Government Operations Committee on Oct. 4th, 2012

[John McBride]

Yes and no. If you go back to the time of 2009, the priority was stimulus. If you remember, that was a time when the government said, for the right reasons, we need to put an injection of stimulus, and infrastructure was one of those tools. There was an extra $9 billion or $10 billion added to infrastructure funds in a two-year window, to focus on making sure the economy moved forward. In that context, those were the same partners, so provinces and municipalities had a two-year window from 2009 to 2011 to spend $9 billion or $10 billion.

In our first year, absolutely, almost every province and most municipalities were extremely focused on stimulus spending. By its very nature, those projects were shorter term, and there is nothing wrong with that; that was the point of them. So in that first period the emphasis was really on getting that stimulus money, and that was really well done, but it did take a lot of capacity and focus away in provinces and municipalities from the longer-term task and the larger projects.

In terms of capacity, there are provinces that have things that.... In terms of being a global leader, I would say our provinces are global leaders. There are Infrastructure Ontario and Partnerships B.C., and our guys have been very lucky to be able to learn from them and their experiences. The credit for our being a global leader doesn't go to us, but it goes to what's been happening at the provincial level.

So there is capacity, but it's uneven. B.C., Alberta, and Quebec have been doing P3s, so they have capacity. They each have established institutions that have expertise to do these kinds of things. That's less true in other provinces.

For example, we just announced a couple of weeks ago an investment for P3 to redevelop the Iqaluit airport. Did the Nunavut territory have a lot of knowledge and capacity about how to do complex project structures like this? No. Did that take a lot of work? Did we work to get B.C. to partner with Nunavut to help them learn and have capacity to make sure they do the deal right?

That's true with municipalities. We've worked with Winnipeg, Surrey, Sudbury, and a whole range of municipalities.

In fact, it's one of the goals of our fund: to try to focus on people. Yes, we want to leave behind great infrastructure. That should go without saying. Yes, we want to leave behind great PPPs that deliver value for money. But what we really want to leave behind is an institutional capacity and a learning. So part of our challenge is to work and partner with people who are new to P3s.

Even those who are more experienced, we want to encourage them to try.... Can we do P3s in areas where they haven't done them before? We're doing a project with Partnerships B.C.—it was their experience—to do the rehabilitation of a single residence occupancy...basically social housing in east side Vancouver. Those are 100-year-old historic buildings. How do you actually get the private sector to take a risk, over 25 years, of rehabilitating and providing social housing in east side Vancouver? It's not obvious, but if we could come up with a social housing model for the rehabilitation of social housing, to engage the private sector, then there may be something that everybody could learn from across the country. But it's not an easy deal to put together, so we're working with people who have experience, to get them to take their experience into new places and with jurisdictions that haven't....

The capacity is a challenge, as was the short-term stimulus focus in the 2009 to 2011 period, which I would say did cause some slowdown in our take-up. But I'd have to say, we were just getting started, too, and we wanted to walk before we ran as well.

[The Chair, NDP, Pat Martin]

You're a little over your time, but thank you very much.

That concludes our first round of questioning.

In the meantime, if you don't mind my taking a minute for one question....

Generally, in the industry—this is why we asked you here, and it's not necessarily to find out the efficacy of what you're doing, but more about the industry—what is an acceptable profit margin? What is the markup? If a bridge costs $100 million to build and maintain over 25 years, it's not charity; you're not doing it out of the goodness of your heart. You're trying to make money on it. So how much more do we pay for having somebody else do it than the real cost of the project?

[John McBride]

If you recall, a P3 pulls all the pieces of a project into one transaction.

[The Chair, NDP, Pat Martin]

And then you're adding profit to it.

[John McBride]

Say you were going to do a bridge and you were going to do it in the traditional mode. You would have to hire an engineering firm to design the bridge, and they would make a profit on that.

A P3 doesn't change the contractual relationships and what they'd make as profit. If you were going to then hire PCL or EllisDon or Strait Crossing to construct the bridge, there would be a profit margin in that. If you were going to hire somebody to operate the bridge, there would be a profit margin in that.

By putting the pieces together, they actually optimize costs. What are the profit margins companies charge in terms of their contractual relationships? Even within the consortium, they have contractual relationships with each other. What is the incremental cost of the finance? Spreads on the debt component, which are usually about 90% of the financing, are around 200 basis points over what governments could borrow. There is a cost to the long-term financing.

[The Chair, NDP, Pat Martin]

One of the main themes of your presentation, sir, was that you're asking the private sector to come in and take on the risk.

[John McBride]

Yes.

[The Chair, NDP, Pat Martin]

You don't take on the risk without some reward.

[John McBride]

That's the incremental cost of the financing.

[The Chair, NDP, Pat Martin]

It's only that.

[John McBride]

Yes, and in fact I would argue that you get better value on the other components. You get better value in design, construction, and operation, and through the competitive process of putting that all together. That is the tenet of that. The competitive process not only brings discipline, but the whole life-cycle optimization—the person who's thinking through the design is also building and maintaining—forces the best possible value.

[The Chair, NDP, Pat Martin]

I didn't mean to take up too much time. If there was a clean answer, such as a 10% markup....

[John McBride]

Sorry. You'd have to ask the industry. It would vary by the industry and the contractor as to how they price their projects.

[The Chair, NDP, Pat Martin]

Okay. Fair enough. Thank you.

Jean-François Larose.

[Jean-François Larose, NDP, Repentigny, QC]

Thank you, Mr. Chair.

I want to thank our guest for joining us today.

I have a few questions for you. Perhaps you could write them down, since our time is very limited. I appreciate your patience.

We know very well what is currently happening in Quebec with the Chartrand commission. Earlier, you said that you were aware of the various problems with PPPs. There have been some scandals in Quebec. That's in our own backyard, and it's recent. You could even say that we have known about this for 30 years. We have been told that PPPs work for 30 years, but we still see problems.

Earlier, you talked about the United Kingdom. To my knowledge, the United Kingdom's Public Accounts Committee reported, in September, that there was a number of scandals. Once again, I find this a bit particular as an example to use. Here, in Ontario, we need not go any further than correctional service and even the ambulance scandal, where the outcome was disastrous.

I have several questions to ask you and I will begin. What kinds of mechanisms have you implemented to ensure an impartial and transparent adjudication process and transparent public accountability? How will you ensure that events like those in the United Kingdom involving private companies will not draw more from PPPs at the expense of taxpayers? What mechanisms have you implemented to ensure that Canadians and ourselves, as members, are informed about the redistribution portion in terms of taxes?

I also have some more in-depth questions for you. How do you assess the costs for the Crown if the project is not carried out with the private sector? What kinds of costs would be involved if only the traditional contracts you mentioned earlier were used? How do you calculate the economic performance of the taxpayers' revenue invested in PPPs? Can you tell us what that performance has been so far? Can you also tell us what the economic performance of private companies is? Do you have any documents in support of those questions you could share with this committee?

[John McBride]

That's a good series of questions.

[Jean-François Larose, NDP, Repentigny, QC]

You wrote them down.

[John McBride]

Let's begin with transparency. When we make an investment with provinces or municipalities, we have to publish the value added study, which compares the costs of the traditional model with those of the PPP model. That analysis has to be published.

How can we avoid the difficulties experienced by the United Kingdom? We can do that by conducting a value added analysis for each project and by ensuring that the reason someone is proposing a PPP is not to avoid budgetary constraints. Accountability requirements in Canada are different from those in Europe.

We estimate the costs. There is a way to assess the return on investment. There are actually two kinds of returns on investment in a project. The first has nothing to do with PPPs. Building a bridge will create economic benefits. However, if the project is constructed based on a traditional model, the economic benefits of that bridge will be there because the bridge will be there. Our comparison is meant to determine whether it is more efficient to carry out those projects based on a PPP model or on a traditional model.

We assess the costs of the traditional model. There is a way to analyze the costs of a traditional model, including risks, and to assess PPPs. That can be done in the beginning, with the estimates. That can also be done once the private sector's proposals have been received so as to ensure that those proposals are less expensive than the traditional model. If that is not the case, no investment is made. Our recommendation would be not to go ahead with the project. The analysis of such factors is a discipline onto itself.

Have I answered all your questions?

[The Chair, NDP, Pat Martin]

I'm afraid your time is up, Jean-François. Thank you.

Mr. Chisu.

[Corneliu Chisu, Conservative, Pickering—Scarborough East, ON]

Thank you very much, Mr. Chair.

Thank you very much, Mr. McBride, for appearing in front of our committee.

I'm a professional engineer, so I will address that aspect of the P3 projects. I like the concept very much. The concept is excellent.

You mentioned in your presentation the screening of projects of over $100 million, and you mentioned in your presentation and in your examples the infrastructure projects under the P3 scenario. You also specifically mentioned the project involving the Communications Security Establishment's long-term accommodation, and that an independent engineer will give a verdict on the completion and how it is.

So my question to you is, how are the design or other engineering aspects evaluated in the P3 projects? In your organization, how are you advising the other departments about whether this is the correct project, the correct design, and the correct concept? Do you have any engineering professionals on your staff? I think a lot of time, if you don't have a correct design, and of course combined with the Project Management Institute's recommendation—PMBOK and all the other stuff. If you don't have that, for sure a project is deemed to fail, and it's costing taxpayers money and I don't want taxpayers' money to be expended.

I understand very much—I am not an expert in finance—that the design is a very important aspect for any project in infrastructure.

[John McBride]

Absolutely.

In terms of the design process, the first step is for the public sector to define performance expectations. It's not how thick the concrete should be or how many bolts should be on the thing, but what the outputs should be. What performance do we want at the end of the day?

In general, then we would go to between 20% and 30% design. The 20% and 30% design is to allow for a reasonable cost estimation. We don't go farther than 30% design because we want to leave scope for the private sector to come up with the best design to achieve the performance specifications.

As part of the bid process, the bidders would have to complete to 100% design and do a cost estimate. They are at risk in their bids of having to go from that 20% and 30% to 100% design and putting that forward.

Then those designs are evaluated based on whether they're technically compliant with the performance specifications that have been put out.

You leave them that kind of scope to allow for innovation. That's why there are greater upfront costs for bidders in a P3. As part of their bid, they have to complete that design and costing work. There is a fair bit of upfront work and more risk for the private sector in having to do that.

That's basically how it works

[Corneliu Chisu, Conservative, Pickering—Scarborough East, ON]

In the design/build concept—not the design/bid/build—how are you sure that the materials are safe and the safety of the public is maintained?

[John McBride]

There is an independent engineer through the course of the process who has to certify that what they are doing is right. These engineers are not only hired by the public authority, but even more importantly they are hired by the investors. They report to the investors on whether or not these things.... If something goes wrong on performance—they do the wrong kinds of things—that will come back to the company and the investors. They won't get paid. So the investors also have a vested interest.

But it's absolutely through independent engineering advice. That leaves the government in the situation that when the independent engineer certifies, then, and only then, do we pay. We rely on independent engineering advice for payments.

[Corneliu Chisu, Conservative, Pickering—Scarborough East, ON]

Speaking about the independent engineers, who is hiring the independent engineers? What are the costs involved in this? Are you choosing the independent engineer? Are you recommending, or is it the public sector who is choosing them?

[John McBride]

It depends on the project we're involved in. If we are working with a province or a municipality and we are a funder on a project that they are executing, they would select the independent engineer. If it is a federal project, then the federal government would select the independent engineer.