Government Operations Committee on Nov. 1st, 2012

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

I wonder if Professor Lee has an answer. I keep coming back to this because it seems to be a struggle between, on the one hand, the cost of capital being higher for the private sector, which is a negative, but on the other hand, if you can jack these risk premiums up high enough, you counterbalance that. I am concerned with the logic by which these risk premiums are calculated.

[Prof. Ian Lee]

I too am going to duck. I'm not a finance professor. This is the domain of finance professors as opposed to economists. I don't mean to put down economists, who are very good, but finance professors literally do teach and study the whole issue of the cost of capital.

It's a very complex area, and I do agree with Ms. Mullen, who said that it varies on a project-by-project basis because the risk varies on a project-by-project basis. But I can't tell you the mechanics of the finance algorithms that are used to measure or evaluate the cost of capital in a particular project.

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

Well, maybe I'll change the subject.

You come from Ottawa. There is a certain amount of expertise required by people doing P3s. Do you think that the expertise is sufficient in the various departments of the federal government, that it exists...? If not, what can be done?

[Prof. Ian Lee]

I want to be very careful in answering your question. I have lived in Ottawa all my life and I know many people in the public service. I think you have one of the finest public services in the world, meaning that it is honest. It's probably the least corrupt of any country, and I've travelled to many, many developing countries as well as western countries.

I'm not sure that the expertise is in Public Works and Government Services. There has been a lot of debate over the last few years—I've talked to people both in government and in the private sector—about the depth of talent in government works. The new P3 agency looks like it is developing. From what I understand, it is developing some very strong competencies in P3, but I'm not so sure that those competencies exist to that degree in Public Works.

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

So that means you think that the new P3 agency is a good idea to compensate for lack of expertise elsewhere...?

[Prof. Ian Lee]

I think they are developing the expertise in an area where we didn't have that knowledge before. One of the reasons—and this came out in the research literature—that we had so many failures in that first round in the 1990s was that people didn't know what they were doing. They were literally creating the rules as they went along, and creating the knowledge and the competencies, and now it is being systematized in this agency at the federal level to provide help to provinces and municipalities. I think that's a good thing.

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

Thank you.

[The Chair, NDP, Pat Martin]

Thank you John.

We have time for the one last round, which will be perfect. It finishes our second round.

We now have Kelly Block, please.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much, Mr. Chair.

I would also like to thank our guests for being here today. I am really enjoying this study. I think it should come as no surprise that a lot of the testimony is very consistent with what you've presented here today, and I find that encouraging and reassuring as we continue with our study.

I'm a member who represents both a fairly significant urban area as well as a rural area. In the rural area, I have 23 small communities. The interest in the P3 model is growing, and the infrastructure issues and the ability to address them are definitely relative when you compare a small community with a large one.

I want to ask if you've done any work in looking at how to reduce the administrative costs of P3s so that smaller communities or municipalities can take advantage of this tool. We've heard about bundling projects, but have you looked at whether or not there is an ability for regions to come together to consider projects and take advantage of the P3 model?

Either of you can answer that.

[Prof. Ian Lee]

I'll go quickly, because I think Mr. Légaré will have a much more extended answer.

It's growing, but I want to echo everyone else: it doesn't solve everything. P3s are good for maybe 15% to 20% of procurement, which means that about 80% or more is not appropriate for a P3. That takes a lot of procurement off the table. It's only a small part—maybe a fifth. That's the first point.

Secondly, it's more and more urgent because of declining economic growth and the looming infrastructure deficit that I see, living in a large city, and it troubles me a great deal. At the same time, of course, we don't want governments to become much more deeply indebted.

Third, because it is very complex, it does require a lot of transaction costs or due diligence up front, so smaller organizations probably don't have the expertise. That's why I see the importance of this new institution at the federal level in developing to become a repository, almost a government think tank, if you will, on P3 best practices, so they can advise and consult with agencies across the country.

In terms of the bundling, I'll defer to Mr. Légaré.

[Roger Légaré]

I've just finished travelling in the most important cities in the Province of Quebec. The concern was exactly what you're expressing: that the cost of preparing for P3s is quite expensive. Therefore, they're trying to find a means for us to develop a mattress of sorts, where they could say, “Okay, for a project of such-and-such a nature, this is what we have to do, and we'll have to simplify, and at the end of the day we'll be able to benefit and profit from a government investing in our project.” We actually.... I'll go at it in French to make sure that I don't make any mistakes.

We are asking municipalities to consider one thing. It is not because they can get more money from the provincial or federal government that there is any justification for incurring the expenditure for a project that may not be good for their community.

However, if all municipalities want the same thing as their neighbours, their leaders will often think that, if hold out their hand, they will get money that will enable them to do something else.

We at the institute do not advocate that. We work with the Federation of Canadian Municipalities. With Infrastructure Québec, we try to find a way to simplify operational models and to present municipalities with ways of proceeding that will save them money on costs in preparing their projects.

I hope that answers your question. That is how we currently work at the institute.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Do I still have any time?

[The Chair, NDP, Pat Martin]

You've one minute left.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

I appreciate your comment, Professor Lee, when it comes to the fact that the P3 model doesn't necessarily work for all projects, and that it truly is limited to about 20%, but that benchmark is quite high when it comes to a project that's perhaps around $50 million or more. I guess that is why I look at opportunities for smaller communities to try to look for ways of using this model.

In particular, I want to pick up on something that Ms. Mullen stated in her comments about the accountabilities for both the private and the public sector when it comes to the P3 model, first for the private sector at the front end when they're looking at being innovative and building into the infrastructure, all the good things they have access to for the longevity of whatever it is they're building, as well as government, the public sector, because, as has been stated, oftentimes the maintenance on something is deferred, and this basically says that you will not be able to abandon something in favour of something else, that you have locked yourself in.

I think it's important for all levels of government, large and small, to have access to that opportunity. I don't know if you want to talk a little more about the--

[The Chair, NDP, Pat Martin]

I'm afraid, Kelly, that there won't be time for that. You used your last minute as a comment more than a question.

Professor Lee.

[Prof. Ian Lee]

I would say that you may want to look at audit. Auditors are becoming more and more sophisticated. I have very high confidence in the audit capacity of the Deloittes and the KPMGs to provide meaningful audits of this kind.

[The Chair, NDP, Pat Martin]

That's helpful. Thank you for your insight.

That concludes the time we have set aside for today.

We want to thank all three of our witnesses, especially Mr. Theodoropoulos for patiently waiting for us and linking up all the way from Toronto. Those were very helpful contributions that you made, sir.

Professor Lee, thank you for being here.

Monsieur Légaré, thank you very much for the testimony from the institute.

We're going to suspend the meeting for just one minute and then reconvene in camera for a little bit of planning.

[Proceedings continue in camera]