Government Operations Committee on Oct. 23rd, 2012

[Prof. Matti Siemiatycki]

We took the value-for-money reports and we tried to understand...we compared the conventional-build projects with the PPP projects. The 49% was added on to the conventional-build projects. That was the expected risk of delivering it to the government, of delivering it through the conventional approach to procurement.

What we found was this. For a lot of the projects, if they're design-build-finance, those risks would be primarily the risk of cost overruns. There were a smaller number of projects that included operations and maintenance in the concession, so in those cases that would include risks of poor operation, poor maintenance, the facility not living up to its expectations. That was the average risk premium of the 27 projects we evaluated.

As I mentioned, it's that premium that invariably tilted the balance in favour of the public-private partnership in terms of its quantitative assessment of value for money.

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

For example, if a project costs $100 million when done conventionally, would you add $49 million for estimated cost overruns and operating problems?

[Prof. Matti Siemiatycki]

There are different types of risk premiums. If I understand your question correctly, yes.

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

That seems a huge amount of money, and you're telling me that you didn't know the basis of that number.

[Prof. Matti Siemiatycki]

We were concerned that we couldn't find the technical evidence. We read through the Infrastructure Ontario briefings and their methodologies. We understand that perhaps studies were done to assess that. There are reports online, but they don't give the details of how those were assessed, and they don't go into the project-by-project details that you would like to see to understand if that really is the risk we've been carrying on conventional-build projects.

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

We do have one project on the table here today.

Mr. Paul, can you enlighten us on the costing of your project? Was there a 49% risk premium or something of that nature? If so, what was the foundation for it?

[James Paul]

The short answer would be that I know I won't be able to enlighten you on the specific cost elements. As I said, we're delivering the project. We weren't part of the financial analysis or the front-end planning there. Ultimately, it's all bundled into a single price for the project, so that would be in there, but I'm not in a position to be able to speak to that right now.

A lot of times we throw that “m” on, design-build-finance-maintain, and everybody says they know what's involved in maintaining. We found that the commissioning aspect of occupying a new facility is a rapidly increasing high cost that we just take for granted as included in the “m” in a PPP or any maintenance project. What I mean by that is we have probably all had the experience: when you buy a new car today, you pull out the owner's manual, and the manual for the onboard navigation, the sound system, and everything is three times the thickness of the old car manual we used to always get.

That's the same with buildings today, when you think of the highly technical facilities that are being moved into. It's no longer a matter of just build it and then turn over the keys and say, “Enjoy your new building.” There's a significant phase that can extend beyond a year to easily a couple of years to actually commission and get that building up and running. It includes testing, ensuring systems are working, warranty work, and adjustments being done.

I just want to mention that they are also factored in on these costs, so I can't respond to the 49% comment. We're not engaged in that type of analysis, but if that's included in there, there are a lot of aspects for those numbers.

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

I would just end with one comment. It seems to me this 49% number is huge, and once you pick a number like that, you almost automatically justify the PPP, I think the professor was saying, so it seems to me we can't really evaluate this unless we get into the guts of that number, as to whether or not it is really justified. It strikes me that just about every conclusion depends on that question.

Would you agree with that, Professor Siemiatycki?

[The Chair, NDP, Pat Martin]

Please give a very brief answer.

[Prof. Matti Siemiatycki]

I would say that was the conclusion of our study. That number is critical.

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

Okay, thank you.

[The Chair, NDP, Pat Martin]

Thank you very much, John.

We're almost out of time, members, but I would like to give an opportunity for the two last speakers on our witness list to have at least one question each, so if we could have maybe two minutes for Bernard and two minutes for Alexandre, that would conclude this first panel.

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

Thank you, Chair.

Thank you, witnesses, for coming in today.

I have a quick question for Professor Siemiatycki.

I really salute the work you're doing. It's interesting, novel, and of tremendous value to the country and the public.

You mentioned that you have been studying for 10 years. I want to know a bit more about the analysis pool. You talked about 175 projects in Canada, but did you look around the world—the U.K., Australia, the U.S.A., Spain, other countries—where they have been doing a lot of P3s?

[Prof. Matti Siemiatycki]

Yes, certainly those are some of the countries.

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

How many projects—

[Prof. Matti Siemiatycki]

We looked at lots.

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

How many projects did you look at in the most recent analysis where you came up with this 16% premium and the 49% risk factor?

[Prof. Matti Siemiatycki]

That was a sample from Ontario of 27 projects. We've actually studied the geography of these projects based on a thousand projects worldwide. I've done case studies of projects in Australia, the United Kingdom, and the United States. The methodologies vary depending on the types of questions we're trying to answer, but the studies have been truly global.

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

Okay. I imagine you have had some discussions with a group called the Canadian Council for Public-Private Partnerships. They were in last week talking about how in Canada we've developed some unique expertise when it comes to really closing the time to get a contract done. That's one of the differentiators in Canada. They looked at the U.K., where it is typically taking four years to get a P3 contract concluded. In Canada we were able to get that done in 18 months or so.

Have you noticed anything in your global analysis indicating that in Canada we've developed some unique expertise when it comes to P3s? Are we better at doing P3s than other jurisdictions?

[Prof. Matti Siemiatycki]

Canada certainly has unique models. I think one of the things the world notices when they look at Canada is that we tend to do design-build-finance. We haven't used the operations and maintain part of the concessions to the same extent as other places. It's that operations and maintain component that has really run into trouble in other jurisdictions.

In many ways, I think the made-in-Canada solution has been focusing on the design-build-finance to a large extent, and also standardizing the processes. Having these expert evaluation agencies that have specific skills in procurement, and standardizing that, has been able to speed up the process. I guess that is part of the made-in-Canada solution to delivering infrastructure through public-private partnerships.

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

Thank you.

[The Chair, NDP, Pat Martin]

Thank you very much, Bernard.

We'd like to give a chance to Alexandre Boulerice for a couple of minutes.

[Alexandre Boulerice, NDP, Rosemont—La Petite-Patrie, QC]

Thank you, Mr. Chair.

I will put my question to Professor Siemiatycki.

I want to come back to the somewhat troubling fact that base costs and public model transaction costs are about 16% less than those of the P3 model. But we just suddenly added a risk bonus that is 49% of the project, which is completely out of balance. This percentage stems from an obscure type of calculation, in a black box, and you are saying that there are not a lot of details about it.

I would like to quote someone, and I will then ask you what you think. It is in English:

...public sector comparators won't do you much good. I could make the public sector comparator as bad as I want to, in order to make the private sector look good.

It's Larry Blain, former president of Partnerships BC, March 26, 2003.

The P3 agencies supervise and analyze P3 projects, but their mandate is also to promote them. So they must always present them as winning formulas. Don't you think that's a problem?

[Prof. Matti Siemiatycki]

I think the quote there really speaks to the need for transparency, and it speaks to the need for a study that is publicly available, that really measures those issues of risk, because the potential is there to see it as the place where you can put in your preferences for whatever type of project you want.

It's very important that there's transparency and that there's open data available in order to understand how big those risk premiums are, so that they can be applied to deliver the project, to select the best approach to delivering infrastructure projects.

[Alexandre Boulerice, NDP, Rosemont—La Petite-Patrie, QC]

Thank you.