Public Values

Metrolinx floats P3 construction of new Toronto light rail

There's always the very real possibility that the private partner will default or walk away.

by Steve Munro

December 1, 2011: The Toronto Star reports that Metrolinx is considering the private sector option for delivery of some or all of the Eglinton LRT project. This is not much of a surprise given that Queen's Park has an entire Ministry, Infrastructure Ontario, dedicated to building stuff, and their standard delivery model is a partnership with the private sector.

Advocates and opponents of public-private-partnerships often take extreme views that these schemes are either the saviour of government services, or evil works meant to transfer control (and money) of vital projects from public to private hands. The devil, as they say, is in the details.

Every project the TTC or Metrolinx undertakes has a large private sector component: engineering, construction, provision of materials. Delays and cost overruns can arise from poor planning and design, some of it carried out by those same private sector engineers, or from contractors who view changes and delays as a potential source of profit. They can also come from a client who can't make up its mind and changes requirements as the project unfolds.

  "The private sector is in business to make money, not to charitably give you a low cost drive across the GTA."

The most recent whipping boy for the ills of publicly managed projects is, of course, the St. Clair reconstruction. This project began with insensitive and unresponsive public participation, and continued with competing community views of the street and the neighbourhoods along it. Requirements changed, sometimes at political instigation, while construction was already underway. Extra utility and street beautification work was merged into the project with at least one agency, Toronto Hydro, unilaterally changing its construction schedules to the detriment of the overall plan. Works arbitrarily stopped to make way for street festivals.

Suppose for a moment that the project was entirely in private hands. Would it have proceeded with the original plans, unchanged? Would the private sector absorb the cost of delays due to other utilities and to political interference, or would they demand extra payment? Would the project be open to public consultation and amendment as work proceeded, or would the attitude be "this is what we contracted to do, and that's what we're building"?

All of this depends on the original contract, on what was specified. The biggest difficulty with completely outsourcing any work is that an agency must define what is required in detail and with a presumption that a contractor will exploit every loophole. Moreover, the agency must manage that contract to ensure performance, and political masters must not let the private partner escape from its responsibilities.

The public sector must entertain the very real possibility that the private partner will default or walk away, and will insulate their other operations from penalties through corporate structure. The original contractor may not even be the long-term owner after a quick-profit flip to another company, possibly offshore and beyond the reach of local governments.

Highway 407 is an embarrassment for the government, but it's a money-maker for the new private owner. Why? When Mike Harris sold the highway, the goal was simple: generate cash quickly to pay for the tax goodies that got him elected, and make an attractive deal with an ironclad guarantee that the buyer had a free hand to set prices. If you give away control, don't be surprised with the outcome. The private sector is in business to make money, not to charitably give you a low cost drive across the GTA.

The biggest public transit PPP fiasco came in London, UK, where a consortium of private companies, including Bombardier, walked away from a £500-million loss. Taking this loss was cheaper than actually performing the contract to the agreed specifications, but the consortium probably never expected to be held, tightly, to those terms. A common outcome in this type of difficulty is a quiet renegotiation in which the public sector assumes at least part of the cost a contractor is unwilling to bear. The very concept of risk-transfer to a private partner is destroyed when this option is available.

Contract details are important. Vancouver's Canada line is touted as an example of "doing it the right way", but even this project has its difficulties. Construction was planned as a deep bore tunnel (like Eglinton), but the bidder had the option to change the construction method. They did so, and neighbourhoods endured months of cut-and-cover work where none was planned to occur. Stations are big enough to hold the trains that operate today, but not for expansion. Automatic train control will allow close headways, and unmanned operation removes the cost differential for many short trains vs fewer long ones. However, there are already concerns about future capacity problems on the line.

These are matters of good or bad planning and contract management, functions that stay firmly in the public sector. If the specifications are too loose, or just plain wrong, then the fault is not in the contractor's hands.

On Eglinton, the situation is more complex both because the project is already underway and because there are major political overlays to what might otherwise be a purely technical discussion.

The first and obvious question is to ask just what we plan to build. Queen's Park, in terror of "Ford Nation" and the provincial Tories, caved in to Mayor Ford's demand that no surface construction occur. Metrolinx agreed to this, but they would never have been presented with the option had Ford not won the election and Council's left been in such chaos early in the first months of their term. Times have changed, and it is unclear whether, by the time the first tunnel boring machine makes even modest progress across Eglinton, that Mayor Ford will have the support of Council, much less the voters. Should we commit to a fully underground route through a design-build contract when we don't actually know if this option will survive close scrutiny for cost and feasibility or Ford's fall from power? Should we entrench a short-sighted political decision in a long-term spending commitment?

The next question would be when will we build this line. The original timeline for Eglinton would have seen it open in 2018. This was stretched out to 2020 not for technical reasons, but because Queen's Park wanted to push many of the Transit City costs into the "out years" of the 10-year plan. Back in May 2010, Metrolinx adopted its "5-in-10? plan to build five projects over the period to 2020, and all of the completion dates moved into the future:

•Viva: From 2015 to 2019 •Sheppart LRT: From 2014 to 2015 •Finch West LRT: From 2015 to 2019 •Eglinton LRT: From 2018 to 2020 •Scarborough RT/LRT: From 2015 to 2020

Word on the street now has the Eglinton line, by TTC estimates, not opening until as late as 2023. How much of this delay is caused by the decision to underground all of the line is unclear, but it's a delay that plays into the "we can do it faster and cheaper" arguments for giving the work to a PPP. How there can be any knowledge of comparative completion dates when we don't even know what will actually be built is a mystery.

If the line is designed and built as a turnkey private project, the next question would be whether it would also be operated independently of the TTC system, or if the TTC as originally planned, would operate the line as Metrolinx's agent. Nobody knows what the TTC may have evolved into by 2020 or later, or if it will still exist. Much depends on the changing political and economic climate of the coming decade.

The TTC has said that it would have no part of a private operation and raises questions about fare collection, systems integration and the provision of replacement service when the Eglinton line is not running. None of these is a substantive argument provided that these issues are addressed up front as part of any project plan and contract.

The much larger problem is how much all of this will cost, whether we will have proper control over unexpected future increases, and how we will pay for it.

Already in the Presto implementation proposal for Toronto, we see the beginning of a disturbing shift in project funding. Rather than paying for the system's implementation from capital (regardless of which level of government foots the bill), the cost will be recovered as a future operating charge against the TTC. Negotiations have wrestled this down to a level no greater than the current fare collection costs, but the premise is troubling. Unless Queen's Park is prepared to treat something like Eglinton as a capital lease, and fund its cost as an ongoing capital subsidy, we could be faced with loading construction costs onto a budget largely funded by riders and by the City of Toronto.

Will this will be a debate on the merits or on ideology? How will political struggles evolve between Infrastructure Ontario's ideological bent and the long-standing, if stodgy and wounded TTC's preference for public sector project management? Will Queen's Park ever address funding issues for transit, or simply continue to meddle in processes and plans without actually making a commitment?

I doubt we will hear any robust discussions on these matters from Metrolinx as they are a provincial agency, not an independent, free-thinking body. A good debate would be interesting and educational, whatever the outcome, but we're unlikely to have the received wisdom challenged. In some ways, Queen's Park can be just a kinder, gentler version of Rob Ford.

Funding of transit expansion in the GTAH will be a powerful, difficult debate in the next year or two as we wrestle with one basic fact: more money must come from somewhere. Tolls, taxes, user fees, whatever we call them, it's net new money. We can hide the problem by having someone else borrow it for us — a pension fund, or a construction consortium — but we still have to pay for what we build and use. We must still debate what we really should be building, how will the network operate, where new and future demands will flow, and what's a good investment for what are, ultimately, public dollars.

Links and sources
  Metrolinx Toys With 3Ps

Posted: December 08, 2011

  Public services

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