Proceedings of the Standing Senate Committee on
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.
The Chair: Good morning ladies and gentlemen, I call this meeting
of the Standing Senate Committee on National Finance to order.
This morning, we will be continuing our study on the Main Estimates for
the 2011-12 fiscal year, which was referred to our committee.
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
Mr. McBride, you have introductory remarks, and we welcome you.
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Senator Marshall: I find this very interesting. Are you not
concerned you will infringe on the private sector and tip the scales of
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
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
Mr. McBride: Correct.
Senator Ringuette: That is over $300,000 per employee. How can you
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
The Chair: Thank you very much, and this meeting is now concluded.