The large-scale infrastructure projects covering these two southern portions of the Edmonton Ring Road have recently been completed, the southwest leg of the ring road under a conventional approach and the southeast leg under a P3 project. These represent the two most comparable of the four case study pairs and have a substantial overlap in project time frames.
The Province of Alberta started planning for a transportation utility corridor around both Edmonton and Calgary beginning in the late 1970s and acquired the relevant lands over the next two decades. The Edmonton Ring Road was part of a long-standing provincial and city commitment to "create a highway trade corridor linking Alberta to the United States and Mexico."1 The ring road was also expected to relieve congestion on the city centre's arterial roads, particularly by diverting heavy commercial vehicles from those roads.
Several points of comparison between the two projects are worth noting. First, according to the public sector owner, now that both the southwest and southeast legs of the ring road are open to traffic, it is very difficult to tell them apart or to determine which one was delivered conventionally and which one was procured as a DBFO.
The Anthony Henday Drive Southwest-A construction Management Approach The southwest leg was the first section of the Edmonton Ring Road to be completed and consists of 18 kilometres of freeway-standard roads from Highway 2 in the south to Highway 16 on the western outskirts of the city. The project also included: ◆ 12 bridges, including a major bridge across the North Saskatchewan River and bridges over three ravines; ◆ portions of a major systems interchange where the ring road meets Highway 2 (Calgary Trail), the main north-south highway that crosses Edmonton; and ◆ four other interchanges. The functional planning study for this project was completed in July 2000, with two prime engineering consultants chosen to provide detailed design and construction management services. About 35 construction contracts were issued over the course of the project, and total project costs amounted to $310 million in nominal terms. The project was completed over a period of six years and five months and opened to traffic in October 2006. Source: Alberta Infrastructure and Transportation. |
The Anthony Henday Drive Southeast-Alberta's First DBFO Highway The business plan for the southeast section of the Edmonton Ring Road was first developed by the Alberta Ministry of Transportation and presented to the Alberta Treasury Board in July 2003. The plan was then referred to the Advisory Committee on Alternative Capital Financing-composed of private sector members-which recommended proceeding with a P3. The request for qualifications was issued in September 2003, with six consortia responding. The request for proposal was issued to the three qualified candidates in April 2004, with the draft contract and related schedules issued shortly thereafter.1 (Pre-qualification of the proponents avoids potentially protracted negotiations after the selection of the preferred bidder.) The three proponents were asked for their input on the draft contract, including their views about which risks would be expensive for these firms to assume, after which a final contract was released. Thus, all proponents submitted bids on the same contract, and the lowest bidder was selected. In January 2005, the contract was awarded to Access Roads Edmonton Ltd. (AREL), which was headed by ABN AMRO Bank, PCL Construction Management Inc., and TSMI.2 The project consisted of 11 kilometres of roadway between Highway 2 and Highway 14, varying in width from four to six lanes. It also included 20 bridges, some of which were required for completion of the Calgary Trail interchange, as well as five new inter-changes and four new flyover crossings. The total budget for the project was $493 million, which provided a value-for-money saving of $4 million when compared with the cost of a conventionally pro-cured project. However, the project also had a compressed design and construction schedule, which meant that the new roadway was expected to open by October 2007, or two years earlier than would have been the case under a conventional approach. AREL assumed most of the design and construction risks, although the risks associated with unknown pre-existing pollution sources and latent defects of existing structures were assumed by Alberta Transportation. The private consortium also assumed most of the financing and operating risks. The type of private financing used was relatively new for Canadian P3s, because the debt portion relied on bond financing, with a $150-million bond issued in January 2005 and a second $140-million bond issued in November 2005. In addition, the federal government provided $75 million in funding through the Canada Strategic Infrastructure Fund, which was paid during the construction phase. The Government of Alberta's monthly payments to AREL were scheduled to begin only when the road opened, and these payments would depend on the availability of the road and not on traffic levels. The roadway opened in October 2007 as scheduled. It also provided cost certainty to the Government of Alberta, which did not incur any costs above those already budgeted. To date, the project has experienced no contract variations or any successful claims against the public sector. However, the operator has faced some deductions for non-performance relative to targets stipulated in the contract. _______________________________________________________________________________ 1 The milestones noted in this paragraph are based on the 2003-04 annual report of the Alberta Auditor General, which reviewed the Calgary Courts Centre and the Anthony Henday Drive Southeast P3 procurements. 2 In December 2005, ABN AMRO sold 81 per cent of its equity stake in AREL to Macquarie Essential Assets Partnership, which took over responsibility for project management. TSMI, a division of Lafarge Canada, is responsible for operating and maintaining Anthony Henday Drive Southeast. Sources: Auditor General of Alberta, Annual Report; Alberta Treasury Board (Alternative Capital and Financing Office); The Canadian Council for Public-Private Partnerships, "Anthony Henday Drive." |
Second, the public sector has also argued that the DBFO project was delivered two years earlier than it would have been under a conventional approach: The Anthony Henday Drive Southwest (AHDSW) project, which was of similar scope to the DBFO project, took six years and five months to complete from the functional specification stage. By comparison, the Anthony Henday Drive Southeast (AHDSE) project took just over four years to complete from the same point. This time saving can be attributed to several aspects of the DBFO process:
♦ The design and build stages can proceed concurrently, which is not possible in a conventional project, where the design stage must be completed first.2
♦ A single project manager can coordinate all the work. In a conventional project, different contractors and consultants carry out different parts of the work, creating coordination issues that have to be resolved either by the public sector managers or by their construction management firm.
♦ The public sector owner cannot call back the funds already allocated to the project, as it can in a conventional project. This removes a potential source of delay.
♦ The private consortium is incented to actively manage the construction delay risks. In the case of the AHDSE project, Access Roads Edmonton Ltd. assumed the cost of the bond financing. Thus, if the project completion had been delayed, the consortium would have lost service payments. These payments started only when the roadway opened to traffic and will end at the fixed end-term date in 2037. By comparison, under the AHDSW procurement, the penalties imposed on the contractor appear to be less than 10 per cent of the AHDSE delay penalties.3
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One time-saving measure of the DBFOo process is that a single project manager can coordinate all the work. |
Third, the DBFO project provided the public sector owner with time and cost certainty. The construction schedule was met at no additional cost to the public sector over and above what was in the original budget. It is not clear whether the same can be said for the conventional AHDSW project. We do not have information about the original budget and timelines for this project, but there are some indications that both of these original targets were exceeded.4 For example, there were references in the press to a $245-million cost for the AHDSW project,5 which would mean that the final cost of $310 million represents a 26.5-per-cent increase relative to the $245-million budget. However, this is likely to be an understatement of the actual cost increase for the AHDSW project over the period from 2000 through to 2006.6
Fourth, anecdotal evidence suggests that the quality of routine maintenance services provided under the DBFO contract is not lower and may well be higher than the standards observed under conventional maintenance contracts. The AHDSE DBFO project provides routine maintenance (but not rehabilitation work) for the southwest leg of the ring road.
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1 "Ring Road, Air Service Constant Irritants."
2 According to one project manager, "At the outset of the work . . . the design activity is always on the critical path. The key challenge . . . is for the design to get ahead of construction at the soonest possible date. [. . .] there is a simple need to design first what the contractor will build first. [. . .] As the work progresses, unforeseen circumstances will arise. Because of this, the design and the construction schedule needs to be fluid to fit available design resources, the contractor priorities and unexpected field circumstances." Cited in Gauer, "Design and Construction," p. 4. Gauer argues that these design and construction process efficiencies can be achieved only through effective coordination of design and construction tasks.
3 According to a letter to the Edmonton Journal, "Anthony Henday Behind Schedule," the contractor on the AHDSW project was subject to a potential $1,500 per day "site occupancy charge . . . until the entire roadway is open" and a "$3000 per day liquidated damages charge for each calendar day after the final contract completion date." By comparison, if the AHDSE project had been late, the implied penalty would have been about $48,000 per day, assuming an interest rate of 6 per cent on the $290 million of AHDSE bonds.
4 According to the letter to Edmonton Journal cited above, "At the time the work was tendered, the southwest leg of Anthony Henday Drive had a completion date of Nov. 15, 2005. This was for the entire road from 45th Avenue to Calgary Trail. [. . .] I consider this project to be a year behind schedule." See "Anthony Henday Behind Schedule."
5 See "Ring Road Extension."
6 According to one presentation to the Van Horne Institute, construction costs on conventional projects were subject to increases in excess of 25 per cent during the period from 2004 to 2007. See slide 6 in McQuay, "Design Build Finance."