Back in June 2020, I wrote about the gradual drift in the planned dates for various Metrolinx projects as reported by Infrastructure Ontario [IO for short].
See: Drifting Timelines on Metrolinx Projects
The September 2020 Market Update has been issued by IO and it shows changes in some projects from the June update.
Sept 26, 2020: Revised to include the change in financing method for the OnCorr GO Corridor project.
Is The P3 Model Falling Apart?
Two revisions in the large GO project procurement model involve a change from private sector financing to traditional government borrowing.
This suggests that the market willingness to finance projects on behalf of the government, or at least to do so at rates competitive with direct government borrowing, may be on the wane. That implies that the “P3” model may be coming unglued.
At its heart, this was always seen as an accounting mechanism to shift debt off of the government’s books, and without this shell game, a major argument for P3s could vanish.
The Future of Electrification
The change in financing model could shift any decision on propulsion technology back to the government.
Metrolinx had pushed this off its plate by saying that the bidders who were going to design and operate a future GO network would make that choice. This punted the knotty political problem of hydrogen trains touted former Premier McGuinty out of Metrolinx itself.
Will Ontario be willing to finance the large up-front capital costs of electrification itself with so many other pressures on financial resources, or is electrification about to fall out of consideration while spending focuses on service expansion?
The project is in three sections of which the last will be the “Northern Civil, Stations and Tunnel” which includes the portion of the line east of the Don River and north to Eglinton, but not the Maintenance Facility which is included with the “South Civil” portion as it is needed relatively early in the project.
Some of the work on the North section between the Don River and Gerrard Station might be undertaken as part of the GO Corridor improvements, but exactly what this might entail has not been made public.
Since the last update, there are three changes for the North section:
- The date for RFQ (Request for Qualifications) issue has been changed from Winter to Spring 2022.
- The RFP (Request for Proposals) issue has been changed from Spring 2022 to Fall 2022.
- The Financial Close (in effect, the contract signing) has been changed from Fall 2023 to Spring 2024.
The remaining portions of the line are on the same timeline as before.
The timelines for this project, with financial close for the first two portions in fall 2022 and for the third in spring 2024 puts this beyond the next provincial election expected in mid 2022, the four-year anniversary of the Ford government’s election. Who will be in place to make final decisions, and what the government’s financial position will be by then, remain to be seen.
Line 2 East Extension (Scarborough Subway)
This project is now shown with two portions: one for the tunnel, and the other for the stations, railway and systems.
There is no change in the tunnel portion of the project, but the remaining portion has reverted to the dates shown for the overall project in the Winter 2020 update.
GO Expansion Lakeshore West Corridor
The financial close for this project has been changed from Winter 2021 to Spring 2021.
GO Expansion Lakeshore East-West Corridor
This was originally to have been a “Build-Finance” project, but it is now “Design-Bid-Build”, a change that was made in August 2020 according to the IO report.
GO OnCorr Projects
[Added to this article on September 26, 2020]
This is a very large project including future operation of GO Transit and possible changes in the propulsion technology.
The procurement model has been changed from “DBOFM” (Design-Build-Operate-Finance-Maintain) to “DBOM”. The proponent will no longer finance the project which has a projected value of over $10 billion.
All other projects are unchanged. A summary of the Metrolinx projects tracking their changing status is available in this spreadsheet (revised version).
This is just pre-election posturing. None of these will begin construction before 2030 as COVID has wrecked the economy and killed the demand for transit. None of these projects will complete before 2035 thanks again to COVID.
I see 2 options:
1) Do all work as multiple Design-Bid-Build contracts, where the Owner does the design, issues it for tender, and has contractor build it. The owner and designer needs to be smart enough to chose the optimal design. This was the TTC model up to Sheppard Subway.
2) Do all work as a giant Design-Build project. Each Contractor teams might have certain specialized skills and they can make changes to the contract to minimize the overall cost – and that will be reflected in their bid price. The Owner needs to be smart enough to list the constraints on what the contractor can change.
#1 with too large contracts doesn’t work as giant firms are the only ones who can bid, and they drive the prices up. #2 with more than one contract doesn’t work as it’s no longer possible for the Contractor to find efficiencies because it doesn’t help them – it helps whichever contractor got the second contract. (of course, the model adopted by Metrolinx – for Eglinton LRT and now Scarborough Subway, Eglinton West, and Ontario Line – is this terrible idea of awarding the tunneling separate from the main contract (stations, rail, etc).
* – Adding Maintenance and Financing is just a modification of #2 with some financial tricks to spread the money out a bit (and likely add to the total cost).
Steve: Please see my update to the article and comments about the future of private sector financing, not to mention the demise of the P3 model and its accounting hocus-pocus.
A couple of questions: #1 in either the RFQ or RFP processes, can a change in power at QP put a pause on the process or even cancellation and rethink prior to financial close? (i.e. party promises if they win to bury the north end of the line to win seats). #2 what are the chances everything for the OL gets put on hold in July 2022 and we have a half-built line?
Steve: Yes and yes. Look at what happened with the Toronto transit projects when Ford came to power. The trade-offs and their implications will be a challenge for any incoming government, not to mention the trustworthiness of Metrolinx to give unbiased advice.
Similar thing happened in Ottawa.
First phase of LRT was DBOFM. Second phase was DBOM. We lost the F.
Why? Because the winning phase one bidder lost a ton of money, and supposedly almost went bankrupt, because of “milestone based payment” (the “F”). The final payment on phase 1 was delayed by a year due to crappy Alstom trains. The consortium had no money coming in, and had to keep borrowing to keep the lights on until the city paid the last instalment.
Bidders made clear that, unless the city shifted to monthly payments, away from milestone payments, the cost of phase 2 would skyrocketed. Private companies don’t want your freakin’ risk transfer!
At this point, the PPP model of risk transfer should be considered a failure in transit — risks are too high to cost effectively transfer. International best practice ( Marron institute) suggests in house design and a strong internal public service to oversee contractors is the lowest cost option.
Steve: It’s so funny how something that should be obvious gets swept away by the political mythology of “the private sector”. They may be able to do great things, but when projects go wrong, they cannot back up their contracts. In business life, companies go belly up, or the parts that are worth saving are bought up and consolidated, and someone – shareholders, lenders – are left holding the bag.
One of the great accounting cons is that debt owed indirectly via a P3 contract does not appear on government books. This allows borrowing that would otherwise weigh down the accounts to be hidden. That was a big incentive for P3s in the first place, not to mention that there was money to be made in all that borrowing at higher-than-government rates. One effect is that the cost of “public sector” projects goes up both because of the financing scheme, the cost of risk transfer and the extra management needed to keep the P3 partner honest.
It’s not accurate to characterize P3s as an accounting shell game that shifts debt of off the governments books. While this has been a common argument, and may be true in other jurisdictions, in Ontario, P3 obligations show up as liabilities on the balance sheet as other long term financing. Here are the 2015/2016 Financial Statements for the Province where they discuss P3 obligations and how they are treated (page 28). This statement is from the liberal era when P3s was called AFPs (alternative finance procurement).
From what’ I’ve read, It’s not true that P3s hide the debt, nor that it does not appear on the government books. There is a real misconception of what the financing (F) means in P3 model, and it’s confusing as there are many different models and variations.
The following is my understanding on how P3s work from a financial perspective, and what the accounting treatment looks like. Happy to have anyone correct me.
Under a Design Build Finance Operate Model (DBFOM) – similar to what was used on Eglinton Crosstown, the proponent (Project Co.), puts up initial capital to build the project. Some of that capital is paid off during construction of the project through monthly payments (from government to Project Co.), some at completion of the project through milestone payments, and the rest is paid off over a 30 year period (timeline may vary depending on the contract). The value of those future payments are captured on the governments books as liabilities (other long term financing).
Furthermore, the initial capital that is paid off over 30 years is rarely the full value of the project. For example if a project cost $5B, likely only about $1B was put up by Project Co. and only some of that is paid off over a 30 years as P3 payments. The other $4B would be funded by debt, and show up as debt on the balance sheet.
We can debate the merits or lack thereof of the P3 / AFP model, but the claim that P3s are used because they hide debt does not live up to scrutiny.
Steve: Thank you for this information. What I can say in defense of my characterization is that the accounting shuffle was cited at the time as one of the reasons for going with a P3 model. Somehow magically the private sector was supposed to have access to funds that, were they borrowed directly by the government, might make the accounts look bad. I know things didn’t work out that way, but that was the official story. Never mind that the government could borrow more cheaply. The loans were not on government books and that was all that mattered. Quite bluntly that would be fraud if it were done in the private sector (masking an unavoidable long-term obligation).
Another scheme related to government ownership of assets (and hence attempts to take control of the rapid transit system) was that if they own the subway, it is an asset on their books counterbalancing the debt raised to build it. However, it is really only an asset in the sense that it could be sold (privatized). The debt is independent of the service actually operated and is payable even if the subway is closed. One wonders why any private sector entity would want to buy such an asset except at a deep discount that would translate to a write-off of capital value by the Province.
From an accounting point of view, the Province doesn’t like to just hand money to the City which then owns whatever they buy with it because that money has no offsetting asset in the provincial books. See the reference to tangible capital assets just ahead of the section you cite.
An issue for future governments at both levels will be the degree to which the Province attempts to build a capital component into the amount it charges the City to provide transit service on Eglinton, Finch, Ontario Line, etc, not to mention the tunnels Ontario will build and own for the Scarborough and Richmond Hill subways.
Wahed’s comment surprised me, because just like Steve explained that off the books financing aspect is always put forward by proponents and was super important for the Mayor of Ottawa. Indeed the City of Ottawa does not report on its books the debt incurred by the P3 concessionnaire; it would be impossible for we do not know how much the P3 concessionnaire did borrow. Which makes sense as it’s not our debt. For stage 2 now the City finances as Ottwaman commented so we do know but it’s not a straightforward P3 at this point. So perhaps the Provincial Government does know how much is borrowed (unlikely as it’s commercially sensitive info; I hate that phrase) or simply puts in a SWAG into its books.
As for Ottwaman’s comment about risk transfer, well that’s an impossibility. If a population requires its government to provide a service then the government owns that risk. In Ottawa our Mayor tried to hide behind the excuse that it’s the fault of the concessionnaire, tough luck that was the city’s choice. I agree with Ottwaman’s that best practice is for the public service to manage that. Which at this point in Ottawa we are almost there.
All this makes me worried about the Ontario Line…