In transit
11 June 2012
Transit projects rarely cover all of their operating expenses, let alone capital costs, so why are Canada's Edmonton and Toronto considering P3s, asks Mira Shenker
Originally, the entire programme was designed to be delivered through a traditional model. After the Regional Transit District’s (RTD’s) FasTracks programme was developed in 2004, Denver voters approved a 0.4% sales tax to help build or expand ten rapid transit corridors - six new rail lines and three extensions to existing rail corridors - at a capital cost of US$4.7bn.
But things soon changed. “Construction costs for transportation infrastructure went through the roof,” says Kevin Flynn, public information officer for RTD’s Eagle P3 project. Costs went up by 52%. By 2007, FasTracks’ capital cost was estimated at $6.1bn. “Then the recession hit, and suddenly, over a 30-year estimate, the project was no longer going to produce $13bn in revenue,” he says. New estimates had the lines bringing in from $7-8bn. That new, lower return affected what the project proponents could raise in bonds.
Three of the six new rail corridors were already paid for with help from a federal Full Funding Grant Agreement. But there were still lines waiting to be built. “We started to look at a public-private partnership (P3) as an option,” says Flynn.
In 2008, RTD released a request for qualifications to design, build, operate, finance, and maintain (DBOFM) the four lines that make up the Eagle programme. DTP has arranged around $450m of private financing for the project, which allows RTD to spread the large upfront costs of a project over 30 years. In return, RTD will make service payments to DTP based on their performance with the operation and maintenance of the project. The rest of the money comes from the federal government ($1.03bn, the largest new starts grant ever from the Obama administration), and a remaining amount from bond proceeds for a total project cost of US$2.1bn for the four lines. To put that in perspective, Toronto would have to spend about C$1bn to build two or three subway stops along the Sheppard line (according to Toronto’s Mayor Rob Ford).
P3s like Denver’s are still a rarity in the United States. In Canada, where many provinces have P3 agencies, it’s a well-known, maybe even notorious model for delivering public infrastructure. While it’s tough to sell P3 in the United States, Canada has been steadily building an expertise in the delivery model, with a pipeline of projects across the health care, transportation, education, and water sectors.
Vancouver’s most recent mega-project, the 19.2-km Canada Line, was delivered through a P3. Now the model is being suggested for transit projects in Toronto and Edmonton.
RTD is happy with its decision, reporting a savings of about $300m which, according to Flynn, will go toward other transit projects, including a new park and ride to handle overflow from a nearby station built as part of Denver’s Transportation Expansion Project - an initiative that Flynn calls “a victim of its own success.” Given these successes, is this model an obvious choice for other Canadian transit projects looking for capital in an increasingly capital-poor environment?
That’s a question Edmonton City Council is asking itself right now.
Edmonton’s North LRT to the Northern Alberta Institute of Technology (NAIT), a 3.3-km extension from the Churchill LRT Station in downtown Edmonton northwest to NAIT, made ReNew Canada magazine’s Top 100 list in 2010. It’s the first segment of a planned LRT expansion to Edmonton city limits near St. Albert and is part of the transportation master plan vision to expand LRT service to all sectors of the City by 2040. The $725m project has already secured $100m through the federal Building Canada Fund, $497m through the provincial Green Transit Incentives Program (GreenTRIP), and $158m from the City through a combination of reserve, tax-supported debt, municipal sustainability initiative (MSI), and other programmes.
Last month Edmonton approved the P3 procurement route to deliver the new line. The City may be aiming to apply to PPP Canada’s fourth round of funding, which launched in April 2012.
In the City of Toronto, there are two primary theories surrounding how to develop new public transit projects: light rail transit (LRT) and subways. Correspondingly, there are two potential funding frameworks: use the $8.4bn allocated by the province to build a network of LRT lines, or use part of the money to start funding a subway on Sheppard Avenue, then arrange a P3 to deliver the remaining lines.
Currently, of the $8.4bn, $6.4bn has been allocated to the Scarborough-Eglinton Crosstown Project. This includes below and at-grade work on Eglinton Avenue and the replacement of the Scarborough rapid transit line with the same LRT technology that the Eglinton line will use. This leaves the City with $2bn. In a February vote, Council reaffirmed Toronto’s commitment to LRT lines on Eglinton and Finch corridors. In a March meeting, an expert panel recommended LRT as the most cost-effective solution and Council voted for LRT on Sheppard. Both the Finch and Sheppard lines have an estimated cost of $1bn each.
However, Toronto’s Mayor Rob Ford has been active in promoting subway as the best form of public transit for the city. While the city does have $1bn to spend on transit along Sheppard, the cost estimate for an eastbound subway extension (the same direction as the proposed LRT) is approximately $2.7bn, according to a report commissioned by former councillor (and dentist) Gordon Chong. The Toronto Transit Commission pegged the cost of this project as closer to $3.7bn.
Ford believes that the private sector would be willing to invest in a P3 project to close the funding gap for a subway on Sheppard. He told reporters on March 15, “You put a shovel in the ground, investors will come, funding will come, it’s all going to come".
A P3 doesn’t mean private money in place of public spending. Within a bidding team on these projects, there’s a lender that’s willing to put money into the project, to finance it up to completion—that’s the private financing element. But the public sector will pay that money back at substantial completion.
“It’s important to understand that the full cost of the infrastructure will ultimately be paid for by the public sponsor,” says a representative for crown corporation P3 Canada.
Along with risk, the public sector will often transfer the revenue stream generated by a project to the private sector proponent. But transit P3s can make that scenario a little tricky. Transit projects rarely cover all of their operating expenses, let alone capital costs. To do transit P3s, governments typically have had to provide capital grants and ongoing subsidies to repay any initial private sector investment. With no guaranteed revenue stream, it’s a riskier endeavour for any proponent.
There was some revenue sharing on the Canada Line project, but not a lot. There is none in Denver’s Eagle P3. The payment model for Denver’s Eagle P3 is an availability. The concessionaire is paid to make the trains available for use by the travelling public by delivering a service that runs to a prescribed schedule. RTD will keep all toll revenue and pay the concessionaire the negotiated amount over the course of the contract. The consortium can also lose up to 25% of its annual payment if the trains don’t run properly, or it can receive a bonus of up to 5% if it exceeds expectation.
Transit-oriented development is one way to make a business case for investment in transit infrastructure. Most jurisdictions look at how they can extract the density/value uplift generated by a new station.
Even without that guaranteed revenue stream, John Laing, part of the consortium behind the Eagle project, would jump at the chance to win a contract for Edmonton’s LRT project. Director for the company’s North American operations, David Rushton, says, “The Edmonton LRT is something that John Laing is keenly interested in and we are following it closely. If it is confirmed as a long-term, privately financed P3, then we would expect to form a consortium to bid.”
With players such as John Laing waiting for an opportunity to bid on a major transit project in Edmonton, it falls to the City to decide whether there’s value in allowing the private sector to finance and deliver the project. It’s not a straightforward decision, but it may help to consider both best practices and failures.
Mira Shenker is a Toronto-based writer and executive editor at Actual Media, publisher of ReNew Canada and Water Canada magazines. www.renewcanada.net
