Government Operations Committee on Oct. 16th, 2012

[The Chair, NDP, Pat Martin]

I'm afraid we don't have time in this round. I've got to tighten it up a little bit or we won't get opportunities for everyone.

We're going to move right away to Mr. Bernard Trottier with the Conservatives.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Thank you, Mr. Chair.

Thank you, witnesses or guests, for being here today.

Mr. Romoff, you mentioned that Canada is now considered the best in class when it comes to delivering P3 projects and in terms of its P3 model, even though the U.K. and Australia were early trailblazers. Can you just expand for the committee the elements of the Canadian model that make it best in class?

[Mark Romoff]

There are several features that are really differentiators in the Canadian context.

First and foremost are our procurement agencies across Canada. The creation of those agencies is in fact a unique feature. There are no other countries that have subnational procurement agencies engaged in this space. That brings an approach and professionalism that is quite unique. More importantly, these agencies have really streamlined the process for P3 procurements to the extent that you get a far better disciplined and tight timeframe, and that's resulted in significantly reducing the time from a project going out to RFQ or RFP to financial close, such that in some cases—in fact in the Canadian case it's virtually half the timeline of the U.K., which is in great part why the U.K. is now looking at our approach to this sector.

The other thing I would say is that we are very open in Canada to international engagement in our infrastructure development and we put high value on the competitive process. That levels the playing field for all, and the outcome of that has been that you get much more competition in every project that goes out to bid. That tends to drive more innovative solutions, and it certainly drives down the cost, so it is a differentiator.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Those are good practices on the procurement end. What about on the delivery end? Are the companies engaged in delivering on P3 projects also best in class?

[Mark Romoff]

That's probably a question I would turn over to Michael.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

The supplemental part of that question is this. Is that a unique expertise we're developing within Canada that can be exploited in terms of being able to sell that expertise internationally?

[Mark Romoff]

Let me just make one comment on the procurement models that are used. In Ontario, it's Infrastructure Ontario; in British Columbia, it's Partnerships BC. Those particular approaches to infrastructure development are highly sought after internationally. There are a number of countries around the world that are looking to move ahead with the P3 approach to infrastructure development, but they don't have either the capacity to do it or a good enough appreciation of how you put in place a framework to enable it to happen.

What we're seeing is that there is a considerable degree of interest, including from the U.S. and from states in the U.S., in what the approach is of Infrastructure Ontario or of Partnerships BC, with a view to taking that approach, adapting it to their particular environment, and moving ahead with P3s. That too reflects the view internationally that Canada has got it right and that it's a process that's adaptable in other environments.

[Michael Marasco]

To answer your question with respect to the Canadian competencies that have been developed, because of the fierce competition from international players, the Canadian companies that have formed have had to become much more competitive to survive. I would argue they're thriving because now we've got great examples of Canadian companies competing abroad on PPP projects. PCL, Canada's largest constructor, just won a major project in Australia for a $1 billion-plus cancer centre. EllisDon has operations in the Middle East. Aecon is doing airports around the world. These are all Canadian construction companies that have developed tremendous success records overseas as a result of the $58-plus billion of projects that have been done here. It creates more Canadian jobs, it exports Canadian expertise, and it is good for the economy here as well as for those entities.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Good. Thank you very much.

I want to change the subject a little. You know that in the province of Quebec the issue of corruption in the construction industry is front and centre, and indeed that's a concern throughout the country. None of you really talked about it in your comments, but just in terms of the traditional versus the P3 model, in terms of their vulnerability to corruption, are there check points within the model within a P3 environment that might mitigate those kinds of points? I'll ask the other guests to weigh in, starting with Mr. Gill.

[Vijay Gill]

I think one good point that's been made is that in either case you're doing some sort of procurement for these large construction projects, so you're still sending out something to be bid. In many cases, you're still getting the same types of companies that might give some good examples of that.

At the very least, if there's a risk, the risk is still present in any type of procurement process. I think the potential mitigation the P3s may have is in the enforcement of the contracts. This may relate to the private finance issue. If it is financed privately and someone else is on the hook in case something goes wrong, it's much easier for the government to say they're just not paying them now. Sure, they're going to have to take over the project as it is now if they're committed to delivering the project, but they're not going to pay them. So they're not going to be able to pay back whoever gave them money in the first place. That is unique to something that is privately financed.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Briefly, I know there's not a lot of time, but are there comments on that?

[Finn Poschmann]

I agree with Mr. Gill's comments.

I've never seen corruption in a P3 contract, which is not to say that it doesn't exist or will never exist. The risks are always there in the process. But one of the things that you can ensure, or look to ensure, is clarity in terms of the contract, and sunshine. Sunshine is a good disinfectant. This is something of a controversial issue when it comes to contracting.

I've seen a bad P3 contract. I'll point out a couple of things, and I'll have to leave parties nameless. The contract allowed the private partner to specify the terms of performance, the metrics by which performance will be measured, and to implement the systems that ran the metrics, that produced the performance measure, and the bonuses associated with the contract. That was a really bad idea. There is something else about it too. I sat in a room with a couple of project proponents and read through the contract. I wasn't allowed to leave the room with the contract; I wasn't allowed to take photocopies of any pages. I had a piece of paper and a pencil that I could make notes on, and that was absolutely it. The contract was not in the public domain.

If the parties knew early on the contract was going to be in the public domain sometime after it was let, after they'd been through the bidding process, probably there would have been more discussion about the terms of the contract early on and sunlight would have prevented at least that kind of problem. I won't call that corruption, but certainly it was a bad contract.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Thank you.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Poschmann.

Hugh, you were waiting.

[Hugh Mackenzie]

I want to enthusiastically endorse the comment about sunshine. One of the real challenges for people who are outside the circle, as I am, in doing critical analysis of these things is the paucity of information that's available to evaluate these contracts.

Several years ago, for example, I did an analysis after the fact, after the contract had been let—a P3 contract to build the hospital in North Bay, Ontario—and literally every iota of that contract that had anything to do with money was redacted. It was impossible to tell what the terms of the contract were. Hundreds of pages were made available on Infrastructure Ontario's website, but not one number. It was as if somebody did a search and replace with a black line for anything that was a decimal. Transparency issues, I think, are really critical.

[The Chair, NDP, Pat Martin]

Thank you, Hugh.

Mr. Marasco asked for a final comment, and then we're out of time—well over time, in fact.

[Michael Marasco]

I have a really practical example. I would argue that there is greater protection under a PPP procurement, and the reason is that there's so much at risk for proponents. There was a federal contract that we recently won for the Communications Security Establishment Canada project. It's a billion dollar plus project, and we had probably $4 million to $5 million of bid costs at risk. If you think I'm going to risk $4 million or $5 million of our own money by going and lobbying someone that I shouldn't be lobbying.... It's a huge deterrent.

I would argue that Canada stands above many countries in the world—we've looked at other countries around the world—and it is as clean as it gets, because you're just not prepared to risk that kind of money for the lobbying effort.

With respect to the sunshine and the transparency, there's an unknown little bit of information that I'll point my research colleagues to. All of these deals are publicly rated, because they're typically financed with bonds, and all of the detailed financials for the projects are available through S&P ratings directly, or whoever did the ratings report. So it's all publicly available if you dig deep enough.

[The Chair, NDP, Pat Martin]

That's interesting.

Thank you, Bernard. That's well over time.

Now, finally, the Liberals and John McCallum.

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

Thank you, Mr. Chair, and thank you to the witnesses for being here.

I'm a little concerned that who I might call the four pro-PPP people didn't answer very directly the points made by the one less pro-PPP person, Mr. Mackenzie, in particular when he said that a one percentage point difference in interest rate can have a very large effect. Then I noticed in the Globe and Mail article yesterday by Barrie McKenna that he cited academic research regarding 28 Ontario PPP projects that says they cost 16% more than conventional ones.

I notice in this document by John Loxley that he refers to a Moncton water treatment P3 plant that has a lease equivalent to a 10% interest rate, when the city could have paid less than 6%.

So there seems to be significant evidence in various places that P3s often cost more. How would you respond to that?

[The Chair, NDP, Pat Martin]

Mr. Romoff.

[Mark Romoff]

I will quickly defer to others, but what I would say again, with respect to the U of T research, and we know the researcher well, is that it comes back to Mike's point that the analysis around cost is done on the front-end construction costs as opposed to whole-of-life costs. If you look at Matti's work and his own recommendations, in fact what he's saying is that, done properly, and where value for money is demonstrated, P3 is the way to go.

The reality is it depends on where on the timeline you choose to do your analysis. I think the focus of our approach has been whole-of-life cost, and looking at that relative to—

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

Well, it would seem fairly evident that the research, then, is fatally flawed. Is that what you're saying?

[Mark Romoff]

I would say the research is excellent. The slice of it that was used to prepare that article would lend itself to interpretations of the kind that maybe you and others—

[The Chair, NDP, Pat Martin]

Mr. Romoff, that was pretty good dancing.

We have lots of interest for comment here: Mr. Poschmann, then Mr. Mackenzie, and then Mr. Gill. I think that will probably take up our time.

[Finn Poschmann]

Thank you, Mr. Chairman, and thank you for the question. I was waiting for it and looking forward to it.

The yield at which, say, Triple-A federal government bonds are sold is typically going to be 1% or 1.25%. It would be foolhardy, however, to imagine that this represents the cost of borrowing that one should transport and carry over in comparison to a P3 contract.

First of all, the debt incurred if the financing is done in-house bears an opportunity cost. It's money that could have gone somewhere else; it could have gone to debt reduction. Here the Parti Québécois, in the course of its most recent election in Quebec, was on to something when they said that perhaps government ought not to be investing in risky assets on behalf of its residents, but reducing debt, because the risks associated with debt reduction are approximately zero and you have a known return: you have the interest costs avoided by reducing your debt instead.

On the first instance there's an opportunity cost associated with government taking on the financing. Second, there is of course the dead-weight loss associated with the implicit tax burden associated with debt. You have to do a little calculation after the fact to account for the fact that taxes cost money, they impose a burden on the economy, and the effective interest rate in net present value terms is much higher than the 1%, because there's a cost of taxation associated with it.

Then, of course, there's the financing risk itself. If government takes on full financing—