Proceedings of the Standing Senate Committee on
National Finance
Issue 5 - Evidence - October 18, 2011
OTTAWA, Tuesday, October 18, 2011
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to examine the expenditures set out in the Main Estimates for the fiscal year ending March 31, 2012.
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: Good morning ladies and gentlemen, I call this meeting of the Standing Senate Committee on National Finance to order.
[Translation]
This morning, we will be continuing our study on the Main Estimates for the 2011-12 fiscal year, which was referred to our committee.
[English]
In this session we will again turn our attention to Public-Private Partnership Canada Incorporated, a Crown corporation more commonly referred to as PPP Canada. PPP Canada last appeared before our committee in March of this year, as referenced in our interim report on the Main Estimates 2011-12, which were presented to the Senate in late March 2011.
This morning we are very pleased to welcome Mr. John McBride, Chief Executive Officer of PPP Canada.
Colleagues, we have more than our normal allotted time, since we do not have a second panel today, but that does not mean that we should abuse our privilege when I call upon you to pose questions. I will rely on you to keep your comments and questions succinct, as usual. That is very much appreciated.
Mr. McBride, you have introductory remarks, and we welcome you.
[Translation]
John McBride, Chief Executive Officer, PPP Canada: Thank you for giving me the opportunity to talk to you about PPP Canada today. This issue, this topic, continues to be very close to my heart. I am pleased to see the interest shown by the committee today.
[English]
I was appointed as the inaugural CEO of PPP Canada in 2009. I know that my CFO was here to speak to you, and I regret not being able to be with you last time, but a little background before kicking off questions.
Our job at PPP Canada is to promote P3s in the country. That is because P3s have demonstrated their ability, both in Canada and elsewhere — we could talk about what is happening at the provincial level and what is happening internationally — to deliver value for taxpayers in the delivery of public infrastructure by bringing private sector capital to play, at risk, to ensure better performance, that is, to have performance-based delivery of public infrastructure, whole life-cycle consideration, risk transfer. We can get into those in detail, but it is a new and different way, and it is fairly recent in Canada.
It was only in 2003 that B.C. started a program, and Ontario in 2005. It is not that recent internationally, but Canada has come a long way in the last while. I was very pleased to have the opportunity to lead this organization, as the federal government wanted to add to what provinces were doing and make sure that Canada was — as it says in the budget — a leader in P3s internationally, and we are.
Last month the Minister of Finance was named by Infrastructure Investor as Minister of the Year, mostly because of the leadership Canada is showing on bringing P3s to the country and private sector capital. It is really great to see the recognition. You can see it in terms of what other countries are bringing and learning from Canada.
What do we do? We do, broadly, two things. We try to encourage the adoption of P3s by provinces, municipalities and First Nations. That is the thing that people know us most for, and the federal government has given us money annually to encourage the adoption of P3s. It is a different type of fund. It is an entirely merit-based fund. We go through annual investment rounds and receive applications. We can talk a bit about that process and what we have learned from that process in the first year.
We are completing our second investment round and we have closed applications for our third investment round. The volume, quality of applications and the complexity of those applications have changed a lot in the first three years. There is greater awareness. We are really pleased by the reaction that we are seeing in the market. I am sure there will be many questions about how the fund is going and how it actually works.
I would just say, without getting into too much detail, that we are after different things than what the federal government has been after in the past with infrastructure. Absolutely we are after quality public infrastructure, and that is right at the top of our list. We are actually also after changing the way infrastructure is considered and how it is delivered. That means a change in processes, education and culture at all levels of government as they begin to think about those kinds of things. It is really that change in approach that is taking time.
We also have a responsibility to help the federal government itself undertake P3s. We do not have a fund for that, because we do not need a fund to help the federal government do that. We are very pleased that in our first two years the federal government has closed its first two P3s since the Confederation Bridge, which was many years ago. It closed a new RCMP headquarters in B.C. as a P3, and it has reached financial close on a new headquarters for the Communications Security Establishment, CSE. They are both very complex projects that involve 25-year concession agreements for the private sector to provide services and for them to put significant capital at risk.
As an example, with the CSE project the private sector is putting over $800 million of its own money at risk to ensure delivery of performance. It is not only building, it is operating that facility for 25 years, providing core IT and security services to the CSE to give them predictability and assurance of those kinds of things.
We underpin our work with provinces, municipalities and First Nations and with the federal government, but trying to build an organization that is full of expertise. If you follow the international literature on this, one of the big challenges of P3s is capacity and expertise. It is one reason why governments create organizations like ours. Some of you might be familiar with Infrastructure Ontario at the provincial level, or Partnerships British Columbia, to bring together an organization that has the expertise to help governments deliver on these things. These are complex financial, contractual agreements that you need to get right in order for them to produce value.
The last thing I will close on is that I would not want to be here today to say that P3s are a magic bullet to all our infrastructure problems. They are not. However, they are part of the tool kit that government should have in delivering on their infrastructure. It has been shown internationally that 15 per cent, 20 per cent of infrastructure projects are best delivered in P3s. It is something that you need to do careful analysis of, however, and we do that because our overall driving force is, of course, good public infrastructure, but does it produce value for taxpayers? It is not P3s for P3s' sake. This is P3s where they are demonstrated to produce better value than traditional type procurement.
I could go on forever, it is my favourite topic, but I will leave it there and let the conversation be guided by questions.
The Chair: Thank you very much, Mr. McBride, for those introductory remarks. I am sure we will get into some of the projects that you may want to talk about. I think it is fair to let you know that last time we were surprised that there were not very many projects and it just seemed like a granting agency. We would like you to convince us that this initiative of about three or four years is actually starting to function the way most people had anticipated.
You are talking about the third tranche; this is the third round of funding. Can you tell us how much each round and when they took place?
Mr. McBride: It has been two and a half years, and I started as the first employee in February of 2009. Over the spring of 2009 we also put together a board but had to design the program and put it out for launch. We talked to many people in those early days and they said — I think it was good advice and I agreed with it — you should just get started. You will learn along the way and you should just get started.
We launched our first call for applications in September of 2009. As you recall, 2009 was an interesting time because there was a significant amount of economic stimulus money and infrastructure money out as well. In those circumstances, the P3 Canada Fund provides only 25 per cent contributions, so it is a much more onerous and much less generous program than what has been traditionally on offer by the federal government.
Provinces and municipalities were overwhelmed with the task of trying to deliver stimulus money. That was time- limited money in round one. We were brand new, too. We got 26 applications, very few from municipalities because they were absolutely new at this game. We out of that approved three projects for $400 million of infrastructure, of which we contributed $100 million, because we only provide 25 per cent. I again underscore that is different from the either 50 per cent or third-third-third that provinces and municipalities are used to.
One of those projects was in Winnipeg called the Chief Peguis Trail Extension, which is being done as a P3. The project was $112 million, of which we put in $25 million. I am pleased to report that that project is not only under construction but is expected to reach substantial completion by September 1. That will be one year ahead of budget. It has had significant innovation. I will give some examples of the kinds of innovation by letting the private sector take responsibility. Some of things are small. The curbs put on the Chief Peguis Trail are about this wide. Why are they this wide? It is because they did an analysis over the 25-year period and said the snowplows will chip the things. They are responsible for replacing those curbs, so they said it is better for us over a 25-year life cycle to build wider curbs. They refused to take the gravel on offer by the local quarry and wanted them to blast new gravel so that the gravel would be sharper so it would compact because guess who is responsible for fixing the potholes when the potholes happen? It is the private sector.
I could go on on a series, but it is coming in at about $20 million under budget; it is coming a year early; and there is significant innovation on how they are doing it.
We did a project — this is an interesting one — involving all three of the Maritime provinces, Prince Edward Island, New Brunswick and Nova Scotia, to build a new maritime radio communications initiative. It is very interesting as a P3 because it is not your traditional bricks and mortar type of P3. This is for first responders. This will bring an interoperable system among the three provinces and among the various first responders. We are putting $50 million into that. Bids are closing this month; that has been out for RFP, and that process is closing this month.
We have also put $25 million in round one into a new maintenance facility for AMT, the organization that runs the light rapid transit system in Montreal, in Lachine, as part of their process to invest in those kinds of things.
That was round one.
The Chair: What was the total amount you were allocating?
Mr. McBride: In round one we invested $100 million.
We launched round two in May of 2010 and closed the application process in July of 2010. We received 76 applications, three times the amount and a significantly greater interest from municipalities. We screen those down and we work with clients. Just a bit on our process, we take 90 days approximately to screen the first applications. We have learned that the screening process is important because actually undertaking a P3 requires quite a bit of detailed analysis — procurement options analysis, we would call it in lingo. We require people to demonstrate to us not just that they have a good idea but that they have actually done the homework that the P3 will produce value. We take 90 days to screen them out, then we require them to produce a detailed business case. We do not ask to do a detailed business case because we do not ask them to invest all that because it costs a few hundred thousand dollars before we give them an indication whether they have been screened in.
It can take clients as short as 60 days and as long as a year to come to grips with their own internal processes and produce a business case. We then take 60 days to complete our due diligence and negotiate a term sheet with them.
We are beginning to roll out round two announcements. I am not at liberty to talk about all of them, but to date we have announced a water treatment facility in Lac La Biche, Alberta. Lac La Biche is $3.8 million. I was in Barrie last week for a bus maintenance facility. We are putting $5.8 million into a bus maintenance facility, but we are getting much more than that. Yes, the bus maintenance facility will be in the order of $20 million, but this is attached to a $200-million service contract for the private sector to operate on a performance basis their bus system for the next 15 years.
The federal government does not contribute to operating costs, but we are getting significant private sector involvement that transcends our own capital investment.
We have also announced $10 million to a $40-million waste water treatment plant in Kananaskis Alberta. There will be another announcement on Friday, and then more over the coming month, which I am not at liberty to speak about, but we are beginning to roll out our round two announcements.
The process of doing a round starts to overlap with other rounds. We have also in the meantime launched round three, a call for applications for round three as we complete our due diligence on round two. We received 121 applications in round three for $37 billion worth of infrastructure, and we had 76 of those applications from municipalities.
We have gone in two years from almost no interest and awareness from municipalities all the way to a very significant response from municipalities. We are tracking our way upwards, but it is a change in the way that people do business and it is not the same for everyone.
The Chair: To complete your background, what is the total amount that was allocated for round two?
Mr. McBride: The total amount allocated for round two would have been $250 million, and the total allocated for round one was $165 million. We did not find and did not conclude deals because we had as much emphasis on quality as quantity, but we are tracking upwards. I am hopeful that in round two our announcements will get us up over the $200 million range, but we are not always in control of the decisions because it takes both parties to agree on that. Our target for round three is to be up over $300 million as we are seeing a ramp up in our business.
The Chair: I am looking at the Main Estimates for this year.
Mr. McBride: Do you see $275 million?
The Chair: I see $287 million.
Mr. McBride: The $287 million is made up of $275 million for our fund and the $12 million for the operating costs. We would notionally have $275 million for our fund, but given that we still have funding left over from previous rounds one and two, we have the opportunity, given the significant increase in the interest, to pursue even more in round three. On an ongoing basis, we should be doing about $250 million to $275 million, but we have the opportunity now that we are in the launch and ramp-up phase to play a little catch-up in round three.
The Chair: That is how you get over $300 million.
Mr. McBride: Yes. I have, as you noted, some money left over that was unallocated in round one, plus the $275 million will allow me to be over $300 million in round three.
The Chair: You are not anticipating supplementary estimates to get you over that $300 million?
Mr. McBride: No.
The Chair: You have sparked quite a bit of interest, as you might have guessed, Mr. McBride.
Senator Gerstein: I will continue on the category of process. First, I would like to understand a little more about how the projects are initiated. You used the term, that you call for submissions. Do you stimulate at all any kind of activity out in the country? Second, could you give us a description of how you will go about evaluating the items that come in? I am a little unclear about the concept of rounds. In other words, does the door open and then close? How long does it stay open? How long does it close?
Finally, as I understand it, you provide 25 per cent of any funding, so if we are investing $1 of federal taxpayers' money into a project, where does the balance of the $3 come from?
Mr. McBride: Those are good questions.
In terms of stimulating demand, we have a business development group. Their job is to build P3 awareness because there is a fair degree of education still required about what a P3 is. Everyone thinks he or she knows what it is, and at the beginning in round one, we did not have much. We called it an exploratory round, so I will talk about what we did in round three in terms of that.
We ran workshops across the country in every province. We ran them in partnership, to the extent possible, in every province. We developed partnerships with their infrastructure organizations. In the case of Ontario, we ran multiple workshops in multiple locations, bringing in interested municipalities to help them understand. Not only did we explain what P3s were but they could also bring their ideas, and we would workshop with their ideas with them. We also speak at conferences, do broader awareness, websites and industry publications, so we are very much out there. We have worked hard over the last two years to build a new relationship with provinces that also have an interest in promoting the P3 concept. All provinces are different in how they approach that. The wonderful thing about the federation is every single province has a different approach, but then there is formulating how you work with Infrastructure Ontario, Partnerships British Columbia or Infrastructure Québec to try to promote this concept with provinces and municipalities.
We do that in advance of a call in order to stimulate demand. It is true that if we just said we are open for business, it is a confusing thing for many people, and sometimes you get weird and wonderful applications. Therefore, we do that in advance. We have a finite window for our call process. We launched the call for round three on May 4, and it closed on June 30. We do that as a finite period of time because we have an obligation in our fund, which is different because it is a national process without provincial allocations to run a merit process. If you are going to run merit, it is a relative thing, so you need to know what you have in your basket to evaluate merit.
We worked with the provinces so that they will work with us in receiving and evaluating applications as well, but the final call is always ours. We then screen those applications. We go through a first step of screening because you can do your best efforts to explain, but how do you whittle down? For example, with 121 applications for $37 billion of infrastructure, I can do maybe $1 billion, so I have to figure out whom I would work with. Our general experience is that 50 per cent of the projects, even if we screen them in, do not materialize for a number of reasons. Provincial priorities change, municipal priorities change or the project does not work and so forth.
We evaluate in three broad steps, each one with specific factors in them. The first one is eligibility. We have basic eligibility criteria that the government has given to us. It must be public infrastructure. The difference between public and private infrastructure is interesting, especially when talking about working with the private sector: what actually is public infrastructure?
It has to be an eligible applicant. Applicants can only be provinces, municipalities or First Nations, or an entity that is sponsored by a province, municipality or First Nation.
Even if they are not eligible applicants, it does not stop people if applying. We have eligible categories, for example, the Building Canada Fund. It is a much more complicated thing, but I say to people, broadly, no health, no education and no provincial justice and security systems.
Interestingly enough, that is a segue. That is actually the place where almost all P3s have happened in the country. We are looking for P3s in places that P3s have never been done. If you looked in Ontario, the vast majority of their P3s have been hospitals.
We work through eligibility, and it has to be an eligible P3 model. For us, that means the private sector would design, build and finance. We can have a debate about operate and maintain, but it has to be at least design, build and finance, and it must be structured as a P3. One of my little jokes is I get many applicants who say, "I am the private sector. You are the public sector. If you give me money, I will be your partner. There is a public-private partnership," and I say, "That is not exactly what we mean by a public-private partnership."
It also has to be a competitive procurement, so that you cannot have picked your private sector partner in advance. There is a lot of that, too, where they come to a negotiated deal, so we put a lot of emphasis on a transparent competitive process. That gets you through basic eligibility.
Then we look at viability because if it is not eligible and not viable, there is not much point in ranking them according to merit. Viability has two aspects: project viability and P3 viability. By "project viability," we mean whether there is a reasonable chance for this project to materialize. Again, we get applicants who say, "With your 25 per cent, we will have secured 25 per cent of the funding." As I have real decisions to make now, I have to take a reasonable look at whether it is a real project or just someone's concept that that might materialize in 15 years' time. As far as P3 viability and the potential to be a good P3, we look at the following: Is there ability to specify performance? Can you actually transfer risk? Are there any market precedents for doing this kind of project either in Canada or internationally? Is it of a size and complexity that might attract private sector interest? In a P3, we ask the private sector to do an enormous amount of work in the bid process — millions of dollars' worth of work. They have to do their design and arrange their financing because when they sign the contract, they are committed. If they have to bid — and you want three bidders bidding — and they have to invest $1 million, they will not do it on $1-million projects because there has to be a certain amount of size. Therefore, we have to judge market interest.
If they get through eligibility and viability, we rank them according to merit of the ones that are eligible and viable. On merit, we prefer more private sector involvement to less, so we look at whether it will develop the market. What does developing the market mean? While we can build infrastructure we are also trying to leave behind the learning of this new way of thinking about infrastructure. We like to engage with jurisdictions that have not done P3s, or if we are engaging with a jurisdiction that has, it is something new for that jurisdiction. Maybe in Ontario they have done hospitals but they have never done X or Y; or you are municipality and you might have thought about it but have never done water and waste water, or we are looking at different types of models. How can we bring different revenue streams to bear on a project that will be new and different? We are trying to leave behind not only good infrastructure and good P3s but also the learning behind those things.
We look at readiness. We will take a project that is more ready than others are. P3s do take time in the development and lead up process, and it is not an excuse, just a reality of these kinds of things. We are interested in projects, and that is a bit of a challenge for us because those projects that are more ready tend to be the ones that are levering less change because you could argue that if they are ready to do it, would they not do it without us. On the other hand, if they are at the beginning of the thought process, we would probably get the most behavioural change, so we have had to balance those choices.
We will look also at revenues. I know that has been a topic for these kinds of things. Many people mistake about P3s. They say that governments do not pay for P3s, like P3s are free. The private sector does not do anything for free. Every P3 requires a revenue stream.
There are two types of P3s. The revenue stream comes directly from users — tolls, water rates — and is paid directly to the private sector and they take the revenue risk, or the revenue stream comes from governments. In Ontario, in every single one of their hospitals, there is no revenue stream from users. It is paid by government. Why do you get the private sector to put its capital up? You are harnessing the disciplines of the capital market and the incentives of the profit motive. I will give an example of that. If you are a private sector proponent and go to your financiers and say, "I want to borrow $800 million to build a hospital, and you will get paid if I succeed," they will do due diligence on that project like you cannot believe, nothing that the government can match on those kinds of things.
That is about our merits and our calls. I am not sure if I have covered all your questions.
Senator Peterson: Thank you for your presentation. On any project, does there always have to be private sector involvement?
Mr. McBride: Absolutely. We can talk about the nature of the private sector involvement, but the answer is yes.
Senator Peterson: The answer is yes. You say there has to be a revenue stream. They expect to get their money. This is not just grant money or donated money.
Mr. McBride: Our fund can go out in a variety of different ways. If there is a revenue stream from users and the province or municipality is going to be repaid, we expect equivalent treatment to the province and municipality. I will take the example of the Chief Peguis Trail Extension. It is a significant road in Winnipeg, but there is no toll, so we are helping the municipality in that circumstance to make payments to the private sector.
Senator Peterson: You mentioned the First Nations, and one example would be the water treatment plant in Lac La Biche. How would the private sector be involved in that, and what role do they play? What is the structure of it? Are they involved in the management and control, or does someone else do that?
Mr. McBride: That is an excellent question. They enter into a contractual agreement with the city of Lac La Biche, and they are designing, building, operating and maintaining that facility for 25 years. The contract comes with specifications about what the facility is supposed to produce. It should have the ability to treat this kind of effluent to this type of quality to this kind of level. Their payments are based on their ability to perform. They do not get a single nickel until the thing is operating. There are no progress payments. They have to go and raise that money. They have to put their own money at risk and put their own performance at risk. In that context, two Canadian companies, Maple Reinders, the design builder, in partnership with Corex, a Canadian company out of B.C., have partnered together to deliver this water treatment facility for over the life of the facility. If it breaks, they have to fix it. They have to operate it and maintain it, and their payments are performance-based.
Senator Peterson: Do they have any way to secure their investment or asset? Can they put a mortgage against it? How are they assured payment, or are they?
Mr. McBride: In these circumstances, no. The asset is the government's at the end of the day. However, they have a contractual agreement. They are financing this transaction based on the contractual agreement that they signed with Lac La Biche to perform.
Senator Marshall: Could you speak about the money and the disbursements? When your CFO testified at one of our past meetings, my understanding was that none of the money had been disbursed. You had received the allocations from the federal government, and you were talking earlier about round one, and there was a total there of $100 million. Has that money been disbursed now?
Mr. McBride: No. We do not disburse our money until the private sector has delivered, consistent with what a P3 is. We commit with the municipality to this contract, and we disburse at the same time the municipality disburses. In a P3, you do not pay until it is performing. We will make our entire disbursement to that when an independent engineer has certified substantial completion. For the Winnipeg one, we are expecting that to be December 1, and there will a single cheque of $25 million.
Senator Marshall: Have you made any disbursements from the fund yet?
Mr. McBride: The Chief Peguis Trail Extension will be the first project that will reach substantial completion. As an arm's-length, non-agent Crown, we are not able to make commitments unless we have the funding. The government gives us the funding in order to enable us to make those commitments. To secure the federal government's interest and to encourage private sector delivery, we would not disburse and actually would not approve a project where the municipality is disbursing until there is actual performance, because that is fundamental to a P3.
Senator Marshall: How much is in your fund now? Is it still the $410 million?
Mr. McBride: We have not yet received this year's annual appropriation. It would be the $165 million and the $252 million, and against that there would be the commitments against round one and round two, which show as contingent liabilities in our financial statements. We are not lapsing appropriations as a Crown. Given that we do not have the backstop of the federal government, the only thing we have is cash in the bank in order to enter into those financial obligations.
Senator Marshall: Round one is $100 million for the three projects.
Mr. McBride: Yes.
Senator Marshall: Two federal projects were referenced, the RCMP headquarters in B.C. and some sort of communications headquarters. What round is that? Is that round two?
Mr. McBride: Our fund is only to encourage provinces, municipalities and First Nations. Federal projects that are undertaken by federal departments are funded from their budgets, so you will review their estimates for that. Out of the RCMP's budget, they built a new headquarters. Communications and security is an organization within the defence portfolio. It does not make any sense, and it would be inconsistent with the appropriations process, for the federal government to appropriate to us money to give to another federal entity. Our fund is for one side of our business, which is provinces, municipalities and First Nations. When I talk about federal projects, that appropriations process would be seen through the appropriations of those federal departments.
Senator Marshall: You talked about round two, and you said that was $250 million. Has that all been decided and approved?
Mr. McBride: I am not at liberty to talk about all of the projects that are in for round two. I can tell you about the ones that have been announced, and I talked a bit about that. Stay tuned, as there is another one on Friday.
Senator Marshall: With the $100 million for round one and the $250 million for round two, is there sufficient money now in your fund to cover off those projects?
Mr. McBride: Absolutely.
Senator Marshall: With a little extra left over?
Mr. McBride: That is true. Since we are an arm's-length Crown, we do not have the ability to commit money that is not actually appropriated to us. The board has a fiduciary obligation and could not and would not be able to approve anything more than what we have in terms of cash in our bank.
Senator Marshall: For the projects that have been approved, would they all be grants?
Mr. McBride: In the sense that we have not had a project where we are expecting repayability yet.
Senator Marshall: I have one other question unrelated to the money. Reading your annual report and looking at the objectives of the corporation, there are six objectives listed, and there is continual reference to direction from Treasury Board. Could you elaborate on the criteria that are provided by Treasury Board, or the guidelines? Different words are used. Is that something at a detailed level, or is it broader? Also, is it in writing? Is it something that you can share with us?
Mr. McBride: There are two ways that we as a Crown are subject to financial management. Every year, we have a corporate plan that is submitted by the minister to Treasury Board, which is approved and tabled in Parliament. That sets out the parameters under which we operate and would include things like terms and conditions for the fund. I spoke about eligible applicants, eligible projects, eligible categories and criteria.
Senator Marshall: The government defines that, not your corporation?
Mr. McBride: Correct. We operate within the parameters that were set out for the fund. I may think it is a great idea to fund a hospital, and it may be the best P3 in the world, but the federal government has said the health sector is not an area where they want federal money being spent, for obvious reasons.
I think you are also referring to a Treasury Board guideline in Budget 2011, the one tabled in June, where the government made another decision and said that for all federal large projects — not provinces and municipalities — over $100 million must mandatorily be assessed for their suitability as a P3. That budget decision said not only will we encourage provinces and municipalities through our fund to do P3s, but we will walk the talk ourselves with our own. The Treasury Board, as the agency responsible for the management of government, has a responsibility to translate that budget decision into more detailed guidelines for departments.
Senator Marshall: Those guidelines come to you and they are written, are they? Those are formal documents?
Mr. McBride: Right, they would be. In fact, they would be issued by the Treasury Board to departments and they are currently working on that now. They are expecting to issue that out in the coming months.
Senator Marshall: The corporation itself reports to the Minister of Finance?
Mr. McBride: That is correct.
The Chair: Senator Marshall, you raised that last question about reporting to the Minister of Finance. Is it the Department of Finance that oversees your books? You are sitting on over $700 million that you have not disbursed yet. Who keeps on eye on that? Who does your annual auditing and accounting?
Mr. McBride: As an arm's-length Crown, we are responsible for managing ourselves. Obviously we have a high calibre board of directors. I am fortunate with the board that we have. That money is invested according to a treasury policy that is consistent with the government's treasury policy and approved by our board. We are audited by the Auditor General and KPMG. We have a relatively sophisticated treasury function where those things are invested — we have a specific treasury policy — so that money, once appropriated to us, is our fiduciary obligation to manage, invest and maintain.
Senator Marshall: I am speaking from memory. When your chief financial officer was here testifying, my recollection is that the Auditor General does the joint audit with the private sector firms.
Mr. McBride: Correct.
Senator Marshall: I think at the time someone had asked about whether the Auditor General had done her special review or special examination. My recollection is that that has not been done yet, but that it is scheduled for 2015 or 2016 or something.
Mr. McBride: You are quite right. In terms of the financial audit — and we also have an internal audit program — the Auditor General is the auditor. They do that in partnership with KPMG. In our annual report there is a report from the Auditor General that says everything is tickety-boo. There is a process for Crown corporations called special examinations that the Auditor General does on a more cyclical basis. My understanding is that is now a five- to seven- year cycle they do those things on, so we would anticipate that our special exam would come around 2014 or 2015.
Senator Marshall: That was my recollection too.
The Chair: Is that special exam what we have come to call a value-for-money audit, where the Auditor General actually investigates the policy issues?
Mr. McBride: I was CEO of a previous Crown, the Canadian Commercial Corporation, and have gone through a special examination. The mandate of that is much broader than the financial audit. They look at processes, value, risks and the whole gamut. Frankly, it is basically wide open to whatever the Auditor General thinks that the Auditor General would like to, and we welcome that. We have a great relationship with them. It is kind of like they do cyclical audits on a more in-depth basis on ministries and departments, and they do it on a five- to seven-year cycle on Crown corporations.
The Chair: In answer to Senator Marshall, you said the Auditor General is our auditor, but we also have KPMG, which is a private sector audit. If the Auditor General was your auditor, why do you have a private sector auditor?
Mr. McBride: The Financial Administration Act says the Auditor General is your auditor, but the Auditor General can choose, and we can choose to partner the Auditor General with several firms. Some Crowns use just the Auditor General and some Crowns partner up with that. It has worked very well, and both of the audit entities report, come to our audit committee and they both sign the audit statement. It is not like just KPMG does the audit. They are both actually physically on our premises. Some days I wonder whether it is a good thing to have two sets of auditors reviewing my books, but they seem to think it makes for a better result. We have continued that process.
The Chair: This is your board's choice, to have two different auditors?
Mr. McBride: Yes. It is something that we are allowed, and it has worked quite well. It is one of those in-camera discussions that the audit committee would have with the auditors on making choices on those kinds of things. We do not have discretion about whether the Auditor General is our auditor. That is why I meant the Auditor General is our auditor, period. However, there is discretion on whether or not to also engage a private sector firm.
Senator Eggleton: I am interested in couple of things. One, in general, do you see and conduct your role as being reactive, responsive to the call for proposals, or do you also see a proactive role, where you would try to respond to the needs of Canadians?
I am thinking specifically about the needs in our large Canadian cities for overcoming traffic congestion. In Toronto, my city, the Board of Trade estimates it is about a $6-billion cost a year. Obviously, there is a great need here, and the Federation of Canadian Municipalities has identified this as a priority area for municipalities in general. The traffic congestion in our big cities is particularly bad.
You mentioned that there is some interest that you get from municipalities. How much of it will fall into the category of dealing with these big-city traffic congestion problems? Are you able to take a more proactive role in encouraging those kinds of proposals being made?
Mr. McBride: We try to take a proactive approach. We talked about doing the workshops and getting out and talking to people about what makes good P3s and how they can use P3s to deal with those kinds of issues. We are not the only organization that is also helping cities and municipalities with infrastructure issues. I am pleased to say that we are not the only ones that are contributing to people thinking about P3s. We are in Ottawa here, and Ottawa is looking at a P3 to put an LRT system in. We talk to and work with our colleagues at the Department of Transport, who also have responsibilities for dealing with those kinds of things.
Yes, we are proactive, but, at the end of the day, we also have to be sensitive to what municipalities decide are their priorities. We do not dictate to a municipality that you have to do this project and not that one. We will tell them things that we think are good and things that they are interested in, but if a municipal council at the end of the day says this is our priority, it is difficult for us to substitute our judgment about the priority for a big city. We are responsive and keen to work with big cities. To date, we have had more luck with mid-sized cities, but we are getting a significant increase.
With the Federation of Canadian Municipalities, they are being much more proactive in terms of working with us on P3s. I spoke at their conference in Halifax this year. They are looking at ways they can support municipalities and thinking through P3s as well. I am not sure that answered your question.
You can say that it is the nature of the federation. The federal government does not decide what municipalities need but they want to support them in their aspirations. We are not completely at the whim of whatever municipalities decide, either.
Senator Eggleton: I can tell you in my city there is no higher priority than public transit. They are scratching their heads, tearing out their hair, trying to figure out how to fund it, particularly our new mayor.
Mr. McBride: We are looking at public transit projects in Toronto.
Senator Eggleton: You mentioned there are other players in the game, so to speak; you mentioned Transport, but do they have money? In big cities, we are talking about big-ticket items here. They are not small investments. What can you really do to help?
Mr. McBride: As I said, in round three, it has taken us some time. In round three we got applications for $37-billion worth of infrastructure. As you note in my estimates, I have $275 million, which, even if I extract four times leverage, I might do $1 billion to $1.5 billion worth of infrastructure. I am not trying to pretend that all of that $37 billion is solid, viable projects, but I would not sit here and say that the needs for public transit will be solved in Toronto by my fund.
Senator Eggleton: You see your role as to try to spread as much of it around as possible as opposed to tackling big projects.
Mr. McBride: We have had that debate. You can debate the numbers for the subway proposals, which you are talking about in Toronto, but the numbers range from $4 billion to $10 billion. Even if we had that kind of money, it would still take resources from the city and the province to make a project like that work.
Another idea people are looking at is whether there are ways of extracting revenues that have not yet been put to play to deal with some of those kinds of issues. I will give you an example. You may know Dr. Gordon Chong, who is working on these issues in Toronto. He is looking at lots of interesting ways to extract private rents from the developers that will benefit from a subway line being put in along there, because the value of their land will go up.
Senator Eggleton: It is a theory.
Mr. McBride: It is a theory. We would be interested in working with people on those kinds of things.
People in B.C. are looking at that. Can we find ways of not always doing it from general tax revenues? If you take the operating costs of what is charged for public transit in Canada, the reality is that public transit does not even cover all of its operating costs, let alone capital costs. There are good public policy reasons for that, and water treatment, water rates; these are larger debates than my fund, but they are good debates to be had.
Senator Runciman: You talked earlier about the areas that you do not cover. I think you mentioned the justice system and the health care, hospital sector. If a province, for example, wants to build a new correctional facility, it cannot be entertained by your organization?
Mr. McBride: Correct. It is ineligible.
Senator Runciman: As I understand it, projects like libraries, museums and sports facilities can be considered. If you weigh that in terms of societal benefits, I wonder if your board has discussed the issue of mandate and whether your mandate is appropriate in terms of what you wish to achieve. If you have discussed it, has there been any discussion with the minister or government officials with respect to broadening it, perhaps?
Mr. McBride: The decision on what categories are eligible for federal funding is a policy discussion that is quite long-standing and transcends the fund. I am sure you have had the opportunity to meet with colleagues from the Building Canada Fund who have $37 billion of infrastructure, gas tax, all their various funds. These debates around where the federal government is prepared to intervene with federal money brings up issues of federal-provincial relations, constitutional divisions of power, a whole range of issues.
We have talked about it in the sense that the reality in Canada is that provinces were ahead of the federal government on P3s. Provinces were investing in things — in provincial jurisdictions, surprise, surprise — and primarily in the areas of health care, security, and to some degree transportation and light rapid transit. You can imagine the constitutional debates and other issues of the federal government putting money directly into a hospital.
We know in terms of the reality and the challenge of our job, it makes it tougher to have to find P3s outside the areas where they have been traditionally done in Canada. The flip side of that is that maybe it is part of our mandate to broaden the market for P3s and do them in areas where they have not been done before.
We basically take that as policy direction from the government, and we try to design our business plans accordingly.
Senator Runciman: You mentioned the three projects that have been approved. They are not payback opportunities. Theoretically, your fund could be exhausted at some point in the future without any payback element incorporated. Did you see that as the intent of the government when you were established?
Mr. McBride: That is a good question. Our fund was part of the overall Building Canada initiative. The whole Building Canada initiative was to help to deal with the funding challenges that Senator Eggleton just referred to, the scope of the infrastructure deficit matched up with the fiscal circumstances of various levels of government. I think people will recognize that there is a need for the federal government to be providing funds, with two caveats, which I think is different from us. One is that not only should we help build public infrastructure, but also we should help them to think about how to build it better. We are getting better quality, delivered faster, under budget, and we are also being less generous. We are getting more leverage with this money and better infrastructure.
I said that when we look at merit criteria we are looking for opportunities to find revenue sources. However, that is a bit of transcending; should we insist on full cost recovery of water in the country? That is a huge debate that you could probably have Environment Canada here on. To what extent should you have congestion pricing of transportation that can provide revenue sources? Those are some very interesting infrastructure debates. To the extent that those things are possible, I think you would get better infrastructure policy. However, I would not want to say that we are going to change the entire world with our $1.2 billion fund.
The Chair: As a follow-up on that last question by Senator Runciman: Do you have the authority to invest with a view to getting money back into your group?
Mr. McBride: Absolutely.
The Chair: You do have that authority?
Mr. McBride: Absolutely, we do. In fact, we have had examples where we have put that as a condition of our investment, and the result, I could not say it is entirely related to that, but the project has not gone forward. We are actually stepping up the bar on expectations around some of those things, in the same way we will work with people. Senator Eggleton mentioned that it is good theory, and it is good theory; but how do you turn some of these theories into practice? It will require some in-depth thought.
Even in most of our projects, we are encouraging — you always have to use the word "requiring" carefully when you are talking about provinces and municipalities when you are the federal government — them to be stepping up cost recovery, but how are municipalities paying for their share? They are paying for their share by asking their citizens to increase water rates or increase X, Y and Z. There is not enough money left over to pay us back. It is at least putting them on a more sustainable footing going forward.
Senator Peterson: Do you get applications for renewable energy projects?
Mr. McBride: Yes.
Senator Peterson: Have you put any through?
Mr. McBride: We have not announced any yet, and I should step back a bit on what we can do with our fund. In any P3 transaction, a public sector party and a private sector party enter into the contract. Some people thought we would invest on the private sector side, that we would be lenders into those projects because the private sector could not raise capital to fund their portion. The reality is the private sector can raise money, and if it cannot raise the money, you have to wonder about the project. You are undermining the discipline of a P3 if you step in on the private sector side of the transaction. The public policy good is helping the public sector to bring more P3s to market.
On those renewable energy deals or energy deals in general, those are generally underpinned by a power purchase arrangement. You will see the new fee in tariff regimes that are coming in various provinces as they are working those things out, and that is creating all sorts of interest in the private sector. In that sense, the power purchase arrangement is the public sector side. Is there any need for us to facilitate those projects by helping the private sector bring those things to market? The general answer to that is no, with a couple of exceptions.
We have been working with a number of First Nations who want to take an ownership interest in renewable energy projects. In those circumstances, we are considering — we have not yet concluded one of those — being a lender to them to allow them to take an ownership interest in a project like that, for which we would get entirely repaid from the revenues from the power purchase arrangement. That is a bit of a complex transaction, but we received a number of them, and we received about another half dozen of them in round three. It started with hydro facilities, sometimes micro hydro that would take people off diesel. Sometimes now we are looking at wind, but that is a recent change and shift in the market, and, in fact, some of them are in Saskatchewan.
Senator Marshall: I find this very interesting. Are you not concerned you will infringe on the private sector and tip the scales of competitiveness?
Mr. McBride: We must be very careful; it is not something we would leap into. My general assessment is this was not always true — in 2009, going back to the financial crisis when capital markets were seized and there were huge debates about whether you could raise capital. We could talk about what is involved in the capital markets in Canada over that period of time — best in the world in terms of being able to finance and fund P3s. That is why my general answer is I do not think I would. The only time I am even prepared to consider it is if there is a First Nations community after it has already secured the PPA arrangements so that you are not changing the competitive field for the bidding on the power purchase arrangement, but you can help change the ownership structure when they implement.
For example, these deals often come forward where a First Nation partners with a private sector firm and they bid on a PPA. The First Nation interest is generally needed to access the resource, the land and so forth. However, the First Nation has no money to purchase its equity share and ends up in arrangements with the private sector where the private sector lends the money. Their partner lends them the money that they have to pay back from this deal. Sometimes I am concerned that that may not actually produce the best kind of deal for the First Nation community.
Can we participate in ensuring that that First Nation community gets the best deal possible when it is participating in that? There I see a public policy rationale for my participation to make sure the First Nation is not at a disadvantage by dealing with its sophisticated partner where the deal they arrange means the First Nation will never get any money because it is paying back at interest rates that are not fair and on terms that are not fair.
Senator Ringuette: Your colleague last March told us that you operate with roughly 40 employees. Is that still the case?
Mr. McBride: Yes.
Senator Ringuette: Do you still require $12.7 million a year to operate?
Mr. McBride: Correct.
Senator Ringuette: That is over $300,000 per employee. How can you justify that?
Mr. McBride: We have not spent all that money in the first two years. Our first interest has been to move that money forward if we do not need it. It does not go to employee costs, but some of it absolutely does. That money is also to build best practices and intelligence, so we spend money on, for example, considering how best to do P3s and water and waste water. We help clients with analytical capacity on their projects. We have established a roster of experts that our clients can draw down on to help them go through the analytical capacity. We work with provinces on tools, for example, with New Brunswick, which last year created its own P3 agency but had never designed a screen to put a screen through for provincial projects. We partnered with them, partly to help them but partly because we could share that work with other provinces. We have a responsibility as a centre of excellence to do that research.
Senator Ringuette: I understand what you are saying, but I am asking how you can justify the $12.7 million that you have to operate with 40 employees on a yearly basis. How can you justify that cost for the setting up of expertise and so forth? P3 projects have been going around the world for the last 25 years, so we do not need to reinvent the wheel. How can you justify a $12.7 million cost with only 40 employees? That is an average of $300,000 a year per employee. How can you justify that cost?
Mr. McBride: Those costs are not just employee costs. Those are the costs of managing projects.
Senator Ringuette: Do your employees not manage those projects? Is that not the overall task description of your office? What kind of super duper expertise at a super duper cost do you have in your facility to justify such an expenditure?
Mr. McBride: What I was trying to explain was that salary costs are not the only costs of the organization. By taking $12 million, dividing by 40 and saying $300,000 per employee, you are missing other costs. We are an arm's-length Crown. We do not get free Public Works accommodation, but I would say that last year $3 million or $4 million of that went into supporting the development of capacity and expertise. We run training sessions and workshops. We talked about all those kinds of things that we run to try to build awareness, expertise and capacity. It is not just the projects that we are trying to leave behind; we are also trying to leave behind learning and expertise. If you look at what has happened in other countries, they have recognized that you need to build core capacity on these kinds of things.
We also draw in external expertise. Yes, I have the most fantastic 40 staff, but many of these projects are unique and different. We draw in external expertise to help us do due diligence on these types of projects.
Senator Ringuette: How much of your $10 million would be allocated to what you call "external expertise" and I would call "consultants"?
Mr. McBride: I do not have those precise numbers. I would be delighted to send those to you, but I would say last year it would have been in the order of $3 million or $4 million.
Senator Ringuette: So 25 per cent of your budget is allocated to consultants?
Mr. McBride: External expertise, yes.
Senator Ringuette: Could you send all the members of this committee a breakdown of all these costs so that we have a better perspective of what has gone on and what is going on in regard to administration, $1-billion worth of taxpayers' money?
Mr. McBride: I would be delighted, for the last fiscal year, to send you a breakdown of our operating.
Senator Ringuette: Thank you.
The Chair: If you could send that information to the clerk, she will then ensure that every member of the committee receives it.
Mr. McBride: We would be delighted. In fact, it will be in our annual report as well. In our annual report is exactly what the money goes to. We are happy to provide that and maybe talk to the clerk about additional details beyond the breakdown that is in the annual report about where it goes.
Senator Ringuette: Thank you.
You made a few interesting comments. One was about harnessing the incentive of capital markets, encouraging private sector delivery and designing build finance in a competitive process. For example, you have talked about a water treatment PPP project. What was the total cost of that project?
Mr. McBride: To take the one example in Kananaskis, it is a $40-million capital cost with a 15-year operating and maintenance component, so just capital cost would be $40 million, approximately, which we put $9 million into.
Senator Ringuette: I am sorry. Could you speak a little slower and a little louder?
Mr. McBride: I am sorry. The capital cost of that project, the cost of building the facility, would have been $40 million, of which we put in a quarter. It was slightly under $40 million, so we put in $9.9 million of that. That is not the only cost of a facility because, at the end of the day, citizens do not want a facility, they want services. That would mean that they have to operate and maintain that facility for the life of the project. I do not contribute to the operating and maintenance of the facility, so that entire contract with the private sector is for design and for building and for operating and for maintaining, but the province or the municipality has to pay all of the operating and maintaining costs. That is how the contract works, and payments are made over the life of the contract based on performance of the private sector in delivering what they are contractually obligated to deliver.
Senator Ringuette: The capital cost is $40 million. Your group put in $9.9 million.
Mr. McBride: Correct.
Senator Ringuette: How much does the province put in?
Mr. McBride: The province, given that is a provincial project, is entirely accountable for all of the rest money.
Senator Ringuette: So the province puts in $30.1 million.
Mr. McBride: Yes, as well as all of the operating and all of the maintenance — again, the contractual payments on what they bid.
Senator Ringuette: Where is the capital input of the private sector?
Mr. McBride: That is an excellent question. That is on the cash-in side. How does that get financed, and how does that —
Senator Ringuette: No, no. I am asking you specifically what the private sector capital input is into this project.
Mr. McBride: In that project, the private sector, at substantial completion, will have $40 million capital at risk, because they have not received a single payment.
Senator Ringuette: Sir, I am asking you for a third time: What is the capital investment of the private sector in this specific project?
Mr. McBride: It is $40 million.
Senator Ringuette: It is not. You just told us that the total cost is $40 million, and your entity, federal tax dollars money, for $9.9 million, and the province for $30.1 million. What is left in regard to the capital cost and the investment from the private sector?
Mr. McBride: Let us step back a bit. The private sector, when it builds public infrastructure, gets repaid. It does not provide free public infrastructure. When the private sector is putting its money at risk, it is expecting to be repaid.
Senator Ringuette: Sir, I wish you would identify which money at risk the private sector is putting in if the federal government is putting in $9.9 million and the province is putting in $30 million in a $40 million project. Where is the capital investment from the private sector?
Mr. McBride: On day one, when they sign the contract, zero payments are made to the private sector. The private sector needs to go and borrow the money and put the entire money up to build the facility.
Senator Ringuette: That is not different from any kind of infrastructure program, except for time delay and routine progress reports and payments. That is not different. The only issue here whereby you are trying to indicate that is a glorious PPP, private sector investment, is the financing of the time of the construction period, which is probably not even 1 per cent. Give me a break.
Mr. McBride: When you asked what does the province put in, the province does not give them the entire money back at substantial completion. They only get paid back over the life of the asset. This is about risk transfer. You are saying at the day of substantial completion they still have money at risk. Over the life of the 15 years, they will get paid back if they perform.
Senator Ringuette: That is on the operation side.
Mr. McBride: And the capital.
Senator Ringuette: They have not provided any capital. I am sorry, unless I am not getting this thing right.
Mr. McBride: Maybe I can explain again.
The Chair: You may not like the scheme. Mr. McBride is explaining the scheme. If you want to challenge the policy issue, this is not the place. Let us get the facts.
Mr. McBride: Give me a second to talk about the financial structure of that transaction. There are two time periods. One is the time period between the commencement of construction and the day the facility operates, and the other is the time from the day the facility operates to the end of the useful life of the contract. In that first period and during the construction period, the private sector receives zero. At the time of substantial completion, there is a debate about how much long-term financing you need in order to anchor the risk transfer. Even at substantial completion, the private sector will not get all of its capital back. It is not that on that day they get paid back. They get paid back over the life of the contract if they perform. They still have capital at risk over the operating period of that facility. Yes, they have money at risk. If the facility stops operating, or if the floor caves in, their money is at risk. That is substantially different than the payment structure of traditional procurement.
Senator Ringuette: If I understood correctly, using the same example, the $30.1 million from the province has not been disbursed.
Mr. McBride: Yes. In fact, ours has not been disbursed either in that project, because they have not reached substantial completion. In that scenario, the province will not disburse money at substantial completion.
Senator Ringuette: Upon completion of the project, let us say day one of operation.
Mr. McBride: They will not disburse money.
Senator Ringuette: The province will not disburse money. Will your unit disburse money?
Mr. McBride: Depending on what the payment structure will be.
Senator Ringuette: No, we are talking about this specific example.
Mr. McBride: Yes.
Senator Ringuette: You will disburse the $9.9 million?
Mr. McBride: Yes, we would disburse our $9.9 million.
Senator Ringuette: When will the province disburse their $30 million?
Mr. McBride: Over the life of the contract.
The Chair: Which is 15 years?
Mr. McBride: Sometimes they are 25, sometimes 15. I think this one was 15.
Senator Ringuette: You commented that the province will input $30 million of capital cost.
Mr. McBride: Over the life of the project.
Senator Ringuette: Your 25 per cent is not really 25 per cent. It is a lot more than that if you consider the life of the project and your partnership with a province.
Mr. McBride: Or a lot less, because I am only paying 25 per cent of the capital costs and they are paying their 75 per cent of the capital cost, plus 100 per cent of the operating and maintenance costs, plus 100 per cent of the financing costs over the long term, which I do not share in.
Senator Ringuette: No federal project should be supplying financing for a provincial or municipal jurisdiction's operating cost.
Mr. McBride: Correct. That is the policy, and that is why we do not do that, but these transactions are an integrated combination of finance, operating and capital components. However, if you looked at the nominal amount of the payments made over the life of this project, my percentage would be much less than 25 per cent.
The Chair: I will put you on round two.
Senator Ringuette: Yes, please.
Senator Neufeld: Thank you for being here. As you are aware, British Columbia embarked on PPPs a long time ago. In fact, a ministry that I was minister of received an award in 2003 for one of the first PPPs in British Columbia. It was a road and bridge project. I am quite in favour of them. We have done hospitals and all kinds of things in B.C. They have been useful in getting the private sector involved, where decisions are made more quickly and faster on the spot than a government can, regardless of whether it is federal or provincial. That was always the benefit. You are nodding your head, so I assume you agree with me that that is one of the good parts about a PPP. Is that correct?
Mr. McBride: Absolutely. You leave them the freedom to get the job done.
Senator Neufeld: I do not want to extend the water plant too much, but did you say 25 or 15 years?
Mr. McBride: In this particular example Kananaskis is 15 years, but they can be anywhere from 15 to 25 on these kinds of things.
Senator Neufeld: At the end of that 25, it would revert totally to the province then, right?
Mr. McBride: Correct.
Senator Neufeld: The private sector is out of it, they have received their revenue on investment and operating it and those kinds of things.
Mr. McBride: We have these hand-back provisions where they have to hand it back in good working order and well maintained and the rest of those things.
Senator Neufeld: On the RCMP project in British Columbia, that would have been a federal-only project?
Mr. McBride: Correct.
Senator Neufeld: The justice ministry actually worked through PPP Canada to have that project built, operated and maintained over a certain period of time; is that correct?
Mr. McBride: Correct, 25 years.
Senator Neufeld: In talking about PPPs within the federal government, I am glad to see that they have taken the step that says anything over $100 million. In B.C. we have anything other $10 million has to go through that screening process. Understandably it is a lot smaller because the money is a lot different.
However, under the RCMP project, or any other project, do you see that the PPP will be doing almost all of the work for the federal government? I guess if it is federal only, the project will be operation and maintenance. The difference is where, if you are working with a province, a municipality or a First Nation, it is not maintaining and operating.
Mr. McBride: In the case of federal projects, the federal government is the procurer itself of the asset, whereas in a provincial or municipal project we are not the procurer, we are just funding that and helping them oversee their procurement process to ensure it meets our criteria.
In the case of federal projects, that is an ongoing discussion, as we develop as an organization, about what role we will increasingly play in federal projects. The RCMP project was well in train before we were even created, so kudos to them that there have been some pioneers at the federal level that have embraced the concept in advance.
In the CSE project, for example, we did what we would call a comprehensive assessment to give confidence to ministers that it had been reviewed and had been well done. It is similar to Partnerships British Columbia, which has a board, and projects go through them to be reviewed. We see ourselves, over time, playing a Partnerships British Columbia role, with respect to federal ministries.
Senator Neufeld: Part of the difficulty I am having, though, is when you review a project that has gone through a provincial process, let us say with Partnerships British Columbia, as being a viable project, you would think all of the papers have been lifted up and everyone has looked at everything, and this is the best way to go forward. If they come to you with that project and say they want to put that in and your call, you will then take the project and do all of that stuff again, I assume, or will you actually just take that project and say Partnerships British Columbia has looked at this, there are a couple of things — and maybe tell me what they are — that we have to look at to carry out our duties. What would they actually be? I hate to see people reviewing and reviewing, and that is where it piles up and where much of the money goes.
Mr. McBride: I wish I got applications at that level of development, but that is not the case. Let us take an example of a B.C. project that would be submitted by the province.
Just as a bit of a segue there, in round two we got 121 applications, but only 9 from all provinces. We will screen in all nine, because we have a better relationship with provinces so we do not end up in those situations.
However, we follow that project along through its business case process. We are working not in sequence with B.C., but in parallel with them as they are going through. You are familiar with the B.C. process; it would be on someone's capital plan, and they would have to produce what they would call their P3 business case. Working through that P3 business case, they would be in parallel working through their approval process and we would be using the same P3 business case to do our analysis.
Different provinces have different approaches to different issues in their business cases, so we have to reconcile some of those things. The methodology that B.C. uses for value-for-money analysis is different from what Ontario uses. The levels of principle are the same, but we might do sensitivity analysis around their value-for-money work in order to give our board a sense of how those parameters might change, but we are working those things in parallel. We will have a B.C. project coming shortly, fingers crossed. I think our board considered it two weeks after it had been considered by the Treasury Board in B.C.
Senator Neufeld: How do you do it in merit then? How do you decide? I appreciate Ontario does it differently from us. We will have some basic things exactly the same but there will be some differences. How do you decide in merit where those projects happen? First year it was Winnipeg, the Maritimes and Quebec.
Mr. McBride: Right.
Senator Neufeld: There was nothing west of Winnipeg. Now there are some other projects that are coming out in the second round that will be west of Winnipeg. How do you decide on merit? It is interesting to me to figure out how that actually is done.
Mr. McBride: It is not simple.
Senator Neufeld: No, I would not think it is.
Mr. McBride: We do it in two stages. I talked about the screening process, where we look at eligibility, viability, and then at factors like market development. Take a B.C. project. If B.C. was going to say, "We have a road project," and you say, "You have done South Fraser Perimeter; you have done Sea-to-Sky," will I really leave a learning behind with B.C. from doing a project like that? However, they have not done something like this. Market development is a factor.
Is there a different kind of model that they might be pursuing? Maybe they are finding new revenue opportunities that we could support. It is a bit of a truth for provincial projects for people who are well advanced, they have a bit of a higher bar to jump over in terms of market development criteria.
The big challenge in B.C. is frankly not so much at the provincial level, because it is the home of P3s in Canada. We have more to learn from B.C. than they have to learn from us, but we work with them to try to get municipalities engaged in P3s.
You would be familiar with Victoria's waste water treatment facilities and the debate that has been going on about whether they could use a P3 there. That would be a very interesting type of project for us to consider on those kinds of things, or other municipalities, or different types of projects. Again, unfortunately, I am not at liberty to talk about it, but B.C. is looking at new areas and new things to take its model to. You can work with the advanced jurisdictions to be leaders and share those learnings and lessons with other jurisdictions as you take those kinds of examples across the country.
Senator Neufeld: I have one last question, about renewable power and power purchase agreements. I will not go through what we do in B.C., but First Nations in many cases — in fact, in almost all cases — have partnerships or have gone out on their own and done power purchase agreements with BC Hydro. You say that you are looking at it — and I am not talking about B.C. only but across Canada — because some First Nations maybe never got treated fairly and you could step in and correct that. I am not paraphrasing you exactly, but that is what you left me with. After the deal is struck between the private sector and the First Nations — and I will talk about BC Hydro in this case — for a power purchase agreement for usually 30 years or sometimes 40 years, Partnerships British Columbia would step in in some financial manner and not disrupt the process that is taking place. Please explain that a bit more to me, where you are coming from. That sounds difficult for me to understand.
Mr. McBride: Right.
Senator Neufeld: First Nations, by the way, at least where I come from, have very good advice, in fact, some of the best and most expensive advice that I know of, when dealing with those kinds of things. It is not just power purchase, but pipelines and all those kinds of things. Please help me here.
Mr. McBride: Sure. I have probably gone too far on that, because we have not actually come to a conclusion, but we do get applications and we do look at them in those kinds of circumstances.
Senator Neufeld: You said after.
Mr. McBride: We would not look at something until there was already a PPA arrangement in place. We are not intervening pre-power purchase arrangement. Post-power purchase arrangement, there are still the issues of what will happen in that structure of the special-purpose vehicle, the project company that is put together to build, say, a small hydro or medium-sized hydro facility in B.C. to deliver on that kind of thing. That requires an equity structure between the private sector partner and the First Nations partner. Sometimes we get applications from First Nations communities for us to help them fund their equity interest in that special-purpose vehicle.
All I am saying is that we have looked at that. If it were the private sector company coming to us, saying could we lend them the money for their equity in an arrangement like that, I would tell them no. All I was trying to say is that we have not completely closed the door to First Nations, but we have not done any of those yet.
Our deal would be with the First Nation community, not as a party to the special-purpose vehicle that is constructed. It would be a question of whether it makes any sense for us to help them pay for their equity interest. You are quite right; many First Nations do not need any help. However, that is not true for all. We have not closed the door.
Senator Neufeld: I appreciate that. I am just saying you are walking on pretty thin ice and you are starting to get involved in things such as: We will just grant the First Nations money and they can go out and do these things. When you start talking that way, to me it leaves what I read a mandate was, but I leave it at that.
Mr. McBride: It is something that we are cautious about, and we would never give them the money. It would have to be repaid. I could not imagine recommending one that would not be repaid, and not repaid with interest, with interest that would be commensurate with the private sector.
Senator Finley: Thanks to the enthusiasm of my colleagues and the comprehensiveness of the answers of Mr. McBride, I was about to say all of my questions had been answered, until Senator Ringuette started on her question path.
I may be beating a dead horse here, but I, like she, am a little confused. Perhaps you can help me walk through this.
We talked about a $40 million project, which has been approved. This is all announced, so all the structures and everything, presumably, are in place. There is $9.9 million coming from PPP and $30.1 million. The $30.1 million undertaking from the province, is that 100 per cent capital or does that include the ongoing and future operating costs?
Mr. McBride: That would be the capital component.
Senator Finley: That is purely capital. Okay.
In answer to my colleague Senator Neufeld's questions, you talked about things like special-purpose vehicles. Does this $40 million deal include a special-purpose vehicle or a special-project vehicle? It does. You are nodding your head.
Mr. McBride: Yes, on the private-sector side.
Senator Finley: That is what I am trying to get at. There is $9.9 million of your money at substantial completion. Who contracts and pays for the construction of the facility if you do not and the province does not? Is it this special- project vehicle? Is that who does it?
Mr. McBride: In that circumstance, the province would issue an RFP to enter into a contract with a private sector entity to design, build, finance, operate and maintain a waste water treatment plant. The private sector, when they come back to respond to that bidding opportunity, almost always comes as a consortium. They come as a consortium and it would include, if it was a PCL, an operator like an EPCOR or a Corex. They would come together in a joint venture. That joint venture is a special-purpose vehicle.
Senator Finley: Would that include a banking facility?
Mr. McBride: They would be equity, and the lenders would lend to that entity. It is a project finance structure where the lenders would lend money to that vehicle, but they would not be equity. Obviously, the lenders would not have an equity interest in that. It is a fairly complex structure. You could have equity investors that own a special-purpose vehicle, and they could have contracts with various entities all behind that, but they will bid. There would be lenders in with the equity, and there would be security packages and arrangements between the various participants that are in that that would allow all of that to work.
It is a fairly complex structure that the private sector has to put together to make it all work. However, that turns into an agreement with Kananaskis water company, and it would sign a contract with the Province of Alberta to design, build, operate, finance and maintain that facility over a 25-year period, according to performance standards. What do they have to do, and, more important, how do they get paid? Payment structures vary in P3s, but you try to design a payment structure that does two things simultaneously. You want to minimize the financing costs because you want to reduce the cost, but you want to make sure that you have enough of their money at risk that if they, frankly, flake, you have their money. Not only do you have that as your absolute backstop, but you have that to re-procure, you also have the disciplines of the lenders who do not get repaid. If you think the federal government or a province is reviewing what is going on inside that company and whether they are delivering, their lenders and lawyers are exercising due diligence on those things, so we get all of that capital market discipline in that kind of project.
The payment structure generally is that some payments are made at substantial completion. These vary across projects. Part of the debate is how much risk has been extinguished at substantial completion. You are trying to balance whether it is worth having 100 per cent long-term finance over the life — you will pay more for that long-term finance — versus what risk has been extinguished.
In Ontario, they have set a policy that they will pay no payments until substantial completion, and, depending on the rates, you try to optimize the financial structure to ensure optimal risk transfer at minimum. Generally, you are paying 40 to 50 per cent at substantial completion of the capital costs. You have paid none of the operating.
Over that time period of the facility, you pay more of that capital off over time. Think of it as your house, that you get to stop paying the mortgage if the roof leaks. You do not have to pay anything until the house is built. However, if the furnace goes or the foundation cracks, you get to deduct money off of your mortgage.
The builder has to make sure that that place works for 25 years. Now he has the incentive to put not the five-year shingles on the roof but the 25-year shingles, or he has to decide. If the shingles start to leak after 10 years, he has to think about that, and he has to replace it, same with the air conditioning system and the foundation sinks, all those kinds of things.
If there is a cost overrun, that is his problem, because you have already contracted with what you are going to pay.
Senator Finley: Does the opposite also hold true? You said at one point that one of your projects came in a year early and $20 million under budget. Do they get the $20 million?
Mr. McBride: The year early means you get the facility, but you start paying earlier. On $20 million, the competitive process grinds out the best price. When we say it came in under budget, it came in under what was expected that they would have to pay for this.
Senator Finley: There was a difference between what you allocated to the project as a whole and what you actually negotiated as a deal.
Mr. McBride: It is what the competitive process produced in terms of a result.
Senator Finley: Whatever, but you or the public sector, if you like, gets to retain the $20 million, not the private sector vehicle.
On the private sector vehicle, then, you mentioned that you have their money. I am not quite sure how that works, because they make a contract with you. They will not get paid until it is substantially complete, which could be several years down the pike. In the meantime, they obviously have to make a banking facility whereby they will borrow money to construct the facility, pay people, buy materials, design — whatever they have to do with this.
What happens if they do fail at some point during that process? If the agreement that they have signed with you is unsustainable and they just stop, you said you had their money, but where is their money? I do not understand that.
Mr. McBride: What have you paid them? You have paid them zero. They are in default and you have no money in.
Senator Finley: Is that what you mean when you say you have got their money?
Mr. McBride: They have put their money into this thing, and this asset is still yours.
Senator Finley: I just wanted to understand.
Mr. McBride: What actually happens, if there is a default, obviously, the lenders have a right to step in and remedy the default and so forth, in terms of remedy on default.
However, it is like when you call someone to repair something for you. You have a contractor coming to your house to build a deck. Would you prefer paying them before or after they have built the deck?
Senator Finley: I appreciate the response you have given. I am just trying to establish in my head — perhaps Senator Ringuette will have future questions on this — precisely what that sort of corporate structure was of public-private partnership. I think there is a clear belief on the part of people that, for the most part, P3 means 50 per cent private money and 50 per cent public money into the mix.
Mr. McBride: Right.
Senator Finley: I think that is where the senator was coming from.
Mr. McBride: That is a bit of a misnomer. A better term for it is "performance-based contracting." It is a contractual relationship. It is a bit of a challenge with the word "public-private partnership," because people use it in all different contexts and different ways. We are talking about a contractual legal arrangement between the private sector and the public sector on either side of a contract where both have obligations. It is a different type of contractual structure and different types of payment structures that transfer more risk to the private sector, and they backstop absorbing that type of risk by putting their own money at risk. You get that kind of due diligence, and that gets you better performance and better innovation, because they have whole life cycle responsibilities, so they have to think about the whole life cycle, all of those kinds of things.
Senator Finley: I think I have it now.
As you have been involved in this for several years, a relatively new undertaking at the federal level, you must have looked, I would imagine, or you continue to look at best practices on an international or a global scale.
For my reference and perhaps for some research that I may want to do, which federal or national jurisdiction in the world, as opposed to municipal or provincial, would you say leads in terms of best practices? Where would one go to look?
Mr. McBride: Every country has adapted to its own circumstances, but the whole private finance initiative started in the U.K in the early to mid-1990s with what they would call their PFI, Private Finance Initiative out of the U.K. treasury. They have the longest track record and the biggest history of it.
European transactions and structures are much more bank financed with monoline insurance wraps. The structure of their transactions is different, and of course they are more of a unitary state so they do not even have the jurisdictional issues that we do. In terms of a federation, Australia is quite advanced, less so at the federal level, both New South Wales and Victoria, with Partnerships Victoria being a leading organization. It is true in a variety of the European countries that some of them are specialized more in sectoral areas. The Spanish have a track record, and it is truer in Europe, of concession-based toll roads. If you travel in Europe, you get to pay toll roads.
Senator Finley: I have just been there. I know.
Mr. McBride: Those are concession-based ones where the general taxpayer is cut completely out in terms of those kinds of models. Different countries have produced different types of models generally within those kinds of rubrics. France has done a range of those kinds of things.
Sometimes I worry a bit about the European model, because you will see things with P3 where, in the past, in the 1980s P3 models, efforts were to move capital expenditures off the balance sheet. A discipline we have in Canada is that they are on-balance sheet transactions. There are still off-balance sheet transactions mostly in Europe, sometimes done for financing reasons as much as for risk transfer.
If you were going to visit Australia and the U.K., New Zealand has just started a program. They have just done their first correctional facility. Those are some interesting models as well.
Senator Finley: Maybe we will get them to teach us how to build some prisons. Thank you.
Senator Dickson: Thank you for an excellent presentation. I want you to know from the outset that I am supportive of your organization and P3 generally, but it does not fit all business cases, as you were suggesting. I hail from the Maritimes, where we have had schools and the P.E.I.-New Brunswick bridge, as you are aware. That is an excellent model. We have a toll road, as Senator Ringuette knows, in New Brunswick. It is too bad they had to take the toll off. We have a correctional facility in Nova Scotia, and on and on.
I am particularly interested in something Senator Marshall mentioned. The Treasury Board directive is that all projects over $100 million are to be vetted through you as to whether or not private finance is a suitable model to be examined for the particular project. Who does the evaluation? Could you give us some background on that?
Mr. McBride: It is a good question. The government has decided — it is actually a fairly standard thing, and New Brunswick has put it in place, and B.C. has had it in place for many years — that we should do that for larger sized projects, so they picked a $100-million threshold.
Senator Dickson: How many have you done?
Mr. McBride: The guideline has not actually been formally issued by the Treasury Board.
Senator Dickson: What will your role be?
Mr. McBride: What would I like my role to be? The first responsibility for assessing capital projects will lie with departments.
Senator Dickson: I am sorry to interrupt, but coming back to what Senator Neufeld said, instead of layers of checks and balances, will you come in right at the beginning? I am looking at the corporate objects. Should there not just be a seventh corporate object which says projects over $100 million have to be vetted through?
Mr. McBride: There is a corporate object that says to identify federal P3 opportunities, which is really what this is, subject to criteria to be issued by the Treasury Board.
Senator Dickson: We are waiting for more paper.
Mr. McBride: We are waiting for the criteria to be issued by the Treasury Board. The government has formally signalled that it will operationalize that part of our mandate. It has said that and has already given some parameters to what those criteria will be by saying it will be the $100 million. I interpret that to mean that the Treasury Board will issue criteria because the government has formally said that in its budget, but there is a process going from budget to a Treasury Board guideline to operationalize that. I would expect that federal departments would want to come and seek our advice. There will obviously be a debate about how mandatory that requirement will be. I would also expect that, prior to Treasury Board consideration of projects, the Treasury Board ministers will also want our advice, similar to, I would expect, that we should and are looking to what has worked successfully in Alberta, B.C. and Ontario for their P3 screens. I think that is what people are being guided by.
Senator Dickson: I am pleased to know that the federal government is moving in that direction, and hopefully you will have a lead role there. Considering the infrastructure deficit in Canada, it is vital that there be as much leverage as possible. Regrettably, someone has to pay at the end. We may have to look at the new bridge in Montreal. Will that be considered as a potential private finance deal, or can you comment on it? Is it too soon?
Mr. McBride: All I can do is repeat what the minister has already said. He is looking at a P3. Everyone knows it will be paid for. Either someone is paying tolls or not paying tolls and it is funded somewhere else. That I am sure will be a large debate as well.
The Chair: We are out of time, but two senators have indicated a desire to ask follow-up questions.
Senator Ringuette: I want to go back to the water treatment project. At what time does Kananaskis become the owner of the facility?
Mr. McBride: It is always a public sector asset.
Senator Ringuette: At what time are they the owners of the facility? Is it at day one of operation, or is it after 20 years of the contract?
Mr. McBride: It reverts to full control to the public sector at the end of the concession period, which will be 15 years.
Senator Ringuette: They pay capital and operating costs and a huge interest fee — the private sector interest rate for capital is a lot higher than government bonds — over 20 years, and they pay all that before becoming the owner. If ever something happened to the entity that is to build and operate for 15 years, such as another project that causes that facility to go bankrupt, where does the capital that that water company has invested for 10 years go? They have no ownership whatsoever until the end of the contract. Where is the risk? Where lies the risk?
Mr. McBride: You used the word "ownership." That is why I mentioned about ownership actually starting. If they go bankrupt, they do not get to walk away with it. They do not own the water facility. They have a contract.
Senator Ringuette: Who owns it? Is it the bank? Does the water company have to buy the facility again?
Mr. McBride: The public sector owns it. You are mistaking ownership with a contractual responsibility to design, build, operate and finance. They have a contractual responsibility to provide services to the province.
Senator Ringuette: Sir, my first question on that issue was about when the assets are in the ownership of the water company, and you said at the end of the contract, which was 15 years.
Mr. McBride: What I said was that all of it reverts. You are asking about what happens in the case of default. Do they have ownership rights in the case of default? Actually, ownership never transfers to them.
Senator Ringuette: They pay the capital cost plus interest plus operation for a facility that will never belong to them?
Mr. McBride: Correct.
Senator Ringuette: Well, kudos to the private sector.
Mr. McBride: They would do that for a 15-year contract to operate and get paid. If they do not deliver the services, you are right that they are out. They do not get the facility.
Senator Ringuette: You are telling us that even after 15 years of the province paying for capital cost plus operating costs, they will never own that facility?
Mr. McBride: The province will never own? The province always has rights to the facility.
Senator Ringuette: What are those rights? I asked you when they own, and you said only at the end. There is a lot of flip- flopping.
Mr. McBride: It is a contractual arrangement.
The Chair: Do you want to try? It is the contract that takes away some of the ownership rights.
Mr. McBride: They have a contractual obligation to provide services. It is not about ownership of the facility. If they stop providing those services, they are in default of their contract. If they are in default of their contract, then you follow the default provisions in the contract. It is never their asset to walk away with. They have no right to do that. They would be in default on their contract. We could absolutely go into a much more detailed conversation about lender rights in the case of default and what happens in the various circumstances under these kinds of things, but it is not like it would ever be a situation where the citizens of Kananaskis would be denied their water. If they are bankrupt and stop providing services, then the lenders have rights to step in and continue to provide those services. If the lenders do not step in and provide those services, then the facility would revert to the public sector for them to provide those services, and you will get that facility back in the way it was without having paid the entire capital cost of the project because you have only paid that off over the life of the project. When I say their money is at risk, they will have lost their money if they go bankrupt.
Senator Ringuette: To clarify, in your first statement, you said that Kananaskis will be the owner at the end of the contract, and then you said, no, they will not be. I am asking my first question again. When will they become owners of that facility? No, they will not be.
The Chair: We are well over our time. A number of other senators have other obligations. Is there something more you can put into writing?
Mr. McBride: Why do I not do that to explain?
The Chair: We will circulate that to everyone.
Mr. McBride: It is the term "ownership." The legal rights and obligations in these contracts are quite complicated, and "ownership" is an over-simplifying term in this context.
The Chair: We had your group here in the spring. We felt we did not have enough time to get into detail. We have had lots of time to get into detail at this meeting, and we thank you for getting into that detail with us to help us understand your organization, Mr. McBride. Since it is a fledgling, third-year organization, we will be watching you closely.
Mr. McBride: I would be disappointed if I did not get invited back.
The Chair: Thank you very much, and this meeting is now concluded.
(The committee adjourned.)