the procurement of public infrastructure: comparing p3 and
TRANSCRIPT
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE:COMPARING P3 AND TRADITIONAL APPROACHES
Lawrence National Centre for Policy and Management
Lawrence National Centre for Policy and Management
Lawrence National Centre for Policy and Management
Lawrence National Centre for Policy and Management
Lawrence National Centre for Policy and Management
Lawrence National Centre for Policy and Management
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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.
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
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.
Comparing P3 and Traditional Approaches 5
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
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
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
Comparing P3 and Traditional Approaches 7
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
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
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.
Comparing P3 and Traditional Approaches 9
Finally,theseparationofconstructionandmaintenancecontractsincreasestheriskofthefailuretodesignorbudgetwiththelife-cycleofrepairandreplacementactivitiesinmind.Theproblemofunder-investinginmaintenanceisespeciallyacuteinthepublicsectorwherethe(politically)urgentconstructionofnewassetsfrequentlyoverwhelmsthe(operationally)importantongoingmaintenanceofexistingassets.Evenwheresuchfactorsaretakenintoaccountinitially,subsequentperiodsofgovernment-widefiscalstressthatdriveacross-the-boardcost-cuttingexercisesaredisproportionatelyhardonmaintenance,repairandreplacementbudgets.
Insum,thereiswidespreadagreementamongacademicsandfinancialandindustryexpertsthatthetraditionalapproachtoprocurementfrequentlyresultsincostover-runs,missedtimelines,under-investmentinmaintenanceandmissedopportunitiesforinnovativeservicedelivery.Therisksofthesefailuresarebornebytaxpayersandservicerecipients.
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
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.
Comparing P3 and Traditional Approaches 11
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.
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
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
Comparing P3 and Traditional Approaches 13
• 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,
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
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.
Comparing P3 and Traditional Approaches 15
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.
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
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.
Decision making process
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.
Comparing P3 and Traditional Approaches 17
Specificperformancestandardsrelatingtoitsmanagementof“hardfacilities”(physicalinfrastructure)werebuiltintotheprojectagreement.Inaddition,theconsortiumwasresponsibleforfinancingtheconstruction(alongwithallassociatedcapitalcosts).
Decision making process
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.
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
MONTRÉAL SUBWAY EXTENSION TO LAVAL – TRADITIONAL PROCUREMENT
Project summary
TheMontréalSubwayExtensiontoLavalprojectwasbuiltbetween1998and2007.TheprojectconsistedofextendingtheeasternsectionoftheOrangeLinetotheNorthShore,addingthreesubwaystationsandconnectingLavaltoMontréalIslandviaasubterraneanlink.
Thisprojectwasplaguedwithmanagementproblemsandendedupcostingmorethan300percentoftheoriginalbudgetandfinishing18monthsbehindschedule.Twoindependentreportswereconductedandpublishedin2004todeterminewhathadgonewrong.ThefirstreportwaspreparedbytheQuébecAuditorGeneral.11ThesecondreportwaspreparedbyanExpertsCommitteeestablishedbytheQuébecGovernment.12
Decision making process
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.
Comparing P3 and Traditional Approaches 19
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).
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
Decision making process
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.
Comparing P3 and Traditional Approaches 21
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
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
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.
Decision making process
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.
Comparing P3 and Traditional Approaches 23
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.
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
• 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/.
Comparing P3 and Traditional Approaches 25
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.
THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
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THE PROCUREMENT OF PUBLIC INFRASTRUCTURE
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Lawrence National Centre for Policy and Management
Lawrence National Centre for Policy and Management
Lawrence National Centre for Policy and Management
Lawrence National Centre for Policy and Management
Lawrence National Centre for Policy and Management
Lawrence National Centre for Policy and Management
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