P3, or not P3? That’s the question as we try to fund Edmonton’s future LRT

In October of last year, Council approved the use of a public-private partnership (P3) to fund the Southeast to West LRT project. The decision came just days after the new LRT Governance Board was established, but it was largely overshadowed by the downtown arena news that week. Today Mayor Mandel announced, along with Minister of Finance Ted Menzies and Minister of Public Works and Government Services Rona Ambrose, that PPP Canada will invest up to $250 million to support the construction of the new LRT extension. While the funding is welcome, it is $150 million less than the City was hoping to receive from the federal government (the rest may come from a future Federal Infrastructure Plan).

“The City of Edmonton welcomes this important funding announcement by the federal government,” said Mayor Stephen Mandel. “The Southeast to West LRT is a key part of our transportation infrastructure. It will connect communities in Mill Woods and southeast Edmonton to the central core and is essential to our plans for building a better, more accessible city.”

The decision to apply for funding through PPP Canada was not an easy one, but Council did not have much of a choice. The City simply cannot afford to build the LRT on its own – the provincial and federal governments must come to the table. Though it hasn’t been explicitly stated as such by those involved, it seems the only way the Government of Canada would provide funding was through the P3 Canada fund. Calgary Mayor Naheed Nenshi has been vocal about his concern around being cornered into a P3, saying “the real problem is that the only dedicated federal funding at this moment is through P3 Canada.”

Let’s set aside for a moment the very big issue that the federal government is essentially dictating how municipalities should build and maintain their infrastructure. If given a choice, would we pick a P3 to build our LRT network?

What is a P3?

A public-private partnership is basically an approach to delivering and optionally operating and/or maintaining a project. Here’s how PPP Canada defines a P3:

“P3s are a long-term performance-based approach for procuring public infrastructure where the private sector assumes a major share of the responsibility in terms of risk and financing for the delivery and the performance of the infrastructure, from design and structural planning, to long-term maintenance.”

In theory, a P3 can help to ensure projects are delivered on-time and on-budget. The idea is that having the expertise of the private sector can lead to better, more innovative solutions. Another benefit of a P3 is that the private sector takes on a share of the risk, which means that there is a profit motive to ensure the project is done well (at least in theory). This is often referred to as “pay for performance”.

The other thing that is important to know about the P3 approach is that there are a variety of different delivery models. With traditional procurement, the public sector is responsible for the design of an asset like a bridge or school, with construction being contracted out to the private sector through a competitive bidding process. After construction, the asset is handed back to the public sector for operation and maintenance. This model is known as Design-Build (DB).

Using a P3 for the procurement of new assets, there are three delivery models to consider:

• Design-Build-Finance (DBF)
• Design-Build-Finance-Maintain (DBFM)
• Design-Build-Finance-Operate-Maintain (DBFOM)

The level of private sector involvement goes up which each model. Under the DBF model, the private partner assumes the risk of financing the project until construction is complete and the asset is handed over to the public sector. With the DBFM model, the private sector also assumes the maintenance of the asset in exchange for payments throughout the operating period. And finally, the DBFOM model is used for projects that have long-term operation and maintenance handled by the private sector, such as roads.

The P3 model is relatively new (becoming popular in the 1980s) but is already used all around the world on a variety of different projects. PPP Canada was established in 2009 to oversee the $1.2 billion P3 Canada Fund, but that was certainly not the start of P3s here in Canada. From 1990 to 2001 more than 150 P3s were concluded throughout the country.

Can a P3 really work?

Here in Alberta, we’ve used P3s to build ring roads and schools in both Edmonton and Calgary, as well as a water treatment and wastewater treatment facility in Kananaskis (a project that EPCOR is the private partner on). It hasn’t been all smooth sailing however, as Godfrey Budd explains:

Although 18 Alberta elementary and elementary-junior high schools, built on the P3 model, opened in September, and another 10 such schools are going ahead as a P3, four high schools were dropped from what was to have been a 14-school package. In May 2009, the province, citing "the economic climate," announced that the four schools would instead go ahead on a design-build basis. Also, six months after a September 2008 provincial news release announcing the go-ahead for the 18-school package, one of the partners in the P3, Babcock and Brown, the project’s banker, collapsed under the weight of $3.8 billion of debt, and in August 2009 Deloitte was appointed liquidator.

Another issue has been the lack of transparency that seems to come with P3s – it’s not always clear whether the approach saves money or not. Some, such as Alberta Federation of Labour president Gil McGowan, are convinced that P3s rarely work:

“P3s almost never work out in the public interest. Governments around the world have had experience with P3s, and in almost all cases they end up costing taxpayers more and creating enormous headaches down the line. It may look cheaper up front, but the experience with P3s is clear. The private developers are never satisfied with the amount of money the governments put on the table in the beginning, and come back asking for more.”

For its part, PPP Canada says that a P3 can work for larger public infrastructure projects, but notes that governments can borrow money at far lower rates than the private sector can. It says that “a detailed value for money analysis is required to assess whether the costs exceed the benefits.”

The case for a P3 to build the Southeast to West LRT

A couple of weeks after Council decided to pursue funding through the P3 Canada Fund, I sat down with Nat Alampi, the Program Manager for the Southeast to West LRT project. Nat has had experience on LRT projects in the past – he managed the preliminary engineering designs for the South LRT extension and the Northeast LRT extension to Gorman. I wanted to know why the City thought using a P3 was a good idea, given the risks that seem to go along with that decision. “Every project has its challenges, regardless of whether you use a P3 or not,” he rightly stated.

Nat explained that it was EXPO 2017 that initially caused the City of Edmonton to start exploring the use of a P3. That investigation led to the adoption of the City’s policy on P3s (C555) and an assessment of the entire LRT network. “We determined there would be a net savings to using a P3,” Nat said. In its presentation to Council last October, City Administration suggested that savings could be between 3% and 10% using the DBFOM model.

A private partner operating the LRT?! “Operating the train and maintaining the infrastructure so closely intertwined,” Nat explained, “that separating them carries significant risk.” While the City did assess the feasibility of retaining the operating portion of the project, it ultimately felt it would be better served by pursuing the DBFOM model. “Typically with a P3 just for build, you get a two-year warranty,” Nat told me. “In this case, we’re getting 30-year warranty.” Of course, any contract would have provisions to allow for an extension of the operations and maintenance period, further expansion of the line itself, and there would likely also be a handback condition. For transit users, the new line will still look and feel like an ETS line (though it will use low-floor technology). “We will still set the fares, the look, and deliver security,” Nat said. The City would also be able to prescribe the level of service required, to ensure it matches the rest of the system.

Nat suggested that procuring a P3 like this could take 12-14 months and would generally require having the necessary funding secured. If all goes well, a P3 contract could be in place by the end of the year, with utility relocation and other preliminary work taking place in 2014.

The case against P3s for Public Transit

When I first learned that Council was considering a P3 for the Southeast to West LRT, I immediately thought of Taras Grescoe’s latest book Straphanger. It’s a fantastic read for anyone interested in public transportation and the impact the automobile has had on our cities. Near the end of the book, Taras addresses the notion that the private sector can successfully build and operate public transit projects:

For transit to remain sustainable, we’re going to have to ignore the zealots who call for its complete privatization, which has proven such a disaster in Britain and Australia. There is a reason that the transit network of almost every major city in the developed world was municipalized at some point in its history: while private companies can do a creditable job of operating the busiest lines, time and again they have filed to manage complex transportation networks in the public interest. The lessons of history show that public agencies with regional scope and unified planning oversight do the best job of running public transport.

Taras graciously agreed to speak with me in October, and I asked him to elaborate on this point. “I’ve seen how private lines can be fantastic in a place like Toyko where they have the revenue and density,” he told me. “But I’m skeptical that private companies can get the return in a low-density place like Edmonton.”

In the book Taras talks about the Canada Line in Vancouver, built for the 2010 Winter Olympics:

The Canada Line to the airport…was the first major piece of transit infrastructure in North America to be built with a public-private partnership, an initiative many commentators say was plagued by corner-cutting. Three stations had to be eliminated from the planned route, and the station platforms that were built were too short to allow future expansion. Thanks to cost overruns, the provincial government will be compensating the private company that operates the line with payments up to $21 million a year until 2025.

While many now point to the project as an example of a successful P3, Taras disagrees. “You’re essentially entering another system when you get on the Canada line,” he told me. The line uses the same fare system as the rest of TransLink, but there are some exceptions (such as the $5 YVR AddFare).

Another well-known P3 transit project in Canada is in Waterloo, where officials are also looking at a 30-year DBFOM contract. Much has been written about the potential issues with that project, but this post does an excellent job of summarizing everything. A few highlights:

• “Probably the biggest problem with a P3 arrangement for Waterloo Region’s LRT is that it would result in higher barriers to expansion of the system in various ways.”
• “On the one hand, using private companies to build and operate the line ostensibly means that expertise can be brought in when needed, and only when needed. On the other hand, this means that expertise in LRT construction, operation, and efficiencies thereof will never be gained by Waterloo Region.”
• “Private operation as a 30-year contract is problematic because it locks us into one operator who can make extension difficult, and a contract which may become uncompetitive ten years down the line.”

Those concerns align nicely with the final thought that Taras left me with: “Transit is not about one line, it’s about a network and making it work for everybody.”

Final Thoughts

The first thing Taras said to me when we chatted was that “any transit construction of this kind is better than none.” While I’m definitely excited to see our LRT network expand, I’m not convinced that a P3 is the way to go. History suggests we should tread very carefully indeed. The City has not yet built anything using a P3, and that lack of experience could be an issue. In theory we should be able to take advantage of the lessons learned in other places, but we all know that’s easier said than done.

So long as we can secure the balance of funding required, It would seem there’s no turning back now for the Southeast to West LRT line – Edmonton will soon embark on its first P3 project. Let’s hope that doesn’t turn out to be a costly mistake.