Government Operations Committee on Oct. 25th, 2012

[Larry Blain]

Almost every large capital project is financed by government, typically by borrowing money to do it. It makes sense to finance long-term infrastructure assets with long-term financing.

PPP is one form of financing, and direct procurement is another form that is typically financed. In terms of intergenerational equity, the cost tends to be amortized over the life of the asset, and I think that's entirely appropriate.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. Blain.

Thank you, Mr. Cannan.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thank you very much for your great work. I appreciate it.

[The Chair, NDP, Pat Martin]

For the NDP, we have Denis Blanchette.

You have five minutes, Denis.

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

Thank you, Mr. Chair.

Thank you to our guests for being with us.

My questions are for Ms. Clark.

Because our time is limited, may I ask you to please keep your answers short.

During your presentation, you mentioned that the methodology for managing PPPs had changed. You talked about various PPP components: creation, set-up and funding, among others. Could you tell us, among all the methods you have used, first, which ones would be useful and transferable to other projects, and second, which you would not want to use again?

[Sarah Clark]

That's a good question.

In British Columbia, I don't think we have favourite approaches in what we attempt to do. The province is very committed to doing analysis around procurement, taking the two most likely approaches to procuring a project and doing a quantitative and qualitative comparator for these projects.

Many jurisdictions have had some false starts, especially in the early days, when trying to transfer too much revenue risk on projects that really didn't have enough revenue to support them. That was a result of not really doing a proper market and financial analysis. You can see this going on in other jurisdictions that are just getting started. They're hoping that money is coming from somewhere that it hadn't come from before to support the same kind of infrastructure.

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

Thank you very much.

I found it interesting to hear you speak about the analysis of risk transfer and risk reduction. It is an interesting approach.

Obviously, you evaluated the project as a whole. In your analysis of risk transfer and reduction—and I want to focus on risk reduction—do you also consider what will happen when responsibility for the project is transferred to government?

[Sarah Clark]

Do you mean hand-back provisions at the end of the contract or during the operation?

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

Yes, that is right.

[Sarah Clark]

Yes, we do. I'll go back to the Interior Heart and Surgical Centre. If you look at the analysis, there was not just one procurement approach that came out of it to provide the program in Kelowna. In fact, there was a building built using design-build. There is some fit-out of other areas of the hospital using construction management, and there is a portion of it using design-build-finance-maintain.

Within the contracts that are used for PPPs, there are hand-back provisions. The owner of the facility has to determine in what condition they want the facility to be when they take it over. In the case of a highway, you might look at the highway and say that you would like the maintenance and the life-cycle to be looked after to a point that the government doesn't have to do any major maintenance for the five years preceding the end of the contract. On that basis, the contract can then be written to have the right provisions, such that the highway will be in that condition.

It's all about setting your expectations for the end of the project. If you want to have a facility in a very new condition, you have to write that in; if you want a condition that supports its life-cycle intention, then you would write that into the provisions.

[The Chair, NDP, Pat Martin]

There is one minute left, Denis.

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

Thank you for your answer, Ms. Clark.

I have a question about your process. There can be a number of PPP projects that are cost effective to a certain point. However, sometimes it just takes one to go off the rails for the profits from other projects to be completely lost.

What checks and balances do you have in place to avoid falling into this trap, of having one project lead to the loss of the profits from all the previous projects?

[Sarah Clark]

That's a great question.

The contracts have been structured to account for different scenarios that could happen in a failure situation, as you pointed out, and it would be remiss of people putting a contract in place not to have analyzed those.

In a case in which the private partner is not performing, there are different provisions, as Marcus pointed out. There are warnings. There are penalties. If the penalties are applied and the partner is not fixing the faults, they add up very quickly, to the point that a partner could have financial difficulties and even default.

In the case of default, there are different scenarios that can happen, such as that the lenders can step in. If the lenders cannot find someone to replace the partner, then the province can step in. But the province is not on the hook for 100% of the cost of the facility at that point. They are able to run a competition to replace the private partner, and what the market will bear will be the cost. It could be down to zero.

The point is that the people who have financing on the line, whether it be the equity providers or the senior debt providers, are always at risk of losing a large portion or all of their investment.

[The Chair, NDP, Pat Martin]

Thank you very much.

Thank you, Ms. Clark.

Our time has expired. Thank you, Mr. Blanchette.

Next, for the Conservatives, is Costas Menegakis.

You have five minutes, Costas.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you very much, Mr. Chair.

I want to thank our witnesses for being with us today and for speaking to us about P3s, particularly with their experiences.

I'd like to direct my first question to Mr. Akhtar, in relation to the Abbotsford Regional Hospital and Cancer Centre.

Could you identify some of the key differences in terms of management as between that project and other health facilities? Perhaps you could elaborate on what some of the walk-away risks were.

Can you hear me, Mr. Akhtar?

[Marcus Akhtar]

Yes, I can. I'm sorry for my hesitation.

You mean differences in terms of the P3. Quite clearly, this project would never have gone ahead in the first place had it not been for a number of different factors. I may have alluded in my presentation to the fact that the Abbotsford Regional Hospital and Cancer Centre, prior to 2003, was actually designed and ready to build. In terms of design, it was ready to go for 18 years. It was only when the cancer agency joined in partnership with Fraser Health, which runs 16 hospitals in British Columbia, that this actually started to gain traction with the Ministry of Health.

Furthermore, the project would never have been constructed at all were it not for the proposal's going through a PPP process.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you very much.

I have a question for you, Ms. Clark.

The Sea to Sky project is clearly an example of a government leveraging private sector expertise, innovation, and creativity in delivering that service. Can you elaborate on maximizing the private sector expertise and innovation and so forth?

[Sarah Clark]

Yes, I can.

The competition was quite an eye-opener for the province, in that the province had a set budget and had a design, but did not feel that they could fully achieve what they wanted to with the highway, because they didn't have enough money. Therefore, they ran a competition that was set around a budget, indicating how much money they had and the things they would like to achieve.

All the areas of safety, for example, four lanes, divided highway, some capacity improvements, as well as some neighbourhood amenities, etc., were included in the competition. The competition was structured around the bidder who could provide the most additional scope to meet the province's needs being the winner.

It was a big eye-opener for the province to see the number of additional features they could have, and they calculated $131 million of additional user benefits from that project.

[Larry Blain]

I might add that there were some very creative evaluations on the Sea to Sky project in that the number one priority of the province was to improve the safety on the roads. The various bids were evaluated in terms of how they could make contributions to safety in terms of number of kilometres with four lanes, number of kilometres that had straight sections and guard rails. They were able to specify what they really wanted in the project, and then to shape the competition to deliver.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you very much.

How am I doing for time?

[The Vice-Chair, Conservative, Mike Wallace]

You have 40 seconds.

[Costas Menegakis, Conservative, Richmond Hill, ON]

I'll go back to Partnerships BC.

I wonder if you could talk to us a little bit about Partnerships BC's focus on standardizing, planning, and evaluation processes, to finding ways to streamline decision-making for all of your projects.

[Sarah Clark]

We have had that focus and I think you have an excellent choice of words. Are we standardizing and streamlining? Yes, we are. At the same time, every project is different and we treat the aspects of each one that way during the analysis. It's not a cookie-cutter approach.

We definitely have the benefit of having base contracts, RFPs, RFQs, a competitive selection process approach, but each project has to be weighed on its own merits, the risks of a project reviewed to determine what the best way is to structure those contracts.

[Larry Blain]

One of the things we've standardized in British Columbia is governance. I should make a comment on the fact that every single project has a project board with a project charter—and we're out of time.

[The Vice-Chair, Conservative, Mike Wallace]

Thank you, sir.

Our last questioner for this round is John McCallum, from the Liberal Party.

John, the floor is yours, for five minutes.