Thank you.
Unlike my colleagues who have spoken before me, I'm not a researcher; I'm a practitioner. I spent 26 years of my life in the public sector involved in real estate and large capital projects. I left five and a half years ago to become CEO of Plenary Concessions with the Plenary Group, and I now know why: when I was a loyal public servant, we couldn't possibly replicate what the private sector does.
What I want to share with you, as a starting point, is my tale of two projects. I was with the Province of B.C. at the time when these projects were done, on the public sector side, and had an in-depth knowledge of them. Subsequent to joining Plenary, I learned why and what the outcomes were and how they occurred. It's a practical demonstration. I think research is great, and a lot of it is done in theory and on spreadsheets, but the practical examples are the ones I want to draw your attention to.
These two projects were done in the same market at the same time in the greater Vancouver area. One was done using P3 procurement, a design, build, finance, maintain model. The other one was done using traditional construction management. The interesting part about these projects.... For the Vancouver trade and convention centre, which was done using traditional construction management, the government set up a very robust governance structure because they didn't want another failure, another embarrassment. They set up a separate corporation and appointed a board. Some of the best project managers in Canada were assigned to the project.
It started in 2004, at the same time that the Abbotsford hospital was started. The Abbotsford hospital was done as a design, build, finance, maintain project, and it finished on time and under budget. The Vancouver trade and convention centre was six months late and 55% over budget, despite all of the efforts from government. I know a lot of the people who were on the convention centre project—some of Canada's best talent.
Interestingly enough, and this is where the irony is, both of them had the same architect. Both projects had the same construction company. So you have to ask yourself how that could be—same market, same construction company, same architect. Having been brought in to look at those projects to try to help government resolve the issues, I have a good understanding of why. You can't replicate the alignment of interests that we bring to bear and the pressure that we bring on project partners to perform in the public sector. It just can't be done.
A lot of it is about risk transfer, clearly. You've heard my colleagues talk about that.
I want to take you on a little journey that's going to open your eyes to something that hasn't been talked about. That's with respect to the value for money. It goes well beyond risk transfer. I would also argue that public-private partnerships are not about finance. Finance is the catalyst for the risk transfer as well as what I'm about to share with you.
In a value proposition that any agency goes through...and this speaks to the point about strong project management offices. If you have them in place, you can actually balance these four bubbles: the capital expenditures, the maintenance and repair costs, the life-cycle refurbishment, and the utilities costs. I've sat on many project committees in my 26 years where we had the operators, we had all the partners at the table, with the objective of trying to optimize the whole-of-life costs. Then we got the capital cost estimates and we summarily dismissed the people who were there from the operations side, saying thank you, but we can't afford to spend that extra $20 million to achieve $100 million cost savings over 30 years because we're constrained by our capital cost inputs. Consequently, we went on and we derived a project solution that actually was more detrimental to taxpayers.
The objective and the value proposition around PPPs is to make that box smaller. This is the thinking about it. I'll draw your attention to the chart. If you look at the facility costs of operations over a 40-year period, you'll see that 8.7% of those costs relate to the cost of first-in construction costs; 29% relate to life-cycle refurbishment; and 58% to the ongoing operations and maintenance. I'd ask even the Government of Canada where they make all their decisions around capital budgeting. I'm sure they don't approve the 29% for life-cycle refurbishment at the time they approve a capital project.
In some cases, they may actually approve a one-year operating budget, but no one is looking at it as a whole. The whole focus and drive behind a DBFM are to optimize the size of this entire circle, not 8.7% of the total whole-of-life cost of that asset. Consequently, what happens is that typically as public servants we were always driven to dealing with deferred maintenance and all the aspects that run down Canada's infrastructure much more quickly.
Under the DBFM approach, the objective is to make the balls in the box smaller. As you can see by this example, the capital expenditures were more up front, but the ongoing maintenance and operations costs were reduced. The beauty of this is that the outcomes are guaranteed by the private partner because it is a performance-based contract. It isn't an exercise in theory of well-meaning people sitting around the table thinking about how to save money. We actually guarantee it. The financing returns are the vehicle that enforce that guarantee.
We talk about savings. These are examples of the P3 projects across Canada—I encourage you to look at the charts when you get them afterwards—and these are all from value-for-money reports, some of which have been reviewed by Auditor General, of the savings that have occurred in these projects. When you look at it on a percentage basis, you can see that the average savings are just under 20%.
I will conclude by saying that for the Vancouver trade and convention centre the government borrowed at 75 basis points over long-term Government of Canada bonds at the time. The Abbotsford hospital borrowing was somewhere in the neighbourhood of 195 basis points over long-term Government of Canada bonds. The difference is something like a 1.2% increase in costs, but the government had to borrow $365 million more for the Vancouver trade and convention centre, and because of the focus on first costs, the price is as yet unknown for the long-term whole-of-life costs and refurbishment.
Thank you very much.