the procurement of public infrastructure: comparing p3 and

THE PROCUREMENT OF PUBLIC INFRASTRUCTURE:COMPARING P3 AND TRADITIONAL APPROACHES

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Paul Boothe, Felix Boudreault, Dave Hudson, David Moloney and Sandra Octaviani

THE PROCUREMENT OF PUBLIC INFRASTRUCTURE

© 2015, Lawrence National Centre for Policy and ManagementThe views expressed in this paper are our own and should not be attributed to any other individual or organization. This research was supported, without editorial input, by the following companies active in both procurement environments: Aecon Group Inc., Bird Construction Inc., EllisDon, Fengate Capital Management, Kiewit Development Company, Macquarie Capital, PCL Constructors Inc., Plenary Group Canada, and SNC Lavalin.

Comparing P3 and Traditional Approaches 3

EXECUTIVE SUMMARY

• InDecember2014,theAuditorGeneralofOntarioissuedareportsuggestingthattraditionalprocurementofpublicsectorinfrastructurewouldbesuperiortoP3procurementifprojectsweresimply‘managedbetter’bygovernment.Theconclusionwassurprisingbecauseitrancontrarytothefindingsofasubstantialbodyofacademicandpractitionerresearch.

• TheLawrenceNationalCentreforPolicyandManagementatWestern’sIveyBusinessSchoolwasaskedbygroupoffirmsactiveinbothprocurementenvironmentstocomparetheprocessesandincentivestructuresembeddedinthetwoapproachestopublicsectorprocurement.

• WebeganbydevelopingaframeworkorlogicmodelencompassingthetraditionalandP3approaches.WethenusedtheframeworktocomparesixcasesoftraditionalandP3procurementofhealthandtransportationinfrastructure.

• Basedonourinvestigationofthetwoapproachesandtheexperiencefromthecasestudies,webelievethattheP3approachisgenerallysuperiorbecauseitbringstobearspecializedexpertise,duediligenceandaccountabilitymechanismsthatarenotpossibletoreplicateinthepoliticalenvironmentinwhichpublicsectormanagerswork.

• Whilethepublicsectorprojectsweexaminedcouldhavebeenmanagedbetter,theincentivestomanagebetterwereweakandincomplete.

• WerecognizethatnotallprojectsarebestdeliveredbytheP3approachandwelayoutconditionstohelpchoosebetweenthetwoapproacheswhenconsideringspecificprojects.

• Finally,weagreewiththeAuditorGeneralthatvalue-for-moneyanalysisiskeytodeterminingwhichapproachisbestforspecificprojectsandthatcontinuedworktorefinemethodologiesisstronglyrecommended.


INTRODUCTION

InDecember2014,theAuditor-GeneralofOntario(AG)issuedareportsuggestingthat‘traditional’procurementwouldbesuperiorto“PublicPrivatePartnerships”(P3s)1ifprojectsweresimply‘managedbetter’bygovernment:

“BasedonourauditworkandreviewoftheAFPmodel,achievingvalueformoneyunderpublic-sectorprojectdeliverywouldbepossibleifcontractsforpublic-sectorprojectshadstrongprovisionstomanageriskandprovideincentivesforcontractorstocompleteprojectsontimeandonbudget,andifthereisawillingnessandabilityonthepartofthepublicsectortomanagethecontractorrelationshipandenforcetheprovisionswhenneeded.TotalcostsfortheseprojectscouldbelowerthanunderanAFP,andnoriskpremiumwouldneedtobepaid.”2

ThisconclusionbytheAGrunscountertowhathasbecomebroadly-acceptedthinkingamongpublicsectorpractitioners,notonlyacrossCanadabutalsoaroundtheworld,thattheP3approachdeliversbetteroutcomes,anddoessopreciselybycreatingincentivesthatspurbetterprojectperformance.ThisisevidencedbythefactthatagrowingnumberofprominentmultilateralinstitutionssuchastheWorldBank,Inter-AmericanDevelopmentBank,andtheUnitedNationshavecreatedsubsidiariesdedicatedtocapacitybuildinginP3procurementmethodsforinfrastructure.Acrosstheindustrialworld,countriessuchastheUS,UK,andAustraliahaveappliedtheP3approachextensivelytomeettheirinfrastructureneeds.

TheLawrenceNationalCenterforPolicyandManagementwasaskedbyaconsortiumoffirms3thatworkinbothP3andtraditionalpublicsectorprocurementenvironmentstoexaminetheAuditor-General’sconclusionand,inparticular,toassesstheunderlyingconstraintsandincentivesembeddedinbothapproachestopublicinfrastructureprocurement.

Ourobjectivesinthispaperaretwo-fold:first,wewanttoclarifythelong-termpolicyobjectivesthatpublicinfrastructureprojectsaimtosupport.Theseobjectiveswillservetoguideourdiscussionofthetwoapproachestoinfrastructureprojectsthroughouttherestofourpaper.Second,wewanttodelveintotheunderlyingfactorsthatexplainwhyandhowthetraditionalapproachtopublicsectorprocurementhasgenerallybeenfoundwantingandtheincentivemechanismsbywhichtheP3approachcanpotentiallyaddressmanyofthoseobservedfailures.

Governmentsareconstantlyfacedwithavarietyofchoicesamongmethodsofdeliveringservicestotheircitizens,particularlyservicesthatrequireinfrastructureassets.Weneed,therefore,toensurethatthosechoicesaremadeonthebasisofaclearunderstandingofthestrategicissuesinvolvedand,ultimately,employtheprocurementapproachthatisoptimalforaparticularcase/project.

Thepaperisstructuredasfollows.WebeginwithbackgroundinformationandcontextsettinginSection2.InSection3,wedevelopaframeworkor‘logicmodel’tocomparethetraditionalapproachtoinfrastructureprocurementwiththeP3approach.SixcasestudiesspanningbothtraditionalandP3approaches,manyofwhichinvolvedthesamefirms,arepresentedinSection4.Thestudieswerenotchosentoberepresentativeofeitherapproachtoinfrastructureprocurement.Further,ourcase-studyanalysisisnot

1 Infrastructure Ontario uses the term ‘Alternative Financing and Procurement’ (AFP) to denote P3 projects. “Value for Money Assessment: Sault Area Hospital Project,” Infrastructure Ontario, 2007, accessed 2015, http://www.infrastructureontario.ca/Templates/Projects.aspx?id=2147484707&langtype=1033.

2 Office of Auditor General, “Reports on Value-for-money Audits (Introduction),” in Annual Report of the Office of Auditor-General, (2004), 193-218.

3 Aecon Group Inc., Bird Construction Inc., EllisDon, Fengate Capital Management, Kiewit Development Company, Macquarie Capital, PCL Constructors Inc., Plenary Group Canada, and SNC Lavalin.


constructionandmanagementofaparticularproject,withvariouspartsoftheprojectoutsourcedbythepublicsectorauthoritytodifferentcontractors.Morerecently,manyjurisdictionshavemovedtowardsanalternativeapproachforinfrastructureprojects,whichisbuiltonthefollowingtwoprinciples:

• Definingservice needs, priorities and affordabilityfortaxpayersandusersarecorepublicsectorresponsibilitiesandcompetencies.

• Projectmanagementoftheconstructionandoperationofcapital assetsneededtodeliverservicesare notcorepublicsectorcompetencies.

Putsimply,thetasksofplanning,constructing,andmanagingphysicalassetsarenotacorecompetenceofgovernments.Withno“DepartmentofConstruction”,orconstructiontradesontheirpermanentpayroll,mainlybecauseofthevarietyandepisodicnatureofmajorcapitalinvestments,itishardtomakeacasethatgovernmentsarebestqualifiedtoapplytheprofessionalprojectmanagementandoperationalexpertiseforcomplex,multimillion-dollarprojectsandongoingservicedelivery.Rather,manyjurisdictionshavedecidedthatthemanagementofsuchprojectsandongoingphysicaloperationshouldbethepreserveoftheprivatesector,whichpossessesfargreaterprofessionalexperienceinrunningprojects,procuringfinance,negotiatingcontractsandmanagingassets.

Finally,thesuccessofaninfrastructureprojectshouldbemeasuredonthestandardofserviceenabledbytheasset,ratherthanontheinputsalone.Inparticular,theperformanceofpublicly-ownedinfrastructureshouldbeassessedonawiderrangeofcriteriaincludingtotalelapsedtimetoservicestart-up,andthecost,ongoingavailabilityandqualityoftheservicesenabledbytheasset.

aformaltestofourframework.Howeverthecasestudiesallowustogaugetheusefulnessoftheframeworktoseewhetheritcanhelpusunderstandtheconstraintsandincentivesembeddedinthetwoapproachesandwhetheranyotherimportantlessonsemerge.

Finally,inSection5wedrawoutthelessonslearnedfromapplyingourframeworktothetwoalternativeapproachesusedinthecasestudies.ThisallowsustoformajudgmentregardingtheAuditor-General’sconclusionthatbettermanagementoftraditionalprocurementprojectswouldmakethemmorecost-effectivethanP3-deliveredprojects.

2. BACKGROUND AND CONTEXT

Tounderstandwhysomanygovernmentsseek“alternativeprocurement”models,itisinstructivetostartwithanunderstandingofgovernments’ultimateobjectiveswheninvestingininfrastructure;howitfitsintotheirdailybusiness;andthechallengesthatitcreatesforanyjurisdiction,regardlessoflevelorcountry.

Thelong-termcaseforanyinfrastructureprojectmustlieintheservicesthatitenables,whethertheybetransportation,healthcare,educationorcleanwaterandsanitation.Thescaleandnatureofsuchprojectschangeovertimeasthetypesofservicesneededbythepublicevolve.Forinstance,arapidlyurbanizingmunicipalitywillrequireanincreasingnumberofmobilityoptionstotransportitsresidentsefficientlyandcost-effectively.Thepublicsectorhasanobligationtoprocurethenecessaryphysicalassetstosupplythisservice.

Traditionally,theprocurementofmostinfrastructureprojectshasbeenmanageddirectlyandonanend-to-endbasisbythepublicsector.Underthisapproach,thegovernmentoverseesallstagesofthe


3. A FRAMEWORK FOR INFRASTRUCTURE PROCUREMENT

Infrastructureprocurementsystemsarecomplexbynature.EvenwithintraditionalorP3procurementapproaches,notwoprojectsareidentical.Traditionally-managedprojectscanincludeprovisionsthataretypicallyfoundinaP3project(e.g.bonus/penaltyincentivestoreducerisksofdelaysandcostoverruns)andP3projectscantakeanumberofforms(fromDesign-BuildtoDesign-Build-Finance-Operate-Maintain).Figure1showsthedifferentpathspossiblewhenconsideringinfrastructureprocurementoptions.

Thechallengesandcritiquesrelatedtoinfrastructureprocurementarenotsimplyofinteresttoauditors,academicsandjournalists.Thedemandforinfrastructure-enabledservicesissoaringasourpopulationsgrow,ageandconcentrateincitiesandsuburbs,allwhileourstockofinfrastructureputinplaceinthe1950sand1960sreachesandexceedsthelimitsofservicelives.Moreover,manyprovincesandmunicipalitiesfaceanescalatingneedtocoveragrowingsetofcompetingneedsforpublicservicesandprograms,evenastheycontinuetograpplewithtighterfiscalconditions.

P3

TR

AD

ITIO

NA

L

Figure 1 Traditional and P3 Procurement Approaches

SeparateContract

Public Financing

SeparateContract

Stand-alone or Combined Contracts

IMPLEMENTATION

SeparateContract

SeparateContract

SOLUTION BUSINESS MODELING

ScopeSetting

Design Financing Build Operate MaintainDeliveryModel

Decision

Political andNational Budget

Approval


startingpointforanypublicinfrastructureprocurement.Next(1o’clock),therelevantpublicsectorauthorityscopestheapproximatecostandtimelineforthenewinfrastructureassetsrequiredtodeliverthepublicservicesinquestionsuchashospitalsforhealthcareortransitsystemsformasstransportation.Thisisfollowed(2o’clock)byapprovalsofbudgetandtimelines.Forlargeprojects,approvalsaregivenbyelectedofficialsatthelevelofcabinetsormunicipalcouncils.

Traditional Approach

TohelpunderstandinmoredetailhowtraditionalandP3procurementprocessesdifferweneedtodigdeeperthanFigure1andlookattheconstraintsandincentivesthatareembeddedineachapproach.Todothis,wedeveloptheframeworkorlogicmodelpresentedinFigure2.Webegin(at“12o’clock”onthediagram)withthevalidationofserviceneeds.Thisisacorepublicsectorresponsibilityandcompetencyandshouldbethe

Figure 2 Traditional Infrastructure Procurement

Validate service needs

Scope cost/timeline for new publicly-

owned asset

Approvals: budget, timeline

Public sector asset owner confirmed

Owner awards asset design

contract

Scope and cost updated

Multiple separate construction

contracts

Operation: service delivery

Maintenance contracts awarded

Asset delivered to public owner

Ongoing scope/cost

changes

Ongoing asset maintenance/lifecycle repair


Notsurprisingly,post-designcostmaydifferfrominitialestimates.Indeed,thisiswhytheprivatesectorclassifiesthetypicalsequenceofcostestimates(ClassAversusClassD)toindicateprogressivelevelsofprecisionandreliability.However,inflexiblebudgetproceduresorthepoliticalconsequencesofvaryingfromannouncedparametersoftencauseproblemsforthepublicsectorowner.

Separately,thedetailedassetdesignmaybetoofocusedontheassetitselfratherthantheservicesitwillbecalledupontoprovide.Thus,thedesignergenerallyhaslittleincentivetointegrateoperatingcostsorservicequalityconsiderationsintotheassetdesign.Indeed,inanefforttopresentawinningbid,thedesignermaytradeofflife-cycleefficiencytoachievelowerconstructioncosts.

Acentralproblemthatemergeswithtraditionalprocurementisthatoncebudgetsanddesignareset,theassetowneractsasprojectmanager,lettingmultiple,separate,contractsforinter-relatedconstructionactivities.Thisleavesabroadrangeofprojectriskswiththeassetownerandultimatelytaxpayersandservicerecipients.Suchrisksincludeconstructiondelays(withtheirknock-oneffects)duetophysicalorsitefactors,unforeseenproblemscausingcostsand/ordelaysassociatedwithobtainingregulatoryapprovals,andshortagesofskilledlabourormaterials.Thelistislong.Inaddition,publicsectorownersmustberesponsivetoshiftingpublicandpoliticalpriorities,yettheaccountabilityfortheresultingscopeanddesignchangesisoftenunclear,addingriskstocostsandtimelines.

Alongwiththeapprovalscomesconfirmationoftheresponsiblepublicsectorowner(3o’clock).Ownersaretypicallygovernmentdepartmentsoragenciesthatmustthendrivetheprocurementprocessforward.Thenextstep(4o’clock)isawardingofthedetaileddesigncontractbytheowner.Often(5o’clock)thescopeandcostoftheprocurementprocessmustbeupdatedtoreflectthenewlycompleteddetaileddesign.

Withdetaileddesignandupdatedcostandscopeinhand(6o’clock)theownermovestoaseriesoftendersandawardsofconstructioncontractsfordifferentpartsoftheproject.Throughouttheconstructionphase(7o’clock)ongoingscopeandcostchangesoccurasnewinformationcomestolight,inputpriceschange,theownermakeschangestorequirements,orchangesaredirectedfromthepoliticallevel.Whenconstructioniscomplete,theassetisdeliveredtothepublicsectorowner(8o’clock)andanyfinalfittinguprelatedtoservicedelivery(notshownhere)isdone.Maintenancecontractsaretenderedandawarded(9o’clock)andongoingdeliveryofthepublicservicebegins(10o’clock).Finally,overthelifeoftheinfrastructureasset(11o’clock)ongoingmaintenanceandrepairsareundertaken.Assessment

Whataresomeoftheproblemsthatoccurinthecreationandoperationallifeofapublicsectorinfrastructureassetprocuredusingthetraditionalapproach?Areviewoftraditionalinfrastructureprojectsfromaroundtheworld4revealsthatcertainproblemssystematicallyemerge.Forexample,thecostsandtimelinesforprojectsaretypicallylockedintooearlyintheprocess,beforethedetaileddesignisevencompleted.

4 The international experience shows similar results. A UK study found P3s typically finished one per cent earlier than scheduled while government-led projects finished 17 per cent behind schedule. Cost overruns averaged virtually zero in P3s compared to 47 per cent in government-led projects. Moreover, an Australian study found P3s were delivered 3.4 per cent ahead of schedule while government-led projects were delivered 23.5 per cent behind schedule. See Mott Macdonald, Mott, Review of Large Public Procurement in the UK ( London: Mott MacDonald, 2006) and Infrastructure Partnerships Australia, “Performance of PPPs and Traditional Procurement in Australia,” accessed 2015, http://www.infrastructure.org.au/Content/PPP.aspx.


Finally,theseparationofconstructionandmaintenancecontractsincreasestheriskofthefailuretodesignorbudgetwiththelife-cycleofrepairandreplacementactivitiesinmind.Theproblemofunder-investinginmaintenanceisespeciallyacuteinthepublicsectorwherethe(politically)urgentconstructionofnewassetsfrequentlyoverwhelmsthe(operationally)importantongoingmaintenanceofexistingassets.Evenwheresuchfactorsaretakenintoaccountinitially,subsequentperiodsofgovernment-widefiscalstressthatdriveacross-the-boardcost-cuttingexercisesaredisproportionatelyhardonmaintenance,repairandreplacementbudgets.

Insum,thereiswidespreadagreementamongacademicsandfinancialandindustryexpertsthatthetraditionalapproachtoprocurementfrequentlyresultsincostover-runs,missedtimelines,under-investmentinmaintenanceandmissedopportunitiesforinnovativeservicedelivery.Therisksofthesefailuresarebornebytaxpayersandservicerecipients.


thepublictotheprivatesectorwhentheprivatesectorisbetterplacedtomanagethoserisks.

Whoarethemembersoftheprivatesectorconsortium?InFigure35weshowtherelationshipsbetweenthedifferenttypesofprivatesectorentitiestypicallyinvolvedandthepublicsectorowner(counterparty).Thekeyfeatureisthataprojectcompanyundertakestheoverall(oratleastprimary)relationshipwiththepublicsectorowner.Theprojectcompanyinturninteractswithitsprojectsponsors,constructioncontractors,serviceprovidersanddebtholders,withreciprocalflowsoffundingandservicesbetweeneachentity.

Source: DBRS, 2015

P3 Approach

P3procurementscantakemanyformsbuttheirkeycharacteristicisthattheyexpandandintegratetherolesthattheprivatesectorplaysinpublicinfrastructureassetcreationandoperation.Broadlyspeakingtheycanbedefinedasajoint,cooperativearrangementbetweenaprivatesectorconsortiumandapublicsectoragencyfor(twoormoreof)theservicesrequiredto:a)design,b)build,c)finance,d)operate,ande)maintaintheinfrastructureassetsneededtodeliverapublicservice.Cooperationbetweenthetwopartiesisstructuredwithlong-term,integratedcontractsthatservetotransferrisks(atacost)from

5 Dominion Bond Rating Service, Methodology: Rating Public-Private Partnerships, Toronto, 2015.

Figure 3 P3 Participants

PUBLIC SECTOR COUNTERPARTY

PROJECT CO DEBT HOLDERSSPONSORS

SERVICE PROVIDER

CONSTRUCTION CONTRACTOR

Availability Payments

Equity

Dividends

Construction Contract Service Contract

Service PaymentsConstruction Payments

Debt

Principle & InterestPayments (P+I)

Project Agreement

AkeyadvantageoftheP3approachisthatitbringsabroadrangeofprivatesectorexpertiseandcapacitytobear,yetdoessothroughasinglepointofaccountability–theprojectcompany.Thisproject-executingcompanyistypicallycreatedbyaconsortiumofexperiencedfirms.It,inturn,arrangesprivatefinancing(equityfromitsshareholdingsponsors,debtviabondissuance),aleadconstructioncontractor,andaserviceprovider.

Theprojectagreementwiththepublicsectorownerwillprovidesomeblendofpaymentatsubstantialcompletionofconstructionandof“availabilitypayments”overtimebasedonassetperformanceandquality.Theagreementtypicallyrequiresaminimuminjectionofequityandongoingoverallprivatefinance,dependingonthedesiredrisktransferfromthepublicsectorownertotheprojectcompany.


BOX 1VALUE ≠ COST

GovernmentsandtaxpayersneedtodistinguishbetweencostandvaluewhentryingtocomparetraditionalandP3procurementoptions.AP3projectwillrarelybethecheapestoptionwhenonelooksattheshort-terminfrastructurecosts(brick-and-mortar,buildingsystems,etc).However,whentheabove-mentionedspectrumofrisksisconsidered,lifecyclecostsandotherqualitativefactorstipthebalanceinfavourofP3sastheprojectsarenowbeingcomparedonavalue-for-money(VFM)basisratherthanapartialbaseline.

TheappropriatemethodologyforderivingVFMassessmentsissubjecttodebateasitimpliesacertaindoseofqualitativeorcounterfactualassessmentsthatneedtobeconvertedintovaluetothetaxpayer.Inbrief,theVFManalysisattemptstoevaluatethelifetimecostsandbenefitsofaP3projectcomparedwithapublicsectorcomparator.Someofthefactorsconsideredaredeliverytimes,financialrisksfortaxpayers,andlowerlifecyclecostsduetoinnovativedesignsand/ormaterials.TheauthorsofthisreportagreethattheVFMmethodologyneedstobecontinuouslyrefinedandupdated,takingintoaccountnewevidenceasadditionalP3projectsarecompleted.


InFigure4wehighlightthedifferencesbetweentheP3andthetraditionalapproach:

• Thescopingofcostscoversbothconstructionandservicedeliveryfromtheoutset.

• AnintegratedRFPisdevelopedattheoutsetfortwoormoreofdesign/build/finance/operate/maintain.

• Thefinalscopeandcostoftheprojectareconfirmedonlyonthebasisofthewinningbid.

• Anintegratedcontractisawardedincludingapre-specifiedcontingencyreserve.

• Privatefinanceintheformofequityplusdebtissecuredaftersubstantialduediligenceiscompletedbyarms-lengthprivatesectororganizations,notablybond-ratingagencies.

• Scopechangesrequireformalandcostedcontractamendmentsorapprovedaccesstothecontingencyreserve.

• Ongoingassetmaintenance/lifecyclerepairandreplacementareincludedintheinitialcontractwiththeprojectcompany.

• Theassetmustbedeliveredtothepublicsectorownerbytheprojectcompanyinsoundconditionattheendofthecontract.

Figure 4 P3 Infrastructure Procurement

Ongoing asset maintenance / lifecycle

repair UNDER CONTRACT TO PROJECT CO

Scope / cost changes: REQUIRE CONTRACT

AMENDMENT OR APPROVED ACCESS TO CONTINGENCY

Substantial completion (PARTIAL) payment for

construction of asset

Project Co and sponsors arrange DEBT FINANCE + PROVIDE EQUITY

Contract award for ONE OR MORE OF: DESIGN /

BUILD /FINANCE / OPERATE /MAINTAIN

Scope and cost CONFIRMED BASED

ON BIDS

Owner ISSUES RFP FOR ONE OR

MORE OF: DESIGN / BUILD / FINANCE /

OPERATE / MAINTAIN

Public sector asset owner confirmed

Approvals: INITIAL budget, timelines

Scope cost / timeline: new publicly-owned

ASSET AND SERVICE

Validate service needs

Operation: service delivery

Asset DELIVERED TO OWNER BY PROJECT CO IN SOUND CONDITION AT

END OF CONTRACT


• AcompetitiveandopenmarketplaceforprivatesectorbiddersiscriticalinensuringdiligentandwarrantedpricinginP3contractsofrisktransfersandtheappropriatefirmexpertiseintheintegratedmanagementoflarge,complexprojectsandlong-livedassets.

• Comparisonsoftime-to-deliveryandalignmenttoinitialcostestimatesmustbecarefultocompareapples-to-apples.

• ArobustoutputspecificationframeworkshouldbeattheheartofallP3contracts.Itnotonlyfacilitatesthesmoothimplementationofcomplexcontracts,butalsoensuresthatperformanceincentivesareeffectiveatmotivatingtheprivatesectortofulfilltheprojectinthemostefficientmanner.Thisframeworkshouldspecifykeyperformanceindicatorsaswellasassociatedpenaltiesandbonuses,potentialrisks,andhowtheserisksareallocatedbetweenthepublicandprivatesectorparties.Oncetheprojectdeliveryphaseiscomplete,P3projectsshouldbeevaluatedontheirperformancetomaintaintransparencyandimprovefuturepractices.

ThekeyadvantageoftheP3approachisthatitfacilitatesbundlingofend-to-endservicestoasinglewinningprivatebidder,whichinturnencouragesanintegrated,whole-of-lifeperspectivetotheproject.ThedefinitionofprojectrequirementsintheRFPdrawsalinebeyondwhichofficialsandpoliticianscannotmakescopechangeswithoutclearaccountabilityanddefinedcostimplications.Incontrast,internalgovernmentprocessescannot,bydefinition,precludechangesinpriorities.

Duetotheneedtodefineend-to-endcontractrequirementsbeforehand,P3projectagreementsaretypicallytheresultoflongerandmoredetailedstudythanisthecasewithtraditionalprocurement.P3contractsoftenaccountforacomprehensivelistofconsiderationsincludingthetypesofriskstobedistributed,serviceoutputrequirements,aswellasperformancemilestonestobefulfilled.

Public-sectorpractitionersshouldbearthefollowinginmindwhenexecutingP3contracts:

BOX 2WHAT ASPECTS OF P3s MAKE THE BIGGEST DIFFERENCE?

ensuringoverallcoordinationamongallcontractorsandasinglelocusforactiveriskmanagementthatisinternalizedintoeachprojectdecision.

Requiringanappropriateprivatesectorequitycontribution,aswellasbondfinancing,incentsoverallriskmanagementvia“skininthegame“,whilebondfinancingaddsindependentandtransparentduediligenceonprojectcostsandotherrisksviabond-ratingagencies.Thepublicsectorgainscertaintyregardingtotalcostsandtime-linesbecausepre-constructionapprovalsandcontractawardsarebasedonbidsratherthanbudgets.

Assessment

Thetraditionalapproachusesseparate,sequencedcontractswithprivatesectorfirmsfordesign,constructionandmaintenanceofinfrastructureassets.Incontrast,P3sbroadenthescopeofacontracttotakeadvantageoftheprivatesector’sspecializedprojectmanagementexpertiseforlarge,complexprojects.

End-to-endresponsibilityincentsintegratedinnovationfromconstructionthroughtooperation,maintenanceandrepairs,therebyloweringtheoverallcostofservicedelivery.End-to-endresponsibilityalsoenablesthetransferofrisktotheprivatesector,


In2004,thehospitalwascompletedafteraseven-yearplanningandconstructionprocess.Theinitialprojectcostestimatewas$126M.Aftervariousplanning,designandconstructionphasingchanges,thefinalcostwasdeterminedtobe$284M.Thenewbuildinghadincreasedby18percentinsizefromtheinitialplan,openedayearbehindschedule,andcostalmost38percentmorepersquarefootthanacomparableprojectineasternOntario.

Ontario’sMinisterofHealthappointedaspecialadvisor,TomClosson,toassesstheTBRHSC’scapitalredevelopmentproject.Mr.ClossonretainedPRISM,aredevelopmentconsultinggroupwithexpertiseinlarge-scalecapitalprojects,toreviewtheprojectandprovidecommentswithrespecttomanagementmechanismsandprocessesandassessmentofthegovernanceandprojectprocurement.

Decision making process

TheroleoftheBoardoftheTBRHSCwastomonitorcompletionoftheproject,andauthorizeallcontractsinexcessof$1M.TheBoardcreatedaNewHospitalsBuildingandFacilitiesCommittee(withsomeBoardofGovernorsmembers,internalsenioradministrators,theprojectcoordinator,andcommunitymembers)tomorecloselymonitorissuesofprojectcost,scopeandschedule.PRISMnotedthatnotwithstandingthefactthattheCommitteemetoversixtytimesoverafouryearperiod,costsandscheduleswerenotkeptincheckoverthedurationoftheproject.

Changeorderswerebeingauthorizedbyavarietyofparticipants,outsideofanyregimentedprocess.Over2,800changeorderswereissued.Forasimilarproject(theUniversityHealthNetworkClinicalServicesBuildingintheToronto)therewere420changeorders.

4. CASE STUDIES

Inthissectionwepresentcasestudiesofsixinfrastructureprojectsintheareasofhealthcareandtransportation.Ourgoalistoexaminewhethertheprojectsexhibitoutcomesthatareconsistentwiththeframework.Wemakenoclaimthatthecasesweexaminearerepresentative.Indeedwiththesmallnumberofcasesweexamineindepth,wedonotbelieve‘representativeness’isapracticalobjective.However,usingacasestudyapproachallowsimportantinsightsthatalargesample,statisticalstudywouldmiss.Thus,ouranalysisshouldbeseenasacomplementtothelarger-samplestudiesandsummarystatisticsthatarewidely-cited.6

Forthehealthsector,wecompareoneprojectthatwasprocuredusingthetraditionalpublicsectorapproach(ThunderBayRegionalHealthSciencesCentre)totwoP3projects(BridgepointHospitalRedevelopmentProjectandSaultAreaHospital).Forthetransportationsector,wecomparetwotraditionalprojects(MontrealSubwayExtensiontoLavalandToronto-YorkSpadinaSubwayExtension)tooneP3project(CanadaLine,Vancouver).AnumberofthesameprivatesectorfirmswereusedtodeliverbothtraditionalandP3projects.

THUNDER BAY REGIONAL HEALTH SCIENCES CENTRE – TRADITIONAL PROCUREMENT

Project summary

In1998,theMinistryofHealthandLong-TermCare(MOHLTC)announcedthedevelopmentofanew375-bedhospitalfortheThunderBayRegionalHealthSciencesCentre(TBRHSC).7TheprojectwasmanagedbyTBRHSCunderatraditionalDesign-Bid-Buildmodel,withseparatecontractsforaPrimeConsultant/ArchitectandforaConstructionManager(CM)(EllisDon),andamultitudeofotherconstructioncontracts.

6 For a survey of P3 projects in Canada, see Mario Iacobacci, Dispelling the Myths: A Pan-Canadian Assessment of Public-Private Partnerships for Infrastructure Investments. (Ottawa: The Conference Board of Canada, 2010).

7 Thunder Bay Regional Health Sciences Center, Thunder Bay Regional Health Sciences Center Capital Redevelopment Review, Thunder Bay, 2004.


Risks/Incentives

Thereappeartohavebeennospecificrisksharingmeasuresbuiltintocontracts.Allrisks,includingdelaysandcostoverruns,fellbacktotheTRBHSC.Thecontractordidnothaveanyincentivetocompletetheprojectontime/onbudget(e.g.nobonusesorpenaltiesprovisions).Inessence,allresponsibilityforfiscalmanagementoftheprojectremainedwiththepublicsector.Accountabilitywasneverclearlysetout.

Assessment

Overall,costsoftheprojectmorethandoubled.Scopeanddesignchangesresultedinasignificantincreaseinfinalprojectsize.Theprojectwasdeliveredoneyearlatewiththepublicownerbearingthebulkofthecostandtimingrisk,thelatterofwhichwassharedbythepotentialpatientsandtheirfamilies.Alloftheseoutcomesareconsistentwithpoorincentivesembeddedinthetraditionalapproach.However,generallypoormanagementwithinthetraditionalapproachwasalsotoblame.ParticularexamplesincludethefactthattenderingstartedbeforethedesignprocesswascompleteandcontractingwiththeCMtookplaceafterconstructionwasunderway.Inaddition,PRISMcommentedthatpoorcommunicationanddefinitionofresponsibilitieswasasmuchtoblameastheprocurementmodelforthefailuretocomeinontimeandonbudget.

Design

PRISMreportedthattheyfoundnoevidencethatoptionsfortheprojectmasterplanandbuildingdesign/envelopeweredevelopedandpresentedtoMOHLTCfortheirconsideration.Theyalsoconcludedthatthestateoftheoverallbuildingdesignwasinsufficientlyadvancedastenderingcommenced.

Procurement

ThecapitaldevelopmentprojectwasbasedonadeliverymodelincorporatingoverallmanagementbytheTRBHSC;theycontractedseparatelywithadesignconsultantandaconstructionmanager(CM)asadvisors.TheCMmanagedallfurtherconstructioncontractsinthebestinterestsofthepublicsectorowner,withtheownerretainingalltheconstructionfinancialrisks.PRISMnotesthattheCMcontractwasneverformerlyexecuted,andthatconstructionactivitieswereinprogresswhiletheCMcontractwasstillunderdiscussion.

Thehospitalwasbuiltundervariousindividualtenderingpackages(e.g.pilings,mechanical/electrical,roofing,exteriormasonry,exteriorvapourbarrierandinsulation),withtheCMprovidingmanagementoversightoncontractstheyhadnotnegotiatedthemselves.

Finance

Thefinancingwasprovidedbygovernment,withtheMOHLTCassumingthemajorityshareofthefinalcostof$284M,whiletheHospitalwasresponsibleforapproximately$75M.Therewereatleastfourrequestsforadditionalfundingoverthelifeoftheproject.In2001,therewasarequestforadditionalfundingof$100M(representingan80percentbudgetincrease),mostofwhichhadbeencommittedorspentbeforetheadditionalfundingrequestwasmade,leavingfewoptionstothedecisionmakersbuttoaccepttherevisedbudget.


Procurement

TheRFPprocessforanAFPconsortiumcommencedinJuly2008,andthewinningconsortiumwasselectedinAugust2009.Fromthenon,contractmanagementriskwastransferredtotheprivatesectorpartners,foralltasksfromdesigntomaintenance.Themaintenancecontractincludeslifecyclerepairandrenewalthatwillensurethatheatingandcoolingsystems,windows,floorsandroofingstructuresarekeptingoodworkingconditionoverthethirty-yearlifeofthecontract.

Finance

Thetotalamounttobepaid(inannualinstallments)totheconsortiumwas$1.27B($622Minpresentvalueterms).Paymentscoverconstruction,buildingmaintenance,lifecyclerepairandrenewalandprojectfinancing.Theannualpaymentsarecomparabletoafixed-ratemortgagewithmaintenanceandrepairexpensesincluded.FinancingfortheBridgepointHospitalprojectwasprovidedbyRBCDominionSecuritiesInc.asbondunderwriter,togetherwithabankinggroupconsistingofCalyonNewYorkBranch,DexiaCreditLocalandRoyalBankofCanada.EquitywasprovidedbyPlenaryandInnisfree.

Risks/Incentives

ThePlenaryconsortiumwasrequiredtoacceptallconstruction,environmental,financial,andapprovalrisksaswellasongoingcostsoverthethirty-yearperiod.Italsoagreedtoabsorballfinancialpenaltiesanddelaycostsassociatedwithanycoordinationerrorsanddeficiencies.Theagreementwasstructuredtoincenttheprivatecontractorstocompletetheprojectonbudgetandontime.

BRIDGEPOINT HOSPITAL REDEVELOPMENT PROJECT – P3 PROCUREMENT8

Project summary

ThisprojectinvolvedbuildinganewhospitaltoreplaceanagingstructureontheeastsideofToronto’scitycentre.Itisa680,000squarefootfacility,withacapitalcostof$380M.9

AfteraplanningdesignphasecompletedinFebruary2007byStantecandKPMB,arequestforproposals(RFP)wasissuedinJulyof2008foraconsortiumtodesign,build,financeandmaintainthefacility.ThecontractwasawardedtothePlenaryHealthconsortiuminAugustof2009.Theconsortiumwasresponsibleforconstruction,buildingmaintenance,lifecyclerepairandrenewalandprojectfinancing.ConstructioncommencedOctober2009.TheprojectwascompletedontimeandonbudgetinMarchof2013.


WithDBFMtheaccountabilitywasclear.Theclientsettheoutputstandardsandtheprivatesectorpartnerhadlatitudetomeetthem,sometimesusinginnovativemeans.Inparticular,theDBFMcontractempoweredtheprivatesectorpartnertomakedesignandconstructiondecisionsforthelong-termtoprovideforoptimaloperationandmaintenanceofthestructure.

Design

WhiletheStantec/KPMBteamlaidouttheplanningdesign,andwasresponsibleforcompliance,thePlenaryteam(PlenaryGroup,Innisfree,HDRArchitects/DiamondSchmittArchitects,PCLConstructionCanada,JohnsonControls,andRBCCapitalMarkets)wasresponsiblefordetaileddesignsandallsubsequentphasesincludingsubcontracting.PlenaryHealthdesignedthebuildingtobecertifiedundertheLeadershipinEnergyandEnvironmentalDesign(LEED)GreenBuildingRatingSystem.

8 Bridgepoint Active Healthcare. 2015. Retrieved from http://www.bridgepointhealth.ca/en/index.asp 9 “Bridgepoint Active Healthcare,” PCL Construction Inc., accessed 2015, http://www.pcl.com/Projects-

that-Inspire/Pages/Bridgepoint-Hospital-Redevelopment.aspx.


Specificperformancestandardsrelatingtoitsmanagementof“hardfacilities”(physicalinfrastructure)werebuiltintotheprojectagreement.Inaddition,theconsortiumwasresponsibleforfinancingtheconstruction(alongwithallassociatedcapitalcosts).


ThiswasoneofseveralAFPredevelopmentprojectsdesignatedunderReNewOntario2005-2010,a$30B-plusstrategicinfrastructureinvestmentplantomodernize,upgradeandexpandOntario’spublicinfrastructure.ItwasdeliveredthroughaBFMcontractwithHIP.

Design

Thedesignofthebuildingforthisprojectwasnotincludedintheprivatepartner’scontract.Inthiscase,thedesignwascompletedbeforetheprojectbyalocalarchitecturefirm(EpohInc)andbyafirmwithextensiveexperienceinthehealthcarebuildingdesign(StantecArchitects).However,asHIPhadaccesstoalldrawingsandplansduringthetenderingprocess,theywereresponsibleforanydesigndeficiencies,andhadtorectifythemattheirowncost.

Procurement

WiththeBFMapproach,HIPwasrequiredtofinancetheconstructionoftheprojectuntilthefacilitywasturnedovertotheSaultAreaHospital.TheprivatesectorfinancingcostsundertheAFPappliedfortheconstructionperiod,inthiscaseabout36months.

Risks/Incentives

AlthoughthedecisiontodelivertheprojectviatheP3procurementapproachledto$82Mmoreinbasecostscomparedtothetraditionalapproach,theprivateconsortiumwasobligatedtoacceptalldesign,construction,environmental,financial,andapprovalrisks.Itwasalsoliableforanyfinancialpenaltiesanddelaycostsassociatedwithcoordinationerrorsanddeficiencies.

Assessment

Consistentwithourframework,thisP3hospitalredevelopmentprojectresultedinontimeandonbudgetdeliveryoftheprojectwithriskstransferredfromthepublicsectorownertotheprojectmanager.Avalueformoney(VFM)assessmentconductedbyDeloitte&Toucheafterthepreferredbidwasdetermined,concludedthattherewouldbea10.4percentcostsaving($95M)comparedwithtraditionaldelivery.

SAULT AREA HOSPITAL PROJECT – P3 PROCUREMENT

Project summary

TheSaultAreaHospitalProjectwasinitiatedtocombinetheservicesofthePlummerandGeneralsitesattheexistingSaultAreaHospital.The$408McontractwasawardedinAugust2007,andthe289-bedhospitalwascompletedinMarch2011,on-timeandon-budget.ThiswasaP3-delivered,Build-Finance-Maintain(BFM)contractbetweenHospitalInfrastructurePartners(HIP--aprivateconsortiumofCarillion,EllisDonandFengateCapitalManagementInc.),andtheSaultAreaHospital.10

Underthetermsoftheagreement,HIPcarriedouttheconstructionofthehospitalaccordingtoperformancestandardssetoutinthecontract,followedbymaintenanceovera30-year(2010to2040)period,duringwhichtimeitisresponsibleforbuildingmaintenance,repairandlifecyclereplacement.HIPwasalsotaskedwithadditionaldutiesthatwouldfacilitateitsconstructionresponsibilitiessuchasworkingwiththeSaultAreaHospitalonequipmentprocurementandtheintegrationofexistingfacilitiesintothenewfacility.

10 “Value for Money Assessment: Sault Area Hospital Project,” Infrastructure Ontario, 2007, accessed 2015, http://www.infrastructureontario.ca/Templates/Projects.aspx?id=2147484707&langtype=1033.


MONTRÉAL SUBWAY EXTENSION TO LAVAL – TRADITIONAL PROCUREMENT

Project summary

TheMontréalSubwayExtensiontoLavalprojectwasbuiltbetween1998and2007.TheprojectconsistedofextendingtheeasternsectionoftheOrangeLinetotheNorthShore,addingthreesubwaystationsandconnectingLavaltoMontréalIslandviaasubterraneanlink.

Thisprojectwasplaguedwithmanagementproblemsandendedupcostingmorethan300percentoftheoriginalbudgetandfinishing18monthsbehindschedule.Twoindependentreportswereconductedandpublishedin2004todeterminewhathadgonewrong.ThefirstreportwaspreparedbytheQuébecAuditorGeneral.11ThesecondreportwaspreparedbyanExpertsCommitteeestablishedbytheQuébecGovernment.12


TheGovernmentofQuébecpassedanorder-in-councilinOctober1998authorizingtheextensionoftheMontréalsubwaytoLaval.Theinitialcostestimateof$179M,wasnotbasedonanydetailedfeasibilitystudy.TheGovernmentrevisedtheapprovedprojectbudgetto$378.8MinJune2000,andagainto$547.7Min2003.Followingtheindependentstudiesconductedin2004,thegovernmentagreedtoincreasethebudgetto$804M,whichexceededthefinalprojectcostof$745M.

Thedecision-makingprocessduringtheconstructionphasewasseverelydeficient.TheMontréalMetropolitanAgency(AMT)issuedanRFPin2002tocontractwithaconsortiumfortheengineering,procurementandconstructionmanagement(EPCM)oftheprojectbuttheresultingcontractdidnotincludeanappropriateremunerationsystemorgovernanceandaccountabilityclauses.

Theagreementwasstructuredtoincenttheprivatecontractorstocompletetheprojectonbudgetandontime.Aone-timepaymentfromtheSaultAreaHospitaltoHIPwouldonlybeforthcomingwhentheprojectreachedsubstantialcompletion(onOctober2010),afterwhichHIPwouldbepaidinmonthlyinstallmentsfortheremainingdurationofconstructionaswellasmaintenanceperiod.Shouldthestateofthefacilityhavefallenshortoftheperformancerequirementsdefinedintheprojectagreement,HIPwouldhaveincurredfinancialdeductionsfromthepaymentstowhichitwasentitled.Theconsortiumwasalsofinanciallyresponsibleforanycostsassociatedwithdelays.

HIPwasalsosubjecttoahighdegreeofthirdpartyoversight.Toensurethatthefacilitymetthespecificationsgiveninthecontract,theprivateconsortiumwasresponsibleforobtainingthird-partyindependentcertificationpriortoreceivinganyportionofitsscheduledpayments.HIPwasalsosubjecttoadditionaloversightmeasures,includinganindependentbudgetreviewbyathird-partycostconsultant,monthlyreportingandprojectmonitoringbyathird-partycostconsultant,andtherequirementthatpriorapprovalbesecuredforanychangesmadetotheprojectbudgetinexcessofapre-determinedthreshold.

Assessment

Consistentwithourframework,thisP3projectwasdeliveredontimeandonbudgetwithriskstransferredtotheprivatesectorconsortium.Althoughthedesigncontractwasseparate,theriskofacoordinationfailurewasmitigatedviatheBFMRFP.AccordingtoaVFMreviewbyDeloitte&Touche,theprojectyielded$101.7M(18.2percent)incostsavingsincomparisontotraditionalprocurementapproach.

11 Québec Auditor General, Rapport de vérification concernant la gestion du projet de prolongement du réseau de métro sur le territoire de la Ville de Laval, Quebec, 2014.

12 Yvon Marcoux and Joel Gauthier, “Comité d’experts sur le projet de prolongement du réseau de métro sur le territoire de la ville de Laval,” October 13, 2004, accessed 2015, http://www.bv.transports.gouv.qc.ca/mono/0936380.pdf.


However,constructioncontractsappeartohavebeenotherwiseexecutedcompetentlyandnomaterialdelayorcostoverrunscouldbeattributedtothem.

Finance

Thisprojectwasfinancedinatraditionalmanner,withfundingmoneycomingfromMTQ.TheTransportationMinisterwasrequiredtogotoCabinetthreetimestoaskforbudgetincreases.

Risks/Incentives

TheEPCMcontractcouldhaveprovidedavehiclefortheAMTtotransferrisksandaccountabilitiestotheprivatesector.Unfortunately,thecontractwaspoorlydesignedandnoclausesoneitherrisktransferorincentives(i.e.penaltiesorbonuses)werejudgedenforceableintheend.

TheAuditorGeneralspecificallyblamedtheAMTfornothavingincludedariskassessmentstrategyintheEPCMcontract.TheinclusionofbonusesandpenaltieslinkedtotheperformanceoftheEPCMfirmwasinitiallydiscussedwhentheprojectwasestimatedtocost$378.8Mbutascostsexplodedfurther,theEPCMfirmarguedthattheircontractwasnolongervalidandaskedforanincreaseintheirprofessionalfeesfrom$45Mtoover$100M,withnoallowancefortheAMTtopenalizethemfortheprojectcostoverrunsordelays.

Assessment

TheMontréalSubwayextensionexhibitedmanyoftheproblemsthatcanoccurunderthetraditionalapproach:thepoliticalannouncementwasnotsupportedbyanydetailedcoststudies;weakduediligenceallowedabasiccalculationerrortoaddmillionsofdollarsincosts;anddeficientprojectmanagementgovernancefailedtoprovideaproperrisktransferandincentivesystem.

TheAMTCEOwouldlaterassignblamefortheprematurenatureoftheinitialannouncementonpoliticians,describingahurriedannouncementofalargeandpoliticallypopularinfrastructureprojectthattookplacewithoutthebenefitofappropriatefeasibilitystudies.

Design

AccordingtotheAuditorGeneralofQuébec,onefactorexplainingthemultipleincreasesinthebudgetbetween1998and2003wasthatthegovernmentdidnothavealltherelevanttechnicalinformationtomakeaninformeddecisionuntil2004,bywhichtimemorethan50percentofthecostshadalreadybeencommitted.Forexample,itwasrevealedthatabasiccalculationerroraffectedthedetailedplansandspecificationsforsomeyears:engineershadmiscalculatedthetunnel’slengthbymorethanakilometer(over20percentoftheactual5.3km)becausethescaleonamaphadbeenwrongfromtheoutset.Inaddition,design-relateddecisionsweremadeastheprojectprogressed,includingaddingasecondentrancetoasubwaystationverylateintheconstructionphase.

Procurement

Launchingconstructionbeforethefullcostswereknownwasobviouslyproblematic.ThisputtheGovernmentinadifficultpositionwhenconfrontedwithcostoverruns.The2004Experts’ReportwascommissionedbytheGovernmenttoprovideoptionsonhowtoproceed,butwith70percentofthebudgethavingbeencommitted,optionswerelimited.TheAuditorGeneral’sreportalsopointedtoseveraldeficienciesinthemanagementofprofessionalservicecontracts.Somecontractsweresplitintosmalleronestoavoidpublictenderingprocesses,whileotherweregivenpriortoobtainingtheapprovalsfromtheMinistryofTransportation(MTQ).



Thedecisionmakingprocesswasstructuredtoensurethatpublicrepresentativesheldavoiceintheprocessproportionatetothedegreeoffinancialrisksforwhicheachmunicipalitywouldbeliable.AnydecisionthatcouldcauseabudgetoverrunordelaytheeventualopeningofthesubwaylinerequiresthejointapprovalofthemunicipalgovernmentsofToronto,andtheRegionalMunicipalityofYork(includingtheCityofVaughan).Somefinancialdecisionsalsohavetobemadeatprovincialandfederalgovernmentlevels,addingtothecomplexity.

Theprojecthasalsobeenhamperedbyafragmentedprojectmanagementstructure.Eachofthesixnewstationswassubjecttoitsownseparatecompetitivebiddingprocessandtherebycarriedoutandmanagedbydifferentprojectcontractors.Whilethishadtheadvantageofimprovingthecompetitivenessofthebiddingprocess,adelayononecontractor’spartmayhaveaknock-oneffectontheworkofotherparties.

Design

Thelackofintegrationbetweenthedesignprocessandallotherstagesoftheprojecthasbeenakeycontributortoprojectdelays.Forinstance,thearchitectwhowasbeencommissionedtodesigntheprojectcreatedadesignproposalthatwastoocostlyfortheinitialoverallbudget.Thedesignprocesswasalsopoorlycoordinatedwiththeplanningfortherelocationofutilities(responsibilityoftheCityofToronto),andasaresultcreatedunintendeddelaysformanyprojectcontractors.Thedesignprocesswashamperedbytheneedtoaddresstherequirementsofmanyregulatorystakeholders(e.g.theTTC,ParcDownsviewPark,CityofToronto,YorkUniversity,GOTransit,MinistryofTransportationOntario,RegionofYorkandCityofVaughan)foreachindividualstation.

TORONTO-YORK SPADINA SUBWAY EXTENSION – TRADITIONAL PROCUREMENT

Project summary

TheToronto-YorkSpadinaSubwayExtension(TYSSE)projectisstillunderway,extendingtheSpadinalinefromDownsviewStationinTorontototheVaughanMetropolitanCenter.Whencompleted,thiswillbethefirstTorontoTransitCommission(TTC)linetocrossmunicipalboundaries,withsixnewstopsthatareprojectedtoaccommodate30MadditionalTTCtripsannuallyby2021.13

TheTTCwasappointedasTYSSE’sprojectmanagerin2007.Itsresponsibilitiesincluded:generalprojectmanagement,definingtheprojectscope,recommendingdeliveryoptionsandstrategy,andcontractmanagement.Projectoperations,includingconstruction,contractsandadministration,wouldapplyTTC’sexistingprocurementandcontractadministrationpoliciesandprocedures.AnExecutiveTaskForce(ETF)consistingofthreerepresentativesfromeachoftheCityofTorontoandYorkRegionwasformedtoworkwiththeTTC.TheETFwouldprovidegeneralprojectoversight,approvetheprojectdeliverystrategy,andmakebudgetrecommendations.Theywerealsotobeprovidedwithseparateprofessionaladvicebyanauditorandanengineer.

Theprojecthasbeenplaguedwithnumerouschallengessincetheoutset,includingfundingdelays,technicalcomplexities,andafatalwork-relatedincidentonaconstructionsite.14SinceitsannouncementinMarch2006,thebudgethasrisenfrom$1.6Btoapproximately$2.75BandtheprojectedcompletiondatehasslippedfromDecember2015toDecember2017.15In2014,theTTCwasreplacedascontractmanagerandaprivateengineeringfirmwascontractedtomanageandoverseethecompletionoftheproject.

13 Tess Kalinowski, “Spadina subway extension $400M over budget,” Toronto Star, March 6, 2015, accessed 2015, http://www.thestar.com/news/queenspark/2015/03/06/spadina-subway-extension-400m-over-budget.html.

14 Don Peat, “Spadina subway extension delayed,” Toronto Sun, October 22, 2012, accessed 2015, http://www.torontosun.com/2012/10/22/spadina-subway-extension-delayed.

15 City of Toronto, Staff report for action on TYSSE - Schedule and Budget Change, 2015.


RegionofYork(plusanadditionalcontributionof$30Mtocovercostsoffurtherinfrastructureupgradestoaccommodatetheincreasedridertraffic).BytheTTC’sownadmission,thefundingagreementwasoverlycomplexandthevariousapprovalprocessestook18months.

Risks/Incentives

Projectcontractorswerepaidatthecompletionofeachprojectmilestone.Thefinancialliabilityforcostoverruns,however,remainedwiththeRegionalMunicipalityofYorkandCityofToronto.Asaresult,therewasminimalrisksharingbetweenthepublicandprivatesectors.

Assessment

TheTYSSEprojectcanprovideonlypreliminaryinsightsgiventhattheprojectisnotyetfullycompletedanditistooearlytoreachanydefinitiveassessments.However,outcomestodateareconsistentwithourframeworkforatraditionally-procuredproject:amajorscopechangeboostedcostsanddelayedcompletionandmajorcoordinationfailuresandanoverly-complexpublicsectorgovernancestructurewerecontributingfactors.

CANADA LINE PROJECT, VANCOUVER – P3 PROCUREMENT

Project summary

Completedin2009,theCanadaLineprojectisa$2.1B,ElevatedRapidTransit(ERT)systemconnectingdowntownVancouver,theVancouverInternationalAirportandcentralRichmond,BritishColumbia.Itconsistsof16stations,2bridgesand9kmoftunnel,servingatransportationcorridorthatconnectsone-thirdoftheregion’sjobsand20percentofitspopulation.16ItwasalsothefirstP3-basedtransitprojectinNorthAmerica,andoneofthelargestinfrastructureundertakingsevercompletedinBritishColumbia,withacapacityequivalenttothatof10additionalroadlanes.TheCanadaLinewasbuilttosynchronizeitsservicewithVancouver’sothermetrolines(runbytheregionalgovernmentagencyTransLink).

AnotherdesignfactorthathadanimpactonthecostsanddelaysrelatestothesubsequentdecisiontoextendtheendpointofthelinefromYorkUniversitytoVaughanCenter.This,alongwithaninflationaryadjustment,resultedintherevisionofestimatedcostsfrom$1.6Bto$2.1B.

Procurement

Asnotedabove,eachstationintheoverallTYSSEprojectwasmanagedonthebasisofmanydifferentcontracts.Notonlydidthisleadtoinefficiencies,italsocreatedtheriskofconflictbetweenitsmanycontractors,andcompetitivebiddingforlabourandotherinputs,whichinturnhadadetrimentaleffectonprojectperformance.Bythemiddleof2013,contractorperformanceandrelationshipsamongthemdeterioratedtothepointthattheTTCCEObecameinvolvedindirectdiscussionswithsomecontractorstomitigatefurtherscheduleandcostimpacts.TheCEOmetwithcontractorson27occasionsinanattempttoresolveissuesaroundpremiums,incentives,andscheduleadherence.Inordertorestorebetterworkingrelationsamongallparties,contractorsalsotookstepstoreallocatestaff.

Followingareviewinmid-2014conductedbyexternalexpertsfromthreedifferentgroups–ateamoftransitagenciesconvenedbytheAmericanPublicTransitAssociation(APTA),ParsonsBrinkerhoff(consultingfirm),andBechtel(engineeringfirm)–identified“resetting”workingrelationsbetweentheTYSSEandtheprojectcontractorsasoneoftheconditionstomeetadeadlineofDecember2017.

Finance

TheTYSSEprojectwasoriginallybudgetedat$1.6B.AccordingtotheCapitalCostAllocationMOUbetweentheRegionalMunicipalityofYorkandCityofToronto,projectcostswereallocatedasfollows–$1.059BtobecontributedbytheProvincialGovernment,$697MbytheFederalGovernment,$526MbytheCityofToronto,and$351.6Mbythe

16 Partnerships BC, Canada Line Final Project Report, Victoria, 2006


Throughatransparentandaccountablegovernancemodel,CLCOwasresponsibletooverseeprojectdesign,procurement,construction,andimplementation.TheadvantagesofhavingCLCOaspartoftheproject’sgovernancemodelincludedcleardefinitionofresponsibilitiesforallpartiesinvolvedandeffectivesingle-pointofcommunicationwiththeconcessionaireandthegeneralpublic,resultinginenhancedtransparency.

Design

ThedesigncomponentoftheprojectwasincludedintheP3contract.Ultimately,InTransitBCbuiltwhattheyhadthemselvesdesigned,allowingfordesignconsistency(CanadaLinestationsvaryonlyslightlyinappearance,designedtoblendinwiththesurroundingneighbourhood)andinnovation.Forexample,InTransitBC’sdesignersrejectedagovernmentproposaltobuildluggageracksoneachtrain,arguingthatpassengersgenerallyprefertobeclosetotheirbags.Instead,thetrainsweredesignedwithcantileveredseatstoaccommodateunderseatbagstorage,aswellaslargeopenspaceswhereriderscanstandnexttotheirluggage(Bula,2014a17).

TheCanadalineprojecthaswoncriticalacclaimincludingInfrastructureJournal’s(2010)100mostinnovativeandsociallysignificantinfrastructureprojectsintheworld.TheCanadaLineincludesinnovativefeaturessuchastheNorthArmBridge,NorthAmerica’sfirst“extra-dosed”,double-cabledbridge.TheprojectwasalsoawardedtheGoldNationalAwardforInnovationandExcellencebytheCanadianCouncilofPublicPrivatePartnerships(2009),andProjectFinance’sawardforNorthAmericanTransportDealoftheYear.

Aprivatesectorconsortium(InTransitBC)consistingofSNC-LavalinInc.,B.C.InvestmentManagementCorporation,andCaissededépotetplacementduQuébec,wasresponsibleforimplementingandpartiallyfinancingtheproject.Asubcontractor,ProtransBC,asubsidiaryofSNC-Lavalin,isinchargeofongoingmaintenanceandensuringthattrainsrunonschedule.

Despitethemanycomplexitiesassociatedwithaprojectofthisnature,InTransitBCmanagedtocompletetheCanadaLinethreemonthsaheadofscheduleduetothestrongcollaborationandcommunicationamongallpublicandprivatesectorparties,includingtheequityprovider,designer,constructorandoperationsandmaintenanceteam(SNC-Lavalin).Othercontributingfactorsincludeintegratedmanagementoftheentireprojectlifecycle,andincentivesstemmingfromInTransitBC’sobligationstoputasubstantialamountofcapitalatrisk.


Theproject’sinitiationwasdesignedtoaddresstheneedtoservicethetransportationcorridorbetweendowntownVancouveranddowntownRichmond,oneofCanada’sfastestgrowingtransportationcorridorsandwascompletedinadvanceofthe2010VancouverWinterOlympics.Astudydemonstratedthestronglikelihoodthatsuchaprojectcouldachieveitstechnicalandfinancialobjectives.

Constructionbeganin2005,afterseveralyearsoffeasibility,engineeringandeconomicstudies.ThisallowedInTransitBC,theselectedconsortium,tohaveallthenecessarydecisionsandcontractsinplacetominimizescopecreeponcetheconstructionhadstarted.Fortheinevitablechangeordersthatcameupbetween2005and2009,asubsidiarybody,CanadaLineRapidTransitInc.(CLCO),wascreatedinvolvingallfinancialstakeholders.

17 Frances Bula, “How Vancouver’s Olympic legacy is shaping the future of transit,” CityLab, accessed 2015, http://citiscope.org/story/2014/how-vancouvers-olympic-legacy-shaping-future-transit.


Risks/Incentives

Toensuretheeffectivetransferofrisks,theagreementwasstructuredsuchthatInTransitBCwouldhavesufficientcapitalatrisk($720M)tofundthecostsofcompletingtheprojectintheeventofcostoverrunsorpooroperatingperformance.TherewerealsocorporateguaranteesandfinanciallettersofcredittosecuretheperformanceofInTransitBCanditsconstructioncontractor(SNC-Lavalin)duringtheconstructionandoperatingperiods.ThisensuredthatthepublicsectorwouldbeinsulatedfromtherisksofpoorperformancebyInTransitBC.

Byassumingtheobligationofconstructingthelineatafixedcost,InTransitBCeffectivelyborefullresponsibilityforanycostoverruns(withtheexceptionofcostsassociatedwithspecifiedrisksthatwereretainedbyCLCO).InTransitBCalsoboremostoftheproject’sconstructioncost,operatingcostandmaintenancerisks.Asthemainprojectsponsor,TransLinkalsoboreasubstantialportionofpublicsectorfinancialrisks.Constructionriskssuchaspropertyacquisitionandutilityrelocationcostswerecoveredbyspecificcontingencyfunds.TheGVTAcurrentlyretainsthemajorityofridershiprevenuerisk.DuringtheRFPstage,therewasalsoahighdegreeofconsultationonprojectinputrequirementsbetweenbiddersandGVTAtooptimizetheirproposalsandhencereducedesignerrorrisk.

Assessment

Consistentwithourframework,thesuccessoftheCanadaLineprojectisabest-in-classexampleoftheefficiencies,innovation,andstrongmanagementrigourthatcanresultfromacollaborativepartnershipandclearassignmentofrisksbetweentheprivateandpublicsectorwhendeliveringhighlycomplexinfrastructureprojects.

Procurement

TheCanadaLineProjectisa35-yearDesign-Build-Finance-Operate(DBFO)agreementinwhichInTransitBCInc.ownsthetrainvehicles,operates,andmaintainstheLineunderanoperatinglicensethroughtotheendoftheagreement.Throughoutthelifetimeofthecontract,InTransitBCreceivespaymentsfromlocalgovernmentsonaperiodicbasisuponmeetingpre-definedperformanceandqualitymilestones(determinedbyafederally-appointedindependentengineer).

Duringtheline’sconstructionfrom2005to2009,theprivateconcessionairereceived$1.14Binmilestonepayments.WhileTranslink,theProvinceofBC,theCityofVancouver,andtheVancouverAirportmadepaymentsaccordingtoanestablishedschedule,theFederalgovernmentonlyreleasedpaymentsequaltoapercentageofthevalueofcompletedmilestoneseachmonth.

Finance

TheprojectwasjointlyfundedbytheGovernmentofCanada,theProvinceofBritishColumbia,theGreaterVancouverTransportationAuthority(GVTA),VancouverInternationalAirportAuthority(VIAA),andtheCityofVancouver.Theprivatepartner,InTransitBC,wasrequiredtocontributeequityanddebtcapitalaswellasbeingresponsibleforanyconstructioncostoverruns.Thefinalpricetagwas$2.054B,withintheapprovedbudget.


• ScopeforPrivateSectorInnovationGains:Thescopeforprivatesectorinnovationisinverselyrelatedtothepublicsector’sneedtobeprescriptive.

• PrivateSectorExpertise:Theavailabilityofprivatesectorexpertiseiscriticalfortworeasons:(1)ensuringacompetitivebiddingenvironment;and(2)ensuringthatthereisprivatesectorcapacitytoperformthefunctionsandmanagetherisksenvisionedintheP3.

• GreenfieldSite:Ingeneral,investmentsinvolvingallnewconstructiononpreviouslyundevelopedsiteslendthemselvestomaximizingrisktransfertotheprivatesector.

• PotentialforContractIntegration:OneofthemechanismbywhichP3sgeneratevalueistheintegrationofvariouselementsofthepotentialP3(i.e.,design,build,finance,operate/maintain).Thegreaterthepotentialforintegration,themorelikelyaP3willbeviable.

TheimportanceoftheVFManalysisistodeterminewhenaP3modeofdeliveryoffersmorevaluetotaxpayersthanatraditionalproject.ButevenbeforeaVFMisconducted,aproject–specificP3suitabilityassessmentisinorderasitisunderstoodthatnotallprojectsaresuitableforaP3approach.ThebenefitsoftheP3approacharemaximizedwhenaprojectmeetsasmanyofthefollowingcriteriaaspossible:18

• InvestmentSize:P3saremoresuitableforlargerprojects.Someprovinceshavea$50MthresholdwhileaccesstotheBuildingCanadaFundisforprojectswithcapitalcostsofmorethan$100M.

• Complexity:P3slendthemselvestocomplexinvestments.Complexitycanariseasaresultofthenatureoftheasset,thesiteonwhichitwillbeconstructed,orthenumberofdistinctassetclassesinvolvedintheinvestment.However,P3smaynotbesuitableinthecaseofprojectswhereregulatoryapprovalsorownershipissuesmaybeunusuallydifficulttoassess(foreg.incasesofsitesofpotentialhistoricalsignificance,orofFirstNationsLandClaims),whichinturnaffectsthepricingofrisktransfersforprojectmanagementandcompletion.

BOX 3P3s ARE NOT ALWAYS THE ANSWER

18 Some elements from PPP Canada, The Guide to the New Building Canada Fund P3 Screen - Suitability Assessment, 2014, accessed 2015, http://www.p3canada.ca/en/about-p3s/p3-resource-library/the-guide-to-the-new-building-canada-fund-p3-screen---suitability-assessment/.


Inaddition,publicsectoremployeestendtomanagemultipleresponsibilitiessimultaneously,limitingthedevelopmentofthespecialistknowledgethatisessentialtoprovidinginfrastructureassetsthatprovidethebest-value-for-moneytotaxpayers.

Akeyreasonpublicinfrastructurerequiresalong-termperspectiveisthatprojectcostsareusuallydistributedamongamixofcurrenttaxpayers,futureusers,futuretaxpayers,andfuturegovernments.Whilemosttraditionalcontractsinvolveadeferralofsomepayments,mostpaymentsaremadeupfrontandduringthedesignandconstructionphases.

WithP3projects,theneedforprivatefinancingensuresthatbanks,bond-holders,andprivatefinanciershaveastrongincentivetoexerciseactiveprojectoversightoverandabovewhatthepublicsectoriscapableofwhenassessingtheinitialfinancialcontractovertheproject’slifetime.Thus,privatesectorinvolvementencouragesalong-termfinancialandoperationalperspective.Theinvolvementofprivatefinancemayacceleratetheterminationofbadprojects,evenwhenpublic-sectordeveloperswouldcontinuesuchprojectsforpoliticalreasons.Privatelendersalsocontributetoefficiencygainsbybringingtheirexpertisetotheprojectmonitoringeffort.

Takentogether,itappearsthatwhiletheprivatesectorisbetterplacedtoassembleandretainthenecessaryexpertisetoexecutelargepublicinfrastructureprojects,theincentivesandriskmanagementpracticesembeddedinP3projectsareaseparateandessentialingredient.Theprivatesector’scomparativeadvantageinretentionofin-houseexpertise,robustoversightstructure,andbetteralignmentofincentivestominimizewhole-of-lifecostsofaparticularprojectgiveitauniqueedgeinfulfillingprojectobligationsonscheduleandonbudget.

5. LESSONS LEARNED

Basedonourframeworkfordecision-making,anditsapplicationtoaselectionofCanadiancasestudies,wenowreturntothecorequestionsofourstudy:DoP3stendtoachieveimprovedoutcomesforpublicly-ownedinfrastructureprojectsduetosuperiormanagementabilitiesintheprivatesectorthatcouldbereplicatedinthepublicsector?OraretheseoutcomesaresultofthecontractstructureandriskmanagementpracticesthatareuniquelycharacteristicoftheP3approach?

Thecaseforthepublicsectortobuyratherthanownthecapacitytomanageinfrastructureprojectsliesinthefactthattheaccountabilitystructureandtimehorizonsofthepublicsectorarepoorlysuitedtothelong-termnatureofmostP3projects.Thesmoothexecutionofinfrastructureprojects,whoseservicelivestypicallymeasureuptodecades,requiresamatchingperspectiveinplanning,design,budgetingandaccountability.

Whileend-to-endbudgetingonatop-downbasisisconceptuallypossiblewiththetraditionalprocurementapproach,itdoesnotprovideasinglepointofaccountabilitythatwouldgenerateappropriateincentivestoproperlyinternalizeandmanagetheprojectoveritsentire,multi-decadelifecycle.Further,theneedtotransferpublicoversightandaccountabilityforinfrastructureprojectsfromonepoliticaladministrationtothenextintroducessignificantpoliticaluncertainty,whichcanhindertheeffectiveimplementationofcomplex,large-scaleprojects.

Anotherimportantissueistheretentionofin-houseprojectexpertisewithinthepublicsector,where,duetopersonnelturnover,employeesusuallyonlyexperiencealimitednumberoflargeinfrastructureprocurementprojectsintheircareer.


AtlusGroup.Infrastructure Ontario AFP Track Record Report.2014.Toronto.

Boardman,AnthonyE.andAidanR.Vining.“P3sinNorthAmerica:rentingthemoney(inCanada),sellingtheroads(intheUSA).”InInternational Handbook on Public-Private Partnerships,editedbyGraemeA.Hodge,CarstenGreveandAnthonyE.Boardman,354-399.Cheltenham:EdwardElgar,2010.

Bula,Frances.“HowVancouver’sOlympiclegacyisshapingthefutureoftransit.”CityLab.Accessed2015.http://citiscope.org/story/2014/how-vancouvers-olympic-legacy-shaping-future-transit.

CityofToronto.Staff report for action on TYSSE - Schedule and Budget Change.2015.

Dobbs,Richard,HerbertPohl,Diaan-YiLin,JanMischke,NicklasGaremo,JimmyHexter,StefanMatzinger,RobertPalterandRushadNanvatty.“Infrastructureproductivity:Howtosave$1trillionayear.”McKinseyGlobalInstituteReport.2013.Accessed2015.http://www.mckinsey.com/insights/engineering_construction/infrastructure_productivity.

DominionBondRatingService.Methodology: Rating Public-Private Partnerships.2015.Toronto.

Hodge,GraemeA.“ReviewPublic-PrivatePartnerships:somethoughtsonevaluation.”In International Handbook on Public-Private Partnerships,editedbyGraemeA.Hodge,CarstenGreveandAnthonyE.Boardman,81-112.Cheltenham:EdwardElgar,2010.

Hodge,GraemeA.andColinF.Duffield.“TheAustralianPPPExperience:ObservationsandReflections.”InInternational Handbook on Public-Private Partnerships,editedbyGraemeA.Hodge,CarstenGreveandAnthonyE.Boardman,399-438.Cheltenham:EdwardElgar,2010.

Iacobacci,Mario.Dispelling the Myths: A Pan-Canadian Assessment of Public-Private Partnerships for Infrastructure Investments.Ottawa:TheConferenceBoardofCanada,2010.

InfrastructureOntario.“ValueforMoneyAssessment:SaultAreaHospitalProject.”2007.Accessed2015.http://www.infrastructureontario.ca/Templates/Projects.aspx?id=2147484707&langtype=1033.

InfrastructurePartnershipsAustralia.“PerformanceofPPPsandTraditionalProcurementinAustralia.”Accessed2015.http://www.infrastructure.org.au/Content/PPP.aspx.

REFERENCES

Kalinowski,Tess.“Spadinasubwayextension$400Moverbudget.”Toronto Star,March6,2015.Accessed2015. http://www.thestar.com/news/queenspark/2015/03/06/spadina-subway-extension-400m-over-budget.html.

Levy,SidneyM.Public-Private Partnerships: Case Studies on Infrastructure Development.Virginia:ASCEPress,2011).

Macdonald,Mott.Review of Large Public Procurement in the UK.2002.London:MottMacDonald.

Marcoux,YvonandJoelGauthier.“Comitéd’expertssurleprojetdeprolongementduréseaudemétrosurleterritoiredelavilledeLaval.”October13,2004.Accessed2015.http://www.bv.transports.gouv.qc.ca/mono/0936380.pdf.

OfficeofAuditorGeneral.“ReportsonValue-for-moneyAudits(Introduction).”InAnnual Report of the Office of Auditor-General,193-218.2014.

OntarioChamberofCommerce.Building Ontario’s Infrastructure Advantage: A Follow-up Report.2015.

PartnershipsBC.Canada Line Final Project Report.2006.Victoria.

PCLConstructionInc.“BridgepointActiveHealthcare.”Accessed2015.http://www.pcl.com/Projects-that-Inspire/Pages/Bridgepoint-Hospital-Redevelopment.aspx.

Peat,Don.“Spadinasubwayextensiondelayed.”Toronto Sun,October22,2012.Accessed2015.http://www.torontosun.com/2012/10/22/spadina-subway-extension-delayed.

PPPCanada.The Guide to the New Building Canada Fund P3 Screen - Suitability Assessment.2014.Accessed2015.http://www.p3canada.ca/en/about-p3s/p3-resource-library/the-guide-to-the-new-building-canada-fund-p3-screen---suitability-assessment/.

QuébecAuditorGeneral.Rapport de vérification concernant la gestion du projet de prolongement du réseau de métro sur le territoire de la Ville de Laval.2004.Quebec.

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