Government Operations Committee on Oct. 23rd, 2012

[The Chair, NDP, Pat Martin]

Good morning, ladies and gentlemen.

We’re going to begin our 58th meeting of the House of Commons Standing Committee on Government Operations and Estimates. We are in the middle of a study on the efficacy of public-private partnerships.

We’re very pleased today to have two witnesses, one in person and one by teleconference. In person we have with us Mr. James Paul, who is the president and CEO of Defence Construction Canada.

We’re very interested to hear what you have to say, Mr. Paul, if you would take five or ten minutes for an opening comment, and then we’ll open the floor to questions.

The floor is yours, Mr. Paul.

[James Paul, President and Chief Executive Officer, Defence Construction Canada]

Thank you, Mr. Chair.

Good morning, everyone.

My name is James Paul. I am the president and chief executive officer of Defence Construction Canada.

DCC is a federal Crown corporation established in 1951 pursuant to the Defence Production Act to operate as the tendering and supervisory authority for the Department of National Defence's construction requirements.

DDC's letters patent established our mandate to deliver and maintain infrastructure and environmental projects and services, and to provide full lifecycle infrastructure support, required for the defence of Canada.

DCC's role is contract management with respect to DND's construction and environmental program. We work together with our client department, National Defence, and their related agencies to meet the time, cost, and quality requirements, including maintaining the minimum possible administrative costs for our services. As we operate on a fee-for-service basis, DCC does not receive any direct government appropriations.

In 2009 we took on one of the largest public-private partnership projects that the federal government has taken on in this country, to build a long-term accommodation project—the acronym is LTAP—for the Communications Security Establishment Canada, CSEC, Canada's national cryptologic agency.

This was to be a design-build-finance-maintain project, or DBFM.

I'm certain you've heard much testimony toward the structure of P3s and all those aspects. My intention was not to come here today to try to further educate you, because I'm sure you're as expert as I am now on this whole area, but I wanted to focus specifically on our experience with this project, our role, and so on—and on any other questions you may have about it.

We were very pleased to undertake this project, given our highly specialized construction, procurement, and contract management experience and our proven track record for delivering complex defence projects quickly and efficiently.

Just to give you a sense of that, in the year just ended, DCC delivered in excess of 2,500 infrastructure projects totalling an expended value of over $1 billion for the defence program for Canada. Just to give you a sense of the volume of projects that we are completing annually, that's more than 50 a week, and they range from infrastructure projects of $20,000 to more than $100 million.

We understand the special-purpose needs of the defence infrastructure assets that the Government of Canada...and the Department of National Defence specifically owns and is responsible for as its steward. We support it from the design phase right through to the life-cycle management, as I said.

Within 20 months on this particular project we took this 30-year highly specialized project from concept to award, and we commenced construction in February 2011. We're just over 18 months into a 39-month planned construction program.

It's scheduled to open in August of 2014. At this point, I can tell you it's on time and on budget, generally speaking, and going very well. We believe it's a very successful project.

To achieve this success, we created a special team overseeing it—a small but focused team—and opened a dedicated project management where we work with CSEC staff collaboratively on the project.

I was asked to respond to a couple of questions in particular, so maybe I will just stay on those themes.

I was asked to address funding by PPP Canada. The quick answer there is to tell you that no funding was provided for PPP Canada on this project. I think you understand their mandate. It wouldn't typically be to fund that; however, they did review the value-for-money analysis provided to Treasury Board as part of the Treasury Board submission.

Because PPP Canada was in the process of being stood up in 2009, when this project was actually being planned, CSEC, our client partner in this project, chose to hire its own experts who had experience in P3s to advise them on the structure.

We were selected as the project manager, and they hired expert program managers with P3 experience—Partnerships BC being one, P3 Advisors, P1 Consulting, and others—to assist them.

The selection of the proponent for the P3 project was a procurement matter that DCC managed, so PPP Canada was not involved in that aspect. But I think their advice on the value for analysis was well received and very helpful towards this.

I was asked to also comment on our role, if any, in the project selection process.

As I've said, our role is in the procurement aspect and the project delivery; that's where we come in. You could consider us an infrastructure delivery organization. We did not play a role in the project selection process. In this case, our client partner came to us wanting to undertake a P3 for the project. We then advised on procurement options and how the contract might be structured, then executed the procurement, and we are overseeing the delivery of the project—with all the necessary approvals from whatever government levels having been received, of course.

In terms of advantages and disadvantages of PPPs versus, say, the traditional procurement process, with the volume of activity that we have and historically have operated for more than 60 years now, the majority of the projects we deliver use the more traditional construction procurement methods. This is in fact the first P3 that we've delivered. As I mentioned at the outset, we think it's going very well; we feel very favourably about it. That's not to say that we think every project should be undertaken with a P3.

Some of the advantages, of course...I think you've been well informed on the aspects of risk transfer, cost certainty, and the financing being arranged, and so on. I suspect that's not what you want to hear about from me today, but I'd be happy to respond concerning any of those matters, if you'd like.

As to the unique aspect that we saw in this, for which we think the P3 was well warranted, this is a very special-purpose, highly sophisticated, high-security facility. Our client partner, CSEC, had stated clear objectives for the space: it needed to be a well-constructed building, it needed to meet the security requirements, and they wanted a quality building that, some 30-odd years from now, when it's handed over from the P3 partner, is still going to be in the quality condition in which they want to continue to operate. It has very high operational requirements, of course, being 24/7 and so on.

You could ask, could those things not be achieved, potentially, with another form of procurement? Yes, they could be achieved; the question the analysis would have looked at is what the best-cost value-for-money approach to achieve those objectives was.

CSEC wanted to have a very collaborative, open-work space, and I think it has succeeded very much in achieving that. In fact, this is really going to be a model space for openness and communication amongst staff, albeit in a very secure facility. I've personally toured the facility a number of times during the construction phase, and there are, for example, no closed offices anywhere in that building. Everyone from the chief down is basically in an open, collaborative work space. It's quite forward-thinking in that regard.

The connection to P3 is that the proponents were, I guess we could say, challenged or tasked with coming up with very creative concepts and approaches for how to achieve this. I think there was a very successful process of collaboration with the industry partners out there who might take on a project of this sort.

The collaborative aspects of this transaction are relatively unique, or at least very forward-thinking, in that a number of meetings and exchanges of information occurred prior to requesting the submissions from the proponents. All of this was done with the full involvement and interaction of a fairness monitor, because you need to make sure that no one proponent is getting any advantage over another. An equal number of meetings were held. Typically these were one-on-one meetings, with CSEC present, with us present as the procurement authority, and, as I said, with the fairness monitor. A lot of discussion occurred so that CSEC could properly communicate its needs and requirements; then the proponents could take that away and come back with their vision as to how they would deliver this within an affordability ceiling that had been stated for the project.

Our observation is that this has been very successful. I had the unique pleasure of seeing all of the submissions. They were all unique, quite different, but I thought did a great job of addressing the needs for the project—all the things I said, plus a facility that the proponent would have the obligation to maintain for 30 years after occupancy commenced. As I said, you end up with a quality facility at the end of the game.

Given the sophistication and complexity of this project, I think it was a good choice to consider this approach and all of the other given factors that the P3 approach brought in. Of course, we're halfway through the construction, so it's hard to look back and speak from experience about the overall success, but I'm speaking in terms of the success to date on the procurement and the commencement of the construction activity.

As to any challenges or disadvantages to it, a facility of this complexity certainly made for a far more complicated procurement process at the front end than the typical procurement that we see does—even if I reflect upon, say, the $100 million-plus projects that we do. So comparatively speaking there has been more effort, more activity.

Of course, a lot of that is loaded onto the proponents who are coming forward. I know, having met with each one of the proponents, that they stated costs of $2 million to $3 million at least to prepare their proposals. But it's like a lot of the things you can say in life: a good upfront investment often sets the right direction for any successful project, and I think this is an example of having achieved that.

[The Chair, NDP, Pat Martin]

Thank you very much for your presentation, Mr. Paul. If there's anything further, I'm sure it will come out in the rounds of questioning.

We now have our video link, our teleconference link, properly up and running, I understand, so we're pleased to welcome our next witness today. From the University of Toronto, we have Mr. Matti Siemiatycki, assistant professor in the Department of Geography and Program in Planning.

I hope you managed to hear the other witnesses' testimony, Mr. Siemiatycki. You have five to ten minutes to make a presentation, and then I hope you'll be available for questions from the committee members.

You may begin now.

[Professor Matti Siemiatycki, Assistant Professor, Department of Geography and Program in Planning, University of Toronto]

Excellent. Thank you.

It's a great pleasure to be able to address the committee on this topic of public-private partnerships and their merits. I've been studying public-private partnerships for around the past 10 years, primarily in the infrastructure sector, in which we're talking about roads, bridges, public transit, highways, hospitals, and, increasingly here in Canada, prisons. These are the types of infrastructure facilities that are being built through public-private partnerships and they are the types of facilities I've been studying. I've studied them here in Canada and around the world.

What I'll do today is try to synthesize and summarize some of my experiences and some of my research to perhaps inform your decisions about how public-private partnerships should be used here and how the federal government should be involved in public-private partnerships.

Here in Canada, in the infrastructure sector, there have been around 175 infrastructure public-private partnerships. These are primarily delivered by the provincial governments, some at the municipal level, and the federal government has provided financing and funding for some of these projects, like the Canada Line, in which the federal government becomes involved and provides funding. But primarily, for the time being, this is a provincial jurisdiction, and these have been carried out by the provincial governments and their procurement agencies, like Infrastructure Ontario or Partnerships BC. That provides some of the context.

There are really two primary rationales that have been put forward here in Canada and around the world for why public-private partnerships are an effective model for delivering infrastructure. What I'd like to suggest is that one has been relatively debunked, and we should not follow that one here in Canada. A second explanation, perhaps, has more credibility, and we should explore this further.

The first explanation that I think should be debunked is the idea that public-private partnerships bring new money for infrastructure. There's a lot of talk that in periods of fiscal austerity, when governments are pulling back funding, when we're seeing large deficits at all levels of government, perhaps public-private partnerships and private financing can be a way to fill that gap. Here in Canada, to date, public-private partnerships have not played that role.

Public-private partnerships and private financing have been a finance strategy that brings money up front to finance some of the upfront costs of capital to deliver these major infrastructure projects, some of which can cost $100 million, $500 million, or $1 billion. But the money primarily for infrastructure projects here in Canada has been paid back directly by the governments that have procured the infrastructure projects over the life of their assets.

This is not a strategy that is bringing forward new money. It's kind of like paying for infrastructure on a credit card. Someone finances you the money, but the government pays it back over an extended period of time at a considerably higher rate of interest.

It's worth considering, then, that public-private partnerships may deliver other benefits, but when it comes to bringing new money to the table to deliver infrastructure, that has not been the case for hospitals, for prisons, and it has not been the case for public transit facilities. This is still government money, and I think that's important to keep in mind when we think about public-private partnerships.

There has been a second explanation, a second rationale, for why we might deliver them that I think does have merit.

I only heard part of it, but I think your previous speaker started to get at it. It's the topic of value for money. Can we understand whether bringing the private sector into the equation earlier in the deal, having them come to the table and collaborating, brings some type of value for money? Can it limit the instances of cost overruns? Can it deliver more innovative types of facilities that we might not get if these projects were being delivered through the traditional conventional types of approaches to delivering infrastructure? And do these innovations and this cost-saving, this transferring of risk, in particular, offset the higher costs of private financing? As I mentioned, the financing costs are considerably higher when you deliver projects through private capital and private upfront financing as opposed to direct public borrowing.

These are some of the rationales that have been put forward. I want to address the second rationale, in particular, around value for money. I want to advance that there are some concerns that I think we need to address, even as we try to zero in on whether public-private partnerships deliver value for money, and, more particularly, in what contexts are they going to be viable alternatives to deliver infrastructure.

The first concern is really this idea of risk transfer and the idea of how we transfer risk from the public to the private sector. In particular, at what cost are we transferring these risks? A colleague and I, a former student, conducted a study of recent projects completed here in Ontario. We looked at 28 public-private partnerships valued at $7 billion. They were primarily hospital projects.

We looked at the official government documents that compare the value-for-money reports, that compare the cost of delivering the projects through conventional delivery models and public-private partnerships. Our study found that, on average, it was 16% less expensive to deliver them through the conventional model. That's because the private sector model, the public-private partnership, had higher financing costs. It had risk transfer built into the model. Because of the higher financing, the higher transaction costs, 2% to 3% of the deal...as your previous speaker spoke about, there may be value to this, but you're paying upfront costs in order to structure these deals. There's a cost to that: 2% to 3%, on average, was the cost we found in transaction costs. Because of these additional costs, it was 16% less expensive. Only after considering risk transfer in the equation did we see that public-private partnerships delivered better value for money. So risk transfer is really the key part of the deal, the key part of public-private partnerships, that is swinging the balance of merit from the conventional to the public-private partnership.

When we're talking about risk transfer, we're primarily talking about construction risk. We have to understand how those risk premiums are being achieved and whether they're really based on previous evidence. Our study found that the risk premium added to the conventional project was on average 49%. That's a very high risk premium, and we couldn't find the technical evidence—the details of past studies were not in the public domain—to allow us as researchers to understand whether that was really based on past experience. We were concerned because this issue of risk transfer, invariably, is tipping the scale from the conventional model to the public-private partnership. It doesn't mean that it's not accurate. It means that we couldn't find the evidence to support it, and we were concerned about that because of how large this risk premium is.

We can say that public-private partnerships are not necessarily the cheapest way to deliver infrastructure, but they might deliver the best value, and that's really where we have to understand from a policy perspective the projects for which this actually makes sense.

There are a few other topics I want to touch on.

One is about public accountability and community engagement. We've heard consistently that in the public-private partnership model—oftentimes because of commercial sensitivities during the planning process—it's often difficult for stakeholders to gain access to the really important technical documents that determine whether these projects should go forward or not. There have been concerns about how to meaningfully engage in these processes.

Another issue is the loss of flexibility over the long term in delivering these projects. When you have contracts and concessions that stretch out for 25, 50, 99 years—as we've seen here in Canada—these can limit government's flexibility and its capacity to make changes to the system over time, to meet emerging policy goals, to change the user-fee structures, as has been the case in some of the projects, and to meet emerging and changing goals. This loss of flexibility is a key challenge that we have to think about when we're looking at public-private partnerships.

The final point is this issue of “the only game in town”. Are we seeing public-private partnerships being put forward more and more as the only option to deliver public infrastructure? Are governments—especially municipal governments seeking federal funding—increasingly trying to design their projects in order to make them realizable through public-private partnerships, even in cases where that might not be the best way forward?

I have a couple of recommendations. What I'm trying to highlight is that public-private partnerships may deliver value in certain cases. We have to be very clear about what they are. I think it should be based on empirical evidence. We should be carrying out studies to understand if the risk premium, the size of it, is appropriate, is based on past evidence, the history of actual cost overruns, on the cost of poor performance as these projects go along. I would add that we should be focusing the partnerships on the design-build finance side. I think public-private partnerships have the best opportunity to deliver on time and on budget—project delivery and in particular cost certainty—and there is merit in that. I think we should be very cautious about how we enter into long-term concession agreements for operations and maintenance, except under the most unique circumstances.

The final point I would raise is that I think we need to understand whether the agencies we've put in place—the procurement agencies—can work to improve both public-private partnership procurements and conventional approaches. Sometimes these have been separate. But the expertise in these agencies could provide the same benefit and perhaps deliver value for money in some cases without necessarily having to look to private finance—which is an expensive way of delivering public infrastructure.

I'll leave it at that. I look forward to participating in the discussion.

Thanks a lot.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. Siemiatycki. You've certainly made good use of your ten minutes. You're right on the button.

We'll go right to questions, then. I believe first in line is the NDP, with Linda Duncan.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Thanks, Mr. Chair.

So we don't have the mayor?

[The Chair, NDP, Pat Martin]

No, the mayor is in the next panel.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Oh, so it's two separate panels?

[The Chair, NDP, Pat Martin]

It’s two panels, that's right.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Okay, thanks.

Thank you very much to both of the witnesses.

Is it Professor Semia...? Do you want to say your name again?

[Prof. Matti Siemiatycki]

It's Siemiatycki.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Siemiatycki. Thank you very much.

[Prof. Matti Siemiatycki]

You got it, yes.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Thank you very much for your—

[Prof. Matti Siemiatycki]

It's phonetic once you hear it once.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Okay.

Thank you very much for your analysis. It's very helpful and very thorough. Have you had any more success in obtaining the risk studies? You mentioned that they're not in the public domain. Did you also try to obtain those through access to information? Were you rebuffed?

[Prof. Matti Siemiatycki]

That's a good question. It should be noted that a summary of the value-for-money report is posted online, and those are the reports we used. But when we tried to look for the detailed documentation behind those values, the actual experiences of cost overruns and how they were obtained, we couldn't find those studies.

In British Columbia, there have been freedom of information act requests, especially around the Canada Line, so we've done some studies that have looked at the Canada Line, but in Ontario, we haven't used the freedom of information act request process to try to obtain those documents.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Thank you very much.

You make a good point. A number of other witnesses have appeared before us and have said that, in some cases, P3s might make sense. In other cases, design-build might make more sense. The problem right now is that the emphasis seems to be on moneys being available only for P3s. If similar efforts were made in better managing government-delivered projects, in the same way that there's been all this investment in a new P3 office to support departments to better manage their P3s...? Do you think if similar changes were made in the way other projects were managed, we might see similarly good results?

[Prof. Matti Siemiatycki]

This was my final recommendation. I think in Canada we need to improve procurement, period, full stop, for all types of infrastructure projects. We need to have mechanisms in place to ensure that we have appropriate procurement for public-private partnerships and for conventional-build projects.

The agencies that have been put in place have a lot of skill in procurement. They brought in trained staff who have specific expertise in different areas of project procurement. I think we should be applying those both to public-private partnerships and to conventional-build projects, and leaving it in the hands of experts to deliver these projects once the traditional policy approaches are used to determine which ones. I think we could see improvements in both public-private partnerships and conventional-build if we applied these same professionalizations of the procurement process.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Thank you.

Mr. Paul, what is the annual budget for the DCC entity?

[James Paul]

It’s approximately $100 million, or in that ballpark. We're not an appropriated entity, so we have to ensure that our fees match our expenses. We don't incur losses or run in a deficit position, nor do we borrow. We manage our business against the program and services we deliver and adjust our resources accordingly.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

How many projects, simultaneously, would the DCC be managing?

[James Paul]

Again, if you take approximately 2,500 completed last year, a number of projects have a life of more than a year, so it would be in the thousands, obviously, that are ongoing.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

When you are involved in a project, and you're doing a P3 or even a design-build, is there also a private contractor who is billing costs?

[James Paul]

We are the procurement authority and then the delivery organization that's managing the contract. So the Government of Canada approach, or certainly the DND one, is to use the private sector to do the construction work, do the design work, and do the environmental work, because we also oversee all the environmental program deliveries. What we're basically doing with our thousand-some-odd professionals in the organization is managing the thousands of contractors doing that work for the Government of Canada and DND.

We’re a management organization.