STANDING COMMITTEE ON PUBLIC ACCOUNTS
Mr. John Holm
MR. CHAIRMAN: We are just slightly over time, so maybe we can get started. My name is John Holm, and I am the Chairman for today's meeting. I would ask members of the committee to please introduce themselves, for our guests, and then we will introduce our guests and get on with the meeting.
[The committee members introduced themselves.]
MR. CHAIRMAN: Our guests this morning: we have Mr. Greg Lusk, who is the Executive Director of Procurement; we have Mr. Eric Schibler, a partner with KPMG; and we have Mr. Bob Abbott, Director of Operations, Priorities and Planning Secretariat. We are still waiting for Mr. Al MacRae, from the Department of Transportation and Public Works. With those brief openings, unless anybody has anything else, I would like to turn the floor over to our guests, and ask if they have any opening statements that they would like to make. Maybe we could begin with Mr. Lusk.
MR. GREG LUSK: Good morning. Actually, I don't have much in the way of a statement. I am just very pleased to be here, and I would be delighted to answer any questions you may have.
MR. CHAIRMAN: Mr. Schibler.
MR. ERIC SCHIBLER: Good morning. I don't have any opening statement, this is a fairly new process to me, but I am happy to answer any questions anybody has concerning our report.
MR. CHAIRMAN: Mr. Abbott, do you have any comments that you would like to make at the beginning?
MR. ROBERT ABBOTT: The same comments as my colleagues to the right, I am just here to answer questions and to be as helpful as possible to the committee.
MR. CHAIRMAN: Mr. Al MacRae.
MR. AL MACRAE: The same. I am pleased to be here and answer anything I can.
MR. CHAIRMAN: We will turn the floor over to our questioners. Welcome, Mr. Gaudet, member of the Liberal caucus as well. We will begin our questioning with the Liberal caucus, 20 minute rounds, first time. Who would like to begin for the Liberal caucus? Mr. MacKinnon.
MR. RUSSELL MACKINNON: Thank you, gentlemen, for appearing here today. My first question would be with regard to the P3 procurement policy as opposed to the traditional methods of financing the construction of schools. In your analysis, were you able to depict any significant advantages of this process versus the traditional methodology that was used by the Department of Education and/or Finance?
MR. CHAIRMAN: And the question is directed to?
MR. MACKINNON: I would imagine a representative from KPMG . . .
MR. CHAIRMAN: Mr. Schibler.
MR. SCHIBLER: Just give me a minute, I will try to refer you to a spot in our report. We responded to that, as one of the first study questions, what the potential benefits were, and we identified seven potential benefits. One was an ability to enhance government's capacity to develop an integrated solution to complex problems. It also provided an ability to facilitate creative or innovative approaches to delivering large projects. There is an opportunity to reduce costs in implementing the project, as well as reducing the time for that implementation. You do, if it is done properly, obtain risk transfer to the private sector, and there is the potential to attract somewhat larger, more sophisticated bidders to the project, which should add to competition, if done properly. I guess, as a last benefit, you do obtain, I think, some additional skills and experience, particularly in, perhaps, some of the ways in which large projects are managed and delivered. Those were the seven areas that we felt a P3 project could benefit a government body.
MR. MACKINNON: Mr. Schibler, the most recent round of school procurement, did it meet the criteria that was required to justify the use of the P3 methodology?
MR. SCHIBLER: I think there were certain advantages obtained by the recent round of 31 schools. Certainly, the ability for the government to carry out a project, in a short period of time, was one advantage from that. I think there were two other advantages as well, you ended up with a fixed price for design-construct, and that speaks to an issue, that whether you are in government or otherwise, when you are developing projects, of who is responsible when things go awry between the design stage and the construction stage. That was also seen as a benefit in carrying out these P3 schools.
MR. MACKINNON: I noticed in the context upon which your report was prepared, it didn't specifically focus on the value-for-dollar aspect, that you may be well aware, is the purpose of our Public Accounts Committee. My attention would be focused on the issue of P3 and what improvements would you suggest could be made to strengthen this process?
MR. SCHIBLER: I guess the main benefit would have been to have taken the information that was at hand and developed a public sector comparator, so you can make a comparison between what the private sector is offering and what you would expect that you could deliver under a more traditional government procurement. There were elements in the two projects that we did examine that had information that was used by the government departments, in judging whether they felt they were getting value or not, but in neither project was it carried through at the end to definitively say whether in fact there was value in terms of dollars, I guess, cost benefit analysis, if you want to use that word, versus what the private sector had offered.
MR. MACKINNON: The argument has been used by government that the P3 method of school construction is a good method versus traditional because we are able to fast track a lot of school construction. In terms of large school construction projects, did you examine the analysis of that?
MR. SCHIBLER: We did interview quite a number of people in various departments of the government. We did speak with gentlemen from Public Works who were responsible for that and I think it was their honest belief that if they had been requested to build 31 schools in the period of time that was allowed, they would not have had the resources, nor even if they were given financial resources to hire resources, would they have necessarily been able to do it in the same time-frame as the private sector. It is consistent with what we have seen in other projects.
MR. MACKINNON: In the final analysis would you suggest that the advantages outweigh the disadvantages compared to the traditional methodology of capital school construction?
MR. SCHIBLER: I think it depends on the project. I don't think you can say categorically P3 is a better process than the traditional process. It all depends on the type of project and it tends to lend itself more to larger and complex projects than it does to smaller projects.
MR. MACKINNON: Mr. Chairman, perhaps I could turn my remaining time over to my colleague.
MR. CHAIRMAN: Mr. Gaudet.
MR. WAYNE GAUDET: Mr. Chairman, I too want to welcome this group of people to the Public Accounts Committee this morning. I guess the whole concept around P3, especially in this Chamber and across this province, is that there has been many questions raised as to whether or not the province should go and deliver these schools with the public-private partnership. I recall having gone to the department with one of the first questions that I had raised with staff at that time. Looking at the requests that were being received by the different school boards from around the province, and at the same time the expectations from those boards that government would be acting and delivering these much needed schools that staff, students, parents and these communities had been waiting for such a long time, that P3 was probably the only way of actually delivering these schools at this time.
Looking at your report you indicated that through this private-public partnership it certainly provides some significant benefits to Nova Scotia. I guess my question would be, technically if you could maybe elaborate a little bit on what you meant by these significant benefits because the people who I have been hearing from, those who are opposed to the P3 process, have been very critical. At the same time when I see such a statement, someone either doesn't have all the right information or at the same time maybe there are benefits. So I guess my first question would be, could you elaborate a little bit for the committee this morning on what significant benefits there would be going with a P3 procurement policy?
MR. SCHIBLER: I think I answered earlier the seven areas where we felt a government could receive benefit. I could perhaps take a look at those. If I was to try to relate the P3 schools, the 31 schools - I did not look at the original eight, we were just looking at what was most recent, so I am not commenting on those - I would say that certainly reducing time to implement the project was a benefit as a result of that and I think it probably could be argued that there were some creative and innovative approaches used in delivering those bundle of schools.
The fact that you bundle them certainly allowed for some synergy. In terms of looking at benefits, when you are looking at the cost benefit side of things, there are really three reasons why you get cost reductions. One is synergy and that is where the designer works with the construction contractor and they try to develop something that is going to be less costly to produce and you do get economies of scale. I think this is where you probably would
have achieved it with the P3 schools or that would be a benefit of bundling schools. In other words, you are building a number at the same time. If you have one group that is doing multiple schools, they should be able to generate economies of scale.
The other area is life-cycle costs when you look at a project over the life of the project and you are looking for some value there. You want to have a school in 20 years that, if you do decide to purchase it, is a quality facility; it isn't a facility that has inherent problems with it. So if the developer is on the hook essentially at the end of 20 years, they should be motivated to look at ensuring that the quality of the school in 20 years time is the best that it can be. I think those were three areas where in the P3 schools, there were savings generated. How they reflected back to the government is another issue. The department had benchmarks which they used as a guide in making their decisions, but there was no overall development of a comparator that could provide that baseline against which to measure the actual tender. They certainly did transfer risks to the project proponent.
I am not sure about attracting larger and more sophisticated bidders. There were a number of people who had been involved with the original and they continued and formed consortiums. So I think it helped them in terms of developing some expertise in trying to develop projects like this. Certainly I know of one group that have looked at projects outside the province. I don't know that they have completed any, or in fact tendered on any, and I think with the technology side of things there were some additional skills brought to bear. So in varying degrees I would say that the schools tried to capture some of the benefits, I am not sure that they necessarily captured them fully, from the government's value perspective.
MR. GAUDET: I guess probably the question that most Nova Scotians are asking, and have asked, are taxpayers in Nova Scotia getting a good deal from these P3 projects? How would you respond to that?
MR. SCHIBLER: As we said in our report, when we viewed the material that was available and looked at it, we were not able to come up with an opinion as to value. We talked to a wide variety of people and tried to make sure that we saw all of the reports that were available. I think in the case of the highway certainly the decision process initially was predicated on a fairly significant saving and reports had been done by qualified people, consultants, to try to determine what the benefit might be, so I think that there was, certainly the anticipation of that benefit in going ahead with the road in those circumstances made some kind of sense.
I didn't necessarily see that kind of screening process in the initial schools and there was a report done for the Department of Education by a very credible estimator in terms of what the benchmark cost per square foot was, and I think those flowed through to their decision-making process. There wasn't a report that was prepared that would define what the financial expectations were in terms of savings in total. They were certainly done on the cost-per-square-foot basis and also in terms of looking at what the operating costs were, although
there were issues in that that made it difficult for us to determine the issue with respect to value.
So I think, as I said, there were elements in both of these projects - and some done better than others - that had they been carried through at the end to provide a report that showed a comparator, then I think we could answer that question but, unfortunately that wasn't done.
MR. CHAIRMAN: A little over two minutes left.
MR. GAUDET: A final question. We understand when this government was elected they certainly wanted to find out whether or not they should continue to finance new school projects through the P3 process. Currently, before government they have 17 projects, 16 of them which were announced roughly about a year ago. I guess from this review, government was waiting to hear from your firm what type of recommendations would be coming forward. Should we proceed financing these 17 new schools that are currently waiting to be announced, to be built through this process, or should we go back to the traditional method? My question would be, what would you recommend to this government as far as which way they should consider delivering these much-needed schools?
MR. SCHIBLER: I guess what I would like to clarify is that public-private partnerships don't necessarily have to have a financing component to it. We tried to outline that in our report in preparing a table that showed the varying degrees of private-sector involvement in a project. For instance, you would look at it, and I guess the three simple examples would be a "design-build", where you encourage the private sector to take on the risks associated with that in the construction of a project; you could also include the "design-build-operate" and put them in terms of their responsibility, make them responsible for the capital costs of the facility and a certain level of quality at periods of time; and the third is to actually have them own the school and finance it.
In the first two options, they wouldn't necessarily be financed by the private sector and there are savings, and I think it has been demonstrated in the P3 schools that there were savings certainly in time. I would suggest that in the financing side, at least in the P3 schools, the financing costs as we understand it in looking at the reports, were slightly more costly with the use of the private sector, but not significantly so. Essentially what they are financing is the government's cash flow in any event.
I would look at how to get a more financially competitive result from the private sector. I mean that by suggesting that, with some changes to the process, you have the private sector tender on the cost if the government owned it. Then you could use an option of putting it back to the private sector in 20 years so that they still will be on the hook for quality in that 20 year period or 10 or 15 or 30 years, whatever period you want, and see what kind of value you get in a tender process of that nature.
I think one of the things you have to use in P3 is you have to make sure you are getting a quality product, and you have to judge everybody fairly on that. I think what you really want to do is find out who is going to give you the best price for that quality.
MR. CHAIRMAN: On that note, I think we are starting to intrude on the New Democratic Party's time, so we will start the NDP at 8:26 a.m
[8:26 a.m. Mr. David Morse took the Chair.]
The honourable member for Halifax Needham.
MS. MAUREEN MACDONALD: I, too, would like to go to Mr. Schibler on this question. You have laid out the benefits. You made a statement at the beginning of your report that seems quite definitive. There are significant benefits to P3 procurements in the executive summary, and you have laid out what you think those are, which I find on Page 26 of the report. But, in fact, in reading your report, I have been unable to find the evidence that you used to reach those conclusions. So, I am wondering if you could help us understand where you quantify in the document that these objectives were actually met, and what measurement you are using that indicates that those objectives were met.
MR. SCHIBLER: Excuse me, I am a little . . .
MS. MAUREEN MACDONALD: Well, for example, Page 26 indicates that these could be the objectives or should be the objectives of P3 procurement to enhance the government's capacity to develop integrated solutions. You have laid those out in response to an earlier question in terms of the benefits. But, what they really are are objectives for P3. Nowhere can I find the quantification that these objectives were reached in the projects that were examined. So, that is what I am wondering, if you can show us, if you can indicate to us where it is demonstrated that these objectives for P3 were actually reached in the projects that we have done to date in this way.
MR. SCHIBLER: I am sorry, I am a little confused. You refer to Page 26 which in the copy that I have is recommendations for improvements for P3 procurement. I think you were referring to . . .
MS. MAUREEN MACDONALD: Okay, let me give you the section. It is in Section 4, Study Question 3, Subsection 4.3.1.
MR. SCHIBLER: Okay.
MS. MAUREEN MACDONALD: So for example, if I could be more specific then, if this would be helpful to you, can you tell me, in your assessment, what were the skills, the experience and the technology? What was the transfer of risk and, what was the reduction in
cost to implement the project? These are the objectives for P3, and if your conclusion that significant benefits rest on an evaluation of these objectives, where is the data that indicates that in the projects these objectives were met?
MR. SCHIBLER: You are asking me in terms of the projects carried out in the province or in our experience with other projects?
MS. MAUREEN MACDONALD: The projects which you evaluated, which I take to be how you reached the conclusions.
MR. SCHIBLER: Well, not entirely, because we did review the materials that were available to us. We didn't do a detailed audit of all of the P3 projects; we did take a review of material. But we also are basing it on experience that we have had with other projects, not just in this region but elsewhere. When we identified the benefits, we did see some of those benefits as I indicated earlier, achieved in some degree by the two projects we did review.
MS. MAUREEN MACDONALD: Can you provide us with some concrete examples?
MR. SCHIBLER: The major one is time, and I think that was demonstrated in both the road and the P3 schools. So, I think there was an advantage attained there in terms of the projects of that nature and size, relative to the way government would normally have procured them and the time that it took to do it this way.
At least, initially, in the road, there was an indication of substantial cost saving. In fact, at the end, it is our understanding that the cost the private sector tendered on, and what the original cost estimate had been through the public sector, was approximately the same. In terms of facilitating creative or innovative approaches, delivering of government projects, I think the idea of bundling schools was a significantly different way of doing it, and I think that demonstrates there is that opportunity to do that. There were certain risks transferred in the process. In the case of the road, and in the case of the schools, the design-build risk, and the problems that could occur between those two parties, those risks were certainly transferred to the private sector. In the case of the road, they did take on the risk of what the toll revenues would be, and that got assessed in the market place at a fairly significant rate. Those are some of the examples we saw in terms of the projects here and how we would have rated them against these kinds of benefits we have seen elsewhere.
MS. MAUREEN MACDONALD: Could we not have bundled schools in a different method other than the P3 school method?
MR. SCHIBLER: Yes.
MS. MAUREEN MACDONALD: So how does the bundling of schools become part of the innovative process here?
MR. SCHIBLER: I think that probably caused people to think about that. There is another example when we were holding one of the workshops, and I am not sure it is necessarily P3, but I think it is a good example where governments, if the departments work together, can find solutions that are beneficial to each other. At least that was expressed to us with the forensic health unit and the facilities being built in Dartmouth.
MS. MAUREEN MACDONALD: I would like to pursue the idea of risk a little bit further as well. I would like you to explain to me the example you used, for example, on the toll highways, and the quantifying of risk around the toll revenues. What did you examine to determine there was a risk to the private partner?
MR. SCHIBLER: Based on the materials we were looking at, my understanding is that the way the project was funded was with government money, both federal and provincial, and the total cost of the project, the difference between the federal government and the provincial government, was the money the private sector had to come up with, and they were judging how much they would risk on this, based on how much revenue would be generated from the tolls. The tolls were to cover the cost of servicing the rest of what it would take to build the road, and the operating cost of that road for a period of time. In assessing that, you had to determine in advance what you thought the traffic potential would be for the road and there are firms that are "traffic consultants" and they - I think both the government and the private sector proponents - retained those kinds of firms to give them advice as to what that expected revenue flow might be, and they used that to go to the market place and assess how much debt could be raised, under what terms and conditions it could be raised.
MS. MAUREEN MACDONALD: Thank you. You lay out in your executive summary a set of conditions that you think are optimal in terms of P3 being successful: financial, technical, operational acceptability, implementation, and timing. It has certainly been the case that acceptability of this method of building roads and schools is questionable in terms of the citizens of the province and the public, and I want to know if, in your assessment, all of these conditions need to be present or some of them and what proportion, if not all of them, to make P3 acceptable and where you see the acceptability within that set of conditions.
MR. SCHIBLER: I think you would want to see all of them present. It becomes a judgement call as to the level of terms of acceptability, what the level of acceptability is but, clearly, if the public is not in favour then it is going to cause significant difficulties in the project for both the private sector and the government and it really probably shouldn't proceed.
You need to, I think, in all cases have a project that parties see as bringing benefits, as opposed to parties seeing it advantaging one party or the other. The whole concept of partnership was to try to get people to work together and it is how you bundle up the elements of that that may cause people the problem. There are other options than using it purely as a financing tool, and there are advantages to those other options.
I think one of the things that we did find, in terms of working with the Department of Education and asking questions of people, is that site selection is a hot issue. They certainly intend to do that differently, but one of the advantages apparently that did come out of it was there was considerably more consultation. The results may not have been what everybody would like to have seen, but the school boards and the parents and so on, there was a larger involvement with that. We would have, and I think they now understand, indicated they would not go forward without having sites in hand.
Our reason is perhaps a bit different from their reason. Our reason is it gives greater certainty of the private sector. You have control over one of the costs and the greater certainty you can put into a project in terms of how your structuring it, the better value you are going to get back. When you don't know where the site is, that is a risk factor and people add something in for that in terms of what they may or may not know about what is happening, the private sector will. There is an area where, if you don't structure the project properly, it can cost you in terms of how much risk you are asking the private sector to assume and they will cost you into their project.
MR. CHAIRMAN: You have seven minutes.
MR. JOHN HOLM: A few questions. First of all, you said in your comments that the government could receive benefits, you didn't say that we did, am I correct?
MR. SCHIBLER: That is correct.
MR. HOLM: You haven't made any decision. You also said that you haven't done an audit of the projects, so you don't know if we have a higher quality than we would have received from the traditional process. Is that correct?
MR. SCHIBLER: Correct.
MR. HOLM: So basically, as a result of what has been done, there is a potential that we might have or we might not have received benefits; we may or we may not have received higher quality from the P3 process. Correct?
MR. SCHIBLER: That is correct.
MR. HOLM: We also, to the best of my knowledge - for as long as I have been around this place and have been following this issue - we have always had public-private partnerships. I don't ever remember the government going out and actually designing the schools. I don't ever remember the government going out and constructing the schools, that was always done by contract. A tender was put out, somebody bid on it and the project was completed, is that not correct? So, we have always had partnerships?
MR. CHAIRMAN: Who are you directing the question to?
MR. HOLM: Maybe I will put that to Mr. MacRae, if I could.
MR. MACRAE: That would be generally correct, yes.
MR. HOLM: The Department of Transportation and Public Works, do you feel that you have within your department capable, qualified staff? Are they competent people?
MR. MACRAE: Yes.
MR. HOLM: Did the staff review the projects that came in under the P3 process? When the tender calls went out for proposals, and some of them were in a bundle and so on, did somebody review those?
MR. MACRAE: We reviewed the designs to ensure they met the design requirements manual. We took part, with the Department of Education, in doing up a design requirements manual. We reviewed the drawings when they came in to see if they were in accordance with the design requirements manual.
MR. HOLM: Do you feel your department and the government has the ability to put out tender proposals that would clearly outline the objectives that the government wants to achieve when they put a project out to tender?
MR. MACRAE: Yes.
MR. HOLM: So we have that ability within house. I go back to Mr. Schibler, you talked about the fact that yes, it would have been higher financing costs. I think that it is also fair to suggest, is it not, that the private sector would expect, if they are going to be taking this so-called risk, that there will be a profit in it for them at the end of the day?
MR. SCHIBLER: I would certainly expect they would be making a profit somewhere along the line.
MR. HOLM: That would be my anticipation. So there are profits built in and there are higher interest costs built in, correct?
MR. SCHIBLER: Yes.
MR. HOLM: All right. I have to ask this question then. Why is it not possible for the government to put out their tender proposals; that could include bundling of schools, it could put in the faster time-frame, it could have had those same conditions. If the objective is to deliver a number of schools within a set period of time, if it is the object to have them meet certain quality standards, and if you want to bundle them, however you want to do that, why could government not have put out a tender call and had those very same companies bid on those projects so we would have then achieved the objectives of time, quality, plus ownership and control at a lower financial cost? Why could we not do that?
MR. SCHIBLER: There is no reason why you couldn't. I think I indicated earlier that there are other alternatives to the process, including financing and ownership by the private sector in the process. I think that you could have achieved some significant benefits by going strictly with a design-build or a design-build-operate if you believe you can achieve benefits there as well.
MR. HOLM: I have been around here long enough that I can remember as one election is rolling around, the government would announce that a new school was going to be built. Before the next election rolls around, they would announce that somebody has been selected to design the building, a site has been selected, and they might even turn the sod. The third election rolls around, they have cut the ribbon, and it achieves a three-election political agenda. I mean, that is totally inefficient. If government is allowed to operate on the same basis, why can we not put out the tender calls and be every bit as efficient, if not more efficient, than the private sector?
MR. SCHIBLER: In talking with a couple of gentlemen who were involved, from the Department of Transportation and Public Works, with this project on the engineering side of things, their comments to me were that they would have had to hire additional resources to do this many schools in that short a time.
MR. HOLM: But doesn't government often, as in the private sector, if they need a specific skill that they do not have in-house, do they not go out and contract somebody to provide that skill on a term basis?
MR. CHAIRMAN: You have one minute.
MR. HOLM: Could the government not have done that?
MR. SCHIBLER: I think they could have done it in a bundled way, in other words, if you had been doing design-build-operate. I don't think you could have done it if you had tried to do it the way you were referring to earlier, the three elections . . .
MR. HOLM: I am not suggesting the way that it used to be done is realistic. The final thing that I would like to talk about is that one of the primary objectives, if not the primary objective, of doing it the P3 way was to off-book the value, so that it wouldn't appear in the debt of Nova Scotia. Now my question is, with the new accounting process, where we are going to be amortizing our capital expenditures, where all of the costs would not appear on the books, is that advantage now, also, not gone?
MR. SCHIBLER: I think there was a large component to off-balance sheet financing driving the P3s, yes, at least based on the information made available to us. It is unclear to me how the accounting treatment is going to impact that, because the last discussions I had indicated that while you would be able to amortize costs, there was still going to be an adjustment at the bottom of the statement, to get you back to a cash system. I am not up to date, and I know that there are ongoing discussions by the Public Sector Accounting Board with respect to the rules associated with that. I might add that if you are looking for value, there is a difference, in my mind, between valuing something, in terms of the value to the government, and how you account for it. Sometimes the accounting rules will make things look worse, in terms of what is being presented, than what the real value is.
MR. HOLM: Thank you, I will resume my other spot.
[8:47 a.m. Mr. John Holm resumed the Chair.]
MR. CHAIRMAN: I will turn it over to the PC caucus.
The honourable member for Kings South.
MR. DAVID MORSE: Mr. Chairman, actually you were touching on a subject which is of interest to the government caucus, you were pointing out that in fact there are other ways of involving the private sector, and we, as well, do take note of the fact that this was a very fine review of the literature, and there was a lot of good qualitative work. On Page 26, after going through all the conditions that would have to be met in order to possibly have a potential successful P3 candidate, you put in one little qualifier. Perhaps you would like to comment on what I am talking about, or would you like me to be more specific?
MR. SCHIBLER: Yes, if you would point it out to me. I am sorry, I don't mean to be dull this morning.
MR. MORSE: No, not a problem. It has been referred to earlier, something called a private sector comparator. Even if you have 26 pages of reasons why it might be a good candidate, you come back to us and say, but let's check out the cost benefit and see whether it could be done cheaper in the conventional method, where the government builds and owns it by calling tenders?
MR. SCHIBLER: Perhaps I could explain. I think one of the objectives, from the government's point of view, is to ensure that they are getting value for a procurement. I think everybody wants that. I guess our experience has been that in order to understand the project better, and also to understand what the private sector is likely to do or not do, is to prepare a bid as if the government was bidding on the project. There are two ways of doing that.
One is the traditional way, the one that Mr. Holm suggested is the three-election process, you tender out for a design, you hire somebody to help the department with the program, the design of the facility. You put together a tender package, you go out and ask somebody to build it. It gets constructed, and you decide how you are going to operate it, whether you will do it internally or will you subcontract to someone else. So essentially there are three distinct steps. That is one way of trying to estimate the cost. I think the way we would suggest doing it is to use the actual tender call itself, because it would achieve some of the benefits I think Mr. Holm was alluding to in that he is saying that the government can do all of these things. Well, sometimes, yes, sometimes no. I don't necessarily agree that the government in all cases can do everything, but certainly they could look at what the costs would be of doing a design-build-operate and put that cost together in a way that is comparable to the private sector. In other words, you have to have it comparable.
The private sector wants to have a level playing field in these things, and if you ask the private sector to provide insurance coverage for facilities and operations and so on, then the government may not insure buildings or may not insure certain things because it has a different way of looking at things. But for purposes of the comparator, you would want to make sure that kind of cost was included because there is bit of a risk being transferred from the private sector to the public sector. So, those kinds of things.
MR. MORSE: You seem to be straying from my point, you . . .
MR. SCHIBLER: Sorry.
MR. MORSE: . . . are going to, again, a great deal of qualitative explanation, but the bottom line is that when it comes down to the budget, we need a number.
MR. SCHIBLER: That is right.
MR. MORSE: You have gone to some trouble to explain all the considerations - and I think you have done a good job of covering the considerations - but still, at the end of the day, your own conclusion was that before you do any of this go and check the cost. You have confirmed for us today that, in your opinion, the P3 projects to date have been more expensive, at least the financing component. Are you familiar with this document?
MR. SCHIBLER: Yes.
MR. MORSE: Okay. There are some interesting things in this document, one of which points out that one of the major costs of any large capital project is in fact the financing and, indeed, I would suggest that depending on how long you finance the project and the cost of money, the interest, it could even be the largest cost.
MR. MACKINNON: Identify the document, Dave.
MR. MORSE: It is Transferring Risk in Public/Private Partnerships, a document put out by the Department of Finance in November, 1997, and it was one of the references you refer to in your appendix.
MR. SCHIBLER: If I could try to explain it. What I was talking about was trying to get a dollar estimate, as if the government was going to do the project, to compare to the private sector's tender.
MR. MORSE: Can you give us a number, a percentage?
MR. SCHIBLER: Well, I don't quite understand what you are asking. I am sorry.
MR. MORSE: Your background is that of an accounting firm?
MR. SCHIBLER: Yes.
MR. MORSE: I like accountants because they give me numbers, so give me a number. Five per cent more expensive to go P3 financing?
MR. SCHIBLER: Well, in the case of the road, I think it was 384 bases points, if you are looking for a number. In the case of the last P3 . . .
MR. MORSE: Okay, so what does that mean, in English . . .
MR. SCHIBLER: It is 3.8 per cent more interest costs on the portion of the debt that was raised in the private sector.
MR. MORSE: Just to round that off to 4 per cent, or I don't care, round it off to 3 per cent, we will be generous to the former government - that if the government could have financed it at six and one-half per cent, the private sector would be financing it at nine and one-half per cent?
MR. SCHIBLER: Yes, but I think . . .
MR. MORSE: Okay. That is an enormous increase over 30 years; just absolutely a phenomenal extra cost.
MR. SCHIBLER: Right. But, I guess the issue there is who is paying?
MR. MORSE: Nova Scotians, and other people . . .
MR. SCHIBLER: The users are paying, yes, and there was a question how many users there would be; that is the risk. That is the assessed difference in the market place.
MR. MORSE: Anyway, to use 384 bases points, I am going to flip over to the Auditor General and ask, at the time of the highway construction, what was the province's costs of long-term capital at that time?
MR. ROY SALMON: I would have to go back and research that, Mr. Morse, I couldn't tell you that.
MR. MORSE: Would it be less than 7 per cent in your opinion?
MR. SALMON: At that time?
MR. MORSE: Yes.
MR. SALMON: I don't believe so.
MR. MORSE: Do you think it was more than 7 per cent? I take note that the former Minister of Education has commented that it was 60 per cent more expensive. He might like to address that when it comes around to him, but actually if it is 3.84 percentage points above about 6.5 per cent, then I would say he is right on - about 60 per cent more expensive for the interest costs and I thank him for that information.
I am going to stay with the Auditor General for a few minutes. Mr. Salmon, there appeared to be maybe two motivations for doing P3, one of which has been mentioned by Mr. Schibler, and that is being able to deliver the schools on time. At the time we started with these P3s my impression was we had somewhat neglected the maintenance of the schools. It had created a pent-up demand for replacing these structures, and because of the lack of maintenance we had exasperated their condition and created a rather grave situation. So I accept that the P3 addressed this second self-inflicted wound by the former Liberal Government, but the flip side I believe that their auditor of the day, which I believe was not yourself, sir, I think they contracted out to a different auditing firm? That is a question.
MR. SALMON: That is correct. The Auditor General Act and the Provincial Finance Act were amended in 1998 and I became the auditor of the province's financial statements. Prior to that, a public accounting firm conducted the audit and reported to the Minister of Finance and not to this Legislature.
MR. MORSE: In fact, this rather peculiar procedure was known right around the world, as far away as Australia, where Nova Scotia had the dubious distinction, as I understand it, of being the only participant in the Canadian Public Accounts Committee to have such a practice?
MR. SALMON: That is correct.
MR. MORSE: We are very pleased that you are now the auditor. Anyway, one of the practices which was done by the former Liberal Government was to keep those costs, the capital costs off the books, correct?
MR. SALMON: As I have reported publicly, my understanding of the rationale for going into the P3 process for school construction was to achieve operating leases so that the debt would not appear on the financial statements of the province.
MR. MORSE: Thank you, that is exactly the point I was trying to get at and I think that that was a huge motivation for the former Liberal Government of the day. One, they could get a more expedient delivery of these schools to address this pent-up demand for new school construction caused in part by their own cutback to the maintenance and, number two, this would, I would believe, make it appear that the province was possibly achieving a better financial result vis-à-vis the deficit and indeed some claimed surpluses. Would you say that was a fair statement?
MR. SALMON: Yes. I would just qualify it by saying that the deferred maintenance goes back many years and not just in the era of the previous government.
MR. MORSE: I concur. In fact, as we speak about keeping it off the books, did you have any concerns with some of the claimed financial progress by the former government and particularly the claiming of surpluses?
MR. SALMON: In terms of the leases and financial arrangements for schools that we examined, we concluded, and the Department of Finance agreed with us, that there was not sufficient risk transferred to achieve and meet the definition of an operating lease and, therefore, they had achieved capital leases which should have been recorded as debt of the province.
MR. MORSE: Under which government were they added to the debt of the province?
MR. SALMON: The decision was made in 1999.
MR. MORSE: After the election?
MR. SALMON: Yes.
MR. MORSE: That is a diplomatic way of saying that it was the new government that recognized this. So I guess we are prepared to concede that there are some delivery advantages to P3, that it does speed up the process, and that under some circumstances which have a very extensive list of qualifiers, as pointed out by the KPMG report, it is conceivable that there could be a benefit to P3, but with the big qualifier that we have to address the public sector cost comparator which basically was not addressed in the body of the report other than to say that the Department of Finance should be responsible for doing one before we embark on a project.
So, number one, we acknowledge that under very specific circumstances there could be a benefit to P3, but we would also like to point out that regrettably - and with the very diplomatic answers given by the Auditor General, he probably does not enjoy this line of questioning - that in fact the process was used to obscure the true financial position of the province. So if a government was to consider this model, it should be upfront, that we are not trying to hide the true costs from Nova Scotians and that has been done by the present government. We have got four minutes?
MR. CHAIRMAN: Was there a question there for somebody?
MR. MORSE: I am interested to hear from Mr. Schibler now. There were a few interesting comments in this book. Actually, would you have a copy of this today? Wonderful, I was hoping that you might bring one. We have somewhere in here the criteria for an operating lease and also on Page 12, the third paragraph, and it is the second sentence in that paragraph. Maybe you could share that with us and then I am going to also ask you to read a couple more from Page 13 and then have your comments. It starts with, "The largest barrier . . ." Are you with me?
MR. SCHIBLER: Yes.
MR MORSE: Would you like to read that sentence to the committee and then I want to flip over to Page 13.
MR. SCHIBLER: "The largest barrier to this . . ." Sorry, just let me read what this is. I think what they are talking in this particular session is, that challenge for the private sector is to develop innovative proposals. That is what the this is referring to.
MR. MORSE: The largest barrier . . .
MR. SCHIBLER: "The largest barrier to this is the specialized nature of schools and the perception that, as a result, they will have limited value at the end of the contract (hence the private sector's tendency will be to try to recover the entire investment plus a return over the contract term)."
MR. MORSE: And flipping over to Page 13, the second paragraph, it goes on on that subject. It speaks of the difficulty in structuring P3 schools. Perhaps you could peruse that and read that into the record.
MR. SCHIBLER: Sure. "The difficulty in structuring P3 schools to qualify as operating leases in substance as well as form is that allowing the government to vacate the building at any specified point in time will cause the private sector partner to price the deal so that its investment (plus a return) is assured by that time or, at a minimum, the partner is compensated for that risk."
MR. MORSE: Then in the next paragraph, it goes on to say, "The annual rental for a proposal based on pure operating terms . . .would very likely be cost-prohibitive and would not likely be pursued by government." Could you comment on how you dealt with those concerns in the report?
MR. SCHIBLER: Part of what we did was interview several of the consortia, both those that had been successful and those that hadn't. There is no question these are valid concerns in trying to do a school deal, in my mind. I think the bundling of them allowed the private sector, as they explained it to me, to bundle the risk as well. In other words, they felt that you are not going to close all the schools in 20 years. In other words, there will be an opportunity at the end of 20 years to either sell it at the price that was specified or continue another lease. They were in fact taking a risk that you were going to do one of those two things.
MR. MORSE: I guess I wasn't looking for the private sector's response. I was more interested in your response as a professional accountant dealing in numbers - I am sure the private sector probably were in favour of this because they have been on the projects - to answer the specific concerns in this government document.
MR. SCHIBLER: Whether, in fact, you could get a fair deal from the private sector?
MR. MORSE: Yes. I guess my time is up. I am trying to make a point and maybe in the next session you will be able to respond to that. I want to thank the former Minister of Education for pointing out the extra 60 per cent in financing fees.
MR. CHAIRMAN: We will move on to the next round. We can either go rounds each of 15 minutes or two rounds of 10 minutes and 5 minutes. How about if we just do the 15 minute rounds? We will go on to the Liberal caucus.
MR. MACKINNON: Thank you, Mr. Chairman. I don't know where to start. I am not sure what the honourable member who previously spoke put in his Wheaties this morning, but I am glad I didn't have any of it.
My first question is to Mr. Abbott. You work with P&P?
MR. ABBOTT: Yes, I do.
MR. MACKINNON: At any time through this entire P3 process, have you seen or do you have any knowledge of political manipulation in the exercise of the P3 process? In other words, where politicians would try to get an unfair advantage putting one school - let's get it constructed in my area versus another?
MR. ABBOTT: No sir, I don't believe I have observed that.
MR. MACKINNON: How long have you worked with P&P?
MR. ABBOTT: I have been with the Priorities and Planning Secretariat from its inception, which was January 1994. Prior to that I was with the former Management Board beginning in 1980 and prior to that, with the Treasury Board going back to 1975.
MR. MACKINNON: Thank you. Our representative from the Department of Transportation and Public Works, have you seen any political manipulation in terms of prioritizing any of the P3 schools that have been constructed or slated to be constructed?
MR. MACRAE: No, the management of the schools lie with the Department of Education. We are a technical advisor to the Department of Education.
MR. MACKINNON: I raise those points because my colleague from the NDP caucus raised an issue, which I think unwittingly he may have touched on, or maybe deliberately, and from my perspective and any reasonable individual would come to the conclusion that the P3 process has depoliticized the capital school construction process. Would anyone care to offer an assessment on that? What I mean by that is the honourable member for Sackville-Cobequid made the suggestion about announcing a school, going through an election, turning the sod, cutting the ribbon, and the politician being successful in getting elected because he uses this one issue over and over again. I don't see that type of activity in this process. Would it be fair to say that it is a rather open and transparent process?
MR. ABBOTT: To answer the question, the process I believe is probably as open a procurement process that government can have. The specifications are put to public tender, and there is a very detailed process which screens the initial bidders. The screening that takes place potentially eliminates any bidders who are not able to deliver the product on time and on budget. So the short list is made, and from the short list obviously the most cost-effective
and best bidder from a number of different perspectives is chosen, and that process is very open and transparent.
MR. MACKINNON: Mr. Abbott, I couldn't help, as I was listening to the questions, I popped into the library and picked out a quote that was raised on a previous date from an honourable member who was questioning the then Minister of Education. Mr. Speaker, I would like to cut right to the chase here. We would be very happy to consult with the Liberal Government on the method of financing this school. Will the government, will the Premier, will the Minister of Education, regardless of how it is financed, any other problems or questions about P3, will the Premier make a commitment in this House immediately today to immediately construct a new school for the community of Lantz? That was the honourable member for Halifax Fairview, Ms. Eileen O'Connell.
I guess the point I want to make is the P3 process has eliminated that type of political opportunity. We have a philosophy in the House here raising a lot of questions about the credibility of the P3 process. Quite frankly, I don't think I have enough expertise to determine the value for dollar and that is why we have experts like Mr. Schibler and so on. There are a lot of technical questions, but this, to me, would suggest going back to the old days. It is all a question of whose ox has been gored the latest. As long as I get the school in my backyard, I don't care about anybody else. So there is a little bit of hypocrisy here, quite frankly.
I wanted to raise that point because it is fair and legitimate to raise concerns as to whether we are getting value for dollar. I guess my next question to Mr. Schibler would be, with the fact that the government is now planning on using the amortization methodology on tangible assets in the province, how would you compare that method of going with the traditional capital construction versus this P3 process? Perhaps I am asking you to compare apples and oranges, I am not sure.
MR. SCHIBLER: I think there are several components to your question. As I said earlier, how you account for something doesn't necessarily equate to how you would judge it for value. There is the perception or the reality of how you report on a transaction versus what the value of that transaction is to the government over time. I think what you are asking is, what about the new accounting rules? Does this make any change? In my mind it would not change the decision process that I would suggest in identifying how you would carry out a project. It may change somewhat how it would be accounted for, after the fact. Previously if you constructed it and financed it through issuing debt, then that showed up on the financial statements of the government. If you attempted an operating lease and it became a capital lease, that also ended up being shown on the books. If it was a pure operating lease, then it did not show on the books.
The reality is, you still have to pay for it, whether you pay for it upfront by borrowing money or whether you pay for it as a lease payment over time. There is still a cash flow with either of those, and that is what really needs to be valued in the whole transaction. That is where you determine what your value for money is, presuming you have gone through a process that you are getting a quality product from both options. In other words, you are, what we say, meeting the bar in terms of the requirements of the program or the project.
MR. MACKINNON: One final question before I turn it over to my colleague, Mr. Chairman. The cost of this project is what, approximately $89,000 or thereabouts? Am I correct?
MR. LUSK: That's correct.
MR. MACKINNON: If we haven't done value for dollar assessment of the P3 process, what exactly was the intent of this analysis and what did we achieve?
MR. LUSK: I guess I will speak to that. In the terms of reference we settled for the study, we wanted to determine three things. First of all, do partnerships as a whole offer an opportunity for benefits and what would those be? So, with that question, is it worth doing in the first place, in a general sense? Second of all, did we achieve the objectives set out in the 1997 transferring risk document that we just talked about a few moments ago? Then third, and perhaps most importantly, this was intended to be a future-looking process, saying, if there are benefits and partnerships worth doing, and we have or have not achieved our objectives, most importantly, what should we do differently in the future? How should we evolve and improve the process. That is what this is, more than anything else, intended to do, is say, look, if we should be doing this, then how should we do things different, and how should we be improving on it, so we can present that.
MR. CHAIRMAN: You have four minutes.
MR. GAUDET: Mr. Chairman, I guess no one disagrees with the need to provide schools to these communities. I am looking back at this review that was conducted, I understand, probably 1993-94 or 1994-95, when the government of the day decided to deliver the much-needed schools through the P3 process. In the early going, it was certainly something new, it was a learning process. But, as we went ahead, we had accountants, people from P&P, staff from the Department of Finance, the Department of Transportation and Public Works, and the Department of Education. We had people from the Auditor General Office to try and make recommendations to government on how we could go about improving upon this process.
I think, basically, we are certainly getting better, because I recall, especially in the last couple of years, people from across North America have been coming to Nova Scotia because Nova Scotia certainly has taken the lead in providing schools to communities. Where you
have the U.S. Senate, where you had a number of States, where you had a number of provincial governments, where we had some staff from the province basically providing and sharing the information to a lot of the requests that came forward. I guess my question is in regard to the credibility on the P3. Have we basically been providing all the information, or making it open and transparent, as much as we can; are we hiding something away from taxpayers in Nova Scotia? Could someone answer that question, please.
MR. LUSK: A simple answer to a very complicated question. To my knowledge, no, all the materials are available for audit, or for you. Certainly the Auditor General has been involved in reviewing financial transactions and thankfully so. I think it is important that we have those control points.
MR. GAUDET: Mr. Chairman, in closing, I know that the Minister of Education has not been able to provide this House with any answers, especially with the budget yesterday. Everyone was hoping that we would be provided with some answers. There are 17 communities in this province that are waiting to hear from this new government, when are they going to deliver on these schools that have been announced. As of yet, nothing. Yesterday, nothing. I would hope that my colleagues to the right here, would certainly take this back and encourage their Premier and encourage their Minister of Education to please try to get back to these communities, before the communities drop in and pay them a visit. Thank you.
MR. CHAIRMAN: Your time, there is about 10 seconds left, so I will turn it over now to the NDP.
The honourable member for Halifax Needham.
MS. MAUREEN MACDONALD: Mr. Chairman, I am still trying to establish, in my own thinking, what it is we know about the P3 method of procuring important public services, so that we can build on that knowledge for the future. I am back to some of the qualifiers that you lay out quite early on, in terms of what will result in a successful project or not. I want to know, in your view, was there proper project screening for the P3 procurements that you assessed? Was there proper project screening?
You lay out a whole section on what you think needs to be put in place, in terms of managerial kinds of processes and procedures and techniques, to make this kind of a process successful. Given that you have said these are things that need to be done, are they after-thoughts? Are these things, now we know needed to be done, because they weren't done, and project screening being one of those things?
MR. SCHIBLER: Based on the materials that we saw and read, in the case of the highway, there in fact was what I would call a good screening process, in that there was a report prepared to try to identify whether there was going to be an advantage or not, trying
to construct this highway using a tolling system and getting the private sector involved that way. The initial report that was produced did indicate that there was going to be a savings. I think, in that case, there was what I would have called an acceptable screening process.
It is difficult when you are reading materials, because you are not there at the time and a lot of what transpires is also not written down. We could only see what was written. Certainly, the result of that process initially would be what I would call a very good screening process, because it does in fact give you some indication that there is some hope at the end of the day that this is going to provide you with some savings.
MS. MAUREEN MACDONALD: For the P3 schools as well, was there proper project screening?
MR. SCHIBLER: In the P3 schools, again, we looked at the 31, but we didn't go back and look at the eight. I think there were a lot of difficulties early on, and I think the department has learned as a result of that, and it is continuing to learn. I think that is part of that process. I don't think you ever stop learning how to do it better.
It think in the bundled schools they didn't prepare an analysis of what the costs would be with the private sector versus the public sector. What they did do is request a report to identify what the cost per square foot would be, or what the costs would be for a variety of schools, and as a result they came up with a cost per square foot. They didn't put that together with the operating costs, and so on, to try to decide, in total, what the benefits would be, although there was an analysis done again internally on the operating size, and there was certainly a reference to the deferred maintenance and to different changes in the requirements for these new schools. I am thinking of air quality and those kinds of issues that are coming, where there are problems in existing schools.
To the extent they have identified problems in the past, they were trying to correct it. It was an internal review that was done to deal with that. Nobody brought it together in one spot. So, I think the screening process could have been improved in that instance.
MS. MAUREEN MACDONALD: Thank you. So, in other words, there wasn't proper project screening in the P3 school process, and there are three other elements you refer to: detail planning, appropriate selection process and a rigorous monitoring program. So my question is the same. Was there detail planning, an appropriate selection process and a rigorous monitoring program? Did you find that in the procurements that you examined?
MR. SCHIBLER: I would say, in terms of the detail planning which is the documentation and getting the responses, it was considerably better than the earlier ones we had seen. I would say that, as I understand with the earlier ones, the RFQs and RFPs didn't necessarily focus a whole lot on the cost or what it was going to cost the government. In this case, the RFP did include a benchmark in terms of what would be an acceptable cost per
square foot on a valuated basis. It did have a benchmark on operating costs, and it did have in their evaluation criteria a certain number of points allocated to the issue of financial ability of the proponent and the cost proposal.
I think there are ways of improving on that, but in fact, there was that kind of planning done. There was also a committee that was formed to help in that process, and a subcommittee actually helped to draft those agreements. Included in that was tying it more directly to the specifications that were required. There were a number of things done better than the original ones in terms of the detail planning side of things.
In terms of the selection process, there was a well-defined list of criteria and scores that were used to evaluate the responses back, and the files that we reviewed did summarize the results. There was not a lot of detail in it. I guess the files themselves had the results of the evaluation. It didn't have any of the background, or very little background; there were a few sheets, but not a lot of background. But the final result was in that process.
On the monitoring side, we really didn't look at that very much, largely because the schools are just coming on, and there is not a lot of monitoring with respect to the schools at this stage. I could say, there was the comment coming from our discussions with the private sector and the government is that there was a transition point between government handling it and the school boards picking it up and then the school boards dealing with the private sector on how the schools are maintained, because that is their normal contact and I think there was some. Maybe the hand-off could have been done better, but there was a hand-off and our understanding is that those relationships are building now and are working . . .
MS. MAUREEN MACDONALD: Thank you, I get the point and I think you are being very polite. There wasn't a rigorous monitoring program in place and I would have to say the former questions where my colleagues to the right were talking about trying to clarify whether or not allegations of political interference in this process can be substantiated or not, I would suggest that it is not a question of political interference but a question of political competence with respect to the P3 procurement process that we are most concerned about. Thank you.
[9:31 a.m. Mr. David Morse took the Chair.]
MR. CHAIRMAN: The honourable member for Sackville-Cobequid.
MR. JOHN HOLM: If I could, just as a follow-up to the comments that were made before, certain information was not available in terms of how they even arrived at evaluations of the point system. A lot of the key information that may have been necessary to come to
conclusions, you were also not privy to. I want to ask you this question if I may, because you had mentioned it earlier. Why didn't you do a quality audit?
MR. SCHIBLER: I didn't do a what, sir?
MR. HOLM: An audit as to the quality of the new schools that were being built compared to what it was under the old system.
MR. SCHIBLER: It wasn't within our scope to go and physically view the quality of the schools. That wasn't part of what we were asked to do.
MR. HOLM: It wasn't part of the mandate?
MR. SCHIBLER: No, it wasn't part of the mandate and if it had been, we would have had to hire somebody else to do that, that wouldn't necessarily be our expertise.
MR. HOLM: Would actually having done that audit not have been a key part to getting a true evaluation of whether we are getting value for money?
MR. SCHIBLER: I think if we go back to the first step which is when you do the screening and decide what quality that you want and you decide that you are going to proceed because it appears there is some value to it . . .
MR. HOLM: But unless you do an audit afterwards to see if you actually received the quality that you want, how do you know that you have actually achieved it?
MR. SCHIBLER: I think that actually part of that should be covered off, and I believe it was covered off in this case, in terms of the requirements that the private sector had to meet in building the schools. In other words, there was a design manual and they had to build to that. I am getting a little bit out of my depth, so perhaps Mr. MacRae could answer that.
MR. HOLM: No, that's fine. I am just noting the fact that the audit wasn't done as part of this review.
The next thing, if I can, I just want to touch on the road for a second. You would have reviewed the original documents that were prepared in the report for that road?
MR. SCHIBLER: I looked at the RFQ and the RFP and some other documents that were available . . .
MR. HOLM: Did you look at those that have projections for vehicle traffic?
MR. SCHIBLER: I didn't. In the document itself, I didn't see any projections for vehicle traffic, no.
MR. HOLM: You didn't? I wish you had contacted me, I could have provided you with the documents because I had actually seen them and in fact, I released them. I got them in a little brown envelope and I did a run on those numbers and I looked at the borrowing rate that the government had at the time. I multiplied that by the vehicle traffic, the number of vehicles and the toll rates that were proposed - and let's leave whether the tolls are good or bad out of this - and came up with the number of dollars that would be generated based on their figures and then I looked at the government rate and figured out on a standard mortgage, principal and interest, leaving $0.5 million a year aside for maintenance. How long would it take to pay off that road? It was under 12 years.
I showed the document to a friend of mine who is a banker, now he is a vice-president. I asked for his comments and the response was, how do I get a piece of the action? (Interruption) Let's put it this way, I got it in the Red Room the same day that the minister made his statement.
If the government is talking about value for money, is it not necessary to have those kinds of vehicle projections if you are doing an evaluation of this? This was without any increased volume over the years to find out if, in fact, we do have value for money?
MR. MACRAE: Just to clarify a point, Mr. Schibler would have had the projections that the government did for the traffic revenue studies in the appendix at the back of the RFP.
MR. HOLM: So the traffic projection studies were, in fact, there?
MR. MACRAE: They would have been there in the back of the RFP. They were made public, the ones that the Department of Transportation and Public Works carried out.
MR. HOLM: You said you didn't look at those.
MR. SCHIBLER: I indicated earlier that the government had done theirs and that the private sector had done theirs as well, I am sure they had. I hadn't recalled that they were in the back of the RFP. Sorry.
MR. HOLM: Time is getting short. The Public Accounts Committee, really what our job is is to be evaluating past government practices and expenditures and to try to see if we actually have gotten good value for our money. I have listened here today to what we have heard, and I come away with the conclusion that, as a result of this study, basically - although there are some recommendations about things we may be able to do differently in the future and some suggestions that there could possibly be some benefits, but then again there may not - we really are no further ahead now than we were before this study was commissioned.
Based on any assessment that was done, do we know if we have value for our money on the Cobequid Pass? My view is we have not. We also don't know if we have value for our money and best value for our money from the P3 process. My honest opinion is, no we have not.
We have played some political games with it, but this report and nothing that we have seen so far tells us that we are, as taxpayers in this province, better ahead as a result of this so-called P3 process that has been undertaken. If you wish to respond to that. That is not meant as any criticism of yourself or any of those who have done the studies. It is just the reality of what we have seen.
MR. SCHIBLER: As we said in our report, we did not find what we would have used in order to determine value for money. So in that case, you are correct.
MR. CHAIRMAN: The honourable member for Preston for the government caucus.
MR. DAVID HENDSBEE: Mr. Chairman, first of all I would like to ask the question, why is the Department of Education also not here today? I see our Department of Finance, Priorities and Planning, and Transportation and Public Works . . .
MR. MACKINNON: We had them here already.
MR. HENDSBEE: The Department of Education was here earlier to explain this? I thought they would have been here for back-up for future questions. I would hope that in the future, in order to explore this P3 process a little further, that we have an opportunity to hear from the private sector participants, those who try to compete in the process, and those who were successful and perhaps not successful in securing contracts. I think it would be important to get the other parties' perspectives in regard to the other end of the process of those who have participated and what frustrations or successes or experiences they have had.
I stated earlier this whole P3 is probably a paradigm shift for the government in regard to how to do these procurements. True, in the early beginnings it was unfamiliar territory, and I think there was a learning curve or learning process from the various departments involved. From the early days, I can speak from personal experience of being the municipal councillor of the District 3 in the Halifax Regional Municipality where the O'Connell Drive school was built. I had the advantage of participating in community participation of trying to get more improvements done to the school through community activism. My experience at that time, and what I have learned is, it was very frustrating even for the proponents of the consortiums to participate in this process.
You talked earlier about the RFQ, the qualification or the screening process of potential consortiums. Could you comment, in regard to that initial process, how did the departments try to qualify the experiences of what was required in this whole thing, from their
experience, how did they try to conglomerate a package and to try to judge the consortium bidders?
MR. SCHIBLER: I am just trying to think back. I think they described what they were trying to achieve with the bundled schools in terms of the numbers involved and they outlined what the objectives were. Then they identified from their perspective what they were looking for in a proponent and it included a variety of items. I don't have the RFQ with me so I can't be certain and enumerate all of the issues, but I think they wanted to assure themselves that these people understood what the educational objectives were as well as a number of other issues. Based on receiving the responses, they decided who they would deal with.
MR. HENDSBEE: In your opinion then, would it have taken a considerable amount of time and resources by the various companies involved in each of the consortiums to put together these packages in regard to meeting this . . .
MR. SCHIBLER: I think in the RFQ stage the cost would not have been significant. At the RFP stage it would have been more costly, but we only reviewed the files from Education, we did not review the responses from the proponents themselves. We did not go through everybody's response in terms of that, we went through the files of the analyses of those responses.
MR. HENDSBEE: That is what I have noticed in the appendix and the bibliography in regard to the various things you reviewed. It looks like more department and government reports and everything else, but I would have hoped to have seen something from the private sector to be included in the analysis. Perhaps those files were private because of the company's nature, but in the early days with the first three P3 schools - the junior high school in Cape Breton, the elementary school in Porters Lake and the high school in the Valley - it was a learning and evolving process at the time.
We had about six to eight consortiums at that time initially bidding to try to get to the RFQ process, but after a period of time and going into the next phase of the other 30 schools, it appeared to be a conglomeration of some of these consortiums. Basically, some of them had partnered together because they were finding that it was just too much time, effort and resources to get through the process. Do you have any comment on that?
MR. SCHIBLER: Part of the reason to kind of pre-qualify proponents is to keep the competitive component to the response, but to provide those responding with a greater opportunity for success. It is a costly enterprise to go through and develop responses to RFQs and RFPs and at the end of the day if you are in the normal - and when I say the normal, it depends on how you evaluate people, but the normal process is to try to have at least three respondents at the RFP stage so that there is a competition involved to encourage the value side of things, the price side of things, but not so many that the chances of success are minimized.
I guess in talking with the private sector, when you lose, you are frustrated. I think the department has indicated that it would hold debriefing meetings and that is something we would encourage as part of the process so that when somebody loses, they understand why they lost, where they came up short, and then they can make the decision to decide whether they want to bid the next time, but I know that the process has frustrated some of the people in the private sector.
MR. HENDSBEE: Could I ask for an answer from one of the other departments in regard to the old conventional methods. If a school was needed to be built, could you quickly identify, if the need was identified, and how the department at that time would have dealt with it?
MR. MACRAE: I am with the Department of Transportation and Public Works. The process would have been with the Department of Education, but there was a capital school committee that would have gone around the province - and it was composed of different members of Education and Transportation - and set up a priority list for the schools to be replaced. Then that decision would have been made with the Department of Education of which ones would be replaced.
MR. HENDSBEE: So once a school had been determined to be built, then the department would then what, go on sole-source and invite an architectural firm to design, or how would it determine which firm got the work?
MR. MACRAE: No. In recent years there has been a requirement for the process to go through a public process for selection and the process at the present time is that you go out and ask for proposals from the architectural firms. They submit a proposal and it is selected on a combination of qualifications and price. Then the firm designs the school from instructions from the Department of Education on what the program will be and the Department of Transportation and Public Works would tender that school, again through a public process, and carry out an inspection. The architectural firm that did the design would have an inspector on-site in the Department of Transportation and Public Works who would come around and view the site as well.
MR. HENDSBEE: In regard to the comments about the options of how to construct these things - design-build, or design-build-operate-own; or perhaps the full design, to build, operate, own and transfer over and stuff - it was determined we have about 4 per cent above the prime of what the long-term debt would have been to finance these things, but could you make a comment about the operational aspect, the operational costs of these P3 contracts? Is there an open-ended scenario there that perhaps would have cost the government more if they had owned or operated the schools themselves versus having the private consortiums operate the facilities?
MR. SCHIBLER: There are two things. One, the 4 per cent or 3.84 per cent related to the road debt. The debt that was raised on the schools was, and I am not exactly certain of the cost increase, but it wasn't a very big increase over the normal borrowing costs of the province.
MR. HENDSBEE: In regard to one of the NDP campaign proposals which was to have a Crown Corporation of schools to own, build and operate these facilities, what is your opinion about a Crown Corporation running these facilities?
MR. SCHIBLER: I guess the issue you were asking in your previous question was on the operating side of things. If you make the private sector responsible for the operating costs, they should and will design in ways to minimize those costs if they are responsible for them for a long enough period of time. They will ask for, and in these cases have received, a commitment to be paid for the operating costs and there are escalation factors built in in terms of wage increases or the Consumer Price Index. They are taking on the responsibility over the life of the contract at that time to meet all of the obligations of the contract within that financial envelope. So if something goes wrong, if they build it improperly or if there is shoddy workmanship, they are the ones who are going to have to pay up at some point.
In the first stages of one of these they are trying to determine what the deal is so we understand just how we want to bid on this to give you the value, but also to keep the costs down and enable us to make some money. You could have a Crown Corporation operate. I am not sure what the arrangements would be with a Crown Corporation in terms of the obligations for any overruns, such as I was alluding to that the private sector would be responsible for, but there would have to be some funding from some source and if it is owned by the government, presumably the government would have it and that is the risk putting it over the long term, then the private sector is responsible to maintain a certain quality which is built into the agreements and if they haven't estimated well enough, they are on the hook.
The reality is that you want to make sure that, from a government point of view, you try to minimize those risks as much as possible with the private sector because then they will be more, they will have a sharper pencil in terms of coming up with their price if they see ways of mitigating their risk. There may be ways of mitigating and it may be a benefit to the government to do that as well.
[9:51 a.m. Mr. John Holm resumed the Chair.]
MR. CHAIRMAN: The honourable member for Pictou East.
MR. JAMES DEWOLFE: Mr. Chairman, certainly one thing that has come to light here is the clear difference between the thinking of the previous Liberal Government and the current Progressive Conservative Government. Certainly with the previous government an accounting function was their priority and our priority is the service and delivery of education.
Just to expand on that in the remaining moments, under the Liberal version of P3, the single greatest benefit of the public-private relationship, as it related to school construction, was its accounting function and the Liberal Government's primary concern was the ability to hide the true cost of schools behind the technicalities that would affect the bottom line. Last spring the line showed a razor thin surplus which indeed turned out to be an actual $767 million in the red, which was incredible. (Interruption) Without the health investment fund. The concern of the Hamm Government, first and foremost, was a service and delivery. Educating our children and certainly preparing them for the future is, in fact, foremost on our minds.
In fact, the accounting function and benefit of P3 that was so important to the former Liberal Government no longer exists because of the open book policy of the Hamm Government. We are not going to benefit from hiding the costs of capital construction because we do have an open book policy that we are all very comfortable with, including the Auditor General. I think that Nova Scotians all agree that this is the way of the future, transparency.
I realize our time is up and thank you gentlemen for coming here today.
MR. CHAIRMAN: I assume there was no question in that statement and while we have a few minutes left if we want to have short snappers, if anybody from any caucus wishes, but if not, then I would also like to extend my appreciation on behalf of the committee to our guests for appearing before us this morning. Hopefully our questions were not too difficult and again, thank you very much for coming.
MR. MACKINNON: I have one short snapper for Mr. Schibler.
MR. HOLM: We will give you a minute. A short snapper.
MR. MACKINNON: If your firm was not commissioned to do a value for dollar, what exactly did you hope to achieve in this analysis? I realize there has been some explanation, but this committee really hasn't (Interruption)
MR. SCHIBLER: We were retained to deal with the three issues that Mr. Lusk outlined and I looked at it, and do you look back or do you look forward? I think what we were trying to do with our report was to look forward and how we could provide some additional direction and some recommendations to the government; should they choose to go forward with P3, how that could help improve what they have done in the past.
MR. CHAIRMAN: Was there another short snapper from . . .
MR. MORSE: I ask the Auditor General, how much would an extra 3.84 base points on the cost of the provincial debt add to the deficit, on an annual basis, approximately?
MR. SALMON: Well, 4 per cent of $11 billion, what is that?
MR. MORSE: No, I asked you the question.(Laughter)
MR. SALMON: Approximately $400 million.
MR. MORSE: It just did not seem to be much of a concern to the member from the former Cabinet.
MR. CHAIRMAN: From the Chair, if I may, I would just make the observation that I look forward to seeing any future audits that may be conducted on this matter by the Auditor General.
With those comments, the official part of the meeting is over. I would like to remind everybody that next week, we will be having our briefing session on the emergency medical care on the ground ambulance, and that will be in the Committee Room at 8:00 a.m. Yes, Mr. Hendsbee.
MR. HENDSBEE: Mr. Chairman, in regard to the question I asked on my first opportunity, would we have an opportunity to have some of the private sector participants in this whole P3 process to come before this committee and talk about and question their involvement?
MR. CHAIRMAN: That certainly is a matter for the committee to decide. If you are making that or if the Progress Conservative caucus is making that as an official request, I personally prefer to have requests brought in writing because then we have something concrete. It is something we could deal with either next week, or the following week, or we could deal with it today. I am at the committee's wish.
MR. HENDSBEE: Perhaps I will just table the idea for the moment and then we will have a discussion with the caucus and bring it forward at a later date.
MR. CHAIRMAN: Thank you. I am just telling you where I come from, and that is that I prefer to have things on paper. It is much easier for us to sometimes understand and to know exactly what we are looking for. I would certainly be more than willing to entertain that request. Any other matters for today?
We stand adjourned.
[The committee adjourned at 9:57 a.m.]