This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its December 2018 report entitled Metrolinx – LRT Construction and Infrastructure Planning, the Auditor General of Ontario found that Metrolinx, a provincial government agency responsible for regional mass transit planning and development, mismanaged the Eglington Avenue light rail transit project in downtown Toronto. The project used an Alternative Financing and Procurement (AFP) public-private partnership (P3) contract. As the report found, after-the-fact changes imposed by the municipal and provincial governments resulted in scope change and delay costs. Notwithstanding the fact that the AFP/P3 contract was designed to shift most of the project delay risks to the AFP consortium (in exchange for higher “risk premium” payments under the contract that were supposed to serve as “insurance” against future delay costs), the Auditor General found that Metrolinx subsequently agreed to pay the AFP/P3 consortium millions in questionable delay costs without any clear supporting documentation:
Metrolinx’s ability to cost effectively plan and deliver an integrated transportation system has been impacted by requested changes to plans by both municipal and provincial governments, resulting in project delays and unnecessary costs being incurred. As well, Metrolinx assumed financial risks associated with the purchasing of light rail vehicles without construction contracts in place.
The Eglinton Crosstown LRT is the only light rail transit project currently under construction. It is being built using the alternative financing and procurement (AFP) model, where risks are transferred to the private sector. However, under the contract with the AFP consortium, Metrolinx retained some responsibility for the risk that the project will not be delivered on time and on budget. Halfway through this project, Metrolinx settled a claim with the AFP consortium, using half of its contingency fund to continue to ensure that the project will be delivered on time. Metrolinx did not have sufficient documentation of evidence linking the settlement amount to the AFP consortium’s claims that Metrolinx was partially responsible for project delays.
As the Auditor General found, the cause of the cost increases could be traced back to the weak planning mandate provided to Metrolinx, which undermined long-term planning by making contracts subject to future funding, and after-the-fact reversals by municipal and provincial governments. As the Auditor General noted, the weak planning mandate already cost taxpayers $125 million (CAD) in cancellation and delay fees on the prior Metrolinx projects for the Scarborough Rapid Transit and Sheppard Light Rapid Transit projects:
4.1 Metrolinx Not Effectively Fulfilling Its Mandate to Lead Transportation Planning
Under the Metrolinx Act, 2006, Metrolinx is mandated to develop and adopt a transportation plan for the GTHA and plan, co-ordinate and set priorities for its implementation. The Big Move (the first transportation plan adopted by Metrolinx in 2008) was to serve as the blueprint for a more sustainable transportation future to guide and direct decision-making. The aim of the plan was to achieve a transportation system for the GTHA that is effective, integrated and multi-modal.
However, while the transportation plan guides Metrolinx’s decisions and actions, there is no legislative requirement for the provincial government and municipalities to follow the plan. As well, the transportation plan is not linked to long term funding and only serves to identify projects that should be funded to achieve the goals set out in the plan. It is at the discretion of the provincial government and municipalities to decide which project (if any), they want to fund from the plan. For example, as shown in the timeline in Appendix 2, since the Province announced funding for the transit priorities in Toronto as LRT projects in 2009, there have been frequently changing circumstances and decisions of what to actually build on those priority routes that have not only delayed the implementation of the projects (that is no transit getting built to serve riders) but also wasted money that could have been used to build transit. The cancellation of the Scarborough Rapid Transit project, for example, and the delay of the Sheppard LRT project cost $125 million [(CAD)]:
Scarborough Rapid Transit project cancellation cost $75 million. In July 2013, the City of Toronto decided to pursue a subway option to replace existing Scarborough rapid transit rather than the approved LRT option. At the time of the cancellation, Metrolinx had already spent about $75 million on a Scarborough LRT, including preliminary engineering costs, design costs, and management and administrative costs. The City of Toronto has agreed to reimburse Metrolinx for these costs, and this amount will be offset against the provincial contribution to the Scarborough subway project.
Sheppard LRT project delay cost $50 million for professional services that would need to be procured again. As of June 2018, Metrolinx had spent $101 million of provincial funding on the Sheppard East LRT: $51 million for route-preparation and infrastructure work, including the grade separation of the Stouffville GO line from Sheppard Avenue, and $50 million on professional services such as contract administration, early design work and site surveys. While the infrastructure work would have benefits for Metrolinx even though the project is delayed, we noted that the $50 million spent on professional services has little future benefit, since the work and services will likely have to be redone and procured again once the project is ready for construction. This money was spent under the understanding that the project would be completed in 2013 as intended. However, the project experienced significant delays and is now on hold until 2023.
In 2013, Metrolinx proposed an investment strategy to the provincial government whereby there would be a steady stream of annual funding for the Province or municipalities to use to support the planning and implementation of the unfunded projects in The Big Move. The strategy was intended to create dedicated resources to fund transit planned projects. However, the recommended funding tools were not established, and funding for transit projects continues to be at the discretion of the governments.
The Auditor General found that the AFP consortium filed a delay claim in connection with the Eglington project after providing Metrolinx multiple assurances that the project was on schedule, which raised doubts regarding whether the delay costs should have been absorbed by the consortium instead of the government:
Under the AFP contract, the AFP consortium is to provide Metrolinx with a detailed six-month work schedule and update it every month. When it finds it is unable to meet the substantial completion date, it must submit a report identifying the reasons for the delay and a plan for eliminating or reducing the delay.
The AFP consortium began falling behind schedule in 2017. Metrolinx had the right under the AFP contract to ask for additional information from the AFP consortium in order to perform a detailed assessment of the work schedule if the AFP consortium indicated that project completion would be delayed or if in Metrolinx’s opinion the consortium had fallen significantly behind the work schedule; however, Metrolinx did not do so because the AFP consortium represented that it could still finish on time. The AFP consortium continued to submit schedules with increasing delays throughout 2017, and Metrolinx communicated its concerns about the delays (as shown in Figure 7), but the AFP consortium did not adequately address them.
In December 2017, Metrolinx met with senior consortium management, at which time the AFP consortium was still certifying it would meet the contracted completion date of September 2021 and indicated that in February 2018 it would provide solutions to mitigate schedule delays. However, the AFP consortium instead filed a claim against Metrolinx in February 2018 for extension of the project completion date to October 2022. The claim also requested compensation because Metrolinx should have done more to help the AFP consortium when, for example, in its view, the City of Toronto took too long to grant it permits, and Metrolinx and TTC technical experts repeatedly rejected the AFP consortium’s unacceptable designs.
According to the Auditor General, Metrolinx should have only paid $66 million of the $237 million delay claim, since the parties had initially agreed that the AFP consortium would assume the risks for the remainder of those additional costs. In fact, the report found that Metrolinx did not ask the AFP consortium for documentation to support its claim for the total amount:
4.4.2 Settlement to Hold the AFP Consortium to the Contracted Completion Date Cost Metrolinx $237 Million
In an AFP project, a private-sector consortium is paid a premium to bear the majority of the risks of project delays and cost overruns. Under the Eglinton Crosstown LRT AFP contract, the responsibility for some risks was not fully transferred to the AFP consortium, and Metrolinx eventually settled the claim against it based on its analysis of the risk allotment in the contract.
Metrolinx initially refuted the claim, noting that the AFP consortium failed to explain and provide support for the specific events or circumstances that might give it the right to request compensation for delay costs. Metrolinx also noted that, despite the delays the AFP consortium was experiencing, the AFP consortium was still certifying up until December 2017 that it would meet the contracted completion date of September 2021, despite a schedule slippage of about 13 weeks noted by Metrolinx.
In August 2018, Metrolinx settled the claim for $237 million, using a portion of the project contingency fund (which is included in the Treasury Board approval of about $12 billion for this project). In addition, Metrolinx agreed to accept later delivery dates for the pedestrian bridges adjacent to the existing West Don River Bridge and a Salvation Army building. Of the $237 million, $100 million was classified as incentive and acceleration compensation subject to clawback if the AFP consortium does not achieve substantial completion on or before September 29, 2021. In return, the AFP consortium committed to a clean slate for all claims known or ought to be known at the time of the settlement. Although this is supposed to protect Metrolinx from existing and future claims during construction, we will not be able to determine if this provision is kept until construction is completed.
As part of the government’s decision to use the AFP approach on this project, Metrolinx, in conjunction with Infrastructure Ontario, completed a value-for-money (VFM) assessment that detailed the many risks (such as contamination and permit delays) the project could encounter. In its agreement with the AFP consortium, it retained responsibility for some, but not all, of these risks. At the time that the VFM assessment was performed (before the contract was signed), Metrolinx and Infrastructure Ontario determined that Metrolinx was retaining about $563 million of risks. When we reviewed this assessment in light of the claim, we determined, with input from Infrastructure Ontario, that approximately $66 million of those risks could relate to factors identified in the claim prior to the awarding of the contract. We confirmed the $66 million with Infrastructure Ontario. However, the settlement amount exceeded this amount.
In the claim, the AFP consortium identified areas where delays had occurred, holding Metrolinx responsible for them. However, the claim did not include support for the AFP consortium’s position that Metrolinx was responsible for the delays. For example, for delays relating to design submissions, it did not provide evidence of how it had been ensuring that it was meeting TTC design standards. Also, Metrolinx noted that the AFP consortium had not followed appropriate procedures in case of delays, such as submitting information about each individual delay event as it occurred, to allow Metrolinx to investigate any problems associated with delays, monitor the AFP consortium’s progress and take action where appropriate. Metrolinx agreed to a settlement amount that it determined to be a portion of estimated total risk exposure but did not ask the AFP consortium for documentation to support the claim amount.
We reviewed the settlement negotiation process and confirmed that Metrolinx and Infrastructure Ontario used a risk register, based on their analysis of the AFP contract, to estimate a settlement amount. We noted that Metrolinx did not have sufficient documentation of evidence linking the settlement amount to where it had determined that the delays were of its own making.
As noted earlier, it is understood that under an AFP contract, a private-sector contractor (the AFP consortium in this case) is responsible for managing the majority of the risks associated with delivering a project on time and on budget. By agreeing to settle the claim using a portion of its project contingency fund, Metrolinx accepted shared responsibility for the Eglinton Crosstown being completed on time and on budget.
The report noted that Metrolinx also paid an additional $49 million in contract amendment costs after it prematurely entered into a contract for the light rail vehicles before the light rail project designs were completed. Metrolinx was then required to scope down the vehicle contract due to other project changes. The Auditor General noted that these costs could have been avoided had the vehicle acquisition been integrated into the construction project instead of requiring Metrolinx to procure the vehicles directly and bear the risks for ensuring that the vehicles aligned with the light rail infrastructure:
4.6.1 Having To Change the Contract with Bombardier Cost Metrolinx about $49 Million
As a result of provincial and municipal government decisions that led to new completion dates for the LRT projects and the cancellation of the Scarborough LRT, Metrolinx had to negotiate extensively with Bombardier to change the contract. In 2012, it negotiated to postpone the initial delivery of the vehicles from 2013 to 2017 (with a subsequent further postponement changing delivery to 2018). It also ultimately reduced the number of vehicles from 182 to 76 because of the cancellation of the Scarborough LRT and concerns with Bombardier’s ability to provide the contracted vehicles (see Section 4.6.2 for details). These developments meant Metrolinx incurred the following costs:
$19-million cost to postpone delivery date. In March 2013, Metrolinx and Bombardier agreed to the revised delivery schedule to accommodate Toronto’s changing plans, and reached a final settlement in August 2014. It included Metrolinx having to make a prepayment of $65 million on the contract, covering the nine-year period from April 2013 to November 2021. This resulted in about $16 million of interest benefit accruing to Bombardier over this nine-year period, which represents a cost to Metrolinx for changing the contract. As well, Metrolinx had to pay Bombardier $3 million in schedule disruption costs, bringing the cost to Metrolinx of changing the delivery date to about $19 million.
$30-million cost to reduce the number of vehicles. In December 2017, as part of a settlement discussed in detail in the following section, Metrolinx and Bombardier agreed to reduce the number of vehicles.
In that settlement, the now 76 vehicles would cost Metrolinx $30 million more than what they were priced at in the original contract. The original contract price for just 76 of the original 182 vehicles would have been $443 million in present-day dollars ($392 million in 2010 dollars), or about $5.8 million per vehicle, but is now estimated at $473 million, or about $6.2 million per vehicle.
Metrolinx’s purchases of vehicles separately for each project (as opposed to having the AFP consortiums that will build and design the LRT projects purchase the vehicles) means that Metrolinx assumes all vehicle purchase risks.
As this case study illustrates, by failing to provide purchasing institutions with an appropriate planning mandate, senior-level governments can undermine the ability of public entities to make stable and predictable long-term procurement planning decisions. This ultimately increases the risk of after-the-fact scope changes that result in avoidable project delays and cost increases. Purchasing institutions should therefore bolster their procurement planning mandates for project areas that require stability in long-term planning.