Creative Financing Forum

March-31-04

Address to Creative Financing Forum 2004

By the Honourable John McKay, M.P. for Scarborough East and Parliamentary Secretary to the Minister of Finance with special emphasis on Public Private Partnerships

Toronto , March 31, 2004

 

I am delighted to be with you for today’s forum.   Thank you for asking me.

It is both stimulating and enjoyable to be in the company of people who are brimming with ambition, entrepreneurial spirit and – above all – a sincere desire to make Canada a better place.

In December, I was deeply honoured when Prime Minister Martin asked me to serve as Parliamentary Secretary to Finance Minister Ralph Goodale.

As a particular area of focus, the Prime Minister tasked me with looking into Public Private Partnerships (P3s) – an important signal of the Martin Government’s interest in this area, as well as its general openness to new ways of doing things.

Although the very notion of P3s was new to me in December, they were not new to Mr. Martin.

In fact, as far back as 1997 when he was the Minister of Finance, he appeared before the Transport Committee and said, “Public private partnerships are not a panacea, however, given the transportation needs of cash strapped governments and a tax weary public, P3 arrangements warrant serious examination and encouragement.”

More recently, as Prime Minister, Mr. Martin made clear to me what P3s are not – they are not about privatizing health care, nor are they about replacing the public service.

Governments in Canada and around the world have longstanding experience in working collaboratively with the private sector to deliver public services. 

These partnerships fulfil government objectives when the private sector shares the responsibilities, costs, risks, and benefits with government.  But we in government are still accountable for managing the contract for best results.

Public-private partnerships are just one option for delivering public services.  We take a case-by-case approach to determine which way is most appropriate to meet the needs of Canadians.

Public-private partnerships work to the mutual advantage of the partners by satisfying public needs, by increasing the capacity of government to deliver programs and services, and by generating employment and economic development opportunities.

So it was in this spirit that I got working on my new assignment – meeting well over 100 people representing a wide range of views, interests and expertise in P3s.

I also began reading everything I could get my hands on to make up for my own lack of familiarity with this relatively new concept.

Since being appointed Parliamentary Secretary three months ago, I have been pleasantly surprised by the number of people who have sought me out wanting to discuss the direction of P3s.

I have also been surprised by both the nature and the extent of P3 activity going on across the country.  It is a uniquely pragmatic Canadian way of dealing with a vexing problem.

Perhaps one of the best-known examples of P3s is the Confederation Bridge linking Prince Edward Island with New Brunswick .

But there are many other examples. They can be found in areas such as transportation, water and wastewater, recreation and cultural centres, and schools. 

In the last six weeks I have been approached about the applicability of P3s to: a tunnel, a sports complex, a waterfront redevelopment, back office human resources management, a ring road, retrofitting government buildings, a sophisticated energy control system, highway choke points, etc.

It is therefore clear that P3s are gaining momentum both at home and abroad. But I think it’s time for that momentum to be accelerated.

Why?

Serving at Mr. Goodale’s side during the last three months has given me an insider’s view of budget preparations.  It is a remarkably democratic process.

During our many days – and nights – of deliberations and trade-offs, we had to craft a Budget that shows Canadians we are living within our means by:

·     balancing the books;

·     controlling spending;

·     continuing to reduce debt; and

·     improving accountability through stronger financial controls.

At the same time, the Budget had to give Canadians greater means to advance their well-being by taking important new steps in key areas such as health care, learning, communities and innovation.

At the end of the day, I believe our Budget delivers on these objectives – moving forward on the priorities of Canadians and keeping us on track to balance the books for an unprecedented seven consecutive years.  For the most part, the feedback we have been receiving seems to corroborate that view.

But striking the right balance was not easy. Budget making requires constant devotion to securing the best value for money so that we can continue to invest in the priorities of Canadians while keeping the books balanced.

Fortunately, we have a number of factors working to our advantage. Indeed, with a resilient economy and strong fiscal base to build upon, Canada is uniquely positioned to benefit from the current global economic recovery.

That is why Budget 2004 introduced a comprehensive package of measures to:

·     strengthen research;

·     enhance the availability of early-stage capital;

·     support small business;

·     stimulate investment; and

·     make the tax system fairer and more effective.

For example, to strengthen research capacity at universities, colleges and research hospitals across Canada, Budget 2004 adds:

·     $90 million annually to the budgets of Canada’s three federal granting councils;

·     $20 million a year to help Canada’s research hospitals and universities offset the indirect cost of research; and

·     $60 million for Genome Canada to strengthen research in genomics.

To promote the commercialization of research – bringing research discoveries to the marketplace, the budget included:

·     $50 million over five years to improve the capacity for commercialization at universities, hospitals and other research facilities;

·     $25 million over five years to support proposals by federal science-based departments and agencies aimed at improving their research commercialization activities; and

·     $5 million per year to the Industrial Research Assistance Program to strengthen its support for regional innovation initiatives sponsored by the National Research Council.

As you well know, however, the availability of venture capital for new firms is crucial for the transition from new ideas to commercial products.

That is why Budget 2004 provided $270 million for new investments in venture capital financing, which will be delivered through the Business Development Bank of Canada (BDC) and the Farm Credit Corporation (FCC).

When combined with private sector investments, these BDC and FCC venture capital financing initiatives are expected to lever $1 billion in new venture capital investment.

Of course, at a time when most industrialized countries are significantly reducing their corporate tax rates, making our tax system more competitive is key to attracting and retaining capital.

Already, Canada’s general corporate tax rate has been reduced to 21 per cent from 28 per cent, and the federal capital tax is being phased out.

As a result, our average corporate tax rate (federal and provincial, including capital taxes) is now 2.3 percentage points lower than the corresponding U.S. rate.

These and other tax relief measures in recent years – such as reducing capital gains inclusion rate and introducing a new tax-free rollover for small business investment – demonstrate we are serious about stimulating entrepreneurship and venture capital investment. 

Budget 2004 built on this progress with targeted measures, for example, those helping small business by:

·     accelerating by one year the planned increase in the small business deduction limit to $300,000 by 2005;

·     removing an impediment to small businesses fully accessing the 35-per-cent refundable scientific research and experimental development investment tax credit on expenditures of up to $2 million; and

·     extending the non-capital loss carry-forward period of all taxpayers to 10 years.

Other tax measures in the budget focused on Canada’s business advantage more generally. For example, we increased the capital cost allowance (CCA) rates for computer equipment, as well as for broadband, Internet and other data network infrastructure equipment.

Living within our means, getting better value for every tax dollar, strengthening health care and expanding opportunities for learning and entrepreneurship are all crucial steps toward a decade of achievement.

But as Mr. Goodale said last week in his budget speech, we also know that Canadians do not live in markets nor raise their children in economies; they do so in neighbourhoods, in communities.

That is why the budget took important first steps towards meeting the objectives of the New Deal for communities. This includes full GST relief for municipalities and giving them quicker access to infrastructure funding.

And, as you know, just yesterday here in Toronto, the federal and Ontario governments got together with the City of Toronto to announce a total investment of more than $1 billion to improve and expand the Toronto Transit Commission’s subway, streetcar and bus system – with each partner contributing $350 million.

These measures represent a significant investment of money.  But money alone will not solve this country’s infrastructure deficit.  So what does this have to do with P3s? 

Municipalities and other levels of government need to look to innovative new solutions to address their challenges.  Solutions such as:

·     demand management;

·     borrowing to finance infrastructure investment;

·     better accounting to manage capital asset needs; and

·     last but not least, P3s.

Let’s face it.  The role of government is changing from that of sole provider of services to that of regulator and guarantor of services.  Public goals and objectives can be achieved without government delivering all services directly.

The case for P3s in particular is strengthened by the following considerations:

·     P3s provide the opportunity to improve service delivery and achieve public goals more cost effectively.

·     Government can benefit from private-sector knowledge and innovation – not to mention its technological, financial and management expertise.

·     Being open to P3 arrangements can also bring greater discipline to government by forcing us to take a closer look at how we do business – a key consideration given our obligation to the taxpayers of Canada to ensure that they receive value for money.

Public-private partnerships clearly have a lot of potential as an additional tool or mechanism for government in delivering public services or shoring up infrastructure.

That is why P3s deserve more prominence in the public policy arena. To put it bluntly, we in Government owe it to Canadians to give serious consideration to these types of arrangements.

However, we must bear in mind that P3s are not a panacea. Not all projects are suitable for P3s. 

There are also important jurisdictional challenges. Given that P3 opportunities are most abundant at the provincial and municipal level, it is clear that cooperation among all levels of government will be a key prerequisite to the advancement of P3s in Canada. 

Public-private partnerships are also time consuming. They require participants to undertake a thorough due diligence and clearly define their objectives in advance – tasks that demand considerable time and energy.

Time, energy and patience.

Even in negotiations between two private entities, ensuring the appropriate sharing of risk and reward would be time consuming enough. When one of the entities is a government, the dynamic becomes even more complex which, I admit, can be a source of frustration to private-sector partners.

On this point, the private sector must make allowances for the Government’s need to be transparent and accountable to the public – and all that entails process-wise.

As well, there are encouraging signs that governments are becoming more aware of the need to be better prepared to respond to P3 proposals from the private sector. For example, British Columbia has set up Partnerships BC to help implement P3s and provide other useful resources to other levels of government.

In short, as with any long-term relationship, there may be some difficulties along the road. But as long as both the public and private sectors are willing to work together, these challenges can be overcome.

Apart from the cultural differences between the public and private sectors, there are political factors standing in the way of further progress on P3s.

Simply put, people have concerns about private-sector involvement in the delivery of public services and maintaining the appropriate degree of accountability. 

While these concerns need to be taken into account, they are by no means insurmountable.

A starting point is for P3 advocates in all sectors to do a better job of communicating the fact that these arrangements provide the opportunity to accelerate the delivery of services to the public, draw upon private sector expertise, and achieve public sector goals cost-effectively.

Public-private partnerships are not privatization.  And it is important to counter resistance that is based solely upon ideology.  Privatization has had its share of successes and criticisms, some of which may or may not have been justified. 

P3s are about partnerships.  Partnerships imply a relationship.  The quality of the relationship will determine the success of the project.  If one of the partners feels disadvantaged, then the relationship will not work and the project will not likely succeed.  That is why due diligence, proper risk allocation, and a recognition of different negotiating realities will be vital to the success of the partnership.

Only with heightened awareness can we overcome the stigma associated with private-sector participation and engage Canadians in a more nuanced debate – no mean feat in a world where, for some, P3 is a four-letter word.

I am reminded of Dr. McFetridge’s observation in an article he wrote for the C.D. Howe Institute, “A good idea, well presented, can overcome entrenched resistance.”

In his budget speech, Ralph Goodale described the New Deal for Canada’s communities as being about “doing things differently and doing things better.” 

I would say the same thing about public-private partnerships.  Although we have a long way to go, you can be assured that P3s are finally getting more attention in Ottawa.

Why?  Because we recognize that the P3 approach has the potential to unite the efforts of all levels of government and the private sector in support of national goals. It holds the promise of a “made-in-Canada solution” – a solution draws on our country’s finest values of pragmatism, resourcefulness and cooperation. It is a rational idea whose time has come.

We welcome your ideas on P3s, and I look forward to discussing this with you further.

Your engagement in the issues of the day and your desire for a better future are a promising sign for Canada – a nation on the threshold of a new decade of achievement. Thank you.