Thank you, Mr. Chairman, and thank you to the committee for the invitation to appear. Having reviewed the list of participants here, I think I'm the official skunk at this garden party. I'm going to try to play that role as best I can.
Let me start with a general proposition right off the top. First of all, I'll give a clarification of terms. We use the term “public-private partnerships”, which in itself is a little bit misleading because a partnership implies a confluence of interest between the parties. In fact, if you look at even the most sophisticated of the kinds of contracts that Finn has been talking about, there are two parties to these contracts, often multiple parties to these contracts, each of which have different interests. I think it's probably more accurate to call these things agreements rather than partnerships. That helps to centre it in a more neutral environment. Partnership implies something that doesn't really reflect the underlying business reality that's in operation here.
The second point I'd make is that I suspect people might be expecting me to spend most of my time talking about how much more noble it is to be doing everything in the public sector than in the private sector. That's not what I'm going to talk about. What I'm going to talk about is the economics. For me, the fundamental issue and the fundamental challenge that P3s have to meet comes to bear when you introduce the concept of private financing of public projects. The reason I say that is because these agreements work best when they take full advantage of the strengths of both parties to the agreement.
Let's think about what are the strengths that government brings to these kinds of arrangements. Probably the most important one is that governments can borrow money more cheaply than anybody else can in our society. This is not a philosophical proposition; this is an observation of market outcomes. If you look at the rates of interest that are paid on public borrowing as opposed to private borrowing, you see significant differences in the interest costs. Those differences, even a difference of 1% or 2%, can make a significant difference in the lifetime financing cost of a project. A rough example is that a 20-year project with a 1% difference in financing costs, which would be low for the difference between P3s and public, has an effect of about 15 percentage points on the lifetime financing cost of the project. Relatively small-sounding differences in borrowing costs can make a big difference.
The second advantage the public sector has in borrowing is that for some of the same reasons that are implied by Finn's comment about contracts, the transaction costs associated with public borrowing are substantially lower than the transaction costs associated with borrowing through P3s. My experience from looking at these things, and granted there's very little really useful information out there about the actual finances of public-private partnerships, is that the general rule of thumb is that somewhere between 3% and 4% of the total project cost per party is about what you pay to put the paper and the agreements and due diligence all together. That's kind of a dead weight cost. Just going into the gate, you've got pretty significant cost disadvantages on the financing side that a P3 project that includes financing will bear.
Another strength that governments have is because governments represent the entire population and are responsible one way or another for all of the infrastructure projects that are taking place in the public sector, they have a much broader base over which to pool risk than any private operator is going to have. Basic insurance principles tell you that the broader the universe over which you can spread the risk and the more diverse the universe over which you can spread the risk, the lower the cost is going to be of bearing that risk. So risk is going to be more expensive for private operators to bear than the public.
The third thing that governments do, and this is not a trivial point, is that governments are in principle best equipped to reflect the public interest. That translates in concrete terms to everything from the amount of information that's disclosed about how P3 projects actually work, right through to the other end of the telescope, where, for particular kinds of P3 projects, it becomes much more difficult for governments to enact changes in public policy because agreements lock them into a certain way of doing things and a certain provision of the service.
Some of the obvious complexities that you run into there are, for example, when you do a P3 for a garbage contract and then you try to implement a waste reduction program. You find yourself committed to pay for a certain volume of garbage, whether or not you're actually generating it.
My basic point, and I'm going to conclude with this, is that there are a lot of strengths that go with the implementation of infrastructure financing through P3s, but they have a lot more to do with forcing the public sector to be better project managers and a lot less to do with the particular form in which that's delivered. I think about, for example, the province I'm most familiar with, Ontario. Infrastructure Ontario does a fabulous job of project management. It does a much better job of managing a project for a hospital in Timmins or North Bay than the North Bay hospital board is going to be able to do or the Timmins hospital board is going to be able to do because Infrastructure Ontario is involved in literally dozens of projects. They get really good at it.
One of the things that people who are involved in delivering major projects in pretty much any organization will tell you is that project management is critical to getting what you want and when you want it.
My basic point is that I think it is possible to get those advantages, including many of the things Finn has been talking about, without throwing the baby out with the bathwater. In other words, we can negotiate better agreements, more comprehensive agreements, with the private sector without giving away the store in terms of the huge differentials in financing costs.
The last thing I would say, in conclusion, is that on the risk issue there's actually a fair amount that has been written. I think committee members will probably have seen the article that appeared in the “Report on Business” in the Globe and Mail yesterday, making reference to a study out of UBC that goes into risk issues in a fairly significant way.
Another study done by that well-known socialist body, the Institute of Chartered Accountants in England and Wales, has looked in detail at the issue of risk transfer in P3 projects in hospitals and roads in Britain. What they find is that in general in these contracts there is a lot less risk transfer taking place on a day-to-day basis than actually appears on the surface.
What is probably more important is this. The nature of the beast is that it creates a risk because the project is in the hands of a private operator that can fail, which didn't exist before. We see many examples of that in Canada.
Finn talks about incentives—and I'll conclude here. Because the government has an overriding commitment to provide the service, the government will ultimately always have to pick up the pieces if the project fails. What that means is that there's a strong incentive on P3 proponents to telescope the risk they bear and load it on to the back end, in other words to underprice the risk during the life of the contract, knowing that if they get caught in their underpricing, they have the ability to walk away.
I'll leave it at that. Thank you.