This is a continuation of my review of the Final Report of the Commission of Inquiry into the Ottawa LRT fiasco. This article picks up from the point where the contract is awarded to the successful P3 bidder, Rideau Transit Group, and reviews the contract and project structure.
See also: The Ottawa LRT Report Part I which contains introductory material and the story up to the contract award. In Part III I will turn to construction problems and testing before revenue service began, and Part IV will cover from that point to the present.
On December 19, 2012, Rideau Transit Group (RTG) achieved the best score on their submission although, as I noted in the previous article, this was primarily on financial factors as the technical scores of the three bids were close to each other. Ottawa still clung to the 2010 budget estimate, and the project was approved at $2.13 billion. However, the P3 arrangement removed much of the City’s control over the project.
The actual structure of the project involved several entities, some of which were actually the same companies acting in different guises. This divided the project into subcontracts although ultimate responsibility rested at the top with RTG.
The Project Agreement accounted for the fact that, as is typical with this type of model, RTG would flow the bulk of its contractual obligations under the agreement down to subcontractors. […] The Project Agreement required RTG to ensure that its subcontractors complete the subcontracted scope of the OLRT1 project in the same manner and to the same extent as RTG is required to under the terms of the
Accordingly, the obligations for the works required by the Project Agreement were set out in RTG’s subcontracts with OLRT-C [the construction arm of the P3] and RTM [the mainenance arm], respectively. Under the subcontract with OLRT-C, OLRT-C took on the obligation to complete the design and construction as required under the Project Agreement as well as the risk and associated payments if the obligations were not met. Similarly, the subcontract with RTM flowed down RTG’s obligations to maintain the OLRT1 project as required under the Project Agreement, and RTM took on the risk and associated payments if the obligations were not met.
This structure allows RTG to be a small entity made up of only a handful of executives and support staff who would administer and oversee its contracts with its subcontractors. Any reporting from the subcontractors up to the City and back went through RTG. [p 148]
In this arrangement, management of the groups responsible for the work flows through the topmost level, RTG. In theory, this provides a single point of contact and responsibility, but it also creates a potential choke point in the City’s ability to manage work done on its behalf.
“Under the Project Agreement, RTG was responsible for the construction and maintenance of the OLRT, and the City would be the operator of the system. The Project Agreement, which was based on Infrastructure Ontario’s P3 template, gave the City limited control over the construction process or the subsequent maintenance of the system. Therefore, the City’s ability to direct the project was generally limited to enforcing specific financial remedies under the Project Agreement. In essence, the City was in a position where it had to rely on RTG to fulfill its contractual obligations and could only attempt to ensure compliance by withholding funds or otherwise enforcing contractual remedies.” [p 9]
Systems integration is an important part of any large technical project. One cannot simply buy components from various sources, plug them all in and expect them to work. With the management of suppliers happening a few levels removed from the City, an assumption is needed that this integration is actually happening. In fact, it was not, or at least not at a level needed to guarantee success.
“RTG’s project plan required the various engineering systems that went into the OLRT1 to be carefully integrated. However, the subcontractors operated in silos. These decentralized arrangements made it essential that the parties integrate their efforts and engage in near-constant communication. They failed to do so, OLRT-C [the construction arm of the P3] did not effectively coordinate their efforts, and the project suffered due to this lack of coordination.” [p 9]
On top of these issues, the vendors argued that the specifications were too “prescriptive” about how things should be achieved, as opposed to describing a system performance requirement and leaving it to the P3 to figure out how that should be met. This affected, in particular, the vehicle design.
An obvious question is why this was not addressed during the pre-award stage of commercially confidential discussions, or if the City and their consultants (who presumably were responsible for the specification) refused to change it.
“Regardless of the details of the project specifications required in the Project Agreement, by signing the Project Agreement, RTG agreed to be “responsible for the complete design, Construction, testing and commissioning and Maintenance of the complete Systems required for the safe and efficient operation of the LRT.” That is, RTG signed the Project Agreement with “eyes wide open.” [p 151]”
The contract contained provisions for various types of default including:
- Failure to Maintain Schedule: The City could issue a notice to RTG which triggered a requirement for a plan to get the project back on time and achieve a Revenue Service Availability (RSA) date no later than mid-May 2019. Failure to deliver a plan would be deemed a default and entitle the City to terminate the contract.
- Delays to Revenue Service Availability: Many preconditions determined whether RSA had been achieved including Substantial Completion of civil works, testing and safety requirements, and training of City staff for system operation. The RSA date was May 24, 2018, and five days after certification, RTG was entitled to a $200 million payment. If this date was not met, the agreement included provisions for rescheduling and a penalty payment (liquidated damages), but in any event if the date went beyond May 2019, this would be considered as a default.
- The contract between RTG and OLRT-C also contained provisions for penalties up to about $145 million for delay damages.
Various types of events were provided for where RTG would be entitled to a schedule change and financial compensation. Typically these were external events including Acts of God, interference by other agencies or governments, labour actions, civil unrest, contamination of work sites, and archeological finds. Even if the event was beyond RTG’s control, they were required to reduce or eliminate its impact to the degree possible.
Despite this fairly exhaustive list, the agreement did not provide for any relief related to geotechnical risk. This was assumed completely by RTG with only the following exemption:
“The only partial exception to this is that the Project Agreement did create a Relief Event “with respect to Tunnel Work only” for “bursting or overflowing of water tanks, apparatus or pipes if such events are not attributable to the actions or omissions of Project Co [RTG] or any Project Co Parties and are not properly inferable, readily apparent or readily discoverable from the Background Information.” [p 159]
RTG, in effect, lost their bet on geotechnical risk thanks to a large sinkhole on Rideau Street. This event is covered later in the report.
Although the contract included a worst-case option that the P3 would be declared in default and the entire project would revert back to the City, this is obviously not a path to be followed except in the most dire circumstances. There is a strong incentive for the P3 to hit the mark on schedules, or at least claim that this will occur, and for the City to use financial threats to ensure projects stay on time. However, this creates an antagonistic relationship if anything goes substantially wrong on the project.
However, with the Mayor’s political credibility hanging on delivering a project “on time, on budget”, the likelihood that the P3 would be forced into default was minuscule. This created a situation where the project would “succeed” no matter what.
Although responsibility for actually delivering the project rested with RTG, the top of the P3 pyramid, the communications role was reserved for the City. Any information flowing to the media and general public had to come through the City and whatever filtering it applied. This is not unlike the situation in Toronto with Metrolinx and its various P3 partners where much information flows through official communication channels. This allows for message control, but that’s a double-edged sword particularly when things go wrong. Each party has a vested interest in spinning a message favourably for themselves, and in the City’s case for their political masters.
RTG had a responsibility to report regularly on the status of construction, including updates to schedules. When the project transitioned to actual operations, reports were required based on daily operating results including the amount of service actually operated.
The Inquiry learned that there was a back channel reporting mechanism to select City Officials and the Mayor, and much information was actually hidden from most of Council and the public. I will come to this later in the article. Such a mechanism directly contravened the hoped-for communications structure.
“The City’s Project Charter, which had the purpose of establishing “a high level framework of governance and management … for the planning and implementation of the OLRT project” stipulates that “all public communication will be managed through the communications office as part of RIO [the City’s Rail Implementation Office].” [John] Jensen, the former Director of RIO, agreed with Commission counsel that a key reason for making RIO responsible for all public communications was “to ensure coordination and consistency of the messages that the public is receiving.”
“Under RIO’s management, one of the City’s main communications objectives for the OLRT1 project was transparency and accountability. The Project Charter identifies transparency and accountability as “key guiding principles.” [p 162]
Actual achievement of “transparency and accountability” can be hard when the message does not fit with the political context of a project.
“The following are two examples of public communications about the OLRT1 project through the FEDCO [Finance and Economic Development Committee] meetings. On February 6, 2018, [John] Manconi [the City’s former General Manager of Transportation Services] appeared at a FEDCO meeting to explain that the RSA date of May 2018 would not be achieved and that November 2018 was the new target RSA. About a year later, on February 12, 2019, both Manconi and [Peter] Lauch, RTG’s CEO, appeared at a FEDCO meeting and spoke publicly.
“At this meeting, Lauch stated publicly that RTG was confident that it would meet its new RSA date of March 31, 2019. Manconi, on the other hand, stated that he was “highly skeptical” that this date would be achieved.
“In addition to the FEDCO meetings, the City would organize media conferences at which Mayor Jim Watson would make announcements about major challenges or achievements in the OLRT1 project. For example, on June 18, 2019, Mayor Watson convened a face-to-face meeting with top executives from RTG and Alstom. Following that meeting, the Mayor held a media conference, joined by the same executives,
where he announced that RTG would hand the OLRT1 system over to the City in August 2019. Later that summer, on August 23, 2019, Mayor Watson held a symbolic key ceremony where RTG officials, including Lauch, gave the Mayor a large framed key to commemorate the handover of the OLRT1 system to the City.” [pp 162-163]
If the public and private parties are getting along well, then there is no reason to suspect that communications flowing from only one of them are biased. However, if there is contention between the parties, the information provided publicly might be skewed.
“There is some evidence that, at least from RTG and RTM’s perspective, the public was eventually getting only a one-sided story about the OLRT1 project. For instance, in his testimony before the Commission, RTM’s acting CEO and General Manager, Mario Guerra, stated that from his perspective, the City’s approach to public communications meant that “there was only one side of the story being told.” In Guerra’s view, the City’s approach led to a public perception that RTM was not performing well and that thus any payment to RTM “could be perceived as cutting us a break.” This, in turn, hindered an open dialogue between the City and RTM on the payment mechanism.” [p 163]
“The SNC-Lavalin “Lessons Learned” document states that in the case of the OLRT1, the City did not consult RTG on information that was provided to the media and that RTG did not issue its own communications to the media. To illustrate the difference more RTG input might have made, the document indicates that the City did not do enough to educate the general public about the new system and the challenges in transitioning from bus to rail. Had it done so, the public’s expectations might have been better informed.” [p 164]
Payments for Capital and Maintenance
The capital portion of the contract was structured so that RTG would be paid when it achieved certain “milestones” in construction. The financing of work in progress was RTG’s responsibility through its lender up to $250 million, and the payments for each milestone would not exceed 80 percent of cumulative costs. This would leave part of the payment as an incentive to complete the contract.
There were twelve milestones up to Substantial Completion, and a further payment was due when the line was accepted for Revenue Service.
Some of the remaining 20 percent would not be paid until the maintenance portion kicked in with the line operating. This would be an incentive both to complete the contract and to provide reliable service as full payment for the capital portion would not be made otherwise.
Once the system was accepted for service, the maintenance portion began, and RTG was entitled to monthly payments with a blend of operating and capital.
“[…] it was designed to be performance-based and rested on RTG’s ability to provide consistently reliable service. A failure to meet the performance levels can result in deductions from the monthly service payments that RTG receives.” [p 168]
Various penalties would apply to the monthly service payments depending system availability and various types of failures. For example, if the vehicle kilometres actually operated fell below 98 percent of spec, deductions would kick in.
Another metric was applied through “failure points” with escalating penalties up to contract termination.
This scheme did not engender a co-operative working relationship.
“The goal of the payment mechanism is for the City to achieve maintenance criteria by balancing incentives and disincentives, encouragement and discouragement, while not being overly punitive. As noted, the Project Agreement was based on Infrastructure Ontario’s existing template used in other infrastructure projects. The benefit of this is that bidders can rely on the predictability that comes with Infrastructure Ontario’s template agreement. Bidders can reasonably expect that agreements with similar payment mechanisms will work like those they have seen before on other projects. As John Traianopoulos, of Infrastructure Ontario, explained, when bidders do their due diligence on the project, “they take comfort in some precedent and some familiarity with [the] documents.”
“In P3s, partnership and co-operation between parties, such as the City and RTG, is fundamental to the success of the project. Traianopoulos testified that if either the City or RTG takes an adversarial approach to the relationship, it can cause a risk to the reliability of the OLRT system. This does not mean that the City or RTG should ignore the contract and not enforce the terms of the agreement, but it does mean that they should not use the contract as a tool to penalize the other party.
“If a bidder knows that the payment mechanism is punitive, or that it will be enforced in a punitive way, it can account for this factor in its bid. In the case of the OLRT1 project, RTG did believe that the payment mechanism was punitive, but it came to believe through discussions with the City that the mechanism would not be enforced in a punitive way. As it turned out […] the City did apply the payment mechanism in a punitive manner. This led to several problems in the relationship between the City and RTG during the maintenance term.” [p 169]
There is a serious problem with this model in that it assumes it is even possible to hit 98 percent of the contracted service. Anyone familiar with transit operations will know that a raft of possible events can “derail” perfect service. This is a very different environment from a building like a school or a hospital, the typical projects IO’s contracts were designed for. Conversely, if the goal is set lower, it is possible to “game the system” so that even bad service can be counted as “good” because it fits badly designed criteria. The TTC’s Service Standards illustrate this problem as I have written on previous occasions.
The Project Agreement established the role of “Independent Certifier” whose primary responsibility was to certify that conditions triggering milestone payments had been met. The Certifier had no role in design or construction of the line, and their role ended with the Final Completion Certificate for the construction phase. They had no role in the operational phase.
“To decide whether the conditions for certification of a given milestone were met, the Independent Certifier would review both RTG’s submission and the City’s opinion regarding that submission, review documentation, and if warranted, perform a site visit. The Independent Certifier would not, however, perform any independent testing or validation related to certification of a milestone – this was not part of its role or function. Instead, the Independent Certifier would review documentation and reports prepared by the professionals of record on the OLRT1 project to assist in deciding whether the milestone was achieved.” [p 171]
One flaw in this scheme is that if the City and RTG agreed that milestone conditions had been met. then the Certifier was not likely to dispute this even if they disagreed.
“An important facet of the Independent Certifier’s role was that it could mediate in the certification process if the City and RTG disagreed on whether a milestone had been achieved. The evidence of Sechiari, the lead for the Independent Certifier, was that if the City and RTG agreed that a milestone or other requirement had been achieved, it would be “highly, highly unlikely” that the Independent Certifier would intervene and take the position that it had not, in fact, been achieved. To intervene in those circumstances would indicate that there had been a total breakdown of due diligence by the parties and their experts.” [pp 171-172]
Certification depended at least as much on reports saying work had been done and accepted as on actual inspection and verification. This means that RTG and City staff could, in theory, do an end run around certification by agreeing that work was completed and accepted even if it really was not.
Also, because the Certifier’s role ended after the construction stage, there was no independent review of system status during the operational stage.
There are two forms of financing required for this project:
- A short-term facility, operating like a line of credit, for the construction period with an ebb and flow of money for construction expenses and milestone repayments.
- A long-term facility with a 30-year term to finance the project out to the end of the maintenance contract.
“The financing component in a P3 is a mechanism to enforce risk transfer. The financing is not a funding mechanism for the OLRT1 project, because the City is ultimately responsible for paying RTG for its work. In other words, the financing is used to transfer risk to RTG and to incentivize RTG to perform well, but all construction and financing costs are ultimately paid by the City.
“The incentives resulted from the fact that the City’s payments to RTG were subject to the deductions and limitations described earlier in this chapter. RTG had the incentive to complete high-quality construction to meet the project specifications in order to receive its construction payments. RTG continues to have incentives to ensure high quality maintenance services, as the monthly service payments from the City for RTG’s maintenance services (by RTM) may be withheld if the OLRT1 system is not performing to the established standards. If RTG does not perform to the agreed-upon standard, it must still make its debt payments to the lenders, but without payments from the City. The long-term financing must be paid back by RTG over an approximately 30-year term. Defaulting on a loan would be a serious matter for RTG’s partner companies. Rob Pattison, of Infrastructure Ontario, explained that the financing is used as leverage against the project company (in this case, RTG).” [pp 173-174]
This is all very well in theory, but it assumes that most of the life of the contract will work as planned. There is a big gap between perfect performance and default where the financial and legal battles could compromise the delivery of service to the public which, after all, is the purpose of the project.
As we have seen in earlier parts of the report, the level of risk transfer inherent in the Infrastructure Ontario P3 model is no longer acceptable to the companies that might form consortia for future projects. It has been abandoned in favour of a more collegial “alliance” model and a payment scheme based on work completion rather than the less granular milestones. However, projects developed with the P3 framework are stuck with it for decades to come.
Finally, although the P3 created a variety of entities to deliver specific elements of the project (see table at the beginning of Part I), the lenders had a call on capital beyond the project itself. Such recourse was not available to the City who in a worst case scenario could see the P3 simply walk away from the project to minimize its losses.
“One of the lenders’ benefits is that they have access to a larger pool of security from RTG. For example, RTG and its partners and parent companies were required to secure RTG’s borrowing with guarantees from the parent companies, letters of credit, and equity investments. The lenders have access to this security if RTG were to default on its repayment obligations. In contrast, the City does not in that same scenario have access to the same type of security as the lenders do.” [p 175]
During the OLRT1 project, the City contemplated piggybacking a Stage 2 expansion onto the arrangements already in place. However, significant contract changes required consent of the lenders lest the risk profile for their loans changed and endanger repayment. Moreover, some parts of the contract did not foresee the effect of additional costs and made no provision for them.
“To provide their consent, the lenders required RTG to inject in the range of $50 million to $100 million in additional equity, as security for the increased risk associated with this increased scope of work. This would be a significant cost to the City, given that financing costs are ultimately paid by the City.
“In the Project Agreement and the other OLRT1 project documents, the other option available to the City for extending the system was for the City to pay out the long-term lenders to retire the debt.” [p 176]
The City entered into a debt swap with the lenders making the City the lender to RTG and destroying the arm’s length relationship and risk management the whole P3 scheme was intended to provide. This arrangement added a layer of contention between the parties as the project ran into difficulties. This is explored later in the Inquiry Report.
The City was advised that it should have a “service-proven” vehicle. However, they actually chose a model assembled from components of other vehicles, a custom built version for project. The low floor design and aggressive performance specification triggered a requirement for automatic train control and pushed the limits of LRT technology, according to the report.
Discussion of the vehicle selection predated the contract award as the consortia bidding on the project each included a vehicle manufacturer with their own proposal. The vehicles were not sourced separately from the construction project.
The parties defined “service proven” in the Project Agreement as being “an existing … design suitable for the OLRT Project,” which they further specified to mean a vehicle that substantially complied with the following characteristics:
- The major components had been integrated into a comparable LRV that was already in use elsewhere;
- A minimum of 10 such vehicles had been in use for a minimum of two years;
- The vehicles in use had been operated in a climate similar to Ottawa’s, and in service conditions similar to those specified for the OLRT1 system; and
- The vehicles in use had achieved a minimum kilometre threshold (50,000 in-service kilometres).
The City also had certain performance requirements for the vehicles, including the low-floor design and various requirements for trip time, operational headway (time and distance between trains), and system capacity. [p 192]
The City rejected the first vehicle offered by RTG, a car from Grupo CAF, on the grounds that
“[…] although the major components were all in service, the particular configuration was not in use anywhere and the City therefore did not consider the vehicle to be service proven.” [p 192]
This decision is ironic considering similar concerns about the integration of various components and designs in the Alstom vehicle that was selected.
“Alstom was the only major vehicle supplier that was not either already disqualified from the process or participating with another bidder. Alstom was introduced late in the process, leaving less time for due diligence.” [p 193]
This illustrates how the bundling of vehicle supply with the overall P3 contract restricted the City’s choice of vehicles. That mistake has not been repeated, but it is a limitation of the OLRT1 P3 that the City must live with.
“June 21, 2012. CAF presents its vehicle proposal in a meeting between RTG, the City, and Infrastructure Ontario and responds to the City’s concerns that CAF does not meet the requirements for a service-proven vehicle. The City then determines that CAF’s proposed vehicles are not service proven and refuses to pre-qualify CAF.
“Late June 2012. RTG asks Alstom to develop a new proposal for the OLRT1.””Late June 2012. RTG asks Alstom to develop a new proposal for the OLRT1.”
“[…] this problem was compounded by the decision to make RTG solely responsible for the delivery of the vehicle. Given that the Project Agreement put the risk on RTG to supply a proven vehicle, and that RTG via OLRT-C subcontracted that task to Alstom, the City had no direct relationship with the key supplier.” [p 10]
With only one vehicle left on the table, the “service proven” requirement was key.
“The evidence with respect to whether the Citadis Spirit was service proven (and thus more reliable) was inconsistent. Some witnesses, such as Lowell Goudge, of Alstom, testified that, while the Citadis Spirit was a new configuration, the essential components were all proven (in that they were in use elsewhere), and thus, the vehicle itself was service proven. Goudge emphasized that the components were in use elsewhere, the Citadis family had been running on tracks in Europe for years, and Alstom had successfully built trains (albeit not the Citadis Spirit) for use in cold-weather climates.
“But there was also a significant body of evidence to suggest that the vehicle was not service proven. Some of the key evidence to that effect is as follows:
- This was the first commercial use of the Citadis Spirit;
- This was the first time that Alstom had developed what is called a low-floor LRV in North America. (The low floor was important to the City.) Goudge called the Citadis Spirit a “development project” for Alstom to demonstrate that it could bring lowfloor technology to North America. (It should be noted that North American vehicle standards are materially different from European standards.);
- Alstom did not have a Citadis Dualis vehicle in operation in a climate similar to Ottawa’s;
- Goudge also acknowledged that, while the Spirit was modelled on the Dualis, there were changes to virtually every part of the Dualis design to meet the City’s specifications for capacity, speed, and climate, changes that Alstom had not previously combined in a single vehicle;
- This was the first time that an LRV had combined an automatic CBTC system with a low-floor LRV (this, combined with the necessary acceleration and deceleration rates, posed significant design challenges for Alstom); and
- The Citadis Spirit vehicle was longer than any other LRV vehicle in North America, and it remains so at the time of writing.
“Regardless of whether the Citadis Spirit met the contract definition of “service proven,” there was certainly good reason to believe that it was not proven, and in any case the point here is not to make a finding regarding whether the Alstom vehicle was or was not service proven. The point is that the vehicle was sufficiently unique that the parties ought to have expected significant growing pains and reliability “kinks” that would have to be worked out during the testing and commissioning phase. The fact that the vehicle was a new design and the difficulties that created were partly attributable to the City’s requirements for the vehicles’ capacity, headway, speed, and braking, which were all pushing the limits of what any LRV in the market was capable of doing. [pp 193-194]
Although the report paints a sad picture of a project whose players were out of their depth, I am not sure I would be quite as generous as the Commission. Too many players who were major international firms, not to mention key public agencies, did not appreciate or have experience for what was involved. They had a duty to be well-informed and create a project structure that would deliver reliable results.
“The OLRT1 project was characterized by new relationships, new designs, new facilities and infrastructure, and new undertakings. These include: (1) the City had no experience with an LRT project of this complexity, or with using a P3 model to deliver a project like the OLRT1; (2) Infrastructure Ontario had never undertaken a light rail system or an infrastructure project involving a tunnel; (3) Alstom had never worked with the Canadian content requirement; and (4) OC Transpo had never previously operated a complex LRT system. Collectively, these “firsts” were at the core of nearly every aspect of the LRT system: procurement, the contract, the trains, systems integration, manufacturing and assembly, operations, and maintenance.
“I do not criticize any of the parties involved in this project for attempting to do something they had not done before. However, the participants fell short in not appreciating the extent to which they were entering uncharted waters and anticipating the issues that would likely arise as a result. They should have planned better for lengthy delays (and informed the public accordingly), understood that reliability problems would arise (and staffed accordingly), and allowed sufficient time for testing and trial running in the context of an unproven vehicle, unproven relationships, and inexperience.” [p 11]
Not only was the vehicle design unproven, but there was bad integration and management. Integration among components and providers is a chronic problem in large projects.
“November 7, 2017. SEMP, an engineering consultant, delivers a report on the OLRT1 at the request of OLRT-C to assess and rehabilitate the systems engineering processes for the OLRT1 project. The report concludes that systems engineering “is considered to be substantially below the minimum acceptable level for a project of this size and complexity,” and that this is particularly evident in the lack of integration between the various infrastructure, assets, and personnel involved.” [p 40]
Alstom had no experience with Canadian content provisions, and they were forced to use an inexperienced workforce in Ottawa. That facility was not ready for production on time. Moreover, Alstom and Thales had limited experience in integrating Thales’ train control system with Alstom’s vehicle.
” […] there was no direct contract between Alstom and Thales setting out each company’s specific responsibilities, leading to significant disputes between the two companies that were difficult to resolve.” [p 195]
As for the City’s advisors, they were not an ideal choice. The City’s own lack of experience with building and operating an LRT system meant that they were at the mercy of their consultants and suppliers.
“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.”
“The procurement and contract design and negotiation efforts were led by a combination of Infrastructure Ontario, Deloitte, and Boxfish. This was a critical phase of the OLRT1 project, because procurement and the contract formed the core of how the relationship between the City and the private-sector partner would work. Infrastructure Ontario and Boxfish were themselves inexperienced in developing those crucial elements in the context of an LRT project. This was Infrastructure Ontario’s first LRT project and its first time working with a municipal government.” [p 190]
One cannot help asking why the City took on as advisors agencies and firms with limited or no experience in projects of this kind. Indeed, the primary consideration was with procurement and P3 management, probably because of provincial pressure real or perceived. Actually building and running a major transit line was not a top requirement. Whether the choices were driven by the Province, or if it was a case of friends helping friends to lucrative contracts, we cannot know.
“The lack of experience at the City and Infrastructure Ontario contributed to the risk of optimism bias, which refers to the risk that the parties are overly optimistic at the start of a project and set the budget, schedule, and contract terms accordingly. […] Optimism bias is exacerbated by inexperience, because a lack of experience increases the likelihood of misjudging the participants’ ability to overcome obstacles and meet project goals.” [p 191]”
An example of optimism bias was the assumption that Alstom would deliver a vehicle that would work pretty much “out of the box”.
“RTG and the City ought to have appreciated that, with a vehicle that was substantially new and was not proven in operation elsewhere, such delays were almost inevitable. Yet, Estrada, of RTG, told the Commission that they assumed there would be no vehicle problems: “We [RTG] were quite optimistic” and “I didn’t have any reason to think that we were going to have problems, technical problems, with Alstom, which is one of the most experienced … companies in the world.” These comments referred to a period after assembly was under way but reflect the overall problem of optimism bias that can arise, particularly where there is a lack of experience. While Alstom itself was an experienced supplier, the vehicle being supplied was sufficiently new that the parties could reasonably anticipate that difficulties would arise.” [p197]
This was only one of several cases where inexperienced players failed to appreciate the complexity of the project.
Part III of this series will continue the story through construction, manufacturing, the infamous sinkhole, and testing leading up to revenue service.