Is Toronto-area transit the next frontier for the private sector?

Could a public-private partnership prevent delays and cost overruns like those on the Spadina subway extension or Union Station?

Thestar.com
May 22, 2015
By Tess Kalinowski

Public-private partnerships (P3s) are like car insurance, says Infrastructure Ontario CEO Bert Clark. It costs more up front but when things go wrong you don’t have to worry about paying for the repairs.

Ontario’s agency in charge of public-private partnerships has used various private-sector financing, project management, design and maintenance arrangements to build dozens of Ontario hospitals, courthouses and other public facilities. The majority have been delivered on time and on budget.

All of those assets - and Clark stresses this because he says it’s a key misconception about P3s - remain publicly owned.

Now, at a time when Toronto-area politicians and residents are feeling stung by overdue, over-budget projects such as the Spadina subway extension and Union Station, IO is casting its sights on the transportation sector.

Premier Kathleen Wynne and Mayor John Tory are both focused on transit expansion.

“It doesn’t take a political genius to anticipate there will be quite a bit of infrastructure investment over the next five to 10 years and it will likely be in heavy rail or transit,” said Clark.

If the TTC had used a P3 to build Spadina, would the subway still be more than two years behind schedule and more than $150 million over its $2.63-billion budget? Could a P3 ensure the Scarborough subway doesn’t suffer similar setbacks?

The questions have to be asked, say some city councillors, including TTC chair Josh Colle.

Through contracts that offer penalties and incentives to private companies to meet construction targets, the government arranges for the private sector to take on the risk of a project going over-budget or over-schedule. In exchange, the public pays an upfront premium to make sure it doesn’t get stuck with a bigger bill in the end.

Not everyone believes it’s a worthwhile proposition. Last fall, Ontario’s auditor general reported that the Liberal government’s P3 contracts cost taxpayers $8 billion more than if the public sector had properly managed those projects itself.

That’s a big “if,” say P3 advocates, given the preponderance of over-budget, overdue public projects.

The Ontario government’s commitment to the model doesn’t necessarily mean it makes sense for the city either, said Councillor Shelley Carroll, a former Toronto budget committee chair, who sits on the TTC board.

She says she’s not wedded to public management of large capital projects.

“But I’m not seeing the P3 payoff,” said Carroll, particularly in terms of financing.

The city already has excellent borrowing capacity and a 30-year private financing arrangement on a project like the Scarborough subway could just add to the long-term burden of building the infrastructure, she said.

It’s the project-management side “that’s the real piece” for the city, said Carroll, who says she’s never seen an exhaustive evaluation of public- versus private-sector project management (the scheduling, supplying and subcontracting of the project).

Once that’s determined you can have an ideological discussion about whether control should remain in the public sector or whether it makes sense to contract out management, operations and maintenance of the project, she said.

According to IO’s Clark, ideology - the belief that the public sector should own every aspect of a project that belongs to the taxpayers - is the only reason anyone wouldn’t consider a P3 on capital works in the billion-dollar range.

“This is an entirely pragmatic project management approach to delivering infrastructure. But there are still people who will say, ‘I don’t like P3s because it is privatization.’

“We say, ‘What about this is privatization?’ We have the same architectural firms designing it, the same guys designing it in the past, the same guys building it, those guys built it in the past. We’re now holding those guys accountable for the work they do. It’s still a public asset. If you walk into a public hospital we built you will not notice anything other than it’s a very well-maintained building. In terms of your experience as a user of the public service in there - zero difference,” he said.

Clark wouldn’t discuss specifically whether a P3 is the right solution for the Scarborough subway. He would only say that it needs to be considered for any large project - large meaning anything in the billion-dollar range.

While P3 transit projects are relatively rare in North America, IO has already dipped its toe into the multi-billion-dollar sector. Its provincial P3 on Metrolinx’s $5.3-billion Eglinton Crosstown LRT, is out to tender.

It is also spreading the P3 gospel at the municipal level, helping Waterloo and Ottawa procure their LRTs.

In Ontario, P3s have been less about tapping into private-sector financing than managing construction and cost overruns, something the public sector hasn’t always done well, said Matti Siemiatycki, assistant professor of geography and program planning at University of Toronto.

Whether it’s a good idea to use a public-private partnership for transit depends on many factors because they are complex in different ways than a hospital or courthouse, he said.

Transit infrastructure runs through changing communities with the constraints of neighbourhood concerns and traffic considerations. Tunnelling adds more risk in terms of what the engineers find in the soil and utilities.

There’s no reason the public sector can’t use IO-style contracts with all the same incentives and penalties, said Siemiatycki.

“Why can’t Infrastructure Ontario manage traditional jobs? Then you remove that potential view that public-private partnerships are the only game in town and you open up their set of skills to traditional build projects. Why can’t we structure traditional projects a bit more like P3s in terms of who’s managing the projects?”

How P3s work

There are different kinds of public-private partnerships. These are two commonly used Infrastructure Ontario models. But some alternative finance and procurement models, as P3s are also known, include operating contracts where a private company maintains and operates the facility it builds. The public-sector owner can still set parameters on user fees and service levels.

Build Finance (BF): The public sector designs the facility and the private sector is in charge of construction and finances the project while it is being built. The public sector pays up once the construction is substantially or fully complete.

Design Build Finance Maintain (DBFM): The public sector determines the kind of project it wants to build and the needs the facility is to fulfil. Then the private sector designs the infrastructure, builds it, maintains it for a contracted period and finances it. The public sector pays a lump sum once construction is complete and pays the balance over the long-term period of 25 to 30 years that matches the maintenance contract.

The Eglinton Crosstown LRT is a design-build-finance-maintain P3. The winning bidder will maintain the line for 30 years, but the TTC will operate the transit.

Source: Infrastructure Ontario

How does a P3 differ from a traditional project management model such as the Spadina subway extension?

Infrastructure Ontario CEO Bert Clark says there are four important components that bring a P3 project in on time and on budget. The private sector gets a premium - Clark says it usually works out to less than 1 percentage point - to take the risk for problems that emerge on infrastructure projects.

Under the traditional model, the public sector comes up with a design for a hospital, school, wastewater plant or transit line. Builders would be asked to bid on an existing design. Inevitably there are problems in the design and the contractor wants more money to repair the issue. It’s what Clark calls “the classic change order.”

In the P3, the builder designs the project so they are responsible for keeping changes within the price of the bid. “Lo and behold ... there are often cheaper ways to resolve design issues.

When they’re doing the design they’re constantly looking for more efficient ways to build the building. There’s no incentive for them to be doing that when it’s your design,” said Clark.

Big projects aren’t broken into many smaller projects under the IO model. On the Spadina extension there are five contractors building six stations. On Eglinton there will be one for 25.

Under the P3 model the contractor doesn’t typically get paid until the job is done.

“Under the traditional model we would pay them monthly,” said Clark. “Whenever we got in disputes, they would say, ‘If you’re going to try to make me pay for that issue we’re just going to walk off the site. I’m not going to pour more money into this project. This is your project not mine.’ So we had no leverage. The leverage you have when all the money in a project is yours is very small. We turned around and said, ‘I’ll pay you when it’s done.’ ”

In a public-private partnership where there’s also a maintenance component - as will be the case on the Eglinton Crosstown - the public agency holds back a bit of money beyond completion.

“Once it’s built I say, ‘I’m going to pay you almost all the construction costs because I want to know five, 10 years, 15, 20 years from now, this thing was built to last. I don’t want to have something that is breaking down in 20 years and I’m trying to go and find the builder.’ ”