• Dean: Lysyk goes Marin on Infrastructure Ontario

    January 30, 2015
    Tony Dean 
    Posted with permission from QP Briefing

    Bert Clark, the CEO of Infrastructure Ontario (IO), leads a powerful provincial agency that is recognized internationally as a highly successful manager of public infrastructure. In a business in which governments have been routinely out-classed by highly skilled private sector players, Ontario now has the capacity and clout to drive hard bargains that better protect the public interest.

    Given that backdrop, Clark was reportedly stunned by Auditor General Bonnie Lysyk's December 2014 annual report, which grabbed headlines with the AG's reckoning that the agency's use of alternative financing and procurement (AFP) has cost $8 billion more than would have been spent through publicly financed projects.

    Through AFPs, governments attract private financing for certain infrastructure projects. Under this model, risks associated with cost escalation, project delays or shoddy work are transferred to the private sector.

    Lysyk said that if the public sector could get its own managerial act together and deliver projects on time and on budget, taxpayer money could be saved. That's a big "if," but this was more about grabbing a headline than it was about facts, which strikes me as a little odd for an auditor. But perhaps it was a bit of experimentation with what some refer to as the "Marin effect," an unveiled reference to the Ontario ombudsman's unrepentant approach to using the media to attract attention to his reports. For some time now, other provincial watchdogs have been feeling pressure to go down the same road. Perhaps Lysyk was the first to bite. In any event, she chose to rip on a widely regarded Canadian success story – and one which sees projects such as the complex Union-Pearson airport express service nearing completion bang-on time and on budget.

    Lysyk must know that IO was created to avoid the huge cost overruns that have become endemic in traditionally managed projects. Current examples of publicly managed projects going sideways include the costly upgrades to Toronto's Union Station and the Spadina subway extension to York University. There are countless others, because prior to the province getting a grip on big construction projects the only questions were how late they would be, and how much they would go over budget.

    Clark says all big projects have risks, and while these risks have costs, the province has saved $14 billion over the past nine years by making deals that require private contractors to deliver on time and on budget – failing which they don't get paid and can be subject to financial penalties. The Ivey Business School's Paul Boothe confirmed in a recent article for Macleans that Lysyk "faltered badly" in her assessment of Infrastructure Ontario's AFPs. The resulting net gain for taxpayers from AFPs is the difference between the province's $8 billion outlay and its $14 billion in saving: $6 billion.

    How, and why do AFPs work? Under traditional financing models, construction companies often have governments over a barrel. Governments are responsible for design changes and change orders during construction and have minimal leverage when delays strike because they write cheques based on the progress of construction rather than at major completion points. Additional costs for governments accumulate as issues such as building quality and unforeseen maintenance are identified. This means that there are huge risks for government in traditional approaches to funding infrastructure projects. An Oxford University study has estimated that cost overruns in these traditionally delivered projects are, on average, 28 per cent higher than estimated. AFPs are designed to transfer those risks to the private sector in order to achieve savings. Assessments about the choice of AFPs versus traditional financing arrangements are made by IO, with oversight from its board and external experts who specialize in risk assessment. Clark says "this is essentially about protecting the public interest in the world of asset management."

    In 2014, Altus Group assessed completed AFP projects with an approximate value of $10 billion and found that 97 per cent of these projects have been successfully delivered within the IO-managed budgets, and 72 per cent have achieved substantial completion within one month of the scheduled substantial completion date. Altus says these outcomes "exceed generally accepted industry benchmarks."

    Clark takes issue with a couple of other misperceptions about AFPs. He maintains they are not about kicking the can of infrastructure costs down the road for another generation to worry about. There is relatively little long-term private finance after construction is completed.

    From a labour perspective, in cases in which the operation and/or maintenance of a new facility is moved to a private manager, the facility remains in public hands and employees' union membership, wages and pensions are protected.

    Lastly, AFPs are not driven by ideology. The use of AFPs is assessed on a case-by-case basis and carefully reviewed by external advisers. Clark says there are currently 79 AFP projects completed or in the pipeline, while 4,000 additional projects ranging across the government real estate portfolio every year are financed under traditional arrangements.

    A familiar take-away from this is that public sector success stories seldom make the news, while bad ones, however fanciful, are magnets for media attention.

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    2015 QP Briefing