Finance Committee on May 16th, 2017

[The Chair, Liberal, Wayne Easter]

Is that—

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Toby didn't have a chance to answer.

[Toby Sanger]

It's the mode, it's not necessarily the type of project. My big concern is the higher cost of private finance that will pervert it.

[The Chair, Liberal, Wayne Easter]

Jeepers, and I thought we were going to have unanimous agreement from witnesses at committee.

Mr. Liepert.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Mr. Khan and Mr. Dachis, by your comments, if I can interpret what you're saying, we have before us here a budget bill, and stuck in the middle is this infrastructure agency. What I'm hearing from you is that it seems as though this shouldn't be part of the budget bill. It should be separate, a stand-alone: get it right instead of sticking it in the budget bill.

Would either of you concur with that?

[Azfar Ali Khan]

Actually, I think our viewpoint is more that...not in terms of whether it's in the budget bill or it's not in the budget bill. We really feel that the most important initiative we should do, first and foremost, is to get the data and evidence around what the—

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

But we have to get this budget passed in two weeks. Are you not saying, in essence, get it right—so do it outside of the budget bill?

[Azfar Ali Khan]

I guess you could say that in the sense that if getting it right means that it is actually helping to deliver on selecting the right projects that will help meet or reduce our infrastructure gap, then absolutely.

[Benjamin Dachis]

I would say first that I'm an economist, not a legislative drafter. The question becomes this: how many of these institutional details have to be baked right into the legislation as opposed to what can come afterwards? That's a question that Parliament and this committee will have to be asking.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

I wanted to follow up on another discussion that took place earlier.

First of all, I'll admit my bias: I'm a big supporter of P3s. I'm a big supporter of the Canada P3 projects, or the concept that was out there under the Conservative government. I'm not familiar with what Mr. Masse was talking about. I am familiar with Alberta.

In my view, the P3 only works if it's full design, build, operate, and maintain. I think I heard a couple of indications along that line. So if this infrastructure agency is going to move forward, would that be one of the things it should look at—to not necessarily just go with the design-build P3s but to ensure that it's the full package so that the taxpayer isn't on the hook? If the private sector can't justify the full package, then should the government be putting in loan guarantees or the other things that are being talked about?

[Benjamin Dachis]

A long-term equity stake, as proposed in the original framing back in the fall 2016 economic statement, is exactly along the lines we were talking about, a long-term operate-and-maintain role for institutional investors. I very much see the idea of this infrastructure bank to get to that core issue during construction, which Andy mentioned. P3 providers may not be thinking long term. With an equity stake, they absolutely can be.

[Andy Manahan]

I would add that the operating component isn't critical. The maintenance component is.

Going back to the U.K. in the 1980s when the train systems became privatized, there were agreements with the unions there that those folks would keep their jobs. I think up to a point, maintain is important. But operations.... And we're looking....

I'm from Toronto, so I apologize for this example. In the current Eglinton Crosstown LRT, my understanding is the Toronto Transit Commission will be doing the operational. It has to, to integrate to the existing system. But there may be other projects where an operating component is important.

[The Chair, Liberal, Wayne Easter]

Do you have anything to add, Ron?

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

I would ask Mr. Bartlett.

[Randall Bartlett]

Again, it goes back to the design of the contracts involved.

One of the considerations around the ownership of these assets is that it's going to be a near-monopoly. Given that's the fact, and the fact that private sector investors have an incentive to have risk-adjusted net revenues as high as they can to increase their profitability, there is an incentive on their end not only to increase revenues through increasing user fees, but also to drive down costs. That may include deferred maintenance, and that kind of thing.

At the end of the day, it comes down to how that contract is drafted, and what obligations the other owners of the asset have with regard to maintaining the asset over the long term.

[The Chair, Liberal, Wayne Easter]

Thank you, all.

Ms. O'Connell, you're next.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you all for being here.

I want to start with a couple of comments. I think someone mentioned the conversation around infrastructure and the infrastructure bank.

I think the trouble has been when we're talking about the infrastructure bank and the types of projects, we're talking about unique projects. We're not talking about the sidewalks, a park, these types of smaller community infrastructure needs that most Canadians think about. So this confusion, or sometimes fearmongering, around privatization of all infrastructure in our communities is not what this is about. That's why our government has also committed to infrastructure funding in traditional forums as well.

Then the conversation happened, and examples were given of projects associated with P3s that probably didn't go very well.

I come from a municipal background, and I can tell you about completely government-funded projects that also went horribly wrong, that also had tenders that were over budget, construction delays, employees not paid, a municipality charged twice, illegal Chinese steel used, and unqualified workers. These examples exist currently, and the taxpayers are on the hook one way or the other. Court cases also happen. In my municipality we had to go after people who didn't complete projects as they were supposed to.

The problem I tend to have is this. Where is the correlation that only bad projects can happen or bad contractors can only exist in a P3-type system? Unfortunately, we can get bad contractors with full government funding or in private partnerships.

That's my comment. I'm sure some may want to speak to that. Because I have limited time, I wanted to throw that out there and then get to a question with regard to the infrastructure gap that I'm somewhat interested in.

We're not talking about every sidewalk, every park, or every municipal need. How do you determine the gap when sometimes these projects...? We've heard a lot about transit, for example. Sometimes there are needs municipalities don't necessarily know they have, because they're too big to even contemplate when we would do 5-, 10-, or 15-year budgets. It's something you'd like to have, but you have to fix the local pool, repair a sidewalk, or resurface a road. How do we come up with that gap when these types of transformational projects...? Some municipalities may not even know what they need or where to begin to identify it.

[The Chair, Liberal, Wayne Easter]

Who wants to start?

Mr. Dachis.

[Benjamin Dachis]

I would say first of all that you're about to hear from Matti Siemiatycki and Mark Romoff. Matti will give you all the answers you could possibly want on P3 performance. Sorry, Matti, I'm putting you on the spot.

The problem with the basis of an infrastructure gap is compared to a fantasy ideal world. I have a Porsche gap, I have a Ferrari gap, and I have a Learjet gap. I would love all those things.

[Andy Manahan]

An Armani gap.

[Benjamin Dachis]

That's the very fundamental basis of how most governments have defined infrastructure gaps.

Getting a bank that's receiving unsolicited proposals is a start, where you can start gaining private sector ingenuity to say, “There's a need here. We can provide this on a user-fee basis.” That's a great way to help address this with real dollars behind a proposal.

[Toby Sanger]

If I could interject here, you're absolutely right. There have been problems in all different types of projects, and there had been a problem with what they called optimism bias in the public sector, so it's not unique.

The concern with these large private sector deals is that you also don't have that transparency, and there are also more opportunities for self-dealing, as we saw with the McGill Hospital in Montreal. There was a lot of corruption and fraud. We don't have the transparency behind that.

In terms of the infrastructure gap, I've been involved with the FCM in terms of talking about that. Ben is right about that. I think that's why it's important to have some better national planning on this, and not just a value for money, but to try to figure out the cost benefit on these different projects in that way so it's not just driven by that, but also not driven by unsolicited bids. People will want a profit from those projects.

We have the example in Montreal of the REM, which was seen as a poster child for this, but there are real problems with it. It's not integrated because they figure they are going to make more money out of it with the existing system. People are going to have to pay more.

I am really concerned about increased user fees related to this. Some people think it's a positive thing, but I think you really need to look at what's happened in Ontario and elsewhere and see how those user fees have really hurt members of the middle class, increased their costs, and they are rebelling against it. It's a real warning down the road, and you should be concerned about it.

[The Chair, Liberal, Wayne Easter]

I'm going to cut you off there, Mr. Sanger.

Mr. Aboultaif and Mr. Grewal, we'll go with three minutes apiece.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Thank you.

I just want to get to the bottom line. What matters to me at the end of the day is the cost. This is an area where investors are coming to put their money. There are projects. We're in Canada. We have a great guarantee that you can give to investors, so the risk taken on that isn't as high as it can be in other countries. We're talking about our country and how healthy our base is, so it should be a phenomenal deal for whoever is going to invest in Canada's infrastructure.

The question to all of you is, if we are to compare this type of investment cost to other types like P3s, what will we be looking at percentage-wise? Do you have any idea? Is there any clarity over how much that is going to be on the taxpayers at the end of the day?

I don't know who is going to start to answer.

[Randall Bartlett]

We don't know how much it's going to be on the taxpayer, but there's a lot of information out there on what returns are required for the private sector to be attracted to making these sorts of investments by various infrastructure asset types.

You're looking at average annual returns in the range of 10% to 15% before being adjusted for risk. About half of that is a cash yield from the revenues generated and half of it's the capital appreciation, but it's quite significant because these are highly liquid assets, generally. It's very difficult to get out of these contracts. There is credit risk associated with it, political and regulatory risk, and those kinds of things, so the private sector requires a great deal of compensation to get involved.

Not only that, this is with regard to brownfield investment. This bank has looked to be dedicated toward a greenfield investment, so these unique assets that have no history of an asset stream associated with them are going to require even higher levels of compensation in order to attract private sector investment, because the risks are that much higher.