Government Operations Committee on Oct. 18th, 2012

[John Nicoll]

No. We've built provisions in for that, sir. At the end of 30 years, those schools have to come back to us in good condition. There are evaluations during the course of the contract, and items that have to have a life-cycle replacement done prior to that are part of the contractor's responsibility.

In tying in the 30-year so-called warranty, the goal is to encourage the overarching contractor to make sure that the quality is built into the facility at the beginning and that high-quality materials are used and that there's a reason for the maintenance contractor to observe how things are being done in order to make sure that the quality is there so that it will last the 30 years.

We have a process within the actual contract documents to evaluate and to ensure that we are getting a facility at the end of the 30 years that is representative and still capable of continuing. If life-cycle replacement was required at 25 years, then it would be done too. It's not an attempt to—

[The Chair, NDP, Pat Martin]

I understand. Thank you very much. I don't want to take any of Mr. Trottier's time.

Go ahead, Bernard.

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

Thank you, Mr. Chair, and thank you, guests, for coming in today.

The biggest impacts of a P3 approach have been mentioned a few times. The biggest is the built-in desire to minimize the total life-cycle costs over the life of a project or an initiative. It's built in not because of good will but because of a contract.

Second, there's a built-in desire to deliver projects on time and on budget. Again that's not good will; it's because of a contract. Many people have identified that there's a transaction cost up front, that contracting is a real challenge.

We had a couple of people from the Canadian Council for Public-Private Partnerships on Tuesday of this week talking about how in Canada we've developed some unique expertise and some best practices in contracting compared with those in the U.K., where very often it takes four years after the selection of a preferred bidder to actually finalize a contract. In Canada we're able to get it done generally, on average, in 18 months.

It's a good thing that we have this intelligence in Canada. Maybe there's something good in our water, but it might also be our legal system and our engineering and contractual expertise that enable us to do that.

I want to make another point of comparison. In the U.K., there was a Treasury report—and this is under the Labour government, by the way, so it's not necessarily a partisan issue—that mentioned that 20% of P3 projects had been delivered late or had run over budget, but that was compared with 70% of conventional public projects, so again the incentive in the P3 contract is really what helped drive the human behaviour to get these things done on time and on budget.

Finally, here is a little quotation, again showing that the P3 approach is not necessarily ideological in that it spans different types of governments. In my province, Ontario—Mike Wallace quoted this same report—Bob Chiarelli was saying:Having private sector firms pay for cost or budget overruns creates the correct incentives to ensure that projects are delivered on time and on budget. Research demonstrates that AFP projects—that's alternative financing and procurement— have delivered substantial savings to Ontario, British Columbia, Alberta and Quebec.

I want to pose my question to Mr. Atkinson. From the point of view of a builder, could you talk about this incentive to get the projects done on time and on budget and how it differs under a P3 environment from the case under a traditional design and procurement and construction project?

[Michael Atkinson]

Well, very often it's because of the additional risks or incentives that are in the contract. You may have a situation.... For example, if you have 18 high schools bundled, you must deliver those all at the same time and at the same opening date, and you take on the risk of any delay, no matter where the delay's coming from, whether it's a delay that is in your control or not.

We'll be honest: the private sector has one way of dealing with that risk, and that's to throw money at it. I am sure that faced with that kind of situation, you will try to mitigate the risk by ensuring that you can control anything you can, but at the end of the day you want to make sure that you don't lose your shirt.

So yes, the penalties can be pretty stiff, but at the same time this methodology gives you the ability, as part of the finance closing, etc., to ensure that you have done what you need to do as a private sector partner to ensure that.

Now, given the fact that the consortium also is going to be responsible for that asset over a 30-year life, everything that the Edmonton public school board gentleman said is absolutely bang on. You're going to ensure that for the 30 years or 35 years that you have this, you haven't set yourself up for a drain on your purse either. You're going to want to make sure that the school is properly designed and properly built, so that the maintenance and operation of that facility isn't a burden. Therefore there is that added incentive as well, because you are going to be controlling the maintenance and management of the facility.

I want to make a quick comment. I wish all of our major capital projects went through that kind of discipline and regimen to ensure that what we were going to do for the next 30 years had been thought out. It's one thing to say that we have a budget overrun with the initial capital cost; that means nothing in terms of a 30-year or 35-year life cycle.

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

Thank you.

If I have some time, Mr. Chair, while it's good to get a perspective from the builder, I'd like to get a perspective from a buyer—Edmonton Public Schools.

By the way, I lived in Edmonton in my youth and I can appreciate the tremendous innovation. Edmonton Public Schools are recognized around North America as being real leaders in terms of curriculum. I salute the work you do.

Could you talk about how you were able to ensure delivery of projects on time, based on the contracts you were able to put in place?

[Sarah Hoffman]

Thank you.

I'll start by saying we are happy to come back and talk about curriculum any time too, so thank you for that comment. We take great pride in that.

To set the climate a little for what happened when these initial rounds of ASAP 1 projects moved forward, we were experiencing extreme labour shortages in Alberta in all sectors. We were in the middle of a boom, and I know that costs were increasing at a rate of approximately 12.5% per year at the time.

I'll ask Mr. Nicoll to comment on the timelines and what was put in place to make sure that we did finish on time and on budget.

[John Nicoll]

Thank you.

I'll follow up on that because this was in part a response to a labour market that was getting very difficult to find resources in and it wasn't uncommon for individual projects to be a year late because of the unavailability of particular tradespeople.

The massing of a certain size made the project such that you could get the resources, you could plan the resources. As well, there was an encouragement that with costs escalating at 12.5% per year, if you were delayed a year, your costs just went up 12.5%. The cost control was in getting things done.

The cost control was also in making sure the design was buildable in the first place and making the contractor responsible for the ultimate design and the processing of any internal change orders and whatnot, which can cripple you. Going into the project, the best way to minimize risk, regardless of whether it's a traditional contract or a P3 contract, is to make sure you do your homework ahead of time. If you get caught in a project that is running late and you don't have time to do that, that's usually where a project runs into difficulty.

Therefore first of all, it's the process of getting the size, the size of the contractors, and the wherewithal in doing the advanced work that's required because of the specificity of the contract itself. You've got to sign a contract so that everybody knows where they're coming from, so you've got to know what you're talking about and you're not designing it as you go. I think that's probably one of the key reasons for getting things done on time.

The other is that because of the size, you're able to get preferable supply arrangements with some of your suppliers and your contractors.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. Nicoll.

Thanks, Mr. Trottier.

We're going to try to get a little time for each of the parties in the remaining minutes we have.

Linda, I know you're next, but if I could ask you to be about three minutes, that'll give John three minutes at the end, and then we have to wrap it up to do some in camera business.

Is that acceptable?

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Yes.

Having heard from all you, I'd like to hear from whoever can answer this question, probably Mr. Sanger and the school board and maybe Mr. Carlton.

From all that we've heard, it's sounding more or less as though a lot of these projects are working for design-build. A number of you mentioned there are lots of different kinds of these partnerships, and some of them that really seemed to have work are the design-build.

Is it fair to say that it may be early in the day to say that the P3 works, because that's where you have to also have a private entity do the maintenance and operation? It sounded to me, from what the school board is saying, that they were told by the province they were going to be allowed to build a whole bunch of schools for a change, but through P3. Therefore part of your success in managing to build all these schools all at once occurred because the money was committed right up front, which is what Mr. Atkinson suggested.

Mr. Sanger, would you comment?

[Toby Sanger]

I think that's the case. For one reason, the Edmonton P3 schools were modular; they were basically all the same design. That helped to accelerate it.

There's no secret to a lot of these things. If you bundle them like that, you can obviously move much faster. If you throw more money at a problem, you can accelerate those things. If you have life-cycle costing within government, that can deal with it. That can ensure some maintenance money as well.

Mr. Trottier raised some issues about the timing. One thing about P3s—and you didn't see this in that report—is that they require a lot more planning up front, so often when they're comparing P3s against traditional procurement, they're not doing it from the same baseline.

Another thing I wanted to follow up on, in terms of the Edmonton public schools, is that although you can see a lot of the contracts online and there's a lot of detail online, the key financial information is missing. A number of organizations went to court for two or three years just to get the financial information on the Brampton hospital, one of the first P3s in Ontario. Supposedly, it was saving hundreds of millions of dollars. That's an issue of transparency. Then the auditor looked at it and found that it actually cost $600 million more than it supposedly did, according to the value-for-money audit, and that if it had been done publicly it would have cost $200 million less. That's an independent assessment.

It's really important. It may be simple to say you need to fix the value-for-money reports and you need to have transparency, but it's a really big thing, a really important thing.

[The Chair, NDP, Pat Martin]

We’ll have a very brief answer from Edmonton Public Schools.

[Edgar Schmidt]

Thank you very much. We'll not comment on the economic question in relation to that. What we do know is that the money was brought out, up front, when the province built 18 schools in the first round across the province. That had a huge impact and brought in a lot of necessary infrastructure where there had been very little action prior to that for a number of years, so it did meet an immediate need.

Thank you.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Schmidt.

Mr. Peter Braid, you have three minutes.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you, Mr. Chair. Thank you to our panel for being here this morning. There are so many questions and so little time.

Mr. Sanger, I'll start with you. Like Mr. McCallum, I thought you painted a bit of a gloomy picture. In your mind, are there any good P3s?

[Toby Sanger]

I would love to be able to answer that question. The problem is that the information is not available. The auditor reports.... For instance, the auditor report on the Edmonton Public Schools was generally positive, but in terms of the risk assessment, they said that there was no evidence for that.

In terms of the other auditor reports, I wish we could see that up front before making those decisions.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

During the committee meeting, I was doing a bit of research on the U.K. situation. You referred to the quote from the U.K. health minister about some of these arrangements being “millstones”. Interestingly, the context of the quote is actually a criticism about some of the arrangements negotiated by the previous Labour government for ongoing maintenance costs of some of these hospitals.

To turn to the folks in Edmonton, are you confident you've avoided the issue of ongoing maintenance costs?

[John Nicoll]

Yes, we are, because you also have to look at our alternative situation, which is that we have an issue with unfunded deferred maintenance liability. I can't tell you that we've got an awful lot of money to spend on maintenance in the traditional method of construction, so I'm confident that our maintenance needs will be met for the 30 years.

Notwithstanding the P3 process, deferred maintenance is an issue that school boards and municipalities have to deal with. This is one way to do it. I feel confident that it will achieve at least comparable results, and more likely better.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you.

I have one final question.

Mr. Atkinson, in your presentation you mentioned that one of the benefits or advantages of a P3 is that the private sector can bring innovative approaches to the arrangement. Could you elaborate on that?

[Michael Atkinson]

For example, in the traditional crown construct situation, basically the design is done, it's finished, it's specified, and you ask for lowest price. Don't you dare vary from that designer spec. Don't even come in with an unqualified or unsolicited alternative, because you'll be kicked out. On the other hand, in a P3 situation and in design-build and in some other methodologies as well, particularly if I know I'm going to be responsible for maintenance, I'm going to come back and tell you that the design stinks and tell you what we should be doing. Maybe you've even got the particular facility in the wrong place. Maybe it should be built over here. It's that kind of innovative, out-of-the-box thinking that often the public sector can't take into consideration. It's not that they're not capable; they're hampered by their own red tape.

[The Chair, NDP, Pat Martin]

Thank you, Peter. Thank you, Mr. Atkinson.

John, go ahead. You have three minutes, please.

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

Thank you very much.

You all agreed when I said it would be a bad idea to ramp up P3 and correspondingly ramp down traditional funding. You all agreed with that. However, if I listen to Mike Wallace, that's what he's effectively saying, I believe, because he keeps saying how wonderful PPs are, or PPPs, and he's also said—

[Mike Wallace, Conservative, Burlington, ON]

PPs are provincial parties, and there's a note saying that.

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

My main point is that you say long-term funding is politically very difficult, if not impossible.

[Mike Wallace, Conservative, Burlington, ON]

Oh, yes.

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

I think that's totally wrong. I will give you two examples: the 10-year health accord under Paul Martin provided stable increases in funding for 10 years. It was health, but it could have been infrastructure. The second is the gas tax transfer. That's clearly long-term funding.

Mr. Atkinson and Mr. Carlton, in the remaining minutes, could you explain to us why, notwithstanding Mr. Wallace's comments, long-term funding is critical to you and whether you have any ideas for mechanisms through which it could be delivered?