The Ottawa LRT project opened for service in September 2019. It was riddled with problems years before through the procurement, construction and commissioning. After several failures, including two derailments, the Ontario government created a Commission of Inquiry under the Honourable Justice William Hourigan to investigate how this came to be.
This article is not an exhaustive review of the findings. Interested readers can browse the full report on the inquiry’s website. The Executive Summary gives a good overview, but many of the details are in the full report which is organized into “deep dives” into various aspects of the project’s history.
There are many lessons to be learned for other agencies and projects, and there is no reason to believe that the issues are unique to Ottawa’s first LRT line.
Where I quote directly from the report, this is shown clearly in quoted blocks. I have used the Executive Summary as a starting point, but have also woven in material from the detailed chapters to give additional background. Any conclusions or interpretations are my own.
This article reviews the report up to the point where the contract is awarded to a P3, Rideau Transit Group, to build and maintain the system. Part II will pick up the story from that point onward.
I have included part of the “Conclusions” section here for the benefit of readers who do not want to read through the full articles, much less the report.
I have included this information here so that readers can make sense of the references to the many companies and agencies outside of the City government as they appear in the text.
Consultants to the City:
- Capital Transit Partnership (CTP): Preliminary Engineering and Management Services:
- STV Canada Consulting,
- URS Canada (now known as AECOM),
- Jacobs Associates (now known as McMillen Jacobs) and
- Morrison Hershfield;
- Subcontract from CTP to Golder Associates for geotech for the tunnel under downtown.
- Parsons Corporation for CBTC signalling, system safety, readiness for operations and maintenance.
- Deloitte as financial and transactional advisors.
- Boxfish: advice on procurement and project management.
- Infrastructure Ontario: A provincial agency whose primary function is to provide procurement services typically using a P3 model. They performed a Value For Money assessment on procurement options in 2009, and were the procurement lead from 2011.
The contract was awarded to a Public Private Partnership. At the top of the P3 structure was Rideau Transit Group, but underneath was a cat’s cradle of interlocking entities sometimes subcontracting to each other. This is a direct result of pushing almost all project responsibility to an outside consortium, and of that consortium seeking to limit its exposure with separate entities for various aspects of the project.
- Rideau Transit Group:
- OLRT-C: Construction group: Dragados Canada, EllisDon and SNC-Lavalin
- Alstom: Vehicle manufacture and supply
- Thales Canada: Computer Based Train Control (CBTC) system
- RTG Engineering Joint Venture: Design & Engineering services: SNC-Lavalin & MMM Group
- Rideau Transit Maintenance (RTM): maintenance: ACS, EllisDon and SNC-Lavalin
- RTM + Alstom: Maintenance subcontract: Alstom to assume some of RTM’s obligations
- OLRT1: Ottawa Light Rail Transit line 1, the east-west line across the city including a tunnel under downtown.
- P3: A Public-Private Partnership in which the majority of risk and a substantial responsibility for financing are transferred to a company separate from the public owner, at least in theory.
Many problems bedeviled this project, mostly self-inflicted. A major factor was the adoption of a fixed budget based on an out-of-date cost estimate that did not allow for inflation, together with a project plan that was compressed for political reasons – the Mayor wanted to avoid conflict between construction and Canada’s 2017 sesquicentennial celebrations.
“The politicization of the OLRT1’s budget and schedule resulted in additional pressures on the City, RTG, OLRT-C, RTM, and their subcontractors throughout the life of the project. Budget constraints became a driving force behind the RFP process, and the hard-cap approach to OLRT1 project costs left the City and RTG with less flexibility to implement the partnership philosophy that was initially intended. Campaign promises in 2010 created embarrassment when deadlines were missed in 2018 and 2019, which caused increased pressure on City staff, RTG, and OLRT-C.” [p 64]
Further problems arose from the project structure with a P3 whose relationship to the City became more confrontational than an actual partnership.
- The City had little control over RTG’s work.
- The P3 focused on “protecting their legal rights instead of opening a reliable LRT”.
- Multiple entities within the P3 further confused roles and responsibilities.
- The complexity was not “appreciated” by the parties [the report’s term].
- Various factors led to delay, some outside of the parties’ control, but they knowingly provided incorrect information to the City.
- Political pressure to open drove changes in criteria for acceptance by the City.
- Information sharing was good during construction, but not during testing.
- There was no “soft start”, and full service was attempted from day 1.
- Inadequate maintenance resources combined with a flood of City-initiated work orders overwhelmed maintenance capabilities.
- Two derailments – one mechanical failure, one human error – caused long service suspensions and loss of public confidence.
- The wheel/track interface is still an issue.
“Most troubling was the deliberate effort by Steve Kanellakos, the City Manager, to mislead Council on the decision to lower the testing criteria and on the testing results. The Mayor had accurate information about trial running and the decision to change the testing criteria, but failed to provide that information to Council. Thus, the conduct of senior City staff and the Mayor irreparably compromised the
statutory oversight function of Council.” [p3]
Kanellakos resigned from his position just before the Inquiry’s report was released. Jim Watson is no longer Mayor of Ottawa.
The two-page conclusion of the Executive Summary pulls no punches. Not only was there inexperience and incompetence at play, but a deliberate attempt to hide information from decision makers and the public.
There are particular concerns about withholding of information about project costs and status, but also of the City government publishing reports of the Inquiry’s work with a spin to put themselves in the best possible light. The parallels with Metrolinx are quite evident and should be a warning to us all.
“While human errors are understandable and expected, deliberate malfeasance is unacceptable in a public project. When participants deliberately mislead the public regarding the status of a public undertaking, they violate a fundamental obligation that underlies all public endeavours. The public rightly trusts both the government and private-sector entities to act in a manner that furthers the broader public interest. As a condition of their involvement, participants in a public project undertake to honour that obligation to the public. There are two instances in the OLRT1 project that stand out as egregious violations of the public trust.
“First is the conduct of RTG and OLRT-C in providing RSA dates that they knew were entirely unrealistic. It is evident that this was done as part of a misconceived scheme to increase commercial pressure on the City. As a commercial tactic, it was a failure because the deliberate communication of unachievable dates did nothing to improve RTG’s commercial position with the City. To the contrary, this gambit only served to increase and accelerate the mistrust that was developing between the parties. More fundamentally, it represented a troubling lack of concern for the public nature of the project and the interests of the people of Ottawa. The leadership at RTG and OLRT-C seemed to have given no thought to the fact that the provision of this misinformation adversely impacted the daily lives of hundreds of thousands of people. The people of Ottawa trusted RTG and OLRT-C to be straight with the City and tell them honestly
when the system would be ready. The Commission finds that RTG and OLRT-C betrayed that trust.
“Second is the conduct of senior City staff and Mayor Watson in not sharing information about trial running. This conduct prevented councillors from fulfilling their statutory duties to the people of Ottawa. Moreover, it is part of a concerning approach taken by senior City officials to control the narrative by the nondisclosure of vital information or outright misrepresentation. Worse, because the conduct was wilful and deliberate, it leads to serious concerns about the good faith of senior City staff and raises questions about where their loyalties lie. It is difficult to imagine the successful completion of any significant project while these attitudes prevail within the municipal government.
“Is there any reason to believe that their conduct regarding the trial running testing results was an aberration or that transparency has improved within the City? Unfortunately, based on the City’s conduct during this Inquiry, there is not. By way of example, throughout the hearings, the City published, at taxpayers’ expense, a summary of the proceedings that was a blatant attempt to spin the testimony in a way that was favourable to the City. This appears to be unprecedented in Canadian judicial history and is part of a troubling pattern of controlling and shaping information flow to Council and the public.
“In the end, the problems with the OLRT1 were a consequence of myriad factors, including the reliance on new vehicles and new relationships, a lack of integration, decisions to rush the system into service, an inadequate investment in maintenance, and several other factors, some of which were beyond the control of the parties. The result was a flawed LRT that failed to meet the needs of the people of Ottawa.
“Despite the foregoing, there is reason for optimism, as the parties have begun working together more co-operatively and the reliability of the system is showing some signs of improvement. This improvement demonstrates that, over time, structural problems can be resolved through good faith, communication, and co-operation. However, until such time as the private and public entities involved in the OLRT1 project understand that their first obligation is to the public, there is reason to be concerned that the project will continue to suffer problems.” [pp 28-29]
Project Delivery Model
The Ottawa LRT project was forced into the “P3” procurement model much loved by the current government at Queen’s Park, but also by its predecessor. There was and is a mythology about “public private partnerships” in which the risk inherent in large, complex projects can be shifted to the private sector whose supposed expertise and the lure of profit making will produce the best possible product.
The City had no expertise in a procurement of this size and technical complexity, and so it turned to Deloitte and Infrastructure Ontario. Although the City’s original intent was probably for a conventional procurement, it was no surprise that the recommended structure was a P3 to provide the full scope of the project: Design, Build, Finance and Maintain (DBFM). The report notes that IO had experience with this model in “vertical” infrastructure such as hospitals, but not with transit. There was also a sense that Ontario would only contribute to a project delivered using the P3 model.
Although Deloitte considered 11 possible models of project delivery, the short-listed four were all P3s [p 92], and they preferred a scheme which involved total transfer of the project to a P3 in a DBFOM (Design, Build, Finance, Operate, Maintain) model.
“February 28, 2011. Deloitte delivers a report to the City recommending that the City pursue a project delivery model for the OLRT that requires bidders to finance the project and take responsibility for operating and maintaining it for a period of time after completion of construction. This model was thought to be one that would satisfy the City’s objective of transferring financial risks to the private sector.” [p 35]
The P3 would be required to deliver system at a fixed price and then maintain it for 30 years. There is a premise that with “skin in the game” on the maintenance work, a P3 would not skimp on construction design or quality.
The Commission was not kind to Deloitte’s work on this evaluation:
“In the Commission’s view, the Deloitte report – informed by the City’s priorities – did not fully consider the disadvantages associated with a P3 model for the delivery of the OLRT1, particularly in the context of the transit sector. For example, likely because the City prioritized cost considerations, the report did not highlight the diminished visibility and control associated with a P3 procurement model, and it did not give sufficient attention to potentially diminished flexibility, particularly as it related to the inclusion of maintenance. Because Deloitte recommended that maintenance be included in the delivery model, any expansions to the light rail system would require the City to either engage the same maintainer or engage a new maintainer, which would cause coordination and integration challenges. In addition, if an expansion requires changes to existing contracts governing the delivery of the project, the private lenders’ consent may be required to make those changes, further limiting flexibility. On review of the Deloitte report, I was left with the distinct impression that the downsides of proceeding with a P3 were not thoroughly analyzed.” [p 93]
In the Toronto context, it is worth noting that discussions are still underway between the City, TTC, Metrolinx and the Crosslinx P3 about service levels. The originally planned buildup over the life of the O&M portion of the contract is felt to be too slow based on projected ridership.
“On Time, On Budget” and the economic risk transfer to the P3 are superficially attractive, but this does not guarantee against corner-cutting, especially when the project owner (the City) connives in changing requirements to achieve political aims. The report notes that “the City’s “on time, on budget” mantra echoes Infrastructure Ontario’s marketing material.” [p 94]
Procurement choices should not be the subject of “marketing”, but IO has a vested interest in pushing its own brand of contract if only to guarantee a continued revenue stream as a procurement manager.
Ontario made a tentative funding commitment to the City for the OLRT1 project in December 2009. Though the Commission heard evidence that Ontario had not mandated the use of a P3 delivery model as a condition for funding the OLRT1, it is clear that several City staff believed that provincial funds were in jeopardy if the City did not adopt a P3 delivery approach.
Adding further pressure to adopt a P3 model, Infrastructure Ontario – which, as noted above, is a provincial Crown corporation – also made a presentation to the City highlighting the benefits of a P3 model. It should be noted that it was only after the City adopted a P3 model that Ontario and the City formally executed a Contribution Agreement, committing the province to provide funding.
Regardless of whether a P3 model was mandated, it is clear to this Commission that City staff believed that the provincial contribution was at risk if the City did not adopt a P3 approach. This was an obvious incentive to avoid other project delivery models and to favour a P3 model. It is reasonable to infer that these factors influenced the City’s procurement decision. [pp 94-95]
On May 25, 2011, the plan was revised to complete by spring 2018, one year earlier than original 2019 date. The model was changed a month later so that the City would operate, but not maintain the line.
“Deloitte had initially determined that a P3 model that teamed operations with the other key project roles (the DBFOM model) best met the City’s priorities. Specifically, Deloitte’s analysis concluded that the DBFOM model resulted in the best value for money savings and that the privatization of the system’s operations would enhance service quality, because performance-based payment and monitoring systems would better incentivize service performance; those options would not be available if the public sector retained operations. On June 29, 2011, Deloitte delivered a supplemental letter to its February 2011 procurement options report to the City. Deloitte’s June 2011 letter provided its revised opinion that the DBFM model – without the O, operations – was the preferred option for the OLRT1 project.” [pp 95-96]
In the same timeframe, July 2011, another consultant, Boxfish, came on board as an infrastructure project advisory firm.
“Boxfish co-founder and CEO Brian Guest had no public-private partnership (P3) experience when Boxfish was hired as a consultant on the OLRT1 project; Guest’s only light rail experience was his work on the City’s diesel-powered O-Train (now called the Trillium Line).” [p 112]
“The City and two of its key procurement implementation advisors (Infrastructure Ontario and Boxfish) were inexperienced in pursuing this type of project (an LRT system using a P3 procurement model). Although Infrastructure Ontario was sophisticated (both experienced and knowledgeable) with respect to P3 procurements, it did not have meaningful experience with a “horizontal” project or with a rail system that included an underground tunnel. […] Boxfish had virtually no relevant experience. The City found itself using a project agreement template that was not developed for the OLRT1 project’s circumstances, and changes to that template that had not been tried and tested; and ultimately the City failed to appreciate the issues and risks that were made more likely because of the parties’ inexperience in these areas.” [p 190]
An obvious question here is whether the entire process was compromised by the choice of consultants.
The decision to exclude operations from the contract was based on City concerns about both future system expansion and labour relations.
“[…] the City wanted to have continuity between the operators of the different transportation modes – the bus routes and the light rail trains – as well as continuity along different segments of the light rail train system, as there were plans to eventually extend the rail line. The City was concerned that if multiple operators ran different parts of the City’s transit system, it would introduce the risk of coordination issues.
“The City also had significant labour relations concerns if it privatized operations. Specifically, because OC Transpo is a unionized workplace, the City had concerns that privatizing the OLRT1 system’s operation might breach the collective agreements already in force in the workplace. Indeed, the City had received a legal opinion on the matter that concluded there was a risk that an adjudicator would find that privatizing the LRT operation would be in breach of the workplace agreements.
“The concerns related to system continuity and potential labour relations issues drove the City’s decision to exclude operations from the delivery model. This decision was reinforced by the City’s view that there were insignificant savings to be gained by bundling operations into the delivery model.” [p 96]
“Marketing” of the P3 approach was loud and clear in the July 2011 report to Council.
“The report highlighted the benefits of private financing and emphasized that long-term financing would “harness the full benefit of private sector management and innovation.” It went on to note that Infrastructure Ontario’s view was that including private finance in the delivery model would reduce overall planning, design, project management, and construction costs, given the competitive bidding process and upfront due diligence associated with bidding on the project as a P3.
“The report also recommended that the City retain Infrastructure Ontario as its Commercial Procurement Lead for the OLRT1 project. In support of this recommendation, the report cited Infrastructure Ontario’s expertise in procuring large infrastructure projects and project financing. It also outlined advantages demonstrated on prior projects, including “date-certain delivery at a fixed cost” and “rigor and discipline brought to the procurement process and particularly to the Project Agreement based on the experience it has gained and the opportunity to enhance the City’s capacity to implement the project.” [p 97]
Anyone who has sat through an Infrastructure Ontario presentation will recognize this flummery for what it is.
Infrastructure Ontario was primarily experienced with procuring […] “vertical” structures, such as hospitals, courthouses, and schools, but did not have much experience in the transit sector. Indeed, Marian Simulik, City Treasurer, testified that the City was Infrastructure Ontario’s “guinea pig” for its first LRT project. [p 97]
Whether it was an explicit demand from Queen’s Park or not, it is quite clear that Ottawa was led into a P3 delivery mechanism by consultants who had a vested interest in the choice.
“Many objectives were to guide the OLRT1 project, but […] two priorities became the focus – the project’s budget and schedule – and these priorities were increasingly politicized. That, along with the expert advice the City received and the belief held by at least some at the City that senior government funding was contingent upon the use of a P3 delivery model, contributed to the City’s tunnel vision about the
appropriate approach to the delivery of the OLRT1. Given the political directive to complete the OLRT1 project “on time and on budget,” it is no surprise that the City was focused on a P3 approach for the OLRT1 project.” [pp 93-94]
Did the P3 achieve its goals? The Commission has mixed feelings on the subject. The risk transfer shifted a significant cost from the City to the P3, but “the downsides to the perceived advantages of a P3 model were in many ways realized”. [p100]
“It is evident that the parties that signed the Project Agreement and the subcontracts have shown that they often do not work together effectively. The ultimate result is that the City’s biggest infrastructure project risks being operated and maintained though a largely dysfunctional partnership, which can come with substantial legal costs.” [p 101]
The P3 model was starting to come unglued thanks to a recognition of what “risk transfer” really entailed. This problem afflicted Metrolinx and the Eglinton-Crosstown project which has a similar structure. Recent contracts have shifted to an “Alliance” model where more risk is retained by the project owner.
We will probably never know how much the attempt to foist a P3 model onto large transit projects has added to time, project management complexity and cost, the very things it was intended to avoid.
The Advantages, or not, of P3s
The report goes into some detail discussing the pros and cons of a more conventional arrangements where the owner (the City) retains overall control and has a direct relationship with all parties, as opposed to ceding this to an outside party as in a P3. [See section 5.1 starting on p 83]
“First developed in the early 1990s, the P3 delivery model was designed to address significant and often unpredictable cost escalations and schedule overruns that accompanied the delivery of government infrastructure projects under traditional commercial arrangements. Thus cost certainty and schedule certainty are key goals of P3 projects.
“Sometimes referred to as the first wave of P3s, the P3 models in the early 1990s were also used to deliver public infrastructure without adding to public debt. These early P3s were often structured to include public user fees and involved partial or total private ownership. [p 87]”
“In response to public frustration with the privatization of the underlying infrastructure, the P3 approach evolved in the early 2000s so that the public sector now keeps full ownership of the infrastructure. This second wave of P3s focused on a technical, commercial solution to the cost and schedule issues associated with traditional project delivery models. So the focus became less on avoiding an increase in the public debt and more on the efficiencies that private-sector leadership is supposed to bring to infrastructure projects.” [p 87]
There is a long description of the supposed benefits of P3s and their less-often discussed downsides [see p88 ff]. These include:
- Higher up front costs including management of the P3 contract.
- Risk transfer to the P3 isolating the public sector from this exposure. This comes at a cost, and might still not isolate governments from political fallout if a project is delayed.
- In theory, a long-term commercial relationship between the P3 members should “incentivize” long-term quality, reliability and performance. However, if the relationship between members sours, they could be locked for decades into a relationship where co-operation is not the priority.
- There is a supposed “private-sector innovation” that will magically lead to a better product, although it is not clear how the same innovation would not be available in a more conventional procurement. Words such as “synergy” and “creative tension” are used by Infrastructure Ontario in touting this arrangement. Such words are hallmarks of marketing, and the “tension” may equally lie in the inability of the owner (City) and the P3 to work together. That “innovation” might also have as much to do with profit margins as with the quality of the product.
- A payment scheme could be devised that back-ends the contract so that the P3 has an incentive to complete what they have promised. The project is financed by the P3, or more accurately by its lenders, until the money comes in. However, this can backfire if the cost to complete exceeds the expected revenue, and the P3 could simply fold its tent and disappear into the night. This relates also to the P3 being a collection of purpose-built entities that can go bankrupt on their own without endangering the parents’ assets.
- The need for private financing, in theory, creates another check on the P3 performance because the lender wants to get their money (and profit) out of the deal. However, this can also constrain a project by making it subject to lender approval if conditions change.
“The Commission heard evidence that the assumption of risk required in P3 models is causing some major construction companies to decline to participate in P3 projects. This reluctance is understandable because, in the context of significant infrastructure projects, the potential financial risk can be almost unlimited. Thus, while the City was able to transfer risk in this case, it may not be able to do so in the future or the cost to do so may be significantly higher.
“I do not suggest or claim that a single delivery model should be used for all infrastructure projects. However, it is essential that governments do not start projects with the mindset that there is only one acceptable delivery model. Instead, I recommend that government agencies procuring large and complex infrastructure projects critically analyze the full range of delivery model options using objective criteria appropriate to the project’s circumstances and the public procurer’s various priorities. I recognize that government agencies need to prioritize cost certainty and risk transfer. Still, decision makers should be cautious about assigning too much weight to these two priorities in assessing options.
“Public procurers should also appreciate that it may not always be helpful to structure the relationship in a manner that creates a zero-sum game whereby one party bears all the risk and “loses” if that risk materializes. A true partnership may be more effective.
“Finally, as an overarching consideration, a public agency must prioritize the protection of the public interest. The public has the right to safe, reliable infrastructure and to receive regular and honest communications from the government regarding its construction status and operations.” [pp 6-7]
The preliminary cost estimate was $1.4 billion in November 2008, but this did not include inflation nor land. This was a moving target, and Council approved the project at $1.68 billion. By October 23, 2009, this was up to $2.1 billion with a margin of ±25%, but still with no allowance for inflation.
The rise from $1.4 to $2.1 billion comprised the following elements:
- $140 million for land acquisition,
- $150 million for scope changes,
- $50 million for the project office (management) costs,
- $100 million for design changes,
- $160 million for project planning, and
- $100 million for contingencies.
This number was repeated in January 2010.
In September 2010, the City had funding pledges for $600 million from both the provincial and federal governments. Those pledges were based on one third shares of a then-current estimate of $1.8 billion, and they had a hard cap leaving any additional costs to the City.
In a later summary of lessons learned, the consultants Deloitte and Boxfish concluded in their review of the planning for this project that the senior government process for funding creates unhelpful constraints on municipal projects because of how early those approvals must be obtained in the life of the project. [p 70]
The phrase “on time, on budget” would be linked to the $2.1b figure creating an inevitable problem with cost pressure through the project.
[…] that 2009 estimate of $2.1 billion nonetheless became the initial budget for the OLRT1 project. The Commission heard evidence that using such a preliminary estimate as the initial budget is relatively standard practice for municipalities. However, the City needed to respect that the $2.1 billion was a very preliminary estimate, with a 25 percent margin of error (plus or minus) and with an expectation that the number would change. As noted earlier, the estimate was derived before even preliminary engineering work, at a time when the design was only 5 percent advanced. It did not account for inflation and did not include any meaningful analysis of the construction design. [p 73]
Politicians have a bad habit of ignoring the not-so-subtle difference between initial estimates and eventual project costs. The question “how much will this cost” is always present, and the pols quail when that number is “too high” for the perceived environment. This has affected many transit projects in Toronto for decades as governments try to portray their “commitment to transit” with big dollars, while others commit to “reducing waste” with budgets that cannot be achieved. Sometimes, this happens with the same government as we will almost certainly discover with Doug Ford’s hopelessly lowballed $28 billion estimate for four rapid transit projects.
Unfortunately, the budget and schedule became politicized in 2011 after the fall 2010 municipal elections. Mayor Jim Watson and the Finance and Economic Development Committee (FEDCO) directed that the OLRT1 project be brought in “on budget,” despite the fact that there was no actual budget, only a preliminary estimate. This approach turned the existing 2009 Class D cost estimate, which was not designed or intended to be a budget, into a political imperative more in the nature of a “hard-cap” budget than a preliminary estimate […] The Mayor also directed that staff find avenues to speed up the schedule.
These directives were set for political reasons: the Mayor had made campaign promises about the budget that he wanted to keep, and he wanted to push the schedule to ensure that the significant construction work would not interfere with Canada’s sesquicentennial celebrations in 2017. The goals of expediting construction and hard-capping the costs did not account for the City’s broad priorities in undertaking the OLRT1 project, which included not only financial responsibility but also other important issues such as mobility, quality of resident life, and reliable transportation. Senior City staff also felt this political pressure, and it affected their approach to the OLRT1 project. [p 66]
The hard line attachment to a fixed $2.1 billion price led to inappropriate political interference.
[…] although the Mayor and Council were rightly involved in managing the City’s budget, they did not have the expertise necessary to determine when and how the budget for this specific project should be fixed. Elected officials interfered with the work of experts on the largest and one of the most important infrastructure projects in the City’s history […] That interference put pressure on City staff to achieve particular results (meeting the $2.1 billion cost estimate), because those results had been the subject of political promises by elected officials. [p 76]
There was also pressure to compress the construction schedule.
Although the March 2011 FEDCO presentation of the schedule devised by the City’s experts suggested that the OLRT1 project would open to the public in 2019, Mayor Watson directed RIO to review every possible way to accelerate the schedule. The rationale for this drive to accelerate the schedule was political: Mayor Watson wanted construction in the downtown area essentially complete by 2017, in time for Ottawa’s celebration of Canada’s sesquicentennial. RIO [Rail Implementation Office] worked with the City’s consultants and, through design changes that the consultants identified and through a compression of the procurement schedule, cut 12 months from the schedule that CTP had created. The principal design change was to change the parameters for the tunnel, including by making it more shallow. [p 76]
It is important to note that although the project would be delivered as a “P3”, almost two-thirds of the estimated cost would be provided through capital subsidies and only the remaining “city” portion would be financed by the successful bidder. However, the total contract would be on a fixed price basis leaving the P3 responsible to control costs within the $2.1 billion envelope, a number that would be very difficult to achieve.
“While there is no evidence that the fixed price dissuaded qualified constructors from bidding on the project, the Commission did hear evidence that certain design choices were made based on the inflexibility of the budget. For example, platform doors were excluded from the design due to budgetary constraints.” [p 8]
“Budget constraints became a driving force behind the RFP process, and the hard-cap approach to the OLRT1 project costs left the City and RTG less room to implement the partnership philosophy that senior City staff understood was important from the outset. One cannot escape the conclusion that some decision-making in 2010–2011 during the preliminary planning imposed constraints on the parties that continued to be felt in 2018 and 2019. At a general level, the “on time, on budget” mantra that characterized 2010–2011 limited the City’s flexibility in later years and increased public pressure in 2019. Evidence given to the Commission showed that the significant pressure to meet the $2.1 billion estimate resulted in design decisions, including choices about platform design, that contributed to the reliability problems after the public launch of the OLRT1. [pp 77-78]
Bidding for the project went through a two-stage process common for large contracts. In the first round, a Request for Qualifications (RFQ), invites interested parties to establish their credentials and be worthy of consideration for a formal proposal. The second round, a Request for Proposals (RFP), is the actual bid, but is only entered by those who have passed the RFQ filter.
Between the RFP submissions and the award, there were commercially confidential sessions with the proponents. Again this is common, and is used to fine-tune the requirements. Typically, any questions about the contract or proposals for alternatives are shared with all bidders to ensure everyone is responding to a common set of requirements.
The process lasted from June 30, 2011 with the issuing of the RFQ and ended with signing of the project agreement on February 12, 2013.
Part of the overall contract included the supply of vehicles because the fleet would be maintained by the P3, not by Ottawa’s transit agency, even though they would be responsible for operating the service. The vehicles were supposed to be “service proven”, but this was effectively dropped. RTG’s originally proposed vehicle from CAF was disqualified, and RTG turned to Alstom as a supplier. However, Alstom did not have a “service proven” offering that would meet the Ottawa specs.
Bundling of vehicle supply with the overall P3 contract led to limitations in pairings of construction/design firms and vehicle offerings because there were exclusivity arrangements between some of them. This restricted RTG to two possible vendors, CAF and Alstom.
What could well have been a fatal blow to the RTG proposal, the lack of a service proven vehicle, was removed from the requirement. This left Ottawa open to all the teething problems of what would effectively be a new vehicle when they had specifically wanted to avoid this risk.
As with some other aspects of the P3 model, the bundling of vehicle procurement created complexity and potential conflict that would have been avoided had the City pursued vehicle supply as a separate process even though they would have taken on the procurement risk. That risk landed in the City’s lap anyhow with a less than ideal vehicle selection that compromised the line’s operation.
The period of the maintenance contract was originally to be 15 years, but this was extended to 30 because “market feedback” indicated that it “provides the best risk transfer to the private sector, ensures best quality LRT system construction and provides overall best value to the City.” [p 114] To put it more clearly, the P3 would need an extended maintenance contract to justify their level of investment in the project.
A key goal in the bid process was to stay within the City’s budget number, and an “Affordability Cap” was established to exclude high bids, unless none below that line was received. Originally, this was set at $1.718 billion, but was raised to $2.075b in response to market feedback. A requirement that bidders provide $400 million of financing was reduced to $300m. One of the three qualified bidders did not meet the cap, and they were dropped from consideration.
While two of the bidders committed to bringing in the project under the affordability cap, it is important to note that these bids may have been affected by optimism bias – an unconscious tendency to believe that bad possible outcomes on a project will not happen to them.
As well, the bidders invested significant amounts of money into preparing their bids and forwent other possible opportunities to pursue the OLRT1 project. Bidders were therefore motivated to avoid disqualification for failure to meet the affordability cap. While the City provided a fee to the bidders who were not selected for the project, that fee did not cover the significant investment bidders made in preparing their bids or compensate for the opportunities they passed up along the way. [p 122]
In addition to the Affordability Cap, the RFP required the bidders to assume all of the geotechnical risk. This proved unacceptable to the bidders, but more importantly to their lenders who saw the risk as excessive. In response, two alternative schemes with varying degrees of risk transfer were offered. Depending on the risk a bidder was prepared to assume, they would get a bonus or penalty in the scoring of their proposal.
This did not have quite the expected effect.
“[…] even though all the bid teams did not want to assume the full risk, they could not convince themselves that their competitors would not find a way to accept the risk. Despite the initial feedback during the in-market period that a complete geotechnical risk transfer was unbankable, each of the three bidders, including RTG, ultimately took on the full geotechnical risk in their proposals.” [p 125]
RTG won the competition with the highest combined technical and financial score. They were within the financial cap and took on the maximum geotechnical risk. Whether they were wise to do so is quite another matter, but they won out.
Three options for payments on the project were available:
- A lump sum payment at substantial completion. The downside of this option was that the City would be responsible for interest on the contractor’s borrowing, a cost the City could not afford.
- Progress payments based on contractor spending. The downside of this option is that spending during construction does not necessarily equate with progress.
- Milestone payments based on achievement of specific goals. This approach would both reduce interest cost and ensure actual progress.
Infrastructure Ontario’s experience was with buildings that might be completed in stages, as opposed to an LRT project that would be finished only when the entire project was built and commissioned. To allow payments to flow over the life of the contract, a menu of milestones was offered to bidders who could select from them or propose their own.
“The intention of the City’s procurement advisors with the milestones was to encourage or incentivize the successful bidder to meet key schedule components, each of which coincided with contract payments. This was in an effort to ensure schedule certainty – or in plainer terms, the City wanted a reliable, accurate schedule and wanted the OLRT1 project to open for public service when it was supposed to.
“While RTG’s milestone schedule was set on February 12, 2013, at the time of the signing of the Project Agreement, the City worked with RTG during the course of construction to redefine some milestone payments in order for RTG to receive payment despite not having met certain milestones due to delays that occurred (in particular, in the tunnel construction). Ultimately the OLRT1 project was not delivered on schedule, despite the use of milestone payments. The schedule would become a contentious issue between the City and RTG.” [p 133]
This arrangement has not been used in subsequent contracts in Ottawa and elsewhere. The payment scheme has shifted to one based on the amount of work done. This is a return to pay-as-you-go (the second option listed above), but with a control that progress be measured against specific goals.
In contrast to the milestone payment approach, the earned value approach requires that, in order to receive payment, a project company must demonstrate only that it has done an amount of work that achieves a required value threshold toward substantial completion. Payments to a builder through the earned value model are based on the percentage of the work performed in a particular period of time, typically on a monthly basis. This approach involves regular progress payments made to the builder for the work actually performed. [p 133]
This is another example of Infrastructure Ontario learning on the fly what actually works in a large transit project.
The Lack of a “Soft Start”
The bidders on this project asked that the system have a “bedding in” period, or soft start, in which service would be provided gradually to allow for teething problems. This was rejected by the City who wanted wholesale replacement of bus routes by the LRT from day 1. Anyone who has witnessed major transit openings in Toronto and elsewhere knows that partial service is not an option, and that once you open the doors to passengers, full service is expected.
Any new line will (or should) have a formal trial period to establish that it will work, to provide experience for staff and to work out any kinks without fouling up travel on the wider transit system. The supposed need for a soft opening, rather like a restaurant unsure of its kitchen’s abilities, does not speak highly of the bidders’ confidence in their own products.
The Commission leaned toward this option without explaining how this would actually work from a transit rider’s point of view.
The view from OLRT-C’s side was that “soft” openings, with reduced operating hours or a reduced line with fewer stations to service, are common industry practice. In the early days of public operation, a soft opening allows for longer maintenance hours, so the maintainer gets more access to the system, allowing staff to become more familiar with it and giving the opportunity to see if any systems are wearing or behaving abnormally.
In my view, the OLRT1 project would have benefited from both a bedding-in period in the payment mechanism and a soft opening, as is illustrated by the issues encountered when the system entered public service. [p 135]
My review will return to this later in the section on testing and the launch of revenue service.
Optimism Bias and the Evaluation Process
The report notes the tendency of proponents to see their work in a rosy context. Indeed this affects not just bidders who might underestimate the risks they assume, but also the project’s owner and advisors who hope for the best possible outcome, if only for political reasons. When things go badly, expectations can be dashed, and the finger pointing starts.
“In the context of complex infrastructure procurement like the OLRT1 procurement, optimism bias is a theory that recognizes that people believe that bad possible outcomes on a project will not happen to them. RTG’s bid director Cosentino described optimism bias as “a tendency … to overlook the downside in order to move forward with a certain decision.” Optimism bias can interfere with the objective, realistic assessment, budgeting, and planning for a complex infrastructure project, leaving parties unprepared when significant project risks materialize.
“It is reasonable to conclude both that RTG was, in fact, aware of the risks it accepted with its bid, and that RTG’s bid and subsequent approach to delivering the OLRT1 project were affected by optimism bias. Sophistication is not enough to counter optimism bias. External processes are required to counter the unconscious tendency to underestimate risk.” [p 136]
The evaluation process had two separate scores, one for technical and one for financial components of the bids. Each was evaluated by teams of subject matter experts who had no contact with each other so that the two scores would be independent.
During the course of both the formal interview process and the public hearings, the Commission heard uncontested evidence that RTG was the clear winner of the RFP. [p 137]
That may be true, but the actual breakdown of the scoring showed that the technical scores were quite close for the three bidders ranging from 391.40 to 399.15 out of 500. It was on the financial side that Rideau Transit Group shone with a score of 492.50, more than double its nearest competitor. The report does not delve into this wide split, nor comment on whether RTG occupied a preferred status from the outset, a consideration that might have influenced the decision to relax the vehicle specifications simply to keep RTG in the game.
This article will continue in Part II from the point of contract award onward to line opening, and Part III covering revenue operations. Stay tuned.