The Abbotsford Regional Hospital and Cancer Centre (ARHCC) Project was the first B.C. hospital procured as a P3. Managed by Partnerships BC, it was also one of the first of the second-wave P3 projects in Canada.7 The Vancouver Convention Centre Expansion Project (VCCEP) was also chosen as a case study, because of the availability of a recent review by the B.C. Auditor General. Both projects are considered social infrastructure, but there are several factors that preclude a strict comparison of the outcomes, including public sector commitments to a potentially unrealistic time frame for completing the VCCEP. Nevertheless, several insights and lessons can be drawn from both projects.
There are several issues worth highlighting for the two projects. First, the P3 procurement process forces an upfront consideration of all the project requirements and associated costs and risks. This is partly due to the presence of a specialized procurement manager, such as Partnerships BC (which is able to impose this kind of discipline on the procurement process), and partly to the fact that private sector bidders will factor the cost of the risks they expect to bear in to the partnership agreement. As a result of this upfront consideration of comprehensive project requirements and costs, the ARHCC's capital cost estimates rose from $211 million in 2001 to $369 million in December 2004, with 60 per cent of the increase due to a combination of project scope changes and a more complete risk assessment. This cost increase is often cited as a drawback of P3s, 8 but in fact the reverse is true. By ensuring that policy makers have a full picture and a conservative view of the total costs of the project at the outset, it provides the basis for informed decision making, which can include modifying the project options to fit the original budget or even cancelling the project in advance of the formal procurement process.
The Abbotsford Regional Hospital and Cancer Centre-The First P3 Hospital for British Columbia The Abbotsford Regional Hospital and Cancer Centre (ARHCC) was designed to increase the local health authority's capacity to provide health-care services for a growing population, including certain health-care services that were not previously available. Four procurement options were evaluated for the hospital project, in line with the provincial Capital Asset Management Framework issued in 2002: ♦ A conventional project in which the public sector owns, finances, operates, and maintains the facility, with private partners carrying out design and construction under separate contracts. ♦ A design-build-maintain (DBM) project, where a private firm delivers the design, construction, and building maintenance, while the public sector retains ownership, financing, and operations tasks. ♦ A design-build-operate-maintain (DBOM) project, which is like the second option except that the private firm also provides selected facilities management services. ♦ A design-build-finance-operate-maintain (DBFOM) project, where the private firm is responsible for all the above tasks. Total costs under the four options were reportedly similar, but the procurement authority concluded that the "DBFOM model offered the best potential to deliver value for money through innovation, timely delivery and the most effective risk transfer to the private sector."1 Four respondents to the initial request for expressions of interest were qualified. Two of these agreed to submit proposals, but one subsequently withdrew. Partnerships BC decided to continue with the request for proposal, because it was able to place increased weighting on the public sector comparator (PSC) as a test of whether the single bid provided value for money. The cost of the project if done conventionally would have been $463 million in 2004 dollars (excluding capital contributions of approximately $75 million from local hospital and health authorities), which was reportedly similar to the cost of the P3 project. Based on the final agreement with the consortium, Access Health Abbotsford, the cost of the P3 project to the public sector fell to $424 million in 2004 dollars (also excluding the $75 million in capital contributions). As a result, the P3 project provided value-for-money savings of 8 per cent relative to the PSC. The partnership agreement transferred risks to the private consortium in several areas: financing, design (fit for purpose), construction cost and scheduling, facilities management services and building maintenance, and latent defects.2 Some other risks-such as equipment procurement and installation- were shared, with the agreement specifying exactly how this would be done. The risk transfer was ensured through output-based performance specifications, performance payments to the consortia that began only at substantial completion (and varied depending on penalties and bonuses), and private financing. Thus, any delay in the actual substantial completion date would result in fewer performance payments to the consortium (since the end-of-term date is fixed) and higher debt-servicing charges. During the procurement, the capital cost component of the project under the PSC rose from an estimate of $211 million in 2001 to $369 million at financial close in December 2004. The difference between the two figures was attributed to construction cost inflation (40 per cent), a more realistic estimate of risks (31 per cent), and changes in project scope (29 per cent). The project reached substantial completion according to schedule and without any additional liabilities incurred by the public sector. The contract variations during the design and construction stage had no net impact on the project budget. Since the hospital has opened, the service payments have been subject to performance deductions related to house-keeping and portering. __________________________________________________________________________ 1 Partnerships BC, Project Report: Achieving Value for Money- Abbotsford Regional Hospital, p. 6. 2 Interestingly, two facilities management services (bio-medical engineering and medical record transcription) were removed from the services to be provided by the private partner during the proposal stage, because it was not deemed cost-effective to transfer risks for facilities management services where there is little private sector experience to date. Source: Partnerships B.C., Project Report: Achieving Value for Money-Abbotsford Regional Hospital. |
The Vancouver Convention Centre Expansion Project-A Conventional Project by Default An expansion of the Vancouver Convention and Exhibition Centre was proposed in 2000 based on the findings of a task force. The project had an estimated capital cost of $495 mil-lion and involved a new waterfront facility integrated with the existing facility at Canada Place, which was also to be renovated. The initial procurement strategy chosen by the provincial government in early 2002 was to build and operate the project as a P3. However, the government cancelled the P3 procurement by the fall of 2002, because it could not reach an agreement with the preferred P3 bidder. In February 2003, a provincial Crown agency (VCCEP Ltd.) was set up to design, build, and own the new facility. After Vancouver was chosen in mid-2003 to host the 2010 Olympic and Paralympic Winter Games, the provincial government decided to complete the expanded facility by July 2008 and use it to house the broadcast and press activities for the Games. The first budget for the project, $565 million, was approved by the provincial government in June 2004. This budget was based on a preliminary design but did not incorporate a full assessment of risks. This was followed by five additional provincial budget approvals for the project, the last of which was for $883 million in July 2007. It is worth quoting the B.C. Auditor General's review of the procurement process to show the interactions between the time constraints, the procurement strategy, and the failure to transfer construction risks to the private sector: [Due to the time constraints, the] VCCEP's choices regarding a procurement approach were somewhat limited. Instead of proceeding with a traditional staged procurement approach such as a design-bid-build, VCCEP felt obliged to proceed concurrently with construction of the marine and platform works while design of the building was being completed and retain a private sector construction management company to provide pre-construction services. Second, the procurement approach assumed that VCCEP would be able subsequently to negotiate a stipulated lump-sum contract with the construction management company. None of the early cost estimates reflected any risk premium that would be needed to compensate the construction manager for accepting the transfer of risk that would be the result of a stipulated lump-sum contract. The stipulated lump-sum contract was not completed until the first part of 2007, by which time most of the large contracts (specifically $360 million) had already been let by VCCEP. This has left the VCCEP to bear the originally unanticipated cost escalations.1 The expansion of the convention centre was completed in September 2009, and the final cost appears to have come in under the $883 million budget.2 ______________________________________________________________________________ 1 Auditor General of British Columbia, Review of the Vancouver Convention Centre, p. 3. 2 Vancouver Convention Centre, Convention Centre's Harbour Concourse. Source: Auditor General of British Columbia, Review of the Vancouver Convention Centre. |
In contrast, there was no comprehensive upfront consideration of all the costs and risks for the VCCEP project. Hence, as the project costs escalated during the design and construction, the government and procurement authority were no longer able to reconsider the full range of project options (including cancellation), because substantial portions of the capital budget were already spent and not recoverable. Sometimes some of the spending may be salvaged under an alternative project option, but the decision makers will almost invariably face a more restricted range of options in doing so.
Second, the process of risk transfer appears to have been effective in the ARHCC P3 project. Not only were the design and construction components of the project delivered within the public sector budget for the P3 (i.e., there were no additional successful claims on the public sector, despite some contract variations during the project), but the facility was also delivered on schedule. It is important to note that the construction phase for both the ARHCC and VCCEP projects over-lapped during the 2005-08 period, and that in the first two years of this period the rate of construction cost inflation more than doubled.9 This risk was effectively transferred to the private sector consortium that built the ARHCC. However, it was not transferred to the private builder of the VCCEP project in large part because the stipulated sum contract was not signed until 2007, when $360 million of the capital spending had already occurred. Moreover, by 2007, the escalation in the rate of construction cost inflation had already occurred and would have been fully factored into the private builder's bid, even if that builder could have managed the inflation risk more cost-effectively than the public sector.
A third issue worth highlighting is the competitive nature of the procurement process. This feature is one of the key drivers of efficient procurement outcomes for both P3s and conventional procurements.10 However, the necessary competitive underpinnings of major infrastructure projects were compromised for both the ARHCC and VCCEP projects, albeit for different reasons and with different results. In the ARHCC case, the withdrawal of one of the two bidders at the proposal stage led Partnerships BC to emphasize the VfM element of the selection criteria in the procurement process.11 This may have been the best response in the circumstances- a response that is not available in conventional procurements, since there is no VfM analysis comparing the cost of the project to that under the next-best procurement option. However, it did compromise the competitive part of the procurement process and this likely reduced the VfM savings achievable under the project. In the VCCEP project, the competitive nature of the procurement process was compromised, because a substantial part of the design and construction work was already completed by the time of the contract award and because of the hard deadline12 noted by the Auditor General. Both of these factors likely increased the leverage of the incumbent contractor on the project.
A fourth issue relates specifically to the ARHCC project, where the facilities management services provided under the P3 project include some services that are being pro-vided by public sector employees in other hospital con-texts. In this case, it is worth asking whether the workers have suffered a drop in pay rates or working conditions and whether the patients have suffered a decline in the quality of the facilities management services. Our review of press reports since the opening of the hospital in August 2008 suggests that neither workers nor patients have been shortchanged in the area of facilities management services, despite considerable scrutiny from P3 critics such as the B.C. Health Coalition. The only issue to surface in the press is the shortage of discounted parking spaces for ARHCC staff, but it is not clear whether hospital management would have dealt with this issue differently if it had retained direct management responsibility for parking services.13
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7 The Sierra Yoyo Desan Resource Road reached financial close before the ARHCC project, but it is not representative of the types of infrastructure assets that have been procured as P3s in British Columbia.
8 For example, see "Premier Shops Around for Expensive Theme," in the Vancouver Sun, for a recent reference to the capital cost increase of the ARHCC project.
9 The B.C. Auditor General noted that the cost consultants for the initial VCCEP budget had projected 4-per-cent annual construction cost inflation and that "by 2006, the actual inflation rate was at 11 per cent per year, almost three times the expected rate." See Auditor General of British Columbia, A Review of the Vancouver Convention Centre, p. 2.
10 This efficiency driver was not discussed in Chapter 3, because it is applicable to all procurement approaches.
11 This is perhaps not entirely surprising, given that the P3 market-place in Canada was still in its infancy in 2003 and the ARHCC was one of the first P3 projects managed by a specialized procurement agency or office within a central agency. It does, however, underscore the importance of nurturing the development of P3 markets, which has been one of the objectives pursued by the P3 agencies in recent years.
12 According to the Auditor General of British Columbia, "after the convention centre was named a venue [for the Vancouver 2010 Winter Olympic Games], the completion date in 2008 became a hard deadline." See Auditor General of British Columbia, A Review of the Vancouver Convention Centre, p. 36.
13 The private contractor managing the parking services issued a limited number of discounted monthly parking passes on a first-come, first-served basis.