Finance Committee on May 17th, 2012

[Maxime Beaupré]

Basically, P3 aims at aligning the incentives in the right way in the interest of taxpayers. For example, when you ask a consortium that's going to be responsible for designing, building, and maintaining an asset over the long term, they can make decisions that will minimize their costs over the long haul.

When you ask an entrepreneur to build you a road and you award the contract to the lowest bidder, they will not propose something with concrete. It's very expensive and the entrepreneur is not responsible for the long-term maintenance of the asset, so they have no interest in proposing to build the road with concrete.

But if the bidding consortium is responsible for the long-term maintenance of the asset, they may see the economies of scale. The life-cycle costs will be lower than paving the road with a lower-grade asphalt and replacing it multiple times over the life of the asset.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you. It makes a lot of sense.

[The Chair, Conservative, James Rajotte]

Thank you.

I thought you were going to ask about Highway 63, Mr. Jean.

We'll go now to Monsieur Mai again.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you, Mr. Chair.

We will set aside the issue regarding Champlain Bridge because, if my understanding is correct, you have not studied, or been given the mandate to study, this report.

Ms. Nash raised an issue I find very interesting. In your studies on PPPs, you can consider projects whose funding comes from the public sector. Is that right?

[Maxime Beaupré]

As I said, regardless of the infrastructure project, the funding may come from the government through general revenues, from the user of the asset in question, or a combination of those two. There are many PPP projects where governments make payments for the consortium that will deliver the project.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

It has often been said that a PPP was beneficial because it reduced costs. When the government takes care of the funding for those projects, what kind of a contribution does the private sector make? Could you talk about specific projects so that we can compare? What would be the benefits of having a PPP when the funding is already public?

[Maxime Beaupré]

The main difference between the traditional procurement method and the PPP method is that there is a greater risk transfer toward the private sector in the case of a private-public partnership project. This may mean that, if there are cost overruns compared with the consortium's submission, they will have to be absorbed by the consortium. Similarly, if the project is late and the risks in question have been transferred to the consortium, the latter will have to absorb the costs of schedule overrun.

In general, those risks are assumed by the Crown in the case of a project delivered using traditional methods. Even if the Crown makes payments for the delivery of the project, the private sector still provides its expertise so that the project may be delivered within the budget and the time frame.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

If my understanding is correct, for those projects, the government would make funding decisions when it comes to things like user fees.

[Maxime Beaupré]

Some projects may be funded entirely by the Crown. As I was saying, most PPP projects in Canada are paid for by the Crown. In the industry lingo, we say that the Crown takes on the financial risk. It guarantees payments to the private sector. It is important to mention that those guaranteed payments are subject to performance criteria. The asset constructed and managed through the public-private partnership must deliver on the performance agreed upon in the contract.

Some projects involve user fees. For instance, in the case of the new Highway 25 bridge in the Montreal region, users will fund the construction and the maintenance of that asset. My understanding is that the same goes for Highway 30.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you. Merci.

At this point I will thank our officials dealing with PPP Canada very much for being here.

We will ask the officials for division 4 on territorial borrowing limits to come forward. I know Mr. Marston has a line of questions on that.

For division 4 we have Mr. Macdonald, and we're on page 192 of the bill.

Welcome to the committee, Mr. Macdonald. If you want to give an overview of this division, then we'll have questions from members.

[Daniel Macdonald, Chief, Federal-Provincial Relations Division, CHT/CST and Northern Policy, Department of Finance]

Certainly.

The Nunavut Act, the Northwest Territories Act, and the Yukon Act provide that territorial governments have the authority to borrow money for territorial, municipal, or local purposes subject to approval by the Governor in Council.

These identical amendments to the Northwest Territories Act in clause 214, to the Nunavut Act in clause 215, and to the Yukon Act in clause 216 provide the authority for the Governor in Council, upon the recommendation of the Minister of Finance, to do two things: one, to set the maximum amount up to which each territorial government may borrow; and two, to introduce new regulations specifying the definition of borrowing and other instruments to be included for the purpose of the limit, entities whose borrowing is to be measured, and the value that should be attributed to each type of borrowing for the purpose of the limit.

As I said, the amendments to each of the three acts are identical. As stated in the budget on page 157, the intent of the regulations will be to ensure accurate reporting of obligations within these limits and to ensure consistency with reporting in the territorial public accounts. Establishing these clear rules will assist territories in their fiscal planning.

I will go through clause 214 for the Northwest Territories, just to show what's happening, and I will leave it at that, because they are identical for the other two territories.

Subsection 214(1) repeals the existing subsection 20(2) of the Northwest Territories Act. This is the subsection that currently authorizes borrowing by the territorial government if approved by the Governor in Council. The clause replaces the current language with a new subsection that specifies that the amount of all borrowings must not exceed the maximum amount that will be set out in a new subsection 20(4).

The new subsection 20(4) specifies that the Governor in Council may, on the recommendation of the Minister of Finance, set the maximum amount of the aggregate of all borrowings. This confirms the current practice of establishing maximum amounts by order in council on the recommendation of the Minister of Finance, within which territorial governments may make their own borrowing decisions.

Then the new subsection 20(5) creates a new power for the Governor in Council, on the recommendation of the Minister of Finance, to make regulations respecting borrowings, including regulations on what will constitute borrowings for the purpose of territorial borrowing limits, for what entities or classes of entities the borrowings must be taken into account, and the value that shall be attributed to each borrowing for the purpose of the limit.

The remaining clause, clause 217, is a coming into force provision.

That's an overview of the division. I'd be pleased to take questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for that overview.

We had Mr. Marston last time, so we'll begin with him.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you, and welcome, Mr. Macdonald. I appreciate you being here.

I'm going to have a couple of comments, and it's not necessarily a question directed to you, so don't feel you have to jump in. I will get more specific at the bottom.

When we look at this action, one has to wonder why the Conservative government is changing the Constitution in these three territories to in fact increase control over the financial affairs of the territories, without public consultation, by putting it through Parliament in Bill C-38. I said yesterday, when I was starting off prematurely, that it strikes me as not being consistent with the government statements that the fourth pillar of their northern policy is improving and devolving northern governance. In fact, the territories, from what I understand, are on record requesting the elimination of borrowing limit provisions. So, again, one might wonder why the Conservative government won't give the territories the same type of respect that they give to the provinces.

To my mind, these changes increase almost a colonial-style governance and control over the territories, and I'm left to wonder why the government won't accord the northerners the same kind of respect they do other provinces in the formation of this and the planning of this.

Was there a financial problem, a financial risk, or something that generated this, that you know of?

[Daniel Macdonald]

To respond to the specific question, I would point to the current language, just as an example, of the Yukon Act. So I'll sort of work from the bottom of your question and work back.

The current guidance that is provided for the administration of this federal authority, which has been in these acts and has been administered since, by my record, the 1980s, reads in its entirety, “No money may be borrowed under a law made under paragraph (1)(a) without the approval of the Governor in Council.”

The issue that arose that prompted a review of the operation of borrowing limits is twofold. Territorial governments are increasingly taking on larger, more ambitious, important projects, and they're looking to finance them in using instruments that have been developed over time. As both instruments and arrangements for risk sharing have become more sophisticated, there's not a whole lot of guidance in that line that I just read. So we started getting increasing questions, such as, if an arrangement looks like this, if a project looks like that, how would that be treated? As I said, there's not a lot of guidance there. The intent is to have clear rules. The territorial governments understand that clear rules facilitate clear fiscal planning. It's intended to clarify and to support decision-making by territorial governments.

With respect to how this is administered, I would make a general comment that the structure of the borrowing limit is to set a maximum amount within which territorial governments are completely free to take whatever decisions about how they allocate the free room that's left to them.

There's a parallel on the fiscal side with respect to the transfers that are provided by the federal government to the three territorial governments. They're quite significant in importance to the territorial governments. On the Finance website for the 2011-12 year, if you look at our website with respect to transfers to individual territories, it refers to how 67% of financial resources of the Yukon come from the federal government, 76% for the NWT, and 88% for Nunavut. The vast majority of that is territorial formula financing, and it's transferred unconditionally. The purpose of that money is to enable territorial governments to take the decisions they need to take to provide comparable programs and services, but we don't in any way look at—

[The Chair, Conservative, James Rajotte]

Thirty seconds.

[Daniel Macdonald]

—or influence the decisions they take. The borrowing limit is done in a parallel fashion. We've set an amount, and within that they are free to take whatever decision—

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

If I may, I'll jump in just for a second. We travelled as a committee to Whitehorse last year, and in the north the cost of infrastructure is just huge. We understand the problems they have up there.

On the other side of it, I'm pleased to get your explanation of this because I think the federal government has a role to play, not necessarily in this fashion, but certainly a role to play financially, because those territories cannot manage or handle the costs they face with the roads or the telecommunications or hydro.

I presume I'm out of time.

[The Chair, Conservative, James Rajotte]

Yes. I don't have any other members, so if you want to have another round....

Sorry, I have quite a few other members. Do you want another round later on, Mr. Marston?

Do you want to respond to that, Mr. Macdonald? Okay.

Mrs. McLeod, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

I wonder if you can share with the committee the reaction of the territorial governments to the announcement that was made that this piece was included in the budget.

[Daniel Macdonald]

There were two pieces announced in the budget. First, the budget stated that legislation and regulations would be introduced to clarify the rules. We've been consulting with the territorial governments since 2010 on this initiative, so that was not a surprise.

On the announcement of the new borrowing limits, the reaction of two of the territories was set out in press releases they issued on the day of the announcement of the increase, March 15, 2012. Both of them were positive and appreciative of the room it would allow them to make decisions about infrastructure projects.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

You just indicated that there were consultations. Could you share with the committee what that consultation process looked like and what it included?

[Daniel Macdonald]

In light of the growing number of questions about exactly how this would work and what was intended to be included or not, a review of the territorial borrowing limits was initiated in 2010. It was conducted in parallel with the regular workings of officials between the governments. It concluded more or less at the end of last year, but it was an ongoing process and they were aware of what we were doing.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

So is it fair to say that not only were there extensive consultations, but the territorial governments are pleased with moving forward in this area? Is that a good summary?

[Daniel Macdonald]

Certainly the press release from the Northwest Territories references successful discussions between the federal Minister of Finance and the three territorial ministers of finance.