Government Operations Committee on Oct. 16th, 2012

[The Chair, NDP, Pat Martin]

I'm going to have to interrupt you. We want to give the others opportunities. You've made some good points.

Mr. Mackenzie?

[Hugh Mackenzie]

Yes, just briefly. I wasn't going to say anything, actually, but when Finn referred to the taxes as a factor that weighs on one side of this equation, of course taxes are paying for the ongoing costs of P3s as well. I don't see how that's not just neutral, as between the two.

Also, I really don't think it's an issue that it costs government less to borrow money than it does the private sector. I hope I'm not putting words in people's mouths, but the issue is, are there other benefits that come from this form of organization and management of infrastructure that offset those higher financing costs? My position is that if we have problems with the way we run infrastructure in Canada, we should design systems and redesign our way of accounting for things, so that there's an incentive in the public sector to do the right thing, not only on the 15% that we do through P3s but on the 85% that we don't.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Mackenzie.

We'll hear very briefly from Mr. Gill, and Mr. Marasco would like a brief comment, but then we have to move on.

[Vijay Gill]

I'll just say that part of the reason why this is very confusing is that there are two different measurements here. Finn was talking largely about the welfare measurement—the overall efficiency gain—and generally the VFM speaks to the government fiscal balance, to the government fiscal perspective, to how many dollars are coming in and out. They're two different things.

I won't elaborate on that right now, but maybe that's part of the confusion.

[The Chair, NDP, Pat Martin]

Thank you.

Mr. Marasco, briefly.

[Michael Marasco]

Thanks. I'll be brief.

I keep hearing about this enormous cost of private sector financing. Again, I think you have to take it into the perspective of looking at that whole-of-life cost, because the reality of it is—as I said with that example of the Vancouver trade and convention centre—that the government borrowed $365 million more than it needed to, right? That was at a lower interest rate, at a lower cost.

As I said, I've wracked my brain against this problem for 26 years in the public sector, working with some of the brightest minds that I've come across—still—and you cannot replicate in the public sector what occurs on the private sector side of these projects.

I agree with you in that as a taxpayer I think there is a need to try to continue to improve those systems, but I'll tell you that after 30 years I can't think of a way that you can actually do it.

Thank you.

[The Chair, NDP, Pat Martin]

John, I'm afraid that used up all the time, but it was a very good question and it generated a very interesting debate.

Ron Cannan.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thank you, Mr. Chair.

Thank you to our witnesses for a very interesting discussion on a very important proposal and process as we move forward. As indicated, it's in its infancy in many ways.

Coming from British Columbia, I'm very familiar with Partnerships BC and the Okanagan Lake floating bridge.

Mr. Marasco, I'm sure you're familiar with that—as well as others who have studied a P3—and the success that has been for the community of Okanagan Valley in Kelowna—Lake Country, which I represent, and for all of British Columbia.

I just want to connect with Mr. Poschmann.

Finn, you're very passionate about your policies on this specific issue. Maybe you could elaborate. Specifically, my legislative assistant, in working on some research, found that the more detailed the contract or agreement, the better likelihood for a successful outcome. Is that your analysis?

[Finn Poschmann]

Yes, I think that would generally be the case. You can't specify everything, but you're always going to do the best you can. Each gap that's left in the contract will be an opportunity for error, oversight, or potentially asymmetric information, as between a proponent and the government.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Mr. McCallum made a good point about the article in the Globe and Mail that was referred to. One item—I picked it out right away—was this: how do you quantify risk and how do you establish risk premiums? You started to talk about it briefly and got cut off.

Maybe you can share that with us, the fact that the cost over an allocation is fixed in P3s specifically as an incentive to finish on time and on budget, which is very important, whether it's private or public sector dollars.

[Finn Poschmann]

How the private proponent goes about pricing risk will be specific to that proponent and the project. In economic terms, risk is a product of the likelihood of an outcome, and the harm or benefit associated without the outcome, if that occurs. This is what the private proponent will assess in pricing contracts or pricing their own cost at which they're willing to undertake the contract.

Maybe some of my other practitioners here will have comments on that as well.

[Michael Marasco]

I would just say that as a result of the intense competition in the Canadian market now, the risk premiums we would typically charge for these contracts have dwindled. It's a function of competition.

To quote the Auditor General in the U.K., value for money is a function of efficient risk allocation and competition. If you get those two things right, you're going to optimize your value for money, and I think we're seeing that in Canada right now with the tremendous amount of competition in the market.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Just to follow up, there's the statement:

Set the value too high, and P3s become vehicles for governments to subsidize inflated profits of powerful and well-connected contractors and financial institutions.

I don't know if anybody wants to comment on that particular statement.

[Michael Marasco]

I wish we were one of those. That doesn't exist. There was a comment made earlier about private sector profits. Our economy is built around private sector entities making money so that we can pay taxes and fund government. That being said, the only way we make money is to get a reasonable return on equity, and we will earn a development fee if we do a good job of managing those risks.

As a little Canadian company that started in 2005, we've now built 12 projects, $6 billion in infrastructure in Canada, and not all of those projects are profitable. You are going to have winners and losers. If we do a great job of managing those risks, we're going to have more winners than losers.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Just following up with Mr. Marasco, coming from British Columbia, I know you had a wealth of experience with the Fraser Health Authority and the very successful Abbotsford hospital project. I was at the groundbreaking on Friday in my constituency of Kelowna—Lake Country for the Interior Heart and Surgical Centre. It's been a great success, and Plenary is one of the leading partners on that. Maybe you can expand on the success of the Abbotsford hospital and why the Cancer Centre partnership was awarded the Project Finance magazine 2004 PPP deal of the year for North America.

[Michael Marasco]

Thanks. Yes, I was on the government side for that transaction for the Abbotsford hospital project. It was a groundbreaking project not only for the government but for the industry. It was deal of the year because that project was the first hospital project in decades in British Columbia that had not been over budget and that came in on time, so for the government of the day it really solidified the model and the need for it to continue to implement that model.

By comparison, with the Jim Pattison Pavilion at VGH, the government built that project and it sat empty for 10 years because it didn't have the money to finish it. They had to re-roof it before they actually fit it out and started using it for patient care. In addition to the value propositions that come from these in terms of risk transfer, I think the fact that we built $50 billion worth of hospital projects in this country over the last five years speaks to the ability to get these things built and done.

Abbotsford spent 20 years in the planning process, with failed start-ups, and the thing never got done. We just can't afford not to have the infrastructure we need to serve Canadians.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Congratulations.

There was some comment about the Ontario government and P3s, but I understand there is an opportunity for a new leader in the provincial government there. One of these panellists might be interested.

Are you planning on immigrating?

[Hugh Mackenzie]

I'll leave that to you, thanks.

[The Chair, NDP, Pat Martin]

I'm sure they would benefit from your experience, Ron.

That concludes our first round of questioning. The difficult thing about being in the chair is that I don't get to participate in these rounds of questioning. Some people view that as a good thing.

I have one question on a general policy level, if you don't mind taking it. I disagree, Mr. Marasco, about hospitals. The general conditions and specifications for hospitals are pretty standard. They are almost cookie-cutter buildings in a sense, whereas the convention centre in Vancouver is seven acres of sod roof cantilevered out over the ocean. Wouldn't we be better off considering P3s for the difficult, high-risk buildings and doing the cookie-cutter ones ourselves? Gary Doer always used to say there's a tendency to privatize the profits and socialize the losses. It seems to me we're handing out all the low-hanging fruit, all the easy stuff, and keeping the difficult, expensive stuff in our own public domain.

[Michael Marasco]

That's a great question.

Having built a convention centre ourselves on the waterfront in Melbourne, and several hospitals, I would argue any day that a hospital is much more complex and a much more critical environment than a convention centre. That's point number one.

Hospitals are anything but cookie cutter. In the case of the Interior Heart and Surgical Centre that Mr. Cannan referred to, that is built on a very unstable foundation, and it's a very complex building on a very complex site. It's way more difficult than any convention centre we've built.

Do you know what? I think to your point, and it speaks to the earlier questions about what works for PPPs, the reality is there is a stronger value proposition the more complex the project is. There's no doubt about it.

[The Chair, NDP, Pat Martin]

Thank you very much. That's helpful.

We're going to start our next round of questioning. We have only 10 minutes left, so perhaps we could keep it to strictly five minutes each. That would give us time for one New Democrat and one Conservative, and then we'll cut it off at exactly 10:30 a.m., as we do have some business in camera that we need to do.

For the NDP, Jean-François Larose.

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

Thank you to our witnesses for being here.

Thank you for the answers you are giving us, even though, personally, I find myself with more questions than answers.

In the arguments, it is always traditional contracts that are compared. We don't hear anything at all today about the public sector, quite simply, for undertaking work. Failures have been mentioned concerning the government, and P3s seem to be the solution. However, I have difficulty with the fact that we're not talking at all about correcting failures within government.

My question is for Mr. Mackenzie, whom I thank for being here today.

A major argument for promoting P3s gives the illusion that risks are shared with the private sector. However, in reality, when P3s run into major problems, it's the public that suffers the consequences. For example, in cases of bankruptcy or force majeure, it is the public that pays the bills.

Can you talk to us about what you call walk-away risks, and give us a few concrete examples of when costs for taxpayers and the public sector turn out to be much higher than expected?

[Hugh Mackenzie]

With respect to the last part of your question, there's a good inventory of a fairly large number of projects, and I'll put in parentheses that I'm sure my colleagues will say that many of those projects are from the bad old days when things weren't done as well as they are today. If committee staff or you or your staff look at the Boardman and Vining paper, that has a fairly careful review of a fairly large number of projects.

On the question of risk, risk allocation and risk transfer is an issue that is really in contention amongst people who study this; I will acknowledge that. The accountants' study that I referred to in Britain looked at an extensive list of P3 projects, largely in roads and hospitals, and came to the conclusion that when you actually drilled into the details of those contracts and looked at how they actually operated, there was very little risk that was transferred, and there were new risks that were created that were related to the survival of the entity, the viability of the entity that had the responsibility for operating the project.

I would further say, in regard to the issue of what value gets placed on the risks that are transferred, at least in Ontario, if you look at the way Infrastructure Ontario explains value for money, the overwhelming majority of the benefits associated with P3 projects in the Infrastructure Ontario model have to do with very large values that are assigned to risk transfer. Interestingly enough, their analysis does not highlight what I would have thought, given the comments that we've heard today, would be more important things, which are improvements in life-cycle maintenance cost, expected better performance at the end of the contract, and so on.

[The Chair, NDP, Pat Martin]

Is there anyone else who would like to comment on Jean-François' point?

If not, you have about a minute and a half, Jean-François, for a second question.

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

Okay.

The current problem is that the position always seems to be to say that P3s will be a magic bullet. However, P3s only started to be developed in Canada in the 1990s and, as you mentioned, there were a lot of problems.

It seems problematic to me that such a firm position is being taken, according to which P3s are a panacea. I heard you say that we had to be careful and that they weren't applicable in all cases. I think that is very good, as a matter of fact. Moreover, we need an adaptation period.

My problem is that I don't know what we will end up with at the end of the contract. At the end of the day, no matter what is said, the risk is still taken on by the public. Unless I am mistaken, we will be the ones who end up paying for the mistakes that will be made. Having a much more modest approach would be greatly appreciated, because after all it is our money being managed.

I don't know if you have comments on that.