Traditionally, we have used the design-bid-build (DBB) model for infrastructure project delivery in North America. In the basic DBB model, the owner (a municipality) hires an engineering firm to design the infrastructure, then the firm prepares the tender documents for bid, and the owner hires the contractor to build the infrastructure. The engineering firm administers and inspects the builder’s work on behalf of the owner. Though this process has worked for many decades, it has inherent problems.
First, DBB often creates adversarial relationships between stakeholders. DBB can also prove time-consuming, expensive, and litigious. It can also be uncertain, which is an issue for public-sector owners looking for certainty in schedule, safety, and budget. They want to build a high-quality project as efficiently as possible, one that is in the best interest of the public. And that is exactly why alternative forms of contracting—including public-private partnerships (P3s) and alternative financing procurement (AFP)—have appeared on the horizon.
With minor exceptions, there has never been a pure P3 of any size for the municipal water and wastewater market in Canada. Back in 1996, we came close with the first design-build-finance-operate (similar to a P3) water treatment plant in Halifax. But that, too, fell short. Though other infrastructure projects such as highways, hospitals, and courthouses take advantage of this delivery method, water and wastewater projects have not. But that may change soon.
At present, one new water treatment project is taking shape: a $600-million wastewater treatment program in Winnipeg. Both projects are proposed as P3s—or have P3 or AFP elements. In fact, the Winnipeg undertaking has transformed into a project-management-at-risk model, but it’s still worth watching both projects to see how they evolve and are received.
With so much at stake for the future of our water infrastructure, exploring alternative delivery models in Canada is imperative in order to maximize infrastructure dollars, improve certainty of cost and schedule, and lower costs for taxpayers. But there are considerable barriers to their implementation.
Like our neighbour to the south—where tax-exempt municipal bonds provide steeply discounted capital—Canadian private-sector entities must borrow funds at a higher rate than municipalities, even if it’s for a public-sector P3. Though municipalities can obtain funding through the provinces—which can borrow at the lowest rates—many private developers in Canada face a disadvantage when it comes to financing.
Though used globally for other infrastructure projects, P3s face misperceptions when it comes to water and wastewater projects in Canada. This is understandable. Water is a sensitive subject; it’s different than, say, a toll road. We cannot survive without water. So people are very sensitive about even the perception of a private entity “owning” the water supply. The fact is that P3s do not privatize anything. In this regard, the P3 structure is greatly misunderstood. Nowhere is this more consequential than with the Canadian Union of Public Employees (CUPE).
A formidable and powerful public-sector employees union, CUPE serves its constituency extremely well. But CUPE campaigns heavily against P3s, (see “P3 Pushback”) believing they will eliminate many public-sector union jobs. In fact, P3s can create union jobs, if so defined by the water authority in the contract documents. By working closely with a water authority, CUPE could create very specific agreements about union participation in P3s. And because P3s enable more infrastructure to be built, they create more jobs for CUPE members. Sadly, the misperception remains.
These barriers are nothing compared to those in the United States, where prescriptive legislation, artificially low user rates, and political and economic turmoil are making any changes difficult. What’s a continent to do?
As P3 veterans, Australia and the United Kingdom have evolved project delivery even further. Australia has pioneered the alliance model, in which the contractor, engineer, and owner all form a unique partnership. That partnership provides incentives, awarding bonuses if the alliance meets or beats the agreed-upon schedule and price. If delivery is late, the alliance is penalized. If the costs escalate, the profits are reduced. No matter what happens, everyone shares the benefits or consequences. And it works. Greatly reducing litigation and claims, the alliance model is also self-regulating in terms of “scope creep” and other DBB drawbacks.
The United Kingdom has advanced the framework project delivery mechanism. Developed after the privatization of British water authorities by Margaret Thatcher, the framework functions as an “open book” form of design-build—one that eliminates the adversarial relationships while reducing both litigation and schedule and cost distortion.
Australia and the United Kingdom are by no means the only alternative delivery pioneers. In Mexico, another alternative delivery model sees states and the federal government providing loans and grants of up to 70 per cent of project funding to municipalities for P3s. Buttressed through the National Bank of Mexico, this blended model has the private side providing the actual equity plus financing, while the federal and state governments provide grants and additional low-interest financing. Asian countries have their own spin on various P3 delivery methods, as well.
What does this mean for Canada?
All such delivery protocols are based on a risk-and-control model. DBB affords a municipality the greatest amount of control, but it also engenders the greatest amount of risk. To move outside of DBB means owners must give up some control, but, in doing so, they also forego some risk.
The first step for municipalities must be to educate staff and decision makers about yielding some of that control. Municipalities could better take advantage of alternative delivery models, while maintaining all levels of service quality and standards through the development of contract documents. It’s a culture shift, but one that is hugely beneficial. Municipal staffs already have the skills to do this. But, ultimately, implementing an alternative delivery method rests on another element: political will.
A political champion—whether a mayor, minister, or other political figure—must drive change to make alternative delivery happen. Inertia is a powerful force, particularly in the water and wastewater industry. People are comfortable doing what they’ve always done. Only a dynamic individual in a position of appropriate power can drive this kind of change. Even at that, there is political risk in backing P3s as evidenced recently when a turn of events in Abbotsford, British Columbia resulted in not only a proposed $200-million P3 for the water plant being defeated by the ratepayers, but the defeat of the incumbent mayor who lead the initiative. But assuming properly positioned leaders are so inclined, what change should they pursue?
At present, there is no Canadian or North American model for using P3s to deliver water and wastewater projects. In some ways, that is what’s being explored in Winnipeg.
Whether there will ever be a specific Canadian or North American model remains to be seen. Every municipality is different. Each has different needs and mandates. The fact is that no one model can fit every situation. That means that whatever models emerge must be flexible. By taking the best elements of existing global models and accommodating local twists and provisions, these hybrids could exploit the knowledge and experience of others to do what’s best for water and wastewater in Canada.
Predicting the future is a lot like predicting the weather. It is relatively easy to get it almost right much of the time. So preparing for what we think is on the horizon is a prudent idea. That is particularly true for water and wastewater alternative project delivery methods like P3s and AFPs. While no one can say exactly what the future holds in this regard, it is in Canada’s best interest to educate ourselves and our people about the potential benefits. WC
Robert F. Andrews is the global managing director for AECOM’s water business.
A proposed public-private partnership (P3) for a new biosolids facility in Sudbury, Ontario has raised hackles of members of the Canadian Union of Public Employees (CUPE).
For over 30 years, the City of Greater Sudbury has used tailings ponds as a disposal site for waste activated sludge from its wastewater treatment facilities. Changing environmental standards and recurrent episodes of foul odour have made this disposal method unsustainable. As such, the City is required to cease using the tailings ponds for disposal purposes after 2012.
New plans include construction of a centralized wastewater sludge treatment and biosolids end-product storage facility at the existing Sudbury wastewater treatment plant, responding to the current restraints on Greater Sudbury’s disposal practices and deliver a long-term, modern approach to wastewater management.
For nearly two years, city council has been considering a P3 model to deliver this facility. In reaction, CUPE launched a community petition and hosted a barbeque and rally themed “NO P3” in September 2011 to educate citizens about “how to keep this crucial service public.”
In December 2011, the federal government announced that it will contribute up to $11 million, or 25 per cent of the capital cost of Sudbury’s new facility, through its P3 Canada Fund. The City will contribute the balance of the funds, and, once selected, the private sector partners will design, build, finance, operate, and maintain the Biosolids Management Facility. The private sector proponent will be responsible for financing project costs during construction and over the term of the operating contract.
Marianne Matichuk, mayor of Greater Sudbury, joined the feds for the announcement, citing the limited tax base and the need to invest in aging infrastructure as the reasons behind this choice. At the time of press, CUPE had not publicly responded to the announcement.
For a related article by Ecojustice’s Randy Christensen, click here.