Government Operations Committee on Nov. 1st, 2012

[The Chair, NDP, Pat Martin]

Good morning, ladies and gentlemen. Welcome to the meeting of the Standing Committee on Government Operations and Estimates.

Thank you to our witnesses for being here today to help us in our deliberations over public-private partnerships.

We're very pleased today to be joined by Professor Ian Lee from the University of Carleton, who I believe is en route. We have with us Johanne Mullen, the president of the Institute for Public-Private Partnerships, and Roger Légaré, the managing director.

Welcome. Thank you for being here.

We're very pleased to welcome Mr. George Theodoropoulos, the managing director of Fengate Capital Management Inc., by video conference.

Thank you, sir, for being with us here today. Can you hear me well?

[George Theodoropoulos, Managing Director Infrastructure, Fengate Capital Management Ltd.]

Yes, very well, thank you.

[The Chair, NDP, Pat Martin]

Very good, George. Thank you very much.

I think we'll begin with Ms. Mullen because she has to leave at roughly 10 o'clock or so.

If you could give us a presentation of five to ten minutes, Ms. Mullen, we'll go through the process from there.

[Johanne Mullen, President, Institut pour le partenariat public-privé]

Thank you.

I would invite my colleague, Roger Légaré, who is the managing director of our institute, to perhaps just say a few words of introduction in terms of our association and our mission, and then I'll chime in with my presentation right afterwards.

[The Chair, NDP, Pat Martin]

Very good, thank you.

[Roger Légaré, Managing Director, Institut pour le partenariat public-privé]

Mr. Chair, members of the Standing Committee on Government Operations and Estimates, the Institut pour le partenariat public-privé is pleased to be taking part in the committee's hearings on public-private partnerships. With your permission, I will briefly present the institute and the role it plays in Quebec.

The Institut pour le partenariat public-privé is an independent non-profit organization that was founded 17 years ago and promotes dialogue on public-private partnerships. The institute's objectives are to increase awareness of and to spread information about public-private partnerships. For example, we strive to monitor the major Canadian and global trends in infrastructure development, the delivery of public services and the emergence of new organizational models.

The institute organizes multisectoral forums for discussion, analysis and comparison of various methods for carrying out projects in all phases: design, implementation process, organization and financing. A few weeks ago, for example, we held a major forum on public-private partnerships. We discussed the construction of the new bridge over the St. Lawrence as a P3 project, particularly from the standpoint of the development and integration of public transit for the greater Montreal area.

The institute has no dogmatic position on P3s. We believe that the option of carrying out a project through a public-private partnership must be subject to a normal project feasibility analysis process based on genuine risk-sharing between public and private partners. In that sense, the privatization of public services is not at all a form of public-private partnership.

In fact, the P3 option should be selected only if it represents genuine added value that can simultaneously enhance the accessibility, quality and continuity of service to citizens, make public services more efficient and ensure maximum transparency and integrity in the process used. In our view, a public-private partnership must be a winning solution for the public and private partners, the public and the users of those services.

Our modern societies, regardless of their level, are dealing with complex issues, the most significant of which is of course guaranteeing their citizens that the supply of high quality public services can be developed and maintained. A public-private partnership is neither a miracle cure nor a panacea. However, it can be a powerful tool in improving and optimizing public services if it is properly used in accordance with strict rules of transparency.

Coming back to the purpose of this committee's proceedings, we hope to draw your attention to the fact that public-private partnerships should be viewed as a collective good, that is to say as a development instrument in the service of national, provincial and local communities that may be advantageous to use, depending on the situation, to carry out infrastructure and service delivery projects, for example.

In Quebec in recent years, many major P3 projects have been, or are about to be, successfully delivered. For example, the Highway A-25 bridge linking east Montreal to the city of Laval was opened in the spring of 2011. There were no cost overruns and the bridge went into service on schedule. The same is true of the Orchestre symphonique de Montréal's new concert hall, which opened for its first concerts one year ago. In a few weeks, Highway 30 and the bridge over the St. Lawrence Seaway will be opened to traffic, in accordance with the project's work schedule, thus helping to relieve traffic congestion around Montreal Island. These are major projects for our community.

Other, smaller public-private partnerships have also been carried out with the same degree of success, including multi-purpose complexes in Lévis, south of Quebec City, rest stops on various highways and a long-term care centre in Saint-Lambert, in Montérégie. These projects are as vitally important for the residents of those communities as the mega-hospitals under construction in the Montreal area, such as McGill University's CUSM, CHUM and the CHUM Research Centre, all of which, with a single exception, are on schedule. That project is being reviewed in response to new demands made by the public partner in accordance with established budgets.

Based on our information, some 40 other projects that could be carried out through P3s are currently being evaluated in Quebec City. Many of them require federal government contributions in order to be implemented. As we told you earlier, every project must be considered on its merits. Some projects clearly will not meet P3 requirements, whereas P3 will be a definite advantage for others. That is also true of the conventional project implementation method.

Public-private partnerships are relatively new in North America. People have been talking about them for about 15 years. Some Canadian provinces go the P3 route more than others. That is the case of Ontario and British Columbia, for example. In Quebec, strong resistance to P3s emerged in the mid-2000s, fuelled essentially by union organizations fearing potential job losses. Those fears have not been realized.

Popular support for public-private partnerships exceeds 60%, even 70%, in certain sectors such as highway infrastructure, for example. Tens of thousands of motorists who take the new Highway 25 bridge, thus cutting 45 minutes to an hour off their driving time, would readily say that, without a P3, there would be no bridge. The arguments against it are well known: higher borrowing costs for the private sector, loss of project control by the public and the idea that P3 processes are much longer, complex and more costly than conventional processes.

However, the evidence allays those fears. In Quebec, as is the case elsewhere in Canada and in many countries around the world, deadlines are very firm: projects are delivered on time and on budget, with no extras; implementation methods are managed jointly by all public and private partners in a completely transparent manner; and guarantees are given that infrastructure will be maintained, service will continue over a long period of time, and infrastructure and service management will revert to the public sector upon expiry of the partnership agreement, and will do so in the best condition possible.

The Institut pour le partenariat public-privé strongly believes that public-private partnerships are one way to ensure process integrity in the design, awarding, implementation and management of infrastructure projects. Across Quebec and Canada, governments and a large number of municipalities must modernize or rebuild their infrastructure. These are major challenges for all communities. Public-private partnerships are a tool with which to meet them.

Thank you very much, Mr. Chair.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. Légaré.

Do you have anything to add, Ms. Mullen? You have one or two minutes left in the time set aside for the institute.

[Johanne Mullen]

Yes, if I may. Thank you.

There was a rather timely article in the Quebec press yesterday—I'm not sure if any of you had a chance to take a look at it—about some of the experiences that we are having on infrastructure projects. The statement was that we are seeing cost overruns in the order of 80% on some of our capital projects; it talked specifically about a road project that is under way currently, in conventional mode. Half of it has been built, we're already two times over the budget announced, and we have another 50% of the project to complete.

I wanted to talk a bit about this because I've had a chance to take a look at some of the testimony over the last few weeks. We've talked a lot about the risk transfer that comes with P3s. No one wants to be involved in a project that has two times, three times, or four times the cost overruns. It's not a question of incompetence; tt's a question of having the right drivers and the right controls in place to try to mitigate those risks.

One of the dynamics that P3 brings is that it imposes a rigour around the planning process. Regardless of why governments announce projects before they have the right costing, the right planning, P3 is a very effective means of focusing attention on defining the requirement. Here's what I mean by that. Because in a P3 we are going to be asking people like Fengate and their partners to provide firm, fixed price commitments on projects, we need to be very clear about what we need. We need to think about how we are going to use the asset, what type of asset we need, and who will be using the asset, and we need to think about these things over a 30-year period.

This means that before we go into the market we must have done all that planning. One of the most powerful mitigators in controlling risks of cost overruns and delays is the discipline it imposes on planning. Now, one could argue that one could impose this type of rigour without doing a P3, but a P3, it turns out, is a very effective way of doing it.

I'd like to also take two minutes to talk a little bit about life cycle. I know that it has been addressed by other witnesses to the committee. Clearly, P3s bring with them a 30-year commitment in terms of maintenance and life cycle, but the other part of the dynamic is that, as we are witnessing...you have seen the infrastructure deficit estimates for the municipalities. That's true for all public infrastructure. It is one of things that we have not done very well: committing dollars to maintenance and life cycle for public assets. The reason is, dollars are limited.

These are the problems you're facing today. When we're faced with a decision today on where we spend those dollars, it's a lot easier to divert away from maintenance and deal with today's pressing problems. It's completely understandable. The reality, though, is that it comes with a cost, and a very significant cost, because what we are seeing is that it's not just a question of putting in a few extra dollars to catch up: we're having to completely rebuild assets that should have lasted another 20, 30, or 40 years.

So on the one hand, we get the advantage of pay for performance. Your private sector sponsors, your private partners, make a commitment to maintain adequately, to the standards you set as the public sector, and if they don't do that, there are financial consequences. The flip side of it is that, as the public sector, you are contractually committed to putting in the right number of dollars for maintenance and life cycle so that at the end of 30 years you're not rebuilding the assets. You are getting them back to you in a condition that is acceptable.

I know that my time is up, but I will say those are the two most compelling arguments. It means, though, that you need to be prepared to do P3s because there is this level of thinking, planning, and reflecting on the use of the asset and how it will be used over 30 years. It means that this will bring change within the federal public service. People will have to think about their roles as asset managers and developers in a different way.

Thank you very much.

[The Chair, NDP, Pat Martin]

Thank you very much, Ms. Mullen. That's very good.

I think we're going to go now by video conference to our friend who is waiting in Toronto: Mr. George Theodoropoulos, managing director for infrastructure, Fengate Capital Management Ltd.

Mr. Theodoropoulos, are you prepared to make a five- or ten-minute statement?

[George Theodoropoulos]

Yes. Thank you very much, Mr. Chairman.

I'm just going to briefly introduce myself and our organization so you can get some perspective on where we fit into the PPP sector.

We're a private money manager. We manage money on behalf of Canadian pension plans. Our clients include several universities; these are the pension funds of the universities. This also includes corporate pension funds, Canadian corporate pension funds. A significant client base is also that of construction unions; trade union funds such as the Labourers' Pension Fund or the Operating Engineers' Pension Plan. These are the individuals who actually work on these projects as construction workers.

I've been in the sector for approximately 15 years. I've seen the sector grow in Canada, specifically at the provincial level, from the first transactions that were done in Ontario and British Columbia. We are concessionaires, in that we invest pension plan money in the form of equity capital in these projects on the strength of the concession agreements executed with municipal, provincial, and federal governments.

I personally am a practitioner as a transaction professional, meaning that I get involved when government is procuring the project. When they've decided to go ahead with a P3 and they at that point put out a request for qualification and a request for proposal, I'm involved in organizing consortiums to bid on the projects, put in a proposal, and then ultimately, if we are successful, execute on that proposal, develop the infrastructure, and operate the infrastructure over the concession term.

That is my perspective. I'm not really involved in consulting with government as to whether to do a P3 or not to do a P3. I get involved once government has decided to go down that path.

I can give you my views on P3s and why I think they're beneficial. Obviously, I'm a supporter of the sector. I make my living from P3s, but also, as a stakeholder in Canada, etc., I actually do believe in the value of P3s.

I think I'm going to echo some of Ms. Mullen's comments. Basically, this is a philosophy of procuring complicated.... By the way, for P3 around the world, whether it's with governments such as those of the U.K. or the EU, less than 10% of the actual infrastructure spend of government is done via P3s, okay? It's a tool that's used in very discrete circumstances, and primarily in respect of new infrastructure—complicated, large infrastructure. It can be used for roads, hospitals, prisons, courthouses, or an information technology project.

By the way, we have 14 investments in Canada in all of those sectors. We have a prison investment, a road investment, a courthouse investment, and several hospital investments, primarily with provincial governments. These are our clients, ultimately—the provincial governments.

There are several reasons to do a P3. One is that government describes the service that it requires, effectively,as opposed to describing the exact specifications of the infrastructure. Government describes the output. That allows for a tremendous amount of design innovation from the private sector, meaning how best to design the piece of infrastructure to provide that specified service, as opposed to having a very descriptive approach to the specific infrastructure.

Again, that allows for design innovation. As you design the asset, you are designing it with the maintenance of the asset in mind over the long term, because P3 integrates design, construction, and maintenance under one service. So whoever is designing and building the asset has the operator beside him, describing how he is building it and how he is designing it, because that operator—this is the private sector operator—has to take on asset on after construction and live with it for 30 years. That's another important aspect of P3 that's beneficial.

The other part of P3 is that there's cost certainty over 30 years for government, meaning that government is buying a 30-year service, as opposed to, “Thank you for the design and construction,” and then having government take on the asset. It's really helpful in a four-year election cycle. We always talk about the challenges of government in long-term strategic planning. When the election cycle is only four years, it really takes away.... It really allows for government to set certain pieces of infrastructure down the path for a 30-year period. This is where—Ms. Mullen talked about it—government receives the asset back in a high-quality condition at the end of 30 years.

Now, there's a price for that, and there's a cost for that. What the actual cost does is remove some flexibility from government in costing—really, in reducing costs—because they've basically entered into a 30-year commitment. These are the trade-offs. You enter into a 30-year commitment. You have cost certainty that the asset is going to behave and it's going to come back to government in a certain condition, but at the same time, you've ventured into a contract for 30 years, with little flexibility as to whether you want to pull back capital or money from that contract. You have an obligation to pay for that asset over 30 years. Those are the benefits, and I've described some of the costs.

Ultimately, it's a philosophy of procurement on certain projects where the government wants to be a builder and operator of assets as opposed to a manager of contracts and assets. Governments struggle with these issues day in and day out.

By the way, never, ever, take the argument that it's a form of privatization; it's never a form of privatization. We operate and own.... No, I shouldn't say that we “own”; we operate a number of prisons, hospitals, and courthouses across Canada. We don't own those assets. Those assets are owned by government. We have the privilege, under a license agreement, to step in, build, and operate those assets on behalf of government. Government can decide to terminate us at any time and take the asset back.

Those are my initial comments.

[The Chair, NDP, Pat Martin]

Thank you very much for sharing that point of view. We appreciate it.

Now we're joined by Professor Ian Lee from the Sprott School of Business at Carleton University.

Welcome, Professor Lee.

[Professor Ian Lee, Director, Master of Business Administration (MBA) Program, Sprott School of Business, Carleton University, As an Individual]

Thank you for inviting me. I apologize for being late. I was at Centre Block. I thought the meeting was in Room 237 at Centre Block.

Before I go into my slides, I want to give you a quick preamble. I'm a former mortgage manager and lender for the Bank of Montreal. In the 1970s and 1980s, in fact, I worked in the building under construction right next door to this building. I believe it's going to become the home of the finance committee.

I'm a tenured professor at Carleton University in the business school.

I have a couple of quick disclosures. I do not consult to any person or entity of any kind, anywhere, directly or indirectly. One hundred per cent of my income is from Carleton. In summary, my views here have not been influenced by someone else's self-interest.

Finally, I will disclose that I was involved as one of the founding activists in an Ottawa NGO called Friends of Lansdowne park. We vigorously opposed the City of Ottawa in the $400-million redevelopment P3. We actually sued the City of Ottawa, lost, then appealed to the Court of Appeal, and then lost again. Then we stopped. You may think that—

[Voices]

Oh, oh!

[Prof. Ian Lee]

I do believe that Lansdowne park is the poster child for a failed—completely failed—P3. Now, you may think that I've come here, then, to tell you how bad P3s are; however, that is not why I'm here.

[Professor Ian Lee, Director, Master of Business Administration (MBA) Program, Sprott School of Business, Carleton University, As an Individual]

Notwithstanding this appalling failure, I will argue that this failed P3 was due to poor decision-making by elected officials, and that does not invalidate P3s. Paradoxically, I will argue today that this failure validates my central or core thesis today: why P3s are an important tool in government procurement.

I'm going to jump to my slides now. I've already done the first disclosure. It has been said.... I have read the testimony of the witnesses who've appeared before your committee previously, so I'm aware of the debates you've been having. This is really just repetitive, but there's about $400 billion of present and deferred infrastructure in Canada, federally, provincially, and municipally.

I'm going to argue that the P3 is yet another tool to address this deficit of infrastructure, which I do think is a very serious problem in our country, both at the national level and right down to the micro level. For example, in the city of Ottawa, we have sewer mains that are over 100 years old and we're dumping raw sewage into the city of Ottawa.

I'm going to argue that P3s, in my view, really only apply to what I call capital-intensive, long-term physical assets called infrastructure. I do not believe they apply to all procurement. I think P3s really only apply to what I call single-purpose infrastructure: bridges, roads, airports, ports, and buildings. I'm staying away from prisons and university buildings simply because I haven't done any real study in those areas. A P3 can be a very important tool. So we're talking about 10% to 15%—and possibly up to 20%, depending on how you measure it—of all the procurement in Canada.

Just very quickly, I'll say that I rely much more extensively on the peer-reviewed literature. There is a very significant and burgeoning, peer-reviewed literature. Vining and Boardman from UBC have published extensively in some of the peer-reviewed journals, as has the World Bank. I'm really synthesizing quite a bit of this.

This has been implicit in the conversations that you've been having over the last two or three weeks, but there's a continuum, I argue, of procurement. I don't think that P3s are mysterious or exotic. There's the traditional procurement that governments everywhere have been doing for a very long time, where the government in question negotiates with a developer, a construction firm, to build the long-term asset under contract. It could be a building. It could be the bridge to P.E.I. It could be Highway 407. The government, in that context, is really playing the general contractor, who is providing contract management and of course acquires ownership and maintenance immediately upon completion.

We're also very familiar with the second model. A lot of downtown Ottawa was built on this model by Robert Campeau. The Place de Ville building, where Transport Canada lives, for many years was a long-term lease. In other words, the Government of Canada, through Public Works and Government Services, leased it and simply paid rent as a tenant.

Those are really the two alternatives: you build and own it or you rent it on a long-term basis. It's not very profound, but that's really what's going on. P3s are, I argue, simply a hybrid between A and B. This is a model that is a hybrid between owning it from the get-go versus leasing.

In this instance, in the shorter term of the P3, the government is somewhat analogous to a commercial tenant, with the developer, the contractor—the P3 firm—responsible for the construction and the long-term maintenance of the asset. At the end of the P3 contract, government gives back the asset, if you will, and gives the title to the government.... Unlike being a tenant, where, after paying rent for 20 years, you sign another lease to pay rent for yet another 20 years, in this instance you actually get the asset at the end of the contract.

What is needed for a P3 to be a right-fit choice? You need good contracts, where the risks are well defined between the public and private sectors. It has to be clear, and that means a lot of due diligence up front, a lot of transaction costs. There have to be strong political leadership, public support, and sufficient private-sector capital.

What are the advantages? I realize that I'm contradicting the Conference Board of Canada and some others who say that the latest generation of P3s are on the government books, but there is research showing that there are some countries and some governments where they're keeping P3s off the books, and that's one of the advantages. The second advantage is that the private sector is vastly more efficient at managing projects, in that hey do not allow politics and the political process to interfere because their money is on the line. Third, the P3s provide long-term, stable financing, including maintenance.

Governments everywhere, at all levels—and this is no disrespect to any of the elected officials here—are notorious for deferring maintenance and allowing bridges and roads to decay. That's my central argument today. As Pogo said, we've met the enemy, and it is us.

I only have two or three slides left.

Quickly on the disadvantages, there are disadvantages. There are externalities. Sometimes it's difficult to evaluate the risk, so there can be failures, but that just calls for greater diligence at the beginning of the contract. Moreover, you have to do the due diligence on the private sector to ensure that it has the capacity and the expertise to operate the asset, not just build it.

In summary, the principal advantage is not lower prices. I think this is a bogus argument. It isn't necessarily lower prices, although research and evidence in the peer-reviewed journals say that some of the P3s did produce a lower price. What's more important is that P3 takes the politics out of procurement. It takes the politics out of property management.

Elected officials do procurement very badly. They do it badly because it's too easy to defer the maintenance in the face of short-term budget exigencies. The P3s mean preferred, professional procurement. A P3 provides stability of funding and stability of management; they have skin in the game, whereas for elected officials and bureaucrats, it's Canadian Tire money, not real money—you don't have skin in the game.

Again, that's not to put down elected officials. I have enormous respect for you and for public servants. My late father was a public servant for 40 years.

But that really is the central advantage of P3s: it removes the politics and then you can have professional property management, not only in the design and build, but also in the maintenance and operation of the asset over its lifetime.

Thank you.

[The Chair, NDP, Pat Martin]

Thank you very much, Professor Lee. You've made very good use of eight minutes. That's excellent, as it leaves a lot of time for questions from all of the committee members.

I'll begin with the official opposition, the NDP, and Denis Blanchette.

[Denis Blanchette, NDP, Louis-Hébert, QC]

Thank you, Mr. Chair. Thanks to all our guests for being here today.

Mr. Légaré, I very much enjoyed your presentation. I am thinking about what you said and also in what you did not say.

Both of us are from Quebec and we are very familiar with the controversy around this topic. As you know, the previous provincial government relied extensively on P3s but became more timid towards the end of its mandate. A P3 agency established by the previous government was abolished. Then there was the creation of Infrastructure Québec, which decided to view P3s as a tool like any other.

You cited examples of P3 achievements, such as highway rest stops. You forgot to say that a $10 million lawsuit has been filed in that matter. You also did not say that parties had backed down from certain P3 projects, such as the Hôtel-Dieu de Québec project in 2009.

Ms. Mullen could answer my question. The evaluations that have been conducted always refer to a benefit that the implementation of a P3 project provides. People always compare the conventional model and the P3 method, obviously forgetting to say that there are also intermediate models.

I am more familiar with the Quebec public service, but I can say that there has been a loss of internal expertise. Consequently, the conventional method is becoming more costly. I would like to hear your opinion on the various elements involved in evaluating P3 projects. At what point do you, personally, and the Institut pour le partenariat public-privé say that this is not really a good project?

[Johanne Mullen]

I will answer you as a person who works in the sector. We at the institute obviously have a more general viewpoint. We promote P3s. However, as you say, we do not do so at all costs because the P3 model does not apply to all projects. So that is how I would answer you.

As for the process used in Quebec to evaluate implementation methods, I would like to confirm that our comparison is not limited to P3s as regards design, construction, financing, maintenance and repair. We also look at all the methods that may apply to a project in order to find the one that is appropriate.

My experience has led me to work on projects in which we concluded that the design, construction, financing, maintenance and repair method was not appropriate. In those cases, it was inappropriate because we could not use that method to generate value in the implementation component.

One example was a project to expand an existing building. The expansion was apparently not to be done by constructing a new building that would have been linked to the existing building by a walkway. The plan was to integrate them floor by floor. If we had builder friends around the table, they would definitely be able to discuss the issue in greater detail.

So they would have had to open the building, construct the extension and integrate it floor by floor. The plan was also to expand the plant containing all the existing electromechanical equipment.

So the idea was to have a single plant that would have served the building as a whole. In the analysis, it was determined—

[Denis Blanchette, NDP, Louis-Hébert, QC]

Pardon me, but our time is limited. We will come back to that a little later.

Mr. Lee, I found your presentation interesting. Ultimately, you are saying that we are doing a poor job with these projects.

Could we agree that our problem in managing infrastructure is much more in the way we define a contract, the way we manage it and whether or not we interfere in it?

You feel those are the issues in government? Have I accurately summed up your thinking on this point?

[Prof. Ian Lee]

Not exactly: I'm arguing that the political interests of members of Parliament, who are of course elected to represent their constituencies—their citizens, their voters—may express views that contradict the professionals.

There are a lot of people, as we all know, who don't have a deep professional understanding, whether it be economics.... I'm excepting somebody like a Dr. McCallum; a lot of people don't understand economics. A lot of people are not engineers. I'm not a professional engineer. Yet the political process can impose demands on you, the member of Parliament, and that in turn feeds into the process. That's at the front end.

Then on the back end, I'm talking about the maintenance of the program. Governments defer maintenance all the time because it's invisible. People don't see the money that's being transferred from maintenance into some other project. When I was testifying before the City of Ottawa on this, I said that elected officials like shiny new objects. Maintenance is very boring. Replacing sewers and that sort of thing is not very sexy. We have $300 million of deferred maintenance on sewers in this city. That was a collective decision made over time, year after year, to defer maintenance. It's not because you're bad people or immoral people; it's simply because that's the nature of the political process.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Blanchette.

Mr. Lee, thank you.

Next, on the government side, the first question is from Costas Menegakis.

You have five minutes, Costas.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you, Mr. Chair.

A big thank you to our witnesses for appearing before us today. I have certainly found your testimonies very, very interesting.

Mr. Theodoropoulos, welcome, sir. I have a few questions for you.

Can you hear me?

[George Theodoropoulos]

Yes, I can.

Thank you.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Can you talk to us a bit about the Toronto South Detention Centre and why it made sense for that project to use a P3 contract over 30 years, over the term of the contract?

[George Theodoropoulos]

The Toronto South Detention Centre is a provincially sponsored internment facility. It's one of the largest in Canada. It holds 2,000 individuals. The Government of Ontario, at that point, decided to procure this facility through a PPP concession agreement that allowed the private sector to design the facility the way it felt would be most efficient for providing the services the province was seeking. It allowed the private sector to build the facility after the design, to finance the facility, and to maintain the facility for a period of 30 years. The maintenance firm and the contractor were at the table as the facility was designed and built with maintenance in mind.

The capital involved—the debt and equity, the private sector money used to actually pay the contractor and pay the designer—is at risk if the facility doesn't behave a certain way. Remember: the government is purchasing a service. The service is to provide a place for 2,000 individuals, house them, feed them, secure them, and so on.

The capital is simply there to facilitate risk allocation to the partners within the team that can best manage the risk. That means that the construction risk is pushed down to the contractor. The maintenance risk is pushed down to the operator. Because we have capital at risk, we are watching the contractor, the designer, and the maintenance firm that maintains the building to make sure that they're doing what they're supposed to do. This way, the government gets the service it contracted for.

It made sense for the government, ultimately. The government felt that it would get more value for money by doing it through a service contract of a PPP type than it would if it actually had to procure the facility through a separate construction contract and then take over the facility and maintain the facility itself.

They did an evaluation. It showed that if we did it, this is what we would spend. If we maintained it, this is what we would spend. They risk-adjusted those numbers. You have to appreciate that they added risk, because when the government builds, it doesn't always build on time. When government maintains, it doesn't always maintain on budget, either. They did that evaluation and found that the PPP process provided value for money. It was less expensive and it gave them the service they were contracting for.