[Recorded by Electronic Apparatus]
Tuesday, November 26, 1996
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[English]
The Chairman: Let's get started. Mr. Mercier from the Bloc has indicated that he's on his way, and he suggests that we get started on an information basis and make it official as soon as he walks into the room.
Our first presenter is David Whitmore, from Vector Construction.
A couple of elements of this whole business of road renewal are some of the new technologies that are being developed here in Canada and some of the research that is being done on new ways to deal with our infrastructure, both in the construction phase and in repair and maintenance.
Mr. Whitmore, with that introduction, you have some slides to show.
Mr. David Whitmore (Vice-President and National Sales Manager, Vector Construction Ltd.): Yes, I do.
The Chairman: You can make your presentation and then we'll get into questions.
Mr. Whitmore: Thank you for the opportunity to present to the committee today. Before jumping into the presentation, I would like to briefly go over what I'd like to cover.
I would like to give you some background on our company and on the type of work we do. I would also like to briefly describe one of the new technologies we're involved in - and I think that's the reason I've been asked to be here today. Thirdly, I would like to talk about how new technology - such as the one we're involved with - is evaluated and promoted in the United States and in Canada, and I would like to compare the similarities and differences. Finally, I'll just make a few comments at the end with regard to how the situation in Canada could be improved with regard to encouraging and implementing new technology.
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First of all, I work for a company called Vector Construction Ltd., and we do specialized concrete restoration and protection work. I work out of our office in Winnipeg. We have four other offices across central and western Canada. There is one just outside of Hamilton, Ontario, one in Thunder Bay, one out in Saskatoon, and one in Calgary, and we have two offices in the upper midwest in the United States.
Although we are generically lumped in with what's considered to be a low-technology industry - the construction industry - we essentially do very specialized work. Our advantage in the industry is basically to come up with and use cost-saving technologies where they make sense. Some of the things we're involved in include specialized methods for bonding cracked and broken concrete back together again; the use of acid-proof concrete; and using carbon fibre for reinforcing structures, which is going to be talked about in considerable detail later on. There is also a new technology we're involved in, and that is a method of removing salt from salt-contaminated concrete structures.
The process for removing salt from salt-contaminated structures is essentially called the Norcure chloride extraction process. Basically, the reason this process was developed is that when it soaks into the concrete and reaches the level of the reinforcing steel, salt causes the steel to corrode. The vast majority of the deterioration that we see on highway bridges and other structures that are exposed to de-icing salts is due to salt-induced corrosion.
Here's a slide that basically shows the salt soaking into the concrete. When it gets to the level of the reinforcing steel, you get some corrosion. As the corrosion occupies more space, it causes the concrete to just fall off. This is what you normally see in the field.
Conventionally, you chip out all of these areas - and here's an example of a typical job, where you have guys chipping out these bad areas and patching them back in. Obviously this makes a lot of dust and noise and concrete rubble that has to be sent to landfill. It also isn't a very long-term solution because you're only patching these isolated areas, whereas all the rest of the bridge deck has been exposed to the salt in the same way as the areas you're patching. So over time, even though you patched these areas, areas over here will start to fail, and it seems like you're going back to the same bridge every year or two to do more and more repairs. So from the public's point of view, you're always shutting the bridge down even though you're only doing maybe 5% or 10% of the area at a time.
The process we're involved in is basically an electrochemical process that removes the salt or the chloride ions from the salt-contaminated concrete. Instead of removing and replacing all of the salt-contaminated concrete, we're just removing the salt and leaving the concrete in place. In some situations, that's a lot more cost-effective and a lot less destructive, and it can also be a lot faster. I'm not going to bother you too much with the details of how it works, but basically it's an electrical process whereby you put a temporary anode on the surface of the concrete, hook it up to a power supply, and basically force the chlorides in the concrete to move out and collect outside the concrete.
I'll just show you a couple of examples on how it's typically done. This is on a bridge deck. You can see them rolling out a synthetic felt. A mesh is then put on over here, and it's then covered with another layer of felt. That's essentially the installation of the system.
Mr. Jordan (Leeds - Grenville): Is that to keep the salt from going in or to get it out?
Mr. Whitmore: No, this is to draw out the salt that's already in there. This is to electrically draw it back out of the concrete. How you keep it from getting back in again is a subsequent step that you would use later on, after you've done the removal, because by removing the salt you stop what's causing the corrosion to occur.
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This is a bridge column, and that's a bench installation of the system there. This is the first full-scale project that was done in North America using this technology. It was done for the Saskatchewan Department of Highways in 1994. They've been relatively proactive in Saskatchewan in terms of implementing this technology and others, so it is worth some note.
This is an old slide from our very first trial project, which was done in 1989 on a portion of the Burlington Skyway, just outside of Hamilton. This was done for the Ministry of Transportation of Ontario. I wanted to throw this in just to give you an idea of the timeframe involved. This was the first trial project done in North America, in 1989. We've done two subsequent trials with the Ontario Ministry of Transportation, but we have yet to do an actual job for them. It looks hopeful that there will be an actual project this year, but that will be for seven or eight years later on.
There's another project. This is a bridge just north of Edmonton, Alberta.
Ultimately, I think if you deal with any kind of new technology, it's going to come down to cost. You might want to do things for other reasons, but certainly cost is a major element. If you can address the structure early enough, you can treat the structure for relatively little money. That is, you can remove the chlorides and stop the corrosion before the corrosion gets to a point that necessitates major repairs. If you look at it in terms of the lifetime of the structure, it's much more cost-effective to do this than it is to wait and do conventional repairs sometime down the road.
That's basically it for the slide presentation. I'd like to talk a little bit about the implementation of the technology, and say some things with regard to the industry and to what is similar and different between Canada and the United States.
First of all, as you are probably very aware, the civil engineering field is very conservative. This conservatism makes engineers very hesitant to adopt new technology. You can see that just from the example of the Ministry of Transportation of Ontario. There are a lot of pressures on people, especially engineers who are in the public sector. There's no incentive for them to try a new technology. If they try it and there are any complaints from the public, they get their necks cut off. And if they try it and it works well, no one really notices or cares. So it really does take a strong individual to stick his neck out and to go the extra mile. It's a lot easier for them to sit back and just do what they've always done because they can save themselves from any flak that way.
In the U.S., the Federal Highway Administration was involved in and did a lot of research through the strategic highway research program. Canadians were involved through the Canadian strategic highway research program. The interesting thing is that when that research program was finished in the U.S., the Federal Highway Administration took the information and gave it to a special department they have called the Office of Technology Applications.
The Office of Technology Applications is specifically responsible for implementing and using the research and innovations, etc., that came out of the strategic highway research program, as well as other research they're doing. So they have an actual method in place to try to implement new technologies. They also have funding available to state departments of transportation to compensate them for the costs of trial projects and projects that incorporate targeted new technologies.
As a result, even though we started off doing chloride removal in Canada two or three years prior to the start of anything in the U.S., there is more activity in the U.S. with regard to this technology right now than there is in Canada. I would say that's solely the result of the Federal Highway Administration's involvement through its Office of Technology Applications.
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The other thing that has helped us in the U.S. is the fact that we won a technology award for the process earlier this spring. That has certainly increased our exposure in the U.S. market and has been beneficial in that way. With regard to Canada, as I said, the situation isn't nearly as proactive, and that may be something you want to consider.
One exception that I would like to note - it's on page 6 of my brief - is that under the federal government's previous national infrastructure program, there was a specific clause in the Quebec provincial agreement. In the Quebec agreement, there was a set-aside. Of the $1.58 billion that was allocated to Quebec, $25 million was set aside for projects that incorporated experimentation with and the adaptation of essentially new technology. Just to put it in perspective, that's about 2% of the total spending in Quebec.
A number of things were done and tried, and I'm sure they wouldn't have been tried at all without that money. So if you are going to consider any similar programs in the future, I would certainly recommend that something like that gets put into all of the provincial or regional agreements. It certainly seemed to work in Quebec.
There is one other thing with regard to economic benefits. For our company, I think the biggest advantage and benefit of new technology is export potential. We have a lot of bridges in Canada, for example, but there are a lot more bridges in other places in the world, particularly in the U.S. and overseas. These bridges suffer from the same problems as our bridges. So if we come up with a new technology - for instance, the chloride removal technology - we can apply that to a bridge in New York City just as easily as we can apply it to a bridge in Toronto. It's a technology-based decision, it's not a regional or local issue. It's something we can take and can apply to a structure wherever. So from our perspective, there's a big potential economic benefit for our company to be able to take this technology to the United States - in particular in our case - and apply it there because the potential market is so much bigger.
In conclusion, the highway infrastructure is an important part of our economy and it costs a great deal. We spend a lot of money to maintain it. There are many innovative technologies that have been developed, and a lot more that are being developed. The technologies have the potential to improve the quality of and reduce the cost of maintaining our infrastructure. But we have to recognize that the engineering community is very conservative and is hesitant to champion new technologies. The federal government should consider the merits of encouraging and implementing ways that will result in cost savings in the long term.
Thank you very much.
The Chairman: Thank you very much, Mr. Whitmore.
Mr. Jordan.
Mr. Jordan: If I'm reading correctly here, you attribute most of the damage to the salt, the sodium chloride that we use -
Mr. Whitmore: - to de-ice the roads so that you have a clear driving surface in the winter.
Mr. Jordan: So if we could find a substitute for that, it would be a big move.
A week or two ago, I was involved... There's an area in my riding in which they claim that the salt used on the roads is contaminating the wells. It was in the news. I got involved there, and they told me that they had a substitute for the salt, but that it was so expensive -
Mr. Whitmore: There are many substitutes.
Mr. Jordan: - that they were inclined not to use it. Are you familiar with that?
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Mr. Whitmore: A number of different substitutes for salt are available.
Mr. Jordan: Is it cost alone? Is that the only determinant?
Mr. Whitmore: Sure, because the people who are paying for the salt aren't paying for the damages. It's cheaper for them to buy the salt because they're not paying, for example, for the corrosion damage to hundreds of thousands of people's vehicles...let alone that the people who are buying the salt aren't the same ones. It's not necessarily coming out of the same pocket as the people who are fixing the bridges and all the other things.
Mr. Jordan: It seems to me if you could prevent the salt from getting in there in the first place, a lot of your problem would be solved.
Mr. Whitmore: Yes. And with new structures they spend a lot more time and effort to do that. The problem we have is mostly with the bridges that were built between the 1950s and the early 1980s. That's the particular period that's a problem.
Mr. Jordan: And would acid rain and air quality and so on not be a factor too in the deterioration? It wouldn't just be salt.
Mr. Whitmore: Yes, that will affect the surface to some degree, but it won't affect that much into the depth of the concrete. It definitely would be a factor.
Mr. Jordan: So your market would really be only in areas where climatic conditions -
Mr. Whitmore: They use de-icing salts.
Mr. Jordan: - were such that you had to use them. You wouldn't have much of a market down in Florida.
Mr. Whitmore: Except there you have salt spray from the ocean, for instance, so they are exposed essentially to... If you're anywhere near the ocean you have a very similar environment - the bridges in California, for instance.
Mr. Jordan: What's this stuff here? Is that some of your -
Mr. Whitmore: I believe that's for the next witness.
Mr. Jordan: I thought you were going to show us some structural steel or something.
The Chairman: Mr. Keyes.
Mr. Keyes (Hamilton West): Thank you very much, Mr. Chairman.
Welcome, Dave, and thank you for presenting this innovative technology to the committee.
I'm a little confused. I notice in this thing your address for more information is Fargo, North Dakota.
Mr. Whitmore: Is it?
Mr. Keyes: Yes, on page 3.
Mr. Whitmore: Yes, okay. This is the press release from the NOVA award we won in the spring. We have two offices in the U.S. We have one in Fargo, North Dakota, and -
Mr. Keyes: So is this technology Canadian or is it American?
Mr. Whitmore: The base technology is actually Norwegian. We were involved in essentially implementing the technology.
Mr. Keyes: Who is ``we''?
Mr. Whitmore: Vector Construction.
Mr. Keyes: And Vector Construction is American or Canadian?
Mr. Whitmore: Vector Construction is Canadian. We have two branch offices in the upper midwest, one in Fargo and one in Sioux City, Iowa. It's actually in Nebraska. The reason Fargo is on there is it's a U.S. organization that gave out the award, and they -
Mr. Keyes: So you are licensed to do this technology in Canada?
Mr. Whitmore: Yes.
Mr. Keyes: And the U.S.?
Mr. Whitmore: And the U.S.
As it stands right now, we work in both. We're a Canadian-based corporation, though, and Canadian owned - essentially a family-owned company with two offices in the U.S. and four offices in Canada.
I believe you're from the Hamilton area.
Mr. Keyes: That's right.
Mr. Whitmore: We have one office in Stoney Creek.
Mr. Keyes: Okay. Thank you very much. I appreciate it.
The Chairman: Thank you, Mr. Whitmore.
Now, from ISIS Canada, which is a centre in the Canadian Network of Centres of Excellence, this one on intelligent sensing for innovative structures, we have Dr. Sami Rizkalla.
Sami, how do we define you, as one of the brains, the head brain...? I think some of my colleagues hope you're not sensing for intelligence in this room.
Dr. Sami H. Rizkalla (President, Canadian Network of Centres of Excellence on Intelligent Sensing for Innovative Structures (ISIS Canada)): Thank you, Mr. Chairman.
Members of the committee, ladies and gentlemen, it's a pleasure for me to be here to share with you my opinions on the future of Canada in the construction field.
You might wonder what ISIS stands for. ISIS stands for ``Intelligent Sensing for Innovative Structures''.
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Before I proceed with this, I would like to show you some slides. ISIS Canada is a centre of excellence in the Canadian network, one out of fourteen established by the federal government over the last seven years. It's taking the way of doing research and development in this country to build a community of knowledge.
These centres of excellence were created by the federal government mainly to enhance the economy and to solve the problems and take the expertise and the research from the university to the application. They established fourteen networks, two in infrastructure, six in health, and others in human resources, natural resources and the information highway.
In this program - this is the second phase of the program - we are one of four selected, out of 65 applications. The program really supports the best in the country in terms of helping the economy and helping the wealth of the country through research.
The program is successful because it attracts very substantial outside financial support for research and development in each field. The program itself, up until now, has attracted 405 companies from industry to work with the universities in research. In health, they attracted 78 hospitals, 72 prevention and federal departments, and 41 of Canada's top 100 R and D companies.
The energy program is the most successful in terms of taking the research into application and using the resources at universities and companies to solve the problems in Canada and build the wealth. Now I will concentrate on one of them. I am the president of the centre for intelligent sensing for innovative structures, ISIS. At ISIS, we are developing Canadian civil engineering and construction capabilities to a world-class leadership level. We do this through the development and application of advanced composite material. I will explain about ACMs - advanced composite materials - and intelligent fibre optic sensing technologies. Both of them are Canadian research outputs.
ISIS is unique in a way. It's not just one field. It's a multi-disciplinary kind of cooperation among many fields, including microchips, optical fibre sensors, remote monitoring and intelligence processing. We cooperate to build structures in a more innovative way, structures that are more economical and have a better performance. And we look at the existing structures so that we can repair them to live longer, to carry more loads, and to be conveniently used for a long time.
The work in ISIS is not in Winnipeg or in Manitoba. The headquarters is in Manitoba, where I come from, but the work and the research are spread across the country from east to west. We are working with companies, with the provincial level, and with all sorts of people involved in infrastructure.
We've been involved for slightly more than one year, and within this year, we attracted all of those people to work with us from industry. We are utilizing the research facilities and the expertise at the universities and putting it in bed with the actual application together with private industry, provinces and municipalities. All work together to solve Canada's problems.
I don't think I will address this because I think the committee knows more than I do about the infrastructure deficit. That is not some kind of local problem. It's a global problem.
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In estimating the type of infrastructure deficit on the national highway systems and in Canada, we're talking about billions of dollars everywhere. Our kind of work is mainly giving Canada the opportunity to solve problems in Canada and everywhere abroad. It will be similar in concept to the Canadarm. We would like to see the construction industry in Canada as well known nationally and internationally as the Canadarm was for the space shuttle.
I'm sure this committee is aware of the problems with infrastructure that are related to the deterioration of the concrete. We heard today from David Whitmore. We have aging buildings everywhere that we would like repaired. We are looking at increasing demands on bridges to carry more loads. We have new codes everywhere to specify traffic and truckloads. We have to respond to this.
What should we do? We are proposing, with this kind of research, to use ACMs, which I referred to before as advanced composite materials.
I can show you what ACMs are. We're talking about fibres. This particular one is a carbon fibre, but they could be glass fibres or any kinds of fibres that come from silica. You must make sure you wash your hands after you hold this one. They are very tiny fibres that are ten times stronger than steel. If you break steel, of course it can be used, but these are very expensive shoes, actually...
Voices: Oh, oh!
Dr. Rizkalla: The fibres cannot be used without being put into a form to give it a certain shape, like epoxy. You put these fibres into epoxy and you produce a product.
Here I have a steel bar and I have a glass fibre bar. You can examine both of them and compare. First of all, you heard from Dave that steel corrodes, so you have a problem with concrete structures. This fibre doesn't have any corrosion problems. The strength is much greater. There is another example here of steel cable and a cable made of this new material. That's what we call advanced composite materials.
This chart will give you some idea. If you put the steel on the chart it's at about 400 - whatever the 400 stands for - and the fibre is at about 5,500, or ten times greater. Some of the bars are produced in Quebec in Iserhoff. We also produce them in Halifax.
This will give you some idea of how the fibres are compacted and put together into this one bar. Right here we're talking about 80,000 fibres compressed with epoxy to produce one bar that we can use with any strength of steel. We don't have corrosion and the strength is ten times that of steel.
We can produce this in sheets rather than bars. Let me show you a cross-section of a sheet. It's like wallpaper. I'm sure most of us are familiar with wallpaper. You can use this as sheets to repair existing structures.
I'd like you to look at this structure, which all of us are familiar with. It's a water tank. In water tanks, over time the concrete will crack and it will leak. What do we do about this now? We build a new and very expensive one. But with these sheets, you can keep using these facilities without any interruption. You wrap the structure with these sheets, exactly like wallpaper in your house.
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Mr. Keyes: How much would that cost?
Dr. Rizkalla: If you compare it to conventional methods of repair, it's about 50%.
Mr. Keyes: Less.
Dr. Rizkalla: It's saving 50% to 60%.
Mr. Byrne (Humber - St. Barbe - Baie Verte): If you were to replace that entire structure, is that what you're saying?
Dr. Rizkalla: If you replace the entire structure, or if you build another wall, like we do in bridges. If you wish to increase the strength of a bridge, you build concrete beams in between, or you encase the beam. Or you take these sheets and put them on the surface.
Mr. Jordan: Does salt affect it?
Dr. Rizkalla: If you like to extract the salt, you can. You can take it out or you can keep it in. This will act as a structural confinement and give the strength. With this one here, you talk about $5,000 as compared with $50,000 for concrete. How to use this technology is what we are waiting on.
Mr. Jordan: I heard of a couple of beams that were done earlier with solvents that you put back during reconstruction. Is that similar?
Dr. Rizkalla: What would happen for them... They still like to use the steel inside to be structural elements. We are replacing the steel with this because -
Mr. Jordan: You're putting them out of business, in other words.
Dr. Rizkalla: Well, it's a combination of both, it's a combination. If you leave it, what will happen is that after ten years you have to go again and do it. But if you do it for some critical structures, we can go and wrap it, then you prevent the salt from penetrating it.
Another application for bridges is to put this glass on the surface and you can increase the capacity of the bridge almost twice.
I'd like you to look at this column here that we wrapped. What I am pointing to down here is the existing steel in the columns. If you look at this after we tested, you can see the steel is already fractured and the material is still in place.
There are many applications now across the country, in Alberta, Ontario, Nova Scotia, Quebec and P.E.I. One of the examples I chose for this committee is a completed project that happens to be in Winnipeg. This building is a very good building, but they must increase the equipment on the roofs of the structures to get some more air conditioning and equipment and the structures cannot carry it. What we did - Vector Construction was actually involved in this, and Vector Construction did this particular project - was to have these sheets attached to the ribs of the concrete. It can then carry almost 50% of the existing load.
You can do this work without any interruption in the use of the building and it is certainly economical compared with any conventional methods.
Here is Vector Construction and other companies working with us on the repair of a bridge. Here's a girder of the bridge - we're doing it to see how it will work. We go and attach these sheets here on the surface and that's the shape of the completed girder. This is another bridge in Manitoba. They wish it to carry a greater load but it certainly cannot carry more with the existing design, which is 30 years old, so without interruption in the use of the bridge we go and attach the sheets. This is estimated to cost about 60% of another alternative conventional way of repairing those structures.
Mr. Keyes: Is that glued onto the beam?
Dr. Rizkalla: We go and clean up the surface from the loose end of the hole with a water jet, like a car wash, then we put epoxy, put this sheet with another epoxy and all that would take a day to do and you're in business.
The other side of ISIS is the optic fibre sensors, the one optical fibre with which we are familiar, but we use it for sensing. We instrument the P.E.I. bridge and then we can communicate with the bridge from a distance to find out what's happening under the different wind load, ice load, without the need to go. If there is any problem, we can solve the problem before it expands.
In Halifax, we use an innovative way of building bridges. Normally, if you have the girders or the beams, you put a deck on the bridge made of steel and then the steel corrodes and you go back every couple of years to repair it.
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We are proposing that we don't put any steel. We don't even use any reinforcement. We shock this material, which is shock fibres, and mix it with the concrete and you end up with no reinforcement.
That's not theory. That's an actual bridge, the Salmon River Bridge, built in Halifax. You can see that they are casting the concrete here on the side, and you notice there is nothing, no steel at all to carry the concrete. It looks like somebody is missing something here, but that's the actual bridge actually in use now under the traffic load, and it's working very well.
In Quebec and many other places in the country, you will see this everywhere you drive on the highway. You can see the corrosion of the steel. Then what we do is go and wrap these columns. With the use of the bridge, there is no interruption of the traffic in any direction. The operation to wrap all these columns would take two days, and you end up with the new columns carrying more loads without interruption of the traffic. That's the type of technology that actually exists and is developed in ISIS to solve the infrastructure problem.
A bridge will be under construction now in Manitoba, which is the first ever bridge in the world built to ISIS technology in terms of using advanced composite material and fibre optic sensors. This bridge - half of it only, because it's on a trial basis - will be with this new material. The bridge is instrumented with the fibre optic sensors, which are connected to a computer. Then the engineer will sit in the office and log in. We have a camera, and we find out what kind of load and record any deterioration or problem on the bridge. Then you have a complete knowledge, rather than going to the bridge and inspecting it every time.
When we look at ISIS and the NCE program and the research here, it's an opportunity not only to do research to solve the infrastructure problem, but in addition, we are giving the youth of the country a highly trained, multi-disciplined... As I indicated, we are working together from the electronic microchip technology to give Canada the kind of expertise that doesn't exist anywhere. It will develop high-tech Canadian products and will export these products known for smart, innovative structures, using these optical fibres and microchip and the new intelligent data processing.
ISIS Canada gives economical - and that's the key - economical repair methods, efficient and economical, so we can use the structures for a long time. It will give the opportunity for the Canadian industry to work or create jobs not only here in Canada, but to go abroad and use this technology everywhere, worldwide.
Mr. Chairman, that's a brief presentation about ISIS. I am very proud that I can share this information with you.
The Chairman: Thank you, Dr. Rizkalla.
Are there any questions?
Mr. Byrne: To get back to the cost element, to use the example of the bridge, one of the last slides you showed, what would you estimate the cost of materials to be for that particular project?
Dr. Rizkalla: The bridge we were talking about is actually two bridges, one way in each direction, in Winnipeg. The cost to repair it to carry more load...you build another beam to encase the existing beams. The estimated cost for the repair is about $10 million. The estimated cost of using this technology is between $6 and $7 million. It's about 60% of the conventional cost.
In a way, if you look at the conventional one, you would have to interrupt. You would have to close the bridge to put it in. Secondly, you put too much weight on the bridge, and in my opinion you are actually hurting the bridge rather than repairing it.
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Mr. Byrne: For how long would that increase the lifetime of the bridge?
Dr. Rizkalla: Until there's another demand, but it will satisfy the requirement of the code to upgrade the bridge to the required loads. This material is much better than concrete. It's used for aerospace and automobiles, and it's much better than steel and concrete.
Mr. Byrne: Thank you.
The Chairman: Dr. Rizkalla, can you talk a little about where the rest of the world is at in this area?
Dr. Rizkalla: I was very proud that I chaired an international conference in Montreal last August. The minister, Jon Gerrard, attended it as a keynote speaker. After he finished, people approached him and asked how Canada came to be ahead of the rest of the world in this field. There is a lot of work going on in the United States, Europe and Japan, but we've been identified in Canada as leaders in this.
In fact - this was news just this week - I've been selected to change the codes in the United States and Canada so as to have a code available for engineers to use in this field. The answer is that we are way ahead compared to other nations.
The Chairman: What point is the industry at in the use of this? This is still relatively new technology. You're just experimenting with it in certain locations.
Here's one of the issues in the renewal of the national highways system. The system, as it's currently identified, includes about 3,000 bridges. Slightly more than 700 of them are estimated to be in need of substantial repair. Is the industry at a point at which it can begin to respond to demands of that magnitude?
Dr. Rizkalla: The industry has started to respond. We've only been in place one year now as ISIS Canada. So far, we have had about ten projects. We have people now talking to the owners and the provinces to get this as an accepted technology. It will take time, but my feeling is that this will peak very quickly as soon as it becomes known that it's working, easy to use and economical.
What is happening now is that we have to talk. I'm here to make people aware of this technology. We have to hold hands. We have to use some of the infrastructure funds to help them cover some of the unknowns in the field. When we repair a bridge like this, the owner doesn't know what it is. We have to test it for the owner. This takes some extra costs at this stage.
It's very promising, but we have to work hard to make sure this is publicized. Engineers are very conservative people. They like to have codes and standards to use, but we don't have codes and standards now. All this is based on them taking the challenge and doing it with some kind of help from ISIS Canada.
The Chairman: The estimates to date are that the costs of repairing a bridge using this new technology are 50% to 60% of the conventional costs for strengthening and bringing a bridge back up to code.
Dr. Rizkalla: Correct. That 60% is the actual estimate of a bridge we have in Manitoba. Dillon Consulting Ltd. has a design to repair the Maryland Street Bridge. The cost is estimated at $10 million. Using this material, we have an estimate of about $6 million. So we're talking about a savings of 40%.
The Chairman: This is a relatively new material, so presumably, should there be a volume demand for it, the cost of the material itself would drop.
Dr. Rizkalla: Absolutely. What we are producing, like the bar you've seen produced in Nova Scotia, is almost like a Rolls-Royce: you have to produce it for a specific application.
I compare this to the calculator. When I bought my first calculator, I paid $400 for four or five functions; now we can buy a hundred functions for $2. It's just a matter of the technology taking off. Then things will be very reasonable, even cheaper and more economical.
The Chairman: Okay. I understand that part of the ISIS network is the University of Sherbrooke.
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Dr. Rizkalla: The University of Sherbrooke is one of the main nodes of ISIS in taking care of this particular application, which is rehabilitation and repair of structures. They have several projects currently in progress. The bridge in Sherbrooke on Highway 10 is done by the University of Sherbrooke, and a parking structure is under repair with the help of the University of Sherbrooke.
The Chairman: That has stimulated a question.
This is Mr. Crête. He has just come in.
[Translation]
Mr. Crête (Kamouraska - Rivière-du-Loup): My question does not necessarily deal with the University of Sherbrooke. I would like to apologize for not being here sooner and I hope that you will not have to repeat some of the things you already said. I am very much interested in this subject. Is there any possibility to export our know-how? Was an assessment done of the market which could be developed in other countries or in countries South of the border, not only in terms of the technology as such, but also to sell the idea that things can be done differently if your projects are taken into account? Was such an assessment done?
[English]
Dr. Rizkalla: That's a very good question, and certainly I'll be happy to repeat anything you want.
That is the main mandate of ISIS Canada, which is one of the network centres of excellence: to promote and implement this technology with the industry and to help the industry use this technology not only in Canada but abroad. In fact, we have hired two people currently and are in the process of hiring another two to go to work with the industry and help them apply this technology.
In one of the projects, actually, we have been asked by the Philippine government to use this technology in the Philippines. Wardrop Engineering Inc., which is a Canadian company, has the kind of work in Philippines that will use this technology.
We are working with different companies here in Canada to do the work in the United States.
In answer to your question, that's one of our mandates as a network, to promote this technology, make sure we have the intellectual property kept in Canada, and create companies and help them use this technology before the others. That's one of our mandates in ISIS.
[Translation]
Mr. Crête: Thank you.
[English]
The Chairman: Thank you, Mr. Crête.
Thank you, Dr. Rizkalla. I appreciate you taking the time to come here today.
Dr. Rizkalla: Thank you very much. It's a pleasure to be here.
Mr. Keyes: The network of centres of excellence are really performing for Canada, and we have to continue to support that avenue of funding and research and hold it all together.
The Chairman: Thank you, Mr. Keyes, because that very question will be before cabinet in about a week.
Mr. Keyes: We'll send them a copy of our minutes.
The Chairman: Absolutely.
Mr. Rafferty, you're from Hambros Canada Inc., from the Hambros Bank?
Mr. Liam Rafferty (Assistant Director and Head of Project Finance Unit, Hambros Canada Inc.): Yes, Mr. Chairman, that's correct. Good afternoon to you, Mr. Chairman, and to the other members of the committee.
[Translation]
Good afternoon, Mr. Chairman, and members of the committee.
[English]
Mr. Chairman, the purpose of our presentation to the committee today is to discuss an approach to the delivery of road infrastructure in Canada that has had applications in the United Kingdom and in Australia and presents an option for the delivery of a federal roads policy in conjunction with provinces across Canada and increasingly municipalities that can accentuate the existing national road system and also provide an opportunity for the expansion of the national road system, in particular, working at the federal level with the provinces on the national highways system.
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Mr. Chairman, as you've noted, my name is Liam Rafferty. I'm an assistant director with Hambros Canada, as well as the head of their project finance unit. I'm also an assistant director with Hambros Bank in London, England.
My colleagues, Mark Warren, who is the chief executive of Hambros Canada, and our chairman designate, Harry Swain, who may be known to some members here from his time as a deputy minister, most recently in the Department of Industry, are not able to attend today. Mr. Swain is actually in the U.K. and Mr. Warren is soon to depart for western Canada. Both wanted to be able to attend today, but unfortunately their schedules did not allow for that.
To explain very briefly who we are and why we are here today, Hambros Canada is the wholly owned subsidiary of Hambros Bank. Hambros Bank is a U.K. merchant bank that engages in a wide variety of commercial transactions, lending corporate finance, project finance, derivatives trading, which always makes everyone nervous when you hear about it, currency swaps of all sorts to allow for cross-border lending, and has been a merchant bank in operation in the United Kingdom for150 years.
Hambros also carries on substantial corporate finance and project finance operations in Australia and has recently broadened their business in both Canada and South Africa to take advantage of other expertise. Hambros also has a dedicated lending and private placement facility operating out of New York City, where they play a significant role in the delivery of private placement finance for a variety of projects.
Mr. Chairman, I have provided material today for the committee that outlines a general approach to public-private partnerships. I also have some material that I would like to supply to the committee but that was not available for distribution today. It is actually material prepared for Transport Canada. One of the gentlemen from Transport and I had the opportunity to meet on a previous occasion where this report was reviewed and presented. It will be of some value to the committee, and with your permission, Mr. Chairman, I will subsequently distribute that to all members through the office of the committee clerk.
As I indicated, Mr. Chairman, the purpose of our presentation is to discuss an approach to the structuring and financing especially of roads infrastructure, but it operates well for any kind of transportation infrastructure. This approach has had a proven application in other G-7 countries, particularly the U.K. and other countries with a similar legal regime to Canada, particularly Australia.
The contractual structure has had two primary benefits in its application. The first is that the quality of road construction has been shown to have improved, and particularly for cold climates where the frost and heaving represent annual dilemmas for anyone travelling the Queensway in Ottawa or any of the other major highways across Canada. The quality of road construction and the availability of lanes are an important component of a national highways policy and a national infrastructure policy.
Secondly, the delivery of this contractual structure has been shown to reduce both capital costs and operating costs in a variety of applications, many of them detailed in the report I will subsequently be able to provide to the committee.
The contractual structure itself is what is called a design, build, finance and operate structure. There are a variety of acronyms that attach to this. The one we employ is DBFO, obviously standing for those four concepts - design, build, finance and operate.
There are three hallmarks of a DBFO system. The first is that in implementing a road contract, the government does not actually do detailed design but rather establishes performance expectations and quality standards. That doesn't mean there's no engineering - far from it. There's still considerable engineering, but the delivery of design and performance criteria still allows considerable flexibility for the private sector partner to undertake construction techniques and design techniques that are intended to limit cost.
The second key element of a DBFO road structure is the idea that governments will purchase a service and not an asset. By that, I mean the purchase of the availability of safe highway passage across a designated right of way, rather than the idea that by issuing a tender and conducting a standard procurement contract, at the end of the day you acquire the least expensive bid for a detailed set of design specs. This would leave the government, whether municipal, provincial or federal, with all of the ownership risk and responsibility for operating and maintaining that road in the long haul.
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The change in a DBFO-structured contract is that you invite the private sector not just to build your road, but to operate your road, maintain your road and in fact pay for your road throughout the life of a long-term concession, typically between 25 and 35 years. At the end of that concession period, you will see an asset that reverts to the government that has undertaken the contract with the private sector, usually for nominal consideration.
This structure in both the U.K. and Australia has been funded by something called a shadow toll. This idea has received considerable interest lately, particularly because of the sensitivity of tolling for existing road networks that have already been financed on at least one occasion by the taxpaying public. There is generally a perceived unwillingness to implement a toll system on roadways that have already been built using general revenues.
We can think perhaps most recently of the example in Quebec with the tolls on the autoroutes. Those did pay the costs of the roads. You would, I suspect, have difficulty persuading the motoring public that they should pay all over again for something they believe they're paying for at the pump and through their tolls.
Using a shadow toll payment device achieves some substantial advantages for a government body that is in a position to fund the construction of a roadway network through the use of either gasoline tax revenue or general revenue. If you accept the premise that for large portions of Canada's road system - again, whether it's a federally, provincially or municipally operated road system - we will not simply put up toll-booths on every right of way in Canada, there is the reality of a continuing role for government in the financing of road infrastructure.
That role, however, can be adapted through the use of shadow tolls to a model that more closely resembles the situation that ensues when someone has the ability and the facility to establish toll-booths, or as we're hearing about today in Nova Scotia and Ontario, the use of electronic tolling technology to allow you to pass through without the inconvenience of stopping and without the need for staffing.
The most significant hallmark of a DBFO contract structure for the delivery of roads to the public sector is a requirement that you achieve a transfer of risk, which is commensurate both with the length of an operating period - again, a 25- to 35-year operating period is typical in a transaction of this sort - but you also must achieve a transfer of risk to justify what will inevitably be the higher price of private finance.
No matter what situation governments in Canada find themselves in today, the government can always borrow more cheaply than even the best credit-rated private finance sources. That remains and will always be, I suspect, a matter of fact, given the differences in the abilities of government and private sector bodies to raise revenue. So there is no doubt that the cost of private finance will be higher, and we've seen play on this point in the press, particularly in Ontario with discussions about highway 407.
The message I am here to deliver today to the committee, and one that I can indicate is at the conference now under way in Toronto, sponsored by the Canadian Council for Public-Private Partnerships, the message they are seeking to deliver to all levels of government is this. The higher cost of private finance, if it is offset by value-added risk transfer, still generates a less expensive solution and arguably a more efficient solution when you look at the deployment of capital resources than under the current model.
May I say, Mr. Chairman, that were I a member of this committee, at this point I suspect I'd be tired of representatives from the private sector who decide to pay a visit to this committee and say that issuing the words ``private sector'' automatically means better. That's not true. The private sector has shown its ability to lose money with the best of them; it's not exclusively a province of government.
The significance of a private sector shadow toll road solution is the application of a DBFO structure, which says to the private sector, your interest is not in building this for the lowest cost at the front end; your interest is in building this roadway with the highest possible quality at the commencement of your concession, to minimize the cost of maintaining and servicing this asset over its useful life.
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What kind of payment device does a shadow toll permit a government to do? These are not abstract theories. They are in practice to the tune of $1.5 billion of shadow toll road procurement in the United Kingdom, all of which has been implemented since 1991. So this is recent information. It's information, in this particular case, that Hambros Bank is particularly familiar with, as it was the adviser to the U.K. government, not only in the development of the policy, but in the actual letting of contracts and the negotiation of those contracts.
A DBFO road project funded by shadow tolls offers three propositions that change the entire nature of the payment stream. The first is that you pay for performance, not for the acquisition of the asset. So in the 18 months to two years before a roadway is actually operational, there are no moneys flowing from the government, as you will see in a traditional construction contract procurement where you're making progress payments all the way along.
That has a significant advantage when you look at the obligations of government to raise capital moneys, especially in road projects where you can get into the hundreds of millions of dollars before you've even left the drawing board, never mind actually get into the ground.
The elimination of the need to raise capital moneys by the transfer of the risk of finance to the private sector is a substantial inducement. Shadow tolls, in addition, are paid for performance. Performance can be defined in a number of ways. The most obvious is the actual use of the roadway by the travelling public, and that can be monitored electronically. You can monitor it manually, if you choose.
In addition to that, you are entitled and able in a DBFO road structure to graft on additional conditions. It's not merely traffic, but is traffic travelling at an adequate rate of speed and is traffic travelling with sufficient safety? Do you have a track record in the availability of lane space that indicates all eight lanes required as a performance standard or all four lanes required as a performance standard are open all or substantially all of the time?
The flip side of the coin when you pay for performance in a DBFO road structure is that you also penalize for non-performance. If laneways are closed longer than minimum periods required for normal maintenance, you not only have fewer cars passing along your roadway, but you can in your contract structure actually impose financial penalties. Your ability to do so, I think it's trite to say, comes along much more easily when you have intensive urban area travel as opposed to less intensive rural area travel. So the more valuable the concession, the greater the ability of the government party to add a level of policing and security to the contract, which goes simply beyond being a paymaster.
The most significant aspect of a shadow toll-style payment structure from a government accounting point of view is that it is truly contingent. It's contingent on use, it's contingent on minimum standards of performance and it's contingent on laneway availability. If the private sector builds a shoddy road, it will spend a lot more time maintaining that road and a lot less time funnelling traffic along that road and it will be making a lot less money as a result.
The private sector in an urban environment will absorb almost all of that risk, as has been demonstrated repeatedly in the experience in other jurisdictions.
There is a lot of talk about the value of off-balance-sheet and off-credit solutions to government. There is certainly a value to off-balance-sheet treatment where it is earned at the audit level - where an audit review confirms an off-balance-sheet treatment is an appropriate treatment. Those kinds of audit decisions are made where you have substantial risk transfer from the public sector to the private sector. The public sector's no longer operating the road - the public sector's purchasing a service.
You also have off-balance-sheet treatment where there is very little or no financial recourse on the part of lenders to the public purse. That is also significant. The U.K. and Australian experience has shown that in urban areas there is an appetite for privately financed, non-recourse debt that relies on revenues either generated electronically through tolling technology or coming from a government payment stream that is contingent. But at least one can say with confidence that when a bill that is proper is rendered, lenders can be sure the bill will be paid.
Secondly, on cost reductions, the experience with winning bids in the U.K. using a DBFO road structure has been that capital costs are, on average, 19% lower than comparable costs in the public sector. Winning bids for maintenance and operations tended to be in the neighbourhood of 30% to 35% lower than was recorded in the public sector. Assessed on a total present value basis, private sector bids, under a DBFO road scheme, were 17% lower than the comparable public sector cost.
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Those broad figures come from the $1.5 billion of roadwork done since 1991 using a U.K. model. All the roads in question were inter-city highways of the sort you would expect in Ontario, for example, on the 400 series, or in Quebec on Highway 20 and Highway 40, for example, and the Laurentian Autoroute. So that's 400 series highways and inter-city roadways of four, six and eight lanes.
I would be remiss, Mr. Chairman, in discussing a DBFO roads approach if I did not highlight a very important element in making the case for private sector involvement. As I indicated before, simply saying ``private sector'' doesn't make it better.
In fact, you can look at the Channel Tunnel. You had a lot of smart people who thought they had a financable transaction. It would appear that there are some difficulties that they, as private lenders and operators, are encountering. It is not, as I had indicated before, uniquely the province of government to make uneconomic decisions.
But if you are to assess whether you're getting value from the private sector, you have to compare apples to apples. This is an accounting proposition that has been accepted in other common law jurisdictions that we would urge upon this committee for consideration in the application of a national roads policy.
The pricing of risk that the government assumes must be undertaken in exactly the same way as the pricing of risk on the private sector side. I'll take a moment perhaps to again explain some of my personal experiences in PPPs in acting on behalf of government.
I can indicate to the committee that the government does not price all the risk that it absorbs in undertaking conventional procurement. In many cases, it doesn't have to price that risk because its capacity to self-insure is beyond the limits of any commercial entity. But to have a true comparison between the costs in the private sector and the costs in the public sector, you must have an audit-quality accounting of public sector costs that does things like price catastrophic risk and attach a dollar value to that and price the risk of the obsolescence or early deterioration of the road network, based on your existing experience, and attach a dollar value to that.
In the private sector, when you establish a price for the actual work you expect to perform, you establish reserves and contingencies that reflect what you estimate reasonably to be your worst-case scenario. If I have to rebuild this road a lot sooner than I expected, what do I have to set aside in my price to account for that? That's just as an example.
In the U.K., the audit office has created a concept called the public sector comparator. This is assembled in every case before a DBFO road solution is undertaken. The private sector must show that its costs are better than the public sector comparator before there is any recourse to private finance and the use of the private sector to construct roadways.
Mr. Chairman, I have a couple of final remarks on the application of this as a new approach philosophically to the delivery of road infrastructures.
The advantage of privately financed DBFO road solutions, besides the creation of self-interest in the quality of the asset and in its ongoing maintenance, is the acceleration of capital projects. Saved from the need to generate large capital sums at the front end to take out the financing established by contractors - consider the building of roads or the fixed link as an example - governments can finance their obligations from general revenues on an ongoing basis rather than having to raise capital at the beginning. That has the benefit of accelerating capital projects and generating a lot more work for people who work in that area.
In addition, the use of a private sector DBFO roads partner creates a taxpaying partner for the government. You will always have people who are making a living and paying taxes, but you will now also have a taxpaying corporate entity. It does have access to capital cost allowances. On the other hand, its revenues are taxable in their hands before this ever make its way into the hands of the employees.
The material I have provided to you today, Mr. Chairman, details the broader question of public-private partnerships. For DBFO road projects or any other infrastructure projects to be successful, governments need to enunciate their expectations and requirements at the beginning. I can indicate to you - I will do this if I have a moment at the end - from bitter experience what happens when those expectations are not enunciated at the beginning.
The material I have distributed today talks in some detail about the development of a PPP policy. We suggest that this is the first step to actually implementing it, especially in the infrastructure environment, where I think there is emerging support for the idea of further government investment in Canada's capital infrastructure. Certainly, at least among the ranks of the 9% who are still looking for work, there's undoubtedly some interest in that happening as well.
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The material I have also indicated I will distribute is material that staff at Transport Canada has now. It was a report on the U.K. experience, which Transport Canada commissioned from Hambros and which has been featured in a number of presentations to Transport Canada staff. I can provide a copy of that to the clerk and he may be able to access that for you more efficiently.
Just as a last bit of advice about who we are and why we say the things we do, Mr. Keyes and I are known to each other from my time in Hamilton. Prior to joining Hambros, I was project manager for the region of Hamilton - Wentworth and chief negotiator in its water and waste water privatization with Philip Environmental. That's the largest transaction of its kind anywhere in North America. Subsequent to that, the privatization of Hamilton Airport - which we argued is the jewel in the crown of those assets being divested by Transport Canada in the airport category - will, as I understand it, be signed before the end of this year by Transport Canada, the region and the private sector.
Many of the comments I bring to bear in this are not simply a result of my time with Hambros Bank. I can also tell you, having seen the process up close on the government side, we are wise to enunciate our expectations before we begin. But there are rules for partnership between government and private industry as long as that partnership creates true value.
I very much appreciate the opportunity to address the committee today and I would be delighted to entertain any questions.
The Chairman: Thank you, Mr. Rafferty. We are very pleased you are here.
Before I turn it over to questions, at the end you used the word ``disastrous''. There has been some discussion about what constitutes a true PPP, as opposed to some of the things that are called private-public partnerships. One of the contrasts that's used is Highway 104 versus Highway 407, feeling that in 407 it doesn't meet the test.
Mr. Rafferty: I would be loath to cast aspersions on the wishes of both the private group and the government employees to do the best for the people of Ontario in the delivery of Highway 407, but there's no doubt that the provincial auditor has said there was not adequate risk transfer in the Highway 407 situation for it to properly be called a PPP. Without talking about the merits of the particular structure adopted by Ontario, our position would be that the delivery of financing risk to the private sector is a sine qua non of a PPP.
I might also say, Mr. Chairman - and you're right the term has an imprecise application across a wide parameter - the purpose of public-private partnerships is not to find your way out of collective agreement obligations or turn yourself into a low-cost supplier, in the sense of who will do it for the least regardless of quality. That's not what PPPs are about. Government bodies that undertake them wisely say they expect you to treat their employees the way they treated them. No one can write cheques forever or issue a guarantee forever, but those kinds of requirements are quite properly folded in.
The thing that most clearly distinguishes a public-private partnership is the continuing interest of government in the delivery of the service that is the subject of the contract. In the divestiture situation where you say - this is a municipal example that applies in Ontario - municipalities are obliged to operate homes for the aged, they only have to operate one, but many of them have a dozen. You can simply divest yourself of that function. We now have a mature nursing home industry. The government doesn't need to be there any more. That's a privatization. Unless it's structured differently, it's not a public-private partnership.
In the public-private partnership situation the realization of publicly generated expectations at the beginning of the contract, during the contract and at the end of the contract - expectations that are generated and communicated by government to the private sector - is an essential element of the arrangement. That's why you would do it in that fashion. In part you get a better and earlier financing of your project, but you also achieve a social goal. Sometimes the achievement of that social goal requires a capital contribution from government because the social goal is the difference between an economic and a non-economic transaction. That does not make it any less a PPP.
In Highway 104 you had a sharing of the costs of financing between government and the private sector. I think you came a lot closer, at least in the opinion of Ontario's auditor, to saying it was a true PPP.
I think it would be fair and important to say the CHIC group - our entire organization is quite well acquainted with the members of that group - and the other competitors for Highway 407 were quite prepared to propose financing, and in fact did. The decision of the province at the time was, as I think I adverted to earlier, that it could do it more cheaply. That is conceptually not the way to go about it. But I don't suggest for a moment that those people acting for Ontario had anything but the best interests of the province at heart.
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The Chairman: Thank you very much.
Mr. Crête.
[Translation]
Mr. Crête: Thank you very much for your presentation. I quickly went through the brief you submitted. In Appendix 2, you mention a contract with Transport Canada to organize a conference which is to be attended by the federal Transport Minister and by his ten provincial colleagues. Has this conference already taken place? Is the content somewhat similar to what you deal with in this document? Could you tell us more about this conference you mention in Appendix 2?
Mr. Rafferty: Six weeks ago, in Charlottetown, a conference was organized by the Transport Association of Canada. Transport Canada was coordinating a conference to be attended by representatives of Transport Departments, both at the federal and the provincial level.
We gave a presentation which was very similar to the one I gave you today. It was primarily based on the premise that, in the context of a policy on transport, circuits, airports, ports and highways, the public sector should be in a position to offer services at a cost comparable to that of the private sector, while ensuring, however, a return as well as an advantage to the users.
I am probably not fluent enough in French to answer your question in a truly adequate manner. I have had the opportunity to speak French regularly for the past eight years. I hope I gave you an adequate answer.
Mr. Crête: Your French is very good. In the same paragraph, it says that you are committed to review the road program in terms of their design, building, financing and operation. In English, you talk about applying a DBFO structure in the United Kingdom. Could we make a comparison with what could happen here, in Canada? Could you give us further information about this, about the fact that Hambros Canada Inc. has been hired to review the United Kingdom program and to make a comparative analysis to adjust it to the situation in Canada?
Mr. Rafferty: Yes, Mr. Chairman. I brought a report entitled Review of the UK Private Sector Model for Highways, which was prepared for Transport Canada and which I can leave with the clerk today. In this report, which was put together in May 1996, you will find a lot of information on highways as well as the policy followed by Great Britain, when the government decided to go ahead with its national highway program. I would be very happy to share this report with you after my presentation.
Mr. Crête: Does the government structure in the United Kingdom allow for the sharing of jurisdiction between a central government and regional governments, as between the federal and the provincial governments? Can we compare our system and that of the United Kingdom to see whether we would have many problems in this area and what kind of solutions have been found already regarding jurisdiction?
.1710
Mr. Rafferty: In Great Britain, there is only one jurisdiction. Municipalities don't have the authority to develop their own finance policies. They have to defer to the national government before launching a program such as the one I just described at the municipal level. Australia is a federal state, like Canada. The kind of policy which can be found in the report I just mentioned prevails. I think the difficulty doesn't come only from the federal structure. I am sorry my French is not better; I don't have the opportunity to practice. However, I hope I gave you an adequate answer.
Mr. Crête: You gave me a very good answer and I invite you to come back to give us some clarifications whenever you wish.
[English]
The Chairman: Thank you, Monsieur Crête.
Mr. Keyes.
Mr. Keyes: Thank you, Mr. Chairman.
Thank you, Mr. Rafferty, for coming forward and bringing us some more knowledge on the PPPs, etc. PPPs in TTT - it's interesting.
I know Mr. Rafferty and I know what he's done in my particular municipality, Mr. Chairman. He's always had a wealth of knowledge and has been well versed in the situations we had there, but obviously I think his presentation here today gives us a greater understanding of this process.
I know the chairman is wildly enthusiastic about how much money is saved in this type of financing venture, and the percentages certainly... I looked over and saw Mr. Chairman very excitedly writing about the percentages, 17%, 35%, 17%...
The Chairman: Quality up, cost down. I wrote that -
Mr. Keyes: Quality up, cost down - that's very good.
Liam, if I could draw something from you, we've had other presenters to this committee who also addressed something called ``better debt management''. Could you explain how your organization could show the government, which would traditionally go out and borrow its money and then pay for a program... I think you know where I'm coming from on debt management. Could you give us some insight on that?
Mr. Rafferty: Certainly. I think there are three elements to the reply. I wouldn't preclude others, but there are three that come to mind immediately for me.
If you ask the question about the government's own obligation to go out and source financing, there's no doubt that the capacity of the Government of Canada has yet to reach what I suspect is its ultimate limit. The people are quite sensitive to the accumulation of debt at the federal level, whether it's as a result of deficits in spending programs or the actual commencement of infrastructure.
Where you have adequate risk transfer combined with no recourse or very limited recourse to the public purse, one element of the debt management plan is that in fact the government no longer finances investments and infrastructure on a capital basis, and that becomes an important accounting treatment and also an important bond-rating treatment.
There is also a debt management concern at a micro-level, if I may say, and without being for a moment cynical about it, one of the things that happens when you design projects to the level of detail which is typically the case in public sector procurement is that the design finalized say in 1994 becomes less current by 1996 when it finally hits the street and is the subject of a tender. That design is bid on and the public sector realizes that they need to change design, and although they do have the benefit of a low price on the tender as delivered, the extras end up generating costs when in fact the tender process was designed to secure low costs.
That element of the experience in typical procurement is missing in a DBFO because the government's not buying an asset. You don't care what it costs to build, you're only going to pay $1.50 a car for every car that travels along the laneway. So that, at a micro-level, is also a debt management issue, because the control of capital costing is fundamentally changed by the way you define your road-building contract and saying to people: Don't just build it for me; run it for me.
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A third element of debt management that also comes into play using a DBFO solution is the effect ultimately on the government's credit rating for other debt it seeks to actually take out in the public interest. If you are not financing $1.5 billion worth of highway infrastructure, that $1.5 billion you ultimately do have to borrow can be borrowed at rates that are reflective of lower overall debt assumption by the federal government or indeed provinces or municipalities. So in that sense, it's two sides of the same coin on the one hand, and the avoidance of extras and the inflation of project costs on the other. I'd be happy to speak to anything specific the committee may have heard earlier today or previously.
Mr. Keyes: Thanks, Liam.
The Chairman: Mr. Jordan.
Mr. Jordan: I too would like to commend you on a great presentation. The difficulty we've been having here - and we're used to putting it in the context of a new national highway structure - is that the government will say it can't afford it. What you're telling me is it can afford it. There's a way of financing it that can get around that simple argument of saying we don't have the money.
Mr. Rafferty: Yes.
Mr. Jordan: Hambros lends money.
Mr. Rafferty: We both lend and place the financing.
Mr. Jordan: You would lend money to a government who went onto this kind of process and approach to building highways?
Mr. Rafferty: The lending would actually occur to the private sector party who's undertaking the construction and operation. But, yes, one of two things happens in a Hambros-based financing. Hambros will take equity in a project, it will lend to a project, but our far greater facility is that we can procure financing five times in excess of what on any specific project we ourselves can lend.
The Hambros New York branch I mentioned was number three in dollar value in U.S. private placements last year. On the U.K. bond issuance side, as you may have seen in the material here, Hambros has done Euro-Canadian-dollar bond issuances for three of the federal agencies, a variety of municipalities across Canada, and a number of Atlantic provinces.
Mr. Jordan: Usually when you come up with a concept like this, somebody is sitting across the way opposing it. Where's the opposition to this?
Mr. Rafferty: At the government level in Canada, I think one might most fairly say that the opposition comes from those who say that the government can borrow more cheaply than the private sector.
Mr. Jordan: Which is true.
Mr. Rafferty: That's most certainly true; that's undeniable.
Mr. Jordan: Okay.
Mr. Rafferty: Whatever level of government and whatever level of jurisdiction you decide to pick is always going to be able to borrow more cheaply than the most creditworthy private sector agency. The difference in finance cost and value, or the difference in project cost and value, comes from the private sector assuming a risk for the construction of a roadway that actually does the job it's intended to do.
If I could use a rolling-stock example - because these were legion in the 1970s and 1980s not only in Canada but elsewhere - whether you were a subway operator or a national railway operator, you bought your rail cars, they didn't work, and it was costing you money and not the people who were supposed to supply you with the rolling stock. In the case of Canadian procurements, CN, CP, and VIA Rail, you'd find that the rail car retrofit required to do what the cars were supposed to do was at your expense and not at the supplier's expense.
In a DBFO model, the government doesn't care what the asset cost to buy. That's a risk entirely assumed by the private sector. Your only exposure as a financing level of government is to whatever level of shadow toll, if we use that device, you've agreed to pay. The private sector will tell you what they think it's going to cost to build their roadway and you'll structure a deal that gives them a fair return on that risk, but if their costs double, that's not your problem. That's one element of the pricing of risk to justify the higher cost of financing.
Mr. Chairman, I'm sensitive to 5:30 p.m. in the House today, and I would be very happy, as would other members of Hambros, to attend again before the committee if there was interest, perhaps to discuss in more detail the report I will provide to the clerk and submit to all members. We would be very happy to be of service to the committee again, at your convenience.
The Chairman: Thank you very much, Mr. Rafferty. I think I heard a large penny drop during your presentation. I appreciate the time very much.
Mr. Rafferty: It was our pleasure. We appreciate the invitation.
The Chairman: We have to be off to the House for a vote.
The committee will meet tomorrow at 3:30 p.m. for clause-by-clause on Bill C-43.