Excellent. Thank you.
It's a great pleasure to be able to address the committee on this topic of public-private partnerships and their merits. I've been studying public-private partnerships for around the past 10 years, primarily in the infrastructure sector, in which we're talking about roads, bridges, public transit, highways, hospitals, and, increasingly here in Canada, prisons. These are the types of infrastructure facilities that are being built through public-private partnerships and they are the types of facilities I've been studying. I've studied them here in Canada and around the world.
What I'll do today is try to synthesize and summarize some of my experiences and some of my research to perhaps inform your decisions about how public-private partnerships should be used here and how the federal government should be involved in public-private partnerships.
Here in Canada, in the infrastructure sector, there have been around 175 infrastructure public-private partnerships. These are primarily delivered by the provincial governments, some at the municipal level, and the federal government has provided financing and funding for some of these projects, like the Canada Line, in which the federal government becomes involved and provides funding. But primarily, for the time being, this is a provincial jurisdiction, and these have been carried out by the provincial governments and their procurement agencies, like Infrastructure Ontario or Partnerships BC. That provides some of the context.
There are really two primary rationales that have been put forward here in Canada and around the world for why public-private partnerships are an effective model for delivering infrastructure. What I'd like to suggest is that one has been relatively debunked, and we should not follow that one here in Canada. A second explanation, perhaps, has more credibility, and we should explore this further.
The first explanation that I think should be debunked is the idea that public-private partnerships bring new money for infrastructure. There's a lot of talk that in periods of fiscal austerity, when governments are pulling back funding, when we're seeing large deficits at all levels of government, perhaps public-private partnerships and private financing can be a way to fill that gap. Here in Canada, to date, public-private partnerships have not played that role.
Public-private partnerships and private financing have been a finance strategy that brings money up front to finance some of the upfront costs of capital to deliver these major infrastructure projects, some of which can cost $100 million, $500 million, or $1 billion. But the money primarily for infrastructure projects here in Canada has been paid back directly by the governments that have procured the infrastructure projects over the life of their assets.
This is not a strategy that is bringing forward new money. It's kind of like paying for infrastructure on a credit card. Someone finances you the money, but the government pays it back over an extended period of time at a considerably higher rate of interest.
It's worth considering, then, that public-private partnerships may deliver other benefits, but when it comes to bringing new money to the table to deliver infrastructure, that has not been the case for hospitals, for prisons, and it has not been the case for public transit facilities. This is still government money, and I think that's important to keep in mind when we think about public-private partnerships.
There has been a second explanation, a second rationale, for why we might deliver them that I think does have merit.
I only heard part of it, but I think your previous speaker started to get at it. It's the topic of value for money. Can we understand whether bringing the private sector into the equation earlier in the deal, having them come to the table and collaborating, brings some type of value for money? Can it limit the instances of cost overruns? Can it deliver more innovative types of facilities that we might not get if these projects were being delivered through the traditional conventional types of approaches to delivering infrastructure? And do these innovations and this cost-saving, this transferring of risk, in particular, offset the higher costs of private financing? As I mentioned, the financing costs are considerably higher when you deliver projects through private capital and private upfront financing as opposed to direct public borrowing.
These are some of the rationales that have been put forward. I want to address the second rationale, in particular, around value for money. I want to advance that there are some concerns that I think we need to address, even as we try to zero in on whether public-private partnerships deliver value for money, and, more particularly, in what contexts are they going to be viable alternatives to deliver infrastructure.
The first concern is really this idea of risk transfer and the idea of how we transfer risk from the public to the private sector. In particular, at what cost are we transferring these risks? A colleague and I, a former student, conducted a study of recent projects completed here in Ontario. We looked at 28 public-private partnerships valued at $7 billion. They were primarily hospital projects.
We looked at the official government documents that compare the value-for-money reports, that compare the cost of delivering the projects through conventional delivery models and public-private partnerships. Our study found that, on average, it was 16% less expensive to deliver them through the conventional model. That's because the private sector model, the public-private partnership, had higher financing costs. It had risk transfer built into the model. Because of the higher financing, the higher transaction costs, 2% to 3% of the deal...as your previous speaker spoke about, there may be value to this, but you're paying upfront costs in order to structure these deals. There's a cost to that: 2% to 3%, on average, was the cost we found in transaction costs. Because of these additional costs, it was 16% less expensive. Only after considering risk transfer in the equation did we see that public-private partnerships delivered better value for money. So risk transfer is really the key part of the deal, the key part of public-private partnerships, that is swinging the balance of merit from the conventional to the public-private partnership.
When we're talking about risk transfer, we're primarily talking about construction risk. We have to understand how those risk premiums are being achieved and whether they're really based on previous evidence. Our study found that the risk premium added to the conventional project was on average 49%. That's a very high risk premium, and we couldn't find the technical evidence—the details of past studies were not in the public domain—to allow us as researchers to understand whether that was really based on past experience. We were concerned because this issue of risk transfer, invariably, is tipping the scale from the conventional model to the public-private partnership. It doesn't mean that it's not accurate. It means that we couldn't find the evidence to support it, and we were concerned about that because of how large this risk premium is.
We can say that public-private partnerships are not necessarily the cheapest way to deliver infrastructure, but they might deliver the best value, and that's really where we have to understand from a policy perspective the projects for which this actually makes sense.
There are a few other topics I want to touch on.
One is about public accountability and community engagement. We've heard consistently that in the public-private partnership model—oftentimes because of commercial sensitivities during the planning process—it's often difficult for stakeholders to gain access to the really important technical documents that determine whether these projects should go forward or not. There have been concerns about how to meaningfully engage in these processes.
Another issue is the loss of flexibility over the long term in delivering these projects. When you have contracts and concessions that stretch out for 25, 50, 99 years—as we've seen here in Canada—these can limit government's flexibility and its capacity to make changes to the system over time, to meet emerging policy goals, to change the user-fee structures, as has been the case in some of the projects, and to meet emerging and changing goals. This loss of flexibility is a key challenge that we have to think about when we're looking at public-private partnerships.
The final point is this issue of “the only game in town”. Are we seeing public-private partnerships being put forward more and more as the only option to deliver public infrastructure? Are governments—especially municipal governments seeking federal funding—increasingly trying to design their projects in order to make them realizable through public-private partnerships, even in cases where that might not be the best way forward?
I have a couple of recommendations. What I'm trying to highlight is that public-private partnerships may deliver value in certain cases. We have to be very clear about what they are. I think it should be based on empirical evidence. We should be carrying out studies to understand if the risk premium, the size of it, is appropriate, is based on past evidence, the history of actual cost overruns, on the cost of poor performance as these projects go along. I would add that we should be focusing the partnerships on the design-build finance side. I think public-private partnerships have the best opportunity to deliver on time and on budget—project delivery and in particular cost certainty—and there is merit in that. I think we should be very cautious about how we enter into long-term concession agreements for operations and maintenance, except under the most unique circumstances.
The final point I would raise is that I think we need to understand whether the agencies we've put in place—the procurement agencies—can work to improve both public-private partnership procurements and conventional approaches. Sometimes these have been separate. But the expertise in these agencies could provide the same benefit and perhaps deliver value for money in some cases without necessarily having to look to private finance—which is an expensive way of delivering public infrastructure.
I'll leave it at that. I look forward to participating in the discussion.
Thanks a lot.