting vacant, no skin on it, with the wind blowing through it. It had been stopped because they had run out of money; the budget had been blown. It was not the only example. They were looking into what happened in Thunder Bay and in Peterborough. Private finance won't put up the money for free, but they take risks that we were not managing well, and that frankly we couldn't afford to manage.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. Clark.

I'm sorry to interrupt you. I'm just trying to manage our time.

Thank you, Mr. Boulerice.

Next, from the Conservatives, Mr. Costas Menegakis.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you, Mr. Chair.

A big thank you to our witnesses for appearing before us today. I certainly found your testimony very interesting.

My first question is for you, Mr. Clark. In order to realize some of the benefits of the expertise and innovation that the private sector brings to the table, we need to provide opportunities for Canadian investors.

In your opinion, how can we increase opportunities for Canadian investors to participate in P3 projects?

[Bert Clark]

As you know, the Canadian pension funds are some of the biggest investors globally in infrastructure. They're being imitated by others, so CPP, OMERS, and the teachers are leaders in infrastructure investment. That's at the equity level.

From a debt perspective, those institutions and the life insurance companies are large investors in Canadian infrastructure projects. There are life insurance companies for the long-term...and Canadian banks for the shorter-term financing are the largest investors in Canadian infrastructure. Indirectly, the ones who are benefiting from it are Canadians, to the extent that they hold insurance policies through Sun Life, Manulife, etc.

One of the very interesting things that's happened is there's been a whole growth of domestic Canadian infrastructure funds, companies like Forum, Fengate, and others that are domestic and are sourcing money from smaller pension funds to invest in Canadian infrastructure funds. In fact, they're now looking abroad in the same way that the larger Canadian pension funds are also scouring the earth for opportunities.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you.

My next question is for you, Your Worship.

Thank you for being here with us today. It's a privilege for us to have the chief executive of one of Canada's largest and most beautiful cities. I represent the town of Richmond Hill, arguably the biggest, nicest, most beautiful town in Canada.

I was very interested to hear from you and to read in your submission that you consider P3s a phenomenal tool in the tool chest for municipalities. You referred to the transparency.

Could you share with us the measures taken by your administration in disclosing information to enhance transparency and effectiveness.