Government Operations Committee on Oct. 23rd, 2012

[Linda Duncan, NDP, Edmonton Strathcona, AB]

I'm left a little bit confused. Usually you hire a contractor, who manages all the people who are building the building. Do we also have your office managing the private managers?

[James Paul]

We are managing that contractor's work. If you look at any given project, a general contractor would ultimately be the winning bidder, in a conventional construction approach. That company would hire and manage the subcontractors as part of their delivery, but you have to have an owner who is acting to manage that general contractor's activity to ensure that you're getting what you contracted for.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

So you're providing oversight.

[James Paul]

We are the delivery organization, as I said, but it includes an oversight role. It's a hands-on management role—the inspecting, the monitoring. It's very similar to what Public Works does for other federal government departments. The Department of National Defence is the biggest real property holder within the Government of Canada, so we're providing that role for this special purpose and its assets. It's the same approach as what Public Works is doing.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. Paul.

Thank you, Linda. That's the end of your time.

For the Conservatives, we have Mr. Jacques Gourde.

You have five minutes, Jacques.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

Thank you, Mr. Chair.

Thank you to the witnesses for being here this morning.

My first question is for Mr. Siemiatycki.

You mentioned the profitability of P3 projects compared with traditional projects. Could you give us some more detail about the transfer of responsibility and risk?

It is difficult for me to assess the cost of realizing a P3 project combined with a maintenance program spread out over 20, 25 or 30 years, compared with the cost of a project that the government wants to carry out at the best possible cost for infrastructures that it will have built and that it is responsible for maintaining in the long term.

You mentioned an amount 16% lower for a project carried out traditionally. However, when it is a P3 project with a private company or another that will be responsible for maintaining the infrastructure for the next 30 years, might that influence the choice of materials? For example, perhaps someone is looking for more efficient and better quality equipment that will allow for long-term savings. For example, you might save energy in the long term through geothermal energy.

Could that really influence the design decisions for these infrastructures? Perhaps it is difficult today to evaluate savings that will occur over the next 30 years with respect to maintaining buildings that were constructed five years ago. Are you able to evaluate that kind of thing?

[Prof. Matti Siemiatycki]

This idea of innovation and efficiencies has been an important one put forward for public-private partnerships. I think you articulated the argument quite accurately: if you have the private sector at the table and they have an incentive to maintain the facility over an extended period of time, they'll make choices about what types of materials to use and how they design the facility.

One thing we've seen is that, at least in the value-for-money reports, where those efficiency gains are actually being achieved hasn't been clarified; we don't see which efficiencies are being brought forward that are considerably different from what happens through the public sector or through the conventional bidding process. Keep in mind that a conventional bidding process is still a competitive procurement, a design-build that you could still incentivize and in which you could still bring forward approaches to have the private sector designers come up with different approaches to deliver the infrastructure.

One thing we have seen with public-private partnerships is that when you have this long-term maintenance component around operations, the private sector will try to design the facility in a way that minimizes the risk of changes over time and makes it easiest to maintain. But that might not be the best facility for the public; the public might actually benefit from flexibility. In the 25- or 50-year life of the asset, the asset might change and the user's needs might actually change quite significantly. Yet if you have that contract for maintenance locked in, it can be very expensive to break it, even if there's a policy rationale for changing and building flexibility into the systems.

That's been part of the challenge around this long-term maintenance feature and the potential for policy lock-ins.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

As a public manager of taxpayers' money, how can we make good decisions when we have time frames like the ones you mentioned, namely, 30, if not 50, years? Obviously, we make decisions based on the information available today, in 2012. If this was 2042, my children might perhaps choose something other than the previous technologies. It will always be difficult for government managers to make a decision for the next 50 years.

[Prof. Matti Siemiatycki]

I think there is always going to be difficulty around making policy for the long term. That's the challenge you all face, being politicians.

Really, the key has often been seen to be to build flexibility into the facilities we're building so that they can change over time. The one thing we know is that there is going to be change over time. There are going to be emerging needs, there are going to be new technologies, and there are going to be new approaches to delivering—maybe even new approaches to maintaining—facilities. If we lock ourselves in over the long term, we might eliminate the possibility of the public's benefiting from those emerging technologies or those emerging uses for the facilities in the way they can be used and the ways they can be managed, and possibly miss out on the potential to lower the costs and deliver value for your constituents.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Siemiatycki.

Thank you, Jacques.

Mr. Paul, do you have anything to add to that exchange?

[James Paul]

Let me say briefly that part of it is in the selection of the project. You want to make sure that you're selecting projects whose use is fairly certain. This doesn't mean there is not flexibility.

If I use the example of the CSEC facility, it's unlikely that over a 25- to 30-year period the intended purpose of that facility is going to change from its being the headquarters of that government institution. Do you need flexibility? Absolutely you do—they could change approaches. But the model and the procurement contract defines a performance availability; it's defined in that way so that there is flexibility available for the user—in this case, CSEC—to call for changes because of their approach. It doesn't mean they're breaking the contract or renegotiating to do it.

Another example would be a hospital. From my personal experience, I haven't seen many hospitals constructed that, within a 25-year or 30-year period, aren't still a hospital. Are there changes in operating room approaches or technology? The model has to be able to allow you to evolve with these.

Another example might be that if we built a new home for the CBC, with broadcast studios and all kinds of things, the technology might change, but it's such a special-purpose asset that you would only do it if you thought there was going to be a longer life.

So I think it's the selection of the project. The risk would come if you're just doing it for a short-term issue or something that really doesn't take any special type of facility.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Paul.

Next, for the NDP, we have Denis Blanchette.

You have five minutes, Denis.

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

Thank you, Mr. Chair.

I'd like to thank our two witnesses for being here.

My first question is for Mr. Paul.

You are a contract manager. You have optimized your management method and how you negotiate contracts. I am convinced that if I asked you if this had evolved, you would say yes.

Since the management of contracts is being refined and best practices are being integrated, would the P3 not just be another way of doing what, one day, might be outmoded? Without P3, could you continue to refine your management models in order to do the work on time and within budget? Do you absolutely need this type of tool to achieve your goals?

[James Paul]

Thank you. That is a good question.

The way you put that is interesting. I would say that you're correct, in that whether you call it a P3 or a design-build-finance-maintain project, ultimately it comes down to the contract terms. I think P3 is, in the end, just a label we put on it that signals that there is a financing component, that there is often an ongoing maintenance component, and that there are the upfront aspects.

What you've alluded to is whether there are other forms of contractor procurement you could undertake. If you look at the more traditional sorts of design-bid-build or design-build approaches that have been used, the P3 is a sort of enhanced model that has off-loaded risk and financing and other aspects that we've talked about.

Just to show you that there is flexibility, the CSEC approach was beyond even the normal design-build-finance-maintain that you've likely heard about and have been thinking about. What was added into it was the full provision of the IT services, in what is a very sophisticated, highly technical environment, of course. The IT delivery for the entire maintenance life-cycle period is included in it. Similarly, so are the security services that are required at one of the highest security facilities in the country.

Those are examples of how, even in what you might generally label as a P3, the contract form of procurement was uniquely modelled for the special needs of the project. I'm just using it as an example. There are opportunities to do this, and I think a good procurement authority and a good owner would plan that way and take advantage of these.

So we might call it a P3, but there are always differences in the contractual approach.

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

Thank you very much.

Mr. Siemiatycki, you have studied P3s. You have probably also studied other forms of contracts that link a public administration to a private company.

P3s have been around for some time now. Do you know whether new trends in managing public contracts would make it possible to complete projects on time, within budget, while providing the required flexibility, as we get further away from the construction and to have maintenance become an increasingly important part of carrying out the contract? Have you or your colleagues studied this issue?

[Prof. Matti Siemiatycki]

To agree with your previous speaker, public-private partnerships really sit on a spectrum of procurement approaches. It's really in the way the contract is designed and the way the bundling is carried out.

I guess we've observed a few things, and one is in terms of the procurement process. The idea is of competitive dialogue, collaborating to a greater extent with the different bidders earlier on in the process, having communications with them to try to see if you can tailor a design, tailor a concession agreement that works for both parties, instead of just using this strict procurement process, and by “strict”, I mean that a competition is going to deliver you the best value for money. Trying to see if you can use greater collaboration to achieve those ends has been one aspect that we are starting to see gaining popularity literally around the world.

The other part about public-private partnerships that's often lost is that, at the core of this, it's really the idea of partnership and the idea of collaboration. The idea is that two partners working together might be able to deliver something that's better than either of them could achieve on their own. So there are emerging ways that these collaborations are coming closer together rather than further apart. It's not necessarily using a concession agreement, but trying to see if you can really align the interests in different ways, trying to really share the facilities, share the benefits, and share the costs.

Another approach has been rebalancing clauses built into the concessions. If you are going to do operations and maintenance, it's better to build in rebalancing clauses so that both parties share risks rather than just trying to transfer them where there's been a lot of trouble with transferring risk in different contexts.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. Siemiatycki.

Next, for the Conservatives, we have Kelly Block.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much, Mr. Chair.

I also want to thank our guests for joining us today. It's been great to have someone who has spent 10 years studying P3s, and then someone who's actually been engaged in the procurement process.

My first question I'm going to direct to you, Mr. Paul. You mentioned a project earlier on in your opening remarks, the long-term accommodation project. I think one of the purposes of our study is to talk to individuals who have been engaged in an actual project and find out what they've learned from that process. I just want to ask you if you would share with us your experience in the long-term accommodation project and any learnings from that.

[James Paul]

The example I've been using has been in reference to that project. As I said, the procurement phase was completed, obviously, and the construction has started, but we're halfway through the construction now, so I can really only keep my remarks limited to that experience.

I think the last witness's comments were bang on in support of what I was saying earlier. We look for opportunities with our client partner to enhance the approach here, that ultimately a P3 was used. The collaboration that I referred to I think is absolutely key, especially given the highly sophisticated facility that this is—to sit down with the industry partners. There were more than 50 collaboration meetings that occurred leading up to the actual procurement commencing, like the formal bidding process, let's say, in order to achieve that. That was done rapidly within a year—it was a matter of many months—to engage each one of those partners so that they understood the need the user was looking for and we understood what their capabilities were to bring to the table.

I think that's why those proposals I mentioned I was able to see were all very exciting, addressing the needs of the facility very well. Ultimately, with the value-for-money analysis, the best one was selected. It doesn't mean any of the others were bad. They could have been successful models that could have been used as well and delivered to CSEC for the capability it required.

As I was saying, I think the procurement was very successful. On the timeline alone, that entire process was done in less than two years, which is really remarkable for a facility of this size. Then, in the construction phase as well, which was envisioned over a period of just over three years—approximately 39 months—again, for a facility of this magnitude and sophistication, more than 70,000 square metres, that's a remarkably fast delivery from shovel in ground to full occupancy.

As I mentioned, there are very sophisticated tools being used to track the progress, etc., and manage the project. So when I said to you that it's on time and on budget, that's very much an informed and confirmed statement I'm making. Part of our management process is to ensure that's happening.

Overall, I think this particular project is proving, as far as that goes, to have been a success. Of course, somebody will, I'm sure, analyze, ongoing and at the end, looking back, whether the entire 34-year package, from procurement through to the end of the maintenance period, was successful. But we believe it will be.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you.

[The Chair, NDP, Pat Martin]

You have about a minute and a half.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Okay, great.

I think it's been noted by some of my colleagues that sometimes setting policy for the long term or making decisions in the long term can be quite a challenge, but I can see a lot of opportunity in that. I think some of the things you've shared in your testimony prove that out.

Mr. Siemiatycki, I wanted to ask you a question. I was very interested in your comments earlier when you talked about debunking the notion that private-public partnerships bring in new money. I guess I'd never thought of it in that light before, but I can certainly see where some might consider it to be new money, not just leveraging money in a different way.

I guess I want to ask you this, then, because you said the focus should be on value for money. I'm wondering if over the 10 years you've been studying P3s you've determined value-for-money criteria and policies that actually maximize the public interest. What would those be, in your opinion?

[Prof. Matti Siemiatycki]

There has certainly been an evolution in the rationale for this. This idea of public-private partnerships bringing new money was in large part seen as a way also of holding public investment off the government books. It was a bit of an accounting mirage that was used in the United Kingdom. These projects, I think especially in Canada, are being counted on the books, and that's the correct way to do it.

In terms of new approaches to achieving value for money, I think we need to have all of the information out in the public realm so that the public can be meaningfully engaged in the discussions around the types of projects that are taking place in their communities. We've had numerous experiences where sufficient information has been considered commercially sensitive during the bidding process. This might be okay for some types of projects, but when we're talking about highly public infrastructure, when we're talking about the transit lines or the hospitals, it's critical that this information is in the public domain. That really contributes to achieving value for money when the communities can see there's a transparency and that the projects are going to meet the needs they see for their communities.

[The Chair, NDP, Pat Martin]

Thank you, Kelly.

Next, for the Liberals, John McCallum. Five minutes, John.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, and thank you to the witnesses for being here.

My first question is to Professor Siemiatycki about this 49% risk premium. It's 49% of what? What are the risks that are included?