Government Operations Committee on Oct. 25th, 2012

[The Chair, NDP, Pat Martin]

Excuse me, Mr. Joy, I'm afraid we're almost out of time for this segment, and I would like to give Dr. Loxley an opportunity to comment on Mr. Larose's question.

[Dr. John Loxley]

Thank you.

I would only add that one only obtains cost certainty and maintenance certainty in P3 contracts by paying for it. Often, the upfront costs that are concluded are arrived at in several different stages, so a lot of these contingencies that we're saying the private sector avoids are actually built into the higher costs of the contract, as is maintenance. The problem with this is that P3 maintenance contracts are fixed and you can't get access to them. Most of the time we don't know how much is being spent on them, and there is no flexibility for governments to switch maintenance between one project and another.

One can say that, yes, maintenance is guaranteed, but we don't really know at what cost, and there is a price to be paid for inflexibility.

[The Chair, NDP, Pat Martin]

Thank you very much, John, and thank you, Jean-François. That concludes your five minutes.

Next, for the Conservatives, Mr. Peter Braid.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you very much, Mr. Chair.

Thank you to both of our witnesses for being here this morning.

Professor Loxley, I have a question for you to begin. You mentioned at the end of your presentation that we should look at ways to strengthen the ability of the public sector to finance infrastructure. I just wanted to ask, how do we do that? In this current era of government deficits and the need for deficit reduction at all levels of government, and our hearing from municipalities that there is concern about an infrastructure gap, how do we strengthen the ability of the public sector to finance infrastructure?

You're an economics professor. You know that money doesn't grow on trees.

[Dr. John Loxley]

Can you hear me?

[The Chair, NDP, Pat Martin]

Yes, go ahead, John.

[Dr. John Loxley]

I have addressed that question in a publication which came out earlier this year.

The point to stress is that you're not getting extra finance from P3s. You're paying more, possibly, for them. The issue is there is a real infrastructure deficit at all levels of government. I think we all accept that. The question is how best to finance it.

I think the federal government has a responsibility, and there is some money for infrastructure, but there should be more money for infrastructure. It would fit in very nicely with action plans. It would fit in very nicely with the phase of the economic cycle that we're in, and the instability that we're facing. I think there would be scope for more federal funding for infrastructure. My argument is that we should not be tying it in a knee-jerk way to P3s.

We should be much more open about how we fund infrastructure, recognizing and acknowledging that it's always the private sector that builds infrastructure. There have been other proposals for infrastructure funds. There are various pension fund proposals. I think it's important to look at these. There are green infrastructure fund proposals that have been looked at over the years. There are proposals on the table for this.

Ultimately, I think, and appropriately at this part of the cycle, recognizing that money doesn't grow on trees, the federal government is in a position to do more than it has been doing.

[The Chair, NDP, Pat Martin]

Thank you, John.

Mr. Joy, would you care to respond?

[Damian Joy]

Yes.

Thank you for your question.

I think it is basic economics, isn't it. Government has the right to tax its citizens. In a democracy we the people accept that point. Therefore, government can borrow more cheaply than the private sector; there's no question. But in a fiscally constrained environment, this is not something, as I'm sure you're all too aware, you can push too far.

It really is a question of balancing the cost of capital against the transfer of risk. As John says, it's not a case of creating new money, it's a case of financing. When does government want to pay for infrastructure? If infrastructure has a 50-year life, a 100-year life, or whatever it is, do you want to pay for that all today, or do you want to pay for it over its 50-year life?

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Mr. Joy, I have a question for you. In hearing about some of the issues and concerns in the U.K., they seem to centre around poorly negotiated contracts for ongoing maintenance costs, that some exorbitant service costs have been part of some of those contracts.

How has Canada learned from that and/or avoided that issue?

[Damian Joy]

I've studied that pretty closely, and certainly I think the vast majority of the criticism in the U.K. has been about the service delivery. I think that's not so much the maintenance of the actual infrastructure itself, but the other associated services. As I mentioned earlier, I think the Canadian provinces that have been most active in procurement of P3s have all avoided including soft services, except for, I think, Abbotsford hospital in B.C., and the William Osler hospital in Ontario.

I think that in all of the other projects the only services included are those that are very directly related to maintaining the fixed infrastructure. That's probably the most clear way Canada has avoided some of those problems. I'm not aware that there's significant criticism about maintenance budgets. On the contrary, the research I'm aware of seems to very strongly support that there is a fixed allocated budget to maintain the infrastructure in a far more planned and controlled way than is typically done with publicly owned infrastructure.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Joy.

I'm afraid, Peter, you're out of time.

Next for the Liberal Party, we have John McCallum.

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

Thank you, Mr. Chair.

Mr. Joy, I think you're speaking from my riding, and John Loxley I've known since, I believe, 1975. Good to see you, John.

I'd like to ask a question about valuing the transfer of risk. John mentioned he couldn't get the information justifying those dollars. We had a witness from the University of Toronto who studied, I think, over 30 projects in Ontario. He said the average risk premium was 49% of the cost, which seemed very high, but he was unable to get information to justify that cost.

I have a double-barrelled question. One, since the public is paying for these things, shouldn't we be able to get the detailed methodology and justification for these costs? It seems to be very lacking in transparency. Two, the Mayor of Winnipeg was totally convinced there was clear and sound analysis to justify these risk premiums from accounting firms and other trustworthy entities. I guess I'm asking you whether you trust these people who produce these estimates—and don't tell us the methodology—or whether you think there's something inherently untrustworthy about it?

Perhaps we could start with John Loxley.

[Dr. John Loxley]

Thank you, John. It's good to see you again.

It's my feeling that risk analysis should be made available publicly, and the details of the projects that go into risk analysis should be made available.

If you talk to small contractors, they would argue they come in on time, they deliver on time, and if they don't, they're penalized. They would argue that this risk transfer is for them mainly bogus. But companies have put together risk analysis. Infrastructure Ontario is the source of most of what is happening. Where risk analysis was done in the U.K. and Australia it has been heavily criticized for being unsubstantiated. I do believe we need greater transparency. There's no reason we shouldn't have it.

When it comes to the Winnipeg situation and even the Ontario situation, yes, consulting firms are asked to give their opinion on the value for money analysis that Infrastructure Ontario does. The way they do this is to say that they have verified it, but they did not conduct a detailed analysis, they did not do an audit, they did not look at the public sector comparator in any detail, and they can't verify that the facts are valid, but, yes, it looks like risk was transferred. This is meaningless. It really is meaningless, and you find this attached to most Infrastructure Ontario projects.

In the case of Winnipeg, the details of the risk that was supposedly transferred on a cheap paperless trail are simply not believable. They're just not believable. They differ significantly from project to project. It looks like they were just pulled out of the air. There's absolutely no substantiation.

Normally, we would say that project risk is the big risk. In this project it's all kinds of other small risks that add up to very significant amounts of money into a high proportion of the capital cost.

Without further verification and explanation, this simply is not believable.

[The Chair, NDP, Pat Martin]

Thank you.

Thank you, John.

We want to leave a moment for Mr. Joy to respond as well.

[Damian Joy]

I'm sure you'll imagine I have a differing view. I agree completely, however, that there should be greater transparency. I have no problem whatsoever, John. I'd be more than happy to come and see you in Winnipeg and show you how we do our risk analysis.

Obviously, we're doing it from the side of the private sector, and we do a very detailed risk analysis on every aspect of the projects in which we get involved. We're pricing it in competition, contrary to an earlier comment you made that there's no competition on any of these projects. I've never bid on a project in Canada with fewer than four competitors. Recently, we've been short-listed to reconstruct Iqaluit's airport. We were facing eight bidders at the RFQ stage.

We're typically seeing eight or nine bidders and some extremely strong companies bidding to compete for this work. We are pricing that risk ourselves in competition. I'm satisfied this risk transfer is being priced very competitively. The government is benefiting from that.

In terms of the transparency of contracts, as I say, I agree completely. I'm surprised you can't find demonstration of that risk transfer. For instance, if you look at the Partnerships BC website, all of their contracts are published there. You can see in fine detail exactly what risk we're taking on, say, Golden Ears Bridge or the Kelowna and Vernon hospitals project.

I can point you to those if you wish.

In terms of how we have—

[The Chair, NDP, Pat Martin]

Mr. Joy, I'm afraid I have to interrupt you. We're well over the time allotted to Mr. McCallum.

Now it's Mr. Wallace's turn for the Conservatives.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

I want to thank our guests for appearing this morning.

I hope to stay within my five minutes. I'm going to start with questions for Mr. Joy and then for the professor.

Just for clarification, we've heard from a number of witnesses that approximately 15% to 20% of government infrastructure projects would lend themselves to a P3 opportunity, not necessarily that it would happen, but P3s may apply to only 15% to 20% of projects. Would you say that's an accurate statement?

[Damian Joy]

I wouldn't put a number on it, Mr. Wallace, but certainly a range of projects is suited to P3s and a range is not. Typically, technically complex projects and large projects lend themselves to P3s. Smaller ones may be easier because less risk is involved, and it may be more appropriate for those to be done through other procurement methods.

[Mike Wallace, Conservative, Burlington, ON]

My second question for you, Mr. Joy, is about financing. I'm with both gentlemen that this discussion should be about the risk transfer and sharing. Tell me if I'm wrong. Let's say there is a $100 million project that you're bidding on. Are the companies bidding on that job operating out of cashflow, or are they borrowing money to do the project and building into their bid the interest costs they would incur?

There's an issue about who can borrow less, but there's always going to be borrowed money in a project whether it's design-build or P3. Is that not correct?

[Damian Joy]

Yes, that is correct. If the project is set up as a P3, the project company that is set up to do that project would typically be financed with both equity and debt finance, and obviously the cost of the debt would be factored into that. However, if you're doing a traditional design build and you go to any contractor, they'd obviously have to finance their operations as well, so at the end of the day somewhere in this equation, in every way in which you use the private sector through traditional methods or PPPs, there is borrowed money to make companies work.

[Mike Wallace, Conservative, Burlington, ON]

Thanks very much.

Professor, I appreciate the work you have done on the P3 piece. Have you seen any change in the quality of the agreements? Have P3s evolved over time in effectiveness, or are you saying you don't see any difference between a P3 project that happened 15 years ago when it was a brand new concept and where they are now? Is there a difference between what's happened in Europe and what has happened in Canada?

[Dr. John Loxley]

It would be fair to say that a lot more thought goes into P3s than there used to be and that the contracts are probably better, in many cases, but that's not always the case. My big fear is the huge concern in hospitals in the U.K. about the unitary charge or the lease payments that are being made. Many of these are now being found to be far too high and they're being renegotiated. That's the crisis in the U.K. health care system. We're not immune from that, in my opinion.

As for competition, when we have the P3s bidding, I did not say there is no competition, but I am saying from time to time there is no competition. The Lansdowne Park project, for instance, or the Amicus project in Saskatchewan were single bid, and in other cases, like the Abbotsford hospital, the range of bidders closes down.

Yes, contracts are published in outline. You cannot find the contracts on the Partnerships BC website. That is simply incorrect. What you get are summaries and the key information is usually wiped out or missing, as it is in Ontario. I would say that if there's been some improvement—

[Mike Wallace, Conservative, Burlington, ON]

I have one really quick question for you, based on the academic work that you've done in studying P3s. Have you done a study of design-build and other procurement systems that the public sector uses?

We have a pier in Burlington, where I'm from, that has taken eight years and it has tripled its price. We've had to call the bond on the original contractor. I'm not sure that design-build works every time either.

Have you done a study on what happens with design-build in other systems?

[Dr. John Loxley]

I've looked at design-build, but perhaps not in as much detail as I should.

Design-build is quite controversial. Architects and engineers don't like it. They think it gives far too much influence to contractors. They worry about the quality of the product because—and this applies to P3s—often if you have to redesign as you go, then usually you kind of dumb down the project and make it fairly generic and not very attractive.

On the other hand, I would argue that the main advantages of P3s are said to be coming in on time and on budget, which I would question some of the time. You could achieve that by design-build.

That's my only argument. I'm not saying design-build is the preferred way.