Government Operations Committee on Oct. 4th, 2012

[John McBride]

Yes, that's right. Our funding is meant solely for projects undertaken by non-federal levels of government. We do work with federal departments, but the resources for those projects come from each department's capital budget.

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

How many federal government projects have you assessed since your corporation was created?

[John McBride]

Roughly a dozen.

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

How many of those passed the screening process and how many didn't?

[John McBride]

One of the deals that has been closed is the RCMP project in Surrey, British Columbia. It was already near completion. There's also the Communications Security Establishment Canada project in Ottawa, which is in the design phase. We also have two major bridge projects: one to replace the Champlain bridge in Montreal, and one in Detroit. The other projects are still at the early stages of departmental planning.

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

Have you turned any projects down? Did you make a decision? Did you ever think this isn't a good project, and if so, why?

[John McBride]

Are you referring to PPPs?

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

Yes.

[John McBride]

Yes, it's happened.

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

What led you to that decision?

[John McBride]

We've turned down projects for a variety of reasons. We have to determine whether clear performance objectives can be set and whether those objectives will remain stable over a long period.

Take information technology for example. Those projects require huge investments. Can the private sector really enter into a binding contract with the government for 25 years and invest in IT? That's extremely difficult given how much IT can change in 25 years.

Sometimes, it's not easy to transfer risk to the private sector. How could the government transfer the risk associated with maintaining military equipment during a war, for example? How could the private sector manage that? In the PPP world, the key is knowing who can do the better job managing the risk.

In some situations, the private sector is better positioned than the government to manage risk. That would be the case with a bridge construction or maintenance project, say, where the private sector has the experience and expertise to manage the risk optimally. It's not that difficult to identify what the government wants over a 25-year period. If it's looking for a bridge that can accommodate a certain traffic volume, it needs the least costly solution over the 25-year period, taking into account the maintenance, design, installation and oversight phases of the project. If the performance standards don't lead to an outcome that meets expectations, payments will be affected. Not all situations offer stable performance standards over 25 years, and not all risks are best managed by the private sector.

[The Chair, NDP, Pat Martin]

Thank you, Mr. McBride.

I'm trying to manage the time as best we can. I think it's in our interests to let the witness fully explain the answer, but that crept on a little long.

Now it's Jacques Gourde's turn. You have five minutes, Jacques, or thereabouts.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

Thank you, Mr. Chair.

Mr. McBride, thank you for being here this morning.

I want to pick up on what you just said. It's in the best interest of Canadians to have a clear idea of how PPPs work. As the public administrators of taxpayer money, we have to make long-term decisions about infrastructure from time to time.

I think you did a good job when you started explaining the benefits of PPPs, pointing to how these relationships came about and giving examples. You also made it clear that some variables cannot be predicted, especially in the field of IT, which is constantly changing. People in the private sector may be better suited to managing risk under a partnership, as far as public infrastructure goes. I quite appreciate how you started explaining that to us. Could you kindly elaborate a bit more?

[John McBride]

Thank you.

Public-private partnerships are the product of experience that has been gained via traditional channels. Keep in mind that the private sector has always built public infrastructure. The public sector doesn't have the equipment required to build bridges, roads and other things of that nature. Standard practice is that the government first enters into a separate contract for the design phase of the project. Once it has the design in hand, the government then solicits bids to find a private firm to build the infrastructure. Once the infrastructure has been built, the government must see to its maintenance and operation.

Where is the problem? The person designing the infrastructure has absolutely no incentive to come up with the least costly solution possible. You get plans that are extremely difficult to build. The person building the infrastructure has absolutely no incentive to consider long-term maintenance. When cost overruns crop up during construction, the builder blames the design. And the designer's response? It's a construction problem. Governments are the ones on the hook in situations like that. The fact that the traditional approach routinely leads to cost overruns tells us that something is wrong with public projects.

One of the country's biggest problems is the upkeep of existing infrastructure, not the building of new infrastructure. Governments don't systematically consider the infrastructure's life cycle. What happens in the event of a cost overrun? It's always governments footing the bill. PPPs address that kind of issue.

How do you change the supply model to prevent such problems? You start by making sure that the same people are responsible for every phase of the project, and leave the job of achieving the most cost-effective outcomes up to them. Those people, then, are responsible for the project's design, construction and upkeep, making it impossible for them to pin the blame on someone else. That is a key feature of the PPP model, integration. Construction isn't the problem, it's everything that comes afterward. If the infrastructure doesn't work, the public's expectations aren't being met.

The only way we can make sure a project is done right is to rely on the discipline of capital markets to force private firms to build infrastructure that functions properly. As I say all the time, governments aren't all that adept at recovering their money when there's a problem; but they're very adept at not making any payments at the start of a project, only once it's been completed.

We're talking about loans and investments worth hundreds of millions of dollars. Given the size of those investments, the banks, or investors, can impose discipline on the private sector that governments can't.

[The Chair, NDP, Pat Martin]

Thank you, Jacques. That concludes your time.

Thank you, Mr. McBride.

We now have John McCallum, for the Liberals.

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

Thank you.

Welcome.

People like to say that Canada is a world leader in just about everything. That's nice when it's true, but sometimes it's not true. You talk about this survey by PPP Bulletin, where Canada comes out on top. I would have thought that countries like the U.K. and Australia had greater depth in history than we did. Are you really saying Canada is number one in the world, and if so, what is PPP Bulletin, and by what measure are we number one?

[John McBride]

You're right that the U.K. and Australia have more experience. They've been at it longer and have done more projects. What I say now is that Canada has sort of emerged, so—

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

No, but you said we're top. That means we're number one.

[John McBride]

Right, in terms of where we are right now.

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

Are we number one?

[John McBride]

Yes. Why is that? The number one reason is that this is emerging post-financial crisis. Certainly in the European markets, the financial structure for the deals has been on long-term bank financing. Therefore, post-financial crisis, banks are not lending long-term, 25-year loans.

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

Can you tell me what PPP Bulletin is, and by what measures we are number one?

[John McBride]

I'm happy to share it with you. PPP Bulletin is an industry trade journal. They did a survey. It's published in the U.K., and in partnership with Deloitte they did an international survey of participants and PPP. They identified a number of countries and a number of criteria. In many respects, Canada emerged as a leader in that survey.

I'm happy to share the results and the content of that survey.

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

So you're saying that overall we're number one?

[John McBride]

We are, in terms of where we are right now with our market.