Public-Private Partnerships

The text is adapted from a speech given at the Canadian Council on Public-Private Partnerships Seventh Annual Conference, Toronto, November 22-23, 1999

The market in public-private partnerships for building infrastructure is growing worldwide, and yet Canadian engineering firms are having to compete with their arms tied.

rivate participation is becoming more and more prevalent in what was once the exclusive domain of governments. In developed countries, we are faced with aging, deteriorating infrastructure. As the population moves toward urban centres, the need grows for renewal and refurbishment to handle the strain placed on infrastructure by increased demand. In emerging economies, building or improving infrastructure is a must in order to secure a better future, but governments lack the capital to undertake such massive projects on their own.

Through public-private arrangements, the burden on government is eased. Operational and financing responsibilities, as well as commercial and investment risk, are placed on the shoulders of the private sector. The public, or the users, gain from increased efficiency offered to them due to more avenues for financing and increased competition.

Public-private partnerships will come to be a key source of activity for many Canadian firms in a variety of industries, not only for engineering-construction companies, but also for lawyers, accountants, brokers, bankers, and bond issuers. In the case of SNC-Lavalin’s participation in the Highway 407 concession [Ontario], we have paid out almost $100 million in fees to such professionals.

World Trends

The World Bank has been following trends in private participation in infrastructure since 1990, and based on some of the data it published in its September report (Table 1, page 45), we can draw our own conclusions on what to expect in the years to come.

Clearly, private participation has grown significantly and at a rapid pace since 1990 when it stood at U.S. $16 billion, to reach a high in 1997 of U.S. $120 billion.

The financial crisis in Asia took its toll on private participation (see Table 2), as did the downturn in the energy sector, seen in the 1998 figure, with a decrease to U.S. $95 billion.

Even though the water sector is not growing as rapidly as the other sectors, it has shown remarkable growth. Water is being regarded more and more as an economic commodity, rather than a social issue. Moreover, the number of projects in the various treatments of water resources and total investment through private participation is increasing. Opportunities do exist, but there are still only a few major players who are seizing them, as we can see in Table 4, page 48.

The large majority of these companies, none of them with headquarters in Canada, are involved in concession, lease or management contracts. We are being outpaced by countries who recognize the advantages of private participation in infrastructure, either through foresight or necessity.

The exception has been in the telecommunications and pipeline sectors, in which a strong domestic market has allowed some Canadian-based companies to do a good job of penetrating the international market.

Enter the Canadians

If the above sets the scene for the international arena for private participation in infrastructure, we must look to what Canada can offer. We have a proven track record and excellent reputation around the world for successfully carrying out large and complex projects. Canadian firms have the technical skills to execute such projects. We have some of the brightest minds in the world. We have a healthy, knowledge-based economy.

The growing market for public-private partnerships evidently offers opportunities and this can assure growth and prosperity. But we must be organized to seize the opportunities.

Companies like SNC-Lavalin have never been protected. We have always worked in a competitive environment. Now, however, we are encountering some problems. Not only do we have to face open competition, but in many respects, the Canadian system has tied our arms. It is very difficult to fight for market share with arms tied.

Let me use the Highway 407 concession as an example [Last year SNC-Lavalin and a Spanish consortium won a bidding process to design and build the extensions to the toll highway, which they will own and operate for 99 years.] Spanish GAP rules (or General Accounting Principles) allow our European partner to show earnings from the beginning of the project. We, on the other hand, initially will have to show a meaningful loss, due to Canadian GAP rules, and we cannot even use income tax credits to reduce this loss.

Only a small portion of the interest costs related to the 407 project can be capitalized during the construction phase. Despite the high quality and potential of a project such as the 407, having to show a loss for the next few years will have an impact on a company like SNC-Lavalin, especially in terms of trading shares on the stock market.

Also, Canada has one of the highest corporate tax rates of all OECD (Organization for Economic Co-operation and Development) countries. Even though our development costs are very high for these types of projects, we are taxed as a service company.

Canada is the only OECD country that has a corporate tax for manufacturing and a separate corporate tax for services, and in that category, it is the highest of the high.

The C.D. Howe Institute released a report by Jack Mintz on why Canada must undertake business tax reform without delay. Table 3, page 45, extracted from the report, gives an estimate of the effective rates of federal and provincial corporate tax, excluding property taxes, for manufacturing and service sectors among G-7 countries.

In 1996, the effective tax rate on corporations in Canada was comparable or below that of most other G-7 countries for manufacturing industries and third highest in services. During these three years, Germany, France, Italy, and Japan have cut business taxes. Canada has not. In 1999, its rate has become the third highest in manufacturing and the highest in services.

If Germany implements a recent proposal for further tax cuts in 2000, Canada will be the highest taxed country for services and the second highest for manufacturing. The report also reveals that Ireland, with an average corporate income tax rate less than one-third the rate in Canada, collects more corporate tax revenue as a percentage of GDP than Canada.

So, our markets for infrastructure projects are fully open, we have severe GAP rules which are not adjusted to these concession-type projects, and we have the highest tax rate. All these contribute to depleting our resources which should have been earmarked for business development.

Jumping the Hurdles

Industry Canada has taken an active approach in helping us to overcome some of the obstacles we face. The national conference in Ottawa in 1998 exploring global markets in public-private partnerships in infrastructure led to the Public-Private Initiative (PPI), which spawned the PPI Ad Hoc Steering Committee.

The committee is a business advisory group. We work with the government to guide the implementation of a series of strategic actions to increase the participation and success rate of Canadian firms in the rapidly growing global PPI market.

The committee is chaired by Garrett Herman, Chairman and CEO of Loewen, Ondaatje, McCutcheon Ltd., and myself. One very important aspect of our work is a campaign to keep the Minister of Finance informed about our concerns, and to make recommendations. In particular, we asked the Minister of Finance:

first, to change the tax treatment for service industries. These industries are the future of our country and must be able to reserve some of their financial resources for further business development;

second, to adapt the tax advantages for extremely high-risk development costs in private participation so that it is similar to investments in research and development;

and third, to create in Canada, as in other OECD countries, a Development Finance Instituti
on, commonly referred to as DFI. This DFI would provide long-term financing to private-sector projects in developing countries. It would also have substantial equity participation from the private sector.

Mr. Martin has committed to examining our recommendations in order to ensure that the position of Canada’s financial sector responds to our needs.

Moving On

Every so often, a business trend presents itself that has the capacity to revolutionize the way we do business. The people who recognize the power of these new approaches and adapt to them are called visionaries. We need only look at the people who understood in the 70s the role that computers would come to play.

We in Canada are at such a juncture now. We are being presented with a whole world of opportunities, and we cannot afford to have them pass us by.

If we are to compete in the global marketplace, the time is now here to adapt ourselves, our businesses, our industries, our laws and regulations to a new business environment. Governments should provide a stable, fiscally responsible national management by reducing their costs using the most effective approach to render services, and should reduce tax burdens in doing so, providing Canadian companies with a fair base from which to secure a fair share of the domestic market and to be a player on the international scene.

The private sector can be a valuable ally to government. Through public-private partnerships, governments and companies can together ensure economic growth. It is time to move out of the theory stage and into practice, into active private participation in infrastructure, in Canada and abroad.CCE

Jacques Lamarre, ing. is president and chief executive officer of the SNC-Lavalin Group in Montreal.