Government Operations Committee on Nov. 1st, 2012

[Johanne Mullen]

That depends on the level of risk transfer we want to accept. In the case of an NPO, where the public and private sectors are investors, the public portion is exposed to certain risks. Ultimately, the question is really whether, for a particular project or asset, the model seems to enable us as investors to manage our risks and the contractual parameters with our private partner. It has been clearly shown that this arrangement worked well in smaller projects in small communities.

[Roger Légaré]

I would add that there is some concern among the public—and we sense this—about the possibility that major contractors, major engineering firms, may line their pockets, thus benefiting their own businesses, but to the detriment of the taxpayers. On the other hand, as you mentioned, an NPO from a smaller community consists of workers from the community, volunteers, people who really want to resolve situations in order to meet specific needs they are facing.

In terms of public opinion, I believe that, in modest projects, NPOs are an option that is a very good response to taxpayers' concerns.

[The Vice-Chair, Conservative, Mike Wallace]

Next is Dr. McCallum. I haven't heard him called Dr. McCallum before.

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

I haven't been called that since many years ago.Thank you to the witnesses for being here.

In the course of our examination of this subject, I think one of the biggest issues is a certain opaqueness in the studies on value for money and the lack of public information. We've been told that summaries of this analysis are available, but they don't really get into the meat of it. One witness told us that in Ontario they'd automatically have a 49% risk premium, and there's no justification or explanation for why that is the appropriate number.

My first question is for Mr. Légaré or Ms. Mullen.

What is being done in Quebec? Is there a risk premium, as is the case in Ontario? If so, is there a public analysis justifying that kind of figure?

[Johanne Mullen]

If we look at the methodology that's used in Quebec, we see that there is no standard risk premium. The approach, which is one that is used in other jurisdictions as well, is to undertake a detailed risk analysis for the specific project.

What do we mean by that? We hold risk workshops. We're talking about bringing together around a table sometimes 10 or 15 or more people who are experts, including representatives from the public sponsor, representatives from Infrastructure Quebec, and representatives who speak from the engineering and construction side and who are independent to the project and may have been hired by the public sponsor to assist.

We develop a detailed risk matrix that looks at the risks throughout every phase of the project, from pre-development, design, and construction to maintenance and operations. We go through those risks to identify them, quantify them, and assign probabilities for each of the

implementation methods.

We do that for each of the procurement approaches that could be used for the project—conventional or construction management, or DBF, DB, or DBFM—depending on the number that have been shortlisted. Those workshops can take one to three days, depending on the complexity of the project. I know, for example, that for the Turcot Interchange, which is a $2-billion capital project that will be done as a design-build, the workshops lasted a week.

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

Okay. Let me give you an example. For the construction phase, let's say, the construction risk, how would you calculate a risk premium for that?

[Johanne Mullen]

For example, during the construction phase, we might have 20 or 30 risks, each broken down and evaluated in order to put a dollar amount and a probability on it. Once we've done that work, it's all run through a Monte Carlo.... I don't mean to sound really technical. I mean that it's run through a simulation that produces a distribution of the probabilities. So you're aware of the methodology, we're not plugging in a number.... It's specific to each project.

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

I guess my concern.... I'm not opposed to PPPs, but I do think we're talking about taxpayers' money, a lot of it. One gets the impression that some number like 49% or whatever is just plucked out of the air; that's a whole lot of money. In your case, it sounds way more complicated and possibly more accurate, but is there any access by the public to the calculations underlying this value-for-money analysis?

[Johanne Mullen]

On the value-for-money analyses per se, the summaries are provided publicly. I can't speak for every jurisdiction. I don't think the risk matrices per se are publicly available.

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

So we don't know what we're getting, really: if it's not publicly available and it's many hundreds of millions of dollars, where does that leave the public in terms of accountability or transparency, and in terms of the expenditure of taxpayers' money?

[Johanne Mullen]

I guess the question then becomes what other controls are involved in that process. We started off by saying that we have several people at the table participating in these risk analyses. The business case per se, including the risk analysis, goes up through—if we look at the approval process and I can speak to Quebec—Infrastructure Quebec, Treasury, and eventually cabinet. The full business case is a tool that's used in making the decision on how we want to procure.

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

Perhaps I could ask Professor Lee if he has some comments on this.

[Prof. Ian Lee]

I'll be very quick. I want to address both the macro and micro, because I understand where you're going. I just want to reference the book that so influenced former President Clinton, Reinventing Government, which states that the role of government is to steer, not to row.

To get right down to the micro level, and to follow up on what Ms. Mullen was saying, there are a lot of examples where government is dealing with confidential commercial issues, such as EDC. If they testify before your committee, I presume you can go in camera and have it confidential, so you could still require that it be disclosed to the public regulators. You're the referee of the hockey game, but I just don't think you should be telling Sidney Crosby when to shoot the puck, to use another metaphor. In other words, you can have this disclosed, but it just won't be disclosed to the general public. You are the agents on behalf of the public, and then you can do the due diligence on those risk analyses to see if they were legitimate or not.

[The Vice-Chair, Conservative, Mike Wallace]

Thank you, Professor.

I wish Sidney Crosby were shooting the puck.

The next questioner is Bernard Trottier.

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

Thank you, Mr. Chair. Thanks to our guests from Quebec.

I would like to talk to you about large engineering, supply and construction businesses in Canada. In fact, Canada is a country of builders. These are major skills, and we have them. I believe in SNC-Lavalin, for example, which is based in Quebec, but which meets challenges from competition around the world in carrying out projects.

Do these Canadian and Quebec businesses export those skills that have been developed through the P3 model elsewhere in the world? Does this way of operating give Canada a competitive advantage?

[Johanne Mullen]

Your question is very interesting because Canada is now recognized as a leading country in the area of P3s and infrastructure development. We are now seeing Canadian businesses, including SNC-Lavalin, Fengate and other builders in Canada, bidding on infrastructure projects in Chile, Mexico and elsewhere in the Americas and around the world.

A lot of these businesses were exporters long before we engaged in P3s in Canada. However, other countries are now turning to us and adopting us as a model. So we are using our documentation and our process. This is true not only for builders and engineers, but also for law firms, which now export their services as well. There are also firms of financial consultants, accountants and so on.

This is increasingly becoming an export area for our country.

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

Perhaps, Mr. Theodoropoulos, you could comment on that too, just in terms of the financial sector. There are companies like Borealis Capital and your company that get involved in P3 projects in other parts of the world.

To what extent is Fengate participating in taking this expertise to other countries and making this a real competitive advantage for Canadian enterprise?

[George Theodoropoulos]

It's interesting. We were recently involved in a project in Chile. Scotiabank introduced us to the opportunity. We teamed up with EllisDon, one of Canada's largest vertical builders. We also brought in Export Development Canada. We also brought in the Ontario Pension Board pension plan. We all went down to Chile as a team to pursue a P3, and we integrated into the local market with a local contractor. We have international aspirations to do more of that.

We lost that bid. Guess who won? SNC-Lavalin won that bid, so now you can see that two Canadian companies are competing for a hospital PPP project in Chile. The exporting is happening as we speak, and that's a great example. This happened just two weeks ago when the bidder was announced.

We are doing more and more of that. We are now in the process of aggregating Canadian pension plans to pursue PPPs in the United States and Chile and in western Europe, in certain markets that we think are deemed safe enough for Canadian pension plans to enter.

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

Is it competition that we have in Canada that forces Canadian companies to sharpen their pencils and hone their skills, which makes them more competitive in going after these contracts around the world?

[George Theodoropoulos]

Yes.

I want to go back to the earlier question on the value for money. Ultimately, there is competition for every single PPP procurement in Canada. There are typically three bidders and sometimes more. Basically, in this competition you evolve to become competitive or ultimately you die. They are very expensive processes to bid on. We take that knowledge, those relationships that we create in Canada—because as you bid on projects, you have to create teams—and that mindset internationally to compete for projects in places like the U.S., Chile, and western Europe.

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

My last question has to do with pension funds. You mentioned that you do a lot of work on behalf of the pension funds, and of course that's important for everybody when they think about saving for their retirement. What makes P3 investments so attractive for pension funds?

[George Theodoropoulos]

They're safe in the sense that on the other end of the contract you have government paying the bills, so you have some revenue certainty. Now, there is risk associated with that. You have to make sure that your builder is competent. You have to make sure that your operator is competent. But on the whole, pension funds like it because there are also very long concession agreements. The pension plans are seeking places to invest their capital for long periods of time because their liabilities are also of a long duration. In addition, the risk-adjusted return is attractive for them.

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

Thank you very much.

[The Chair, NDP, Pat Martin]

That's about it for your time, Bernard. Thank you very much.

That concludes our first round of questioning.

If I might just ask one question, what we've heard from testimony is that it's about the transfer of risk and that there is a cost built into that. We heard some witnesses say the cost was about 16%. Others said it was as high as 48%.

As a financial money manager and venture capitalist who is funding some of these projects, what kind of costs are you putting onto risk, as a rule of thumb?

[George Theodoropoulos]

There are three components to every project from the private sector. First, there is the construction component: the builder produces a price to build the asset and he prices for risk. That risk price would be there even if it weren't a PPP. If the government hired a builder, the builder would price for risk. Second, there is a maintenance contract for 30 years. That's a fixed-price maintenance contract and the maintenance company will price for risk. Third, there is the capital, the cost of capital. This is what gives rise to most of the debate.

Our cost of capital—the concessionaire's cost—for a typical PPP in Canada is about 6%. However, the cost of capital for government is far lower than 6%. I'm talking about 6% over 30 years—30-year capital. The cost of capital for government is less than 6%. It's probably closer to 4%, so there is a 2% premium in the cost of capital.

The question is, what is government receiving for that 2% premium? Are they getting value for money? This is the subjectivity of the debate, and it is subjective—it's a tough question. We can sit there and do all this analysis and risk-adjusted projections, but at the end of the day, there is a lot of subjectivity and it's a difficult question. This is what government grapples with: is it value for money for that 2%?