Government Operations Committee on Oct. 18th, 2012

[Costas Menegakis, Conservative, Richmond Hill, ON]

You mentioned in your testimony some of the challenges that are faced with the contract management approach. I think you said that the municipalities are very good construction managers, but with the contract management concept, that poses some different challenges. Is it fair to say, though, that with contract management, the cost of the project is known up front and there's less risk for cost overruns as opposed to a construction management approach?

[Adam Thompson]

Again, that's a very good question. I think it really does depend on the local circumstances. I mean, in some cases, the municipality has the capacity to make those assessments. In other situations, it doesn't, frankly, and that's where we're talking about building the capacity at the local level. That's really where you see the most need.

To answer your question—or maybe not to answer your question—it's very much at the local level that those assessments are done.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you.

Mr. Atkinson, I have a question for you. We have a large number of construction firms here in Canada, but not all of them are large construction firms, and normally we have thresholds for a P3 model at somewhere around $50 million. Do smaller firms have the capacity, the in-house resources, to be able to compete in the marketplace?

[Michael Atkinson]

Yes, and there is a role for SMEs in P3 partnerships. If you look at a typical construction contract, with a general or prime contractor and a number of subcontractors and a number of sub-subs below them, and suppliers, etc., and you look at it as a pyramid, the group most affected by the contracting method or the delivery method, P3 versus the other, is the top tier.

Those same trades, specialty trades, sub-sub contractors, and suppliers will all be engaged. It may well be that they will just be working for a different contracting party than they normally would.

My comment vis-à-vis the ability of Canadian firms to compete and for SMEs to compete was primarily at that first level, the so-called prime contractor level. They are the ones that normally, typically, would be dealing directly with the government. That's the group that is most challenged, not just by P3s but by the complexity and size of projects we see in Canada now.

There's no question that we've seen a trend over the last five to 10 years in that projects in the infrastructure area are becoming much bigger and much more complex. That is going to tax and challenge that first level, that first contracting level, regardless of what the delivery method is, because you need the capacity to take those on.

It's extremely important, and I keep coming back to this, from a planning perspective. If you own one of those companies that typically has been bidding on $2 million to $3 million school projects and you hear that a provincial government is going to start bundling those and turning them into $30 million or $40 million projects, gee, I guess you'd better do something.

It would be nice to get some advance notice of the fact that this is where your market is going and to know that it's not going to be a market that's going to disappear overnight because a funding program has come to an end.

I'm probably going on too long.

[The Chair, NDP, Pat Martin]

No, that's fine, Mr. Atkinson.

Before we move on, though, because we're on the theme of bundling schools, etc., I wonder if the Edmonton school board guests would have any comment.

[Sarah Hoffman]

Thank you very much.

I'm going to ask that Mr. Nicoll respond.

[John Nicoll, Managing Director of Facilities, Edmonton Public Schools]

Bundling or bringing together enough schools to make it a large enough project was one of the elements considered in the P3 process. As people mentioned previously, it needs to be a certain size because of the complexity of the contractual arrangements and the legal documentation.

The previous speaker mentioned that it is really an issue for the general contractors. You need to get a general contractor that is large enough to handle that volume of work.

In our particular case, the bundling of the projects was also able to incur some economies of scale and some efficiencies in design, because we repeated the design several times for several different schools. We achieved economies of scale by having a large enough project that made it worthwhile.

That was a departure from previous projects, where schools would be one-off. By getting a large enough project, we were able to actually get the economies of scale. In Edmonton Public Schools, for example, the six schools we built under our ASAP 1 program were identical designs. That was responsible for a significant amount of risk reduction and cost savings because of economies of scale.

[The Chair, NDP, Pat Martin]

Thank you very much. That's very interesting.

For the Liberals, we'll have John McCallum.

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

Thank you.

Thank you all for being here.

I wanted to start by giving you an interpretation of what I think you're saying, and you tell me if I'm right. I think you're saying that you want government to have long-term traditional financing and the possibility of P3s. Mr. Carlton said to have them under one roof. That would seem to imply that if the government moved to radically reduce the traditional kind of funding and increased P3s correspondingly, it would create an imbalance that would not be appropriate. Is that a fair statement?

[Brock Carlton]

Yes, it is.

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

Okay. Does anyone disagree with that? No.

The next thing I'd like to do is generate a little bit of debate regarding what Mr. Sanger said and hopefully give him the last word.

You make P3s out to be pretty disastrous. The federal government, I think you said, used a discount rate of 8% plus inflation, or rates that were way too high.

[Toby Sanger]

The federal government Treasury Board guidance is recently revised. It had been left over from the 1970s and it was apparently 8% plus.

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

Then you talked about an extraordinarily high risk transfer without evidence, hundreds of millions of dollars, massive disasters in the U.K.. You are painting a pretty catastrophic picture, so I'd like to ask the other three for their views on this issue of transparency and accountability in the financial reporting.

[Michael Atkinson]

Our organization welcomes that kind of scrutiny. To some extent, on the second round of P3 projects that we've seen over the last 10 years or so, it's too early in the game to do an objective assessment of that, because you're talking about the total life-cycle management cost. You're not just talking about capital costs. I think that's important.

I think it's also important to say that the reason projects go bad is not necessarily the delivery mechanism that they've chosen. Very often it's because one of the parties has not been as clear as they ought to have been in describing right from the get-go what it is they expected to get.

This goes back to an earlier question, if I may, about not being just a complete risk transfer. In a P3 project, I dare say the public sector owner is going to have their hands a little more full than being able to wash their hands and think that they're not going to get involved. You need a sophisticated owner for that kind of approach. You need an owner who through that mechanism can clearly describe what they're looking for so that the private sector can then bring the innovative solutions to achieve those challenges.

I do not believe that there is one particular delivery method that's worse than another or necessarily better. They are all well suited, as I said right up front, and when it comes to value for money, when it comes to the premium that may be otherwise pegged to go with a P3 project and the value you get back, I'm no economist, but I think all Canadians would welcome third-party objective, transparent methodologies to assess those projects.

What you are assessing is the 35- or 40-year life cycle, not just the acquisition costs.

[The Chair, NDP, Pat Martin]

Could we leave a moment for the others to respond as well? We want to hear from the Federation of Canadian Municipalities and the Edmonton Public Schools for about a minute each, please.

[Brock Carlton]

One way to ask your question is to ask if P3s are a failure. Our answer is that, no, they are not a failure. There are some hair-raising experiences along the way, but we are in a process of learning here and we're experimenting here. We as a country are learning things as we go through the exercise of trying different things around P3s, so for us the really important thing is, as was somewhat indicated in my comments, what we have learned and what we are going to do differently as we go into the future. It's in this vein that we look at the experiences to date. We say there are some failures and some successes, and I've talked about those learnings.

I think we all agree that the original experience of P3s hasn't lived up to the expectations that had been hoped for at the time, but we are gaining that experience and, as we've all said, if we can establish a long-term infrastructure plan that has that sense of long-term stability about it, then P3s become one of the tools that can be really helpful, given the right conditions and the local capacity to make the decisions they need to make.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Carlton.

Could we have a brief comment from Edmonton? Then Toby would like a moment to rebut.

[Sarah Hoffman]

I'll just say that we have definitely learned a lot by looking at what projects have happened across Canada and also internationally in terms of the way schools have gone forward with P3 construction. We think that we also learned through phase 1 and phase 2. It's hard for us to say if there were definitive cost savings, because we haven't done this project the exact same way before. We didn't build six schools with the same model using a traditional procurement model. We've only done it with the P3 model.

However, we are really happy to have that space. It was very much needed. We think we've improved upon some of the challenges that we saw in phase 1.

Thank you.

[The Chair, NDP, Pat Martin]

Thank you, Ms. Hoffman.

We'll go back to you, Mr. Sanger.

[Toby Sanger]

My point on this is that from the value-for-money assessments that are produced, it's impossible to tell. They are not transparent. They don't provide the key information that is required. They hide debt that is going to be paid in many future years. That is what has happened in the U.K.

We need a much more transparent process. The P3 agencies we have that do this—even members of Mr. Atkinson's organization—have said that Partnerships BC is biased towards P3s, so they produce many more P3s than would be appropriate.

We need much greater transparency and accountability and a transparent process. If you have that, you might be able to judge. Right now, a number of auditors across Canada who have looked at P3s that were supposedly providing a whole lot of savings have found that traditional procurement would have cost considerably less. These are provinces right across Canada.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Sanger.

For the Conservatives, we have Mike Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

I want to thank our guests for coming today.

I'm going to start with our friends from Edmonton. I appreciate your getting up early in the morning to join us.

There are some themes we've heard about in the couple of meetings we've had on this. One particular economist said, “The P3 model provides three things. Pick two.” The three things were that P3 can be cheaper, faster, or better.

I just wanted to clarify that this is the P3 model for a school board, because it hasn't happened in my area in Ontario. They are still one-offs. Did the P3 program that was put in place enhance the ability of the school board to build those schools faster, since you had two models to pick from? It sounds as though you got six schools out of the deal. Was that part of the decision-making?

Another thing we are hearing about is transparency and understanding what the deal is or what the agreements are. Would you classify what has happened between your first phase and your second phase as an improvement in transparency and in understanding who is responsible for what? In terms of access to the schools and everything you've mentioned, is that what has happened? Was that an improvement in transparency?

[Sarah Hoffman]

My answers would be yes and I think so, but I will ask Mr. Nicoll to expand a little more.

[John Nicoll]

Thank you.

With regard to the transparency of the Alberta model, a great deal of effort was put into transparency through fairness auditors, so the transparency on the first round was exceptional. The documentation is readily available on websites. One of the key aspects of the program was in fact the transparency as to what's happening when and where.

With respect to being better, the projects we have built in Alberta, in my opinion, after looking at both methods of delivery, are “as good as”. I think that's a good statement. I'm not prepared to say they are better, but that wasn't the goal; the goal was to have quality schools. The delivery was faster in that using standard designs and bulking up the project made things move more quickly. It did have a larger project component, and since the project was large, it had momentum. Also, it was a large project both in Edmonton and in Calgary, which made it possible to get some of the impediments out of the way. People were more committed to the project because of the size.

[Mike Wallace, Conservative, Burlington, ON]

Thank you.

To Mr. Atkinson, we hear your message loud and clear about long-term planning, but we live in a political world here. I've been a municipal councillor, which has a little more stability, technically. Federally and provincially, whether you're in a minority or a majority government, governments are short-lived, and plans are not....

Unless you lived in Ontario for a number of years, when we had a Conservative government for 40-some years or whatever it was, it's very difficult to plan long term. I understand the concept and I understand it would be great for us, but it's a very difficult piece.

My next question is really more of a comment. We got a “Building Canada Together” document just the week before. It's from Minister—who'd like to be premier, I think—Bob Chiarelli, a former municipal mayor. Part of that, a whole chapter, is on privatization and having the private sector involved.

The Province of Ontario says, as one of its recommendations, the following: “Promote the wider use of AFPs”—that's P3s at the provincial level—“across all federal infrastructure funding programs and jurisdictions when appropriate....” The message from the Province of Ontario—and I'm from Ontario—is that P3s do work.

Now, I would agree with you, and we've heard from every single witness, regardless of which office they're from, that P3s do not apply to every single project, but what would you say...?

You know, we're getting input from provinces, partners, that they want a national infrastructure project, and part of that funding mechanism is the private sector involvement. To me, it sounds as though they believe it's working, and I would like your opinion.

Mr. Sanger, I know you mentioned that you worked for the province as an economist. Under which government did you work? Would you have given them advice at the time to look at P3s?