Stephen Rees's blog

Thoughts about the relationships between transport and the urban area it serves

Financing the Evergreen Line

with 14 comments

MAJOR construction works on Vancouver’s Skytrain Evergreen Line are set to begin by the end of the month after the provincial government of British Columbia signed a finance-design-build contract for the $C 1.4bn ($US 1.39bn) project with the EGRT consortium, which is led by SNC-Lavalin.

That comes from The International Railway Journal – but my question to the readers of this blog concerns just one word. “Finance“. Why do EGRT need to finance anything?

If my understanding is correct, the funds for building this project come from three levels of government – Canada, BC and Translink. The good thing about government funded projects is that there is almost no risk – since the loans needed to pay for the outlays can all be “underwritten” by the taxpayers – you and me. That means that when governments go to the financial markets for loans, the interest rates they have to pay are lower than commercial activities.  You can buy so called “gilt edged” bonds, but the rate of return will not be anything like as great as if you buy commercial bonds or, even riskier, buy equities. The return won’t be great but it is (almost) certain. Governments of places like Canada, or BC or even Metro Vancouver do not normally welch on their obligations, because they have the power to raise taxes. Of course if there is a violent revolution then the bonds you bought will become worth very little: some people do sell  Chinese railway bonds from pre-revoltionary times.

You probably recall that the Port Mann Bridge was going to be a so called “private sector partnership” but they could not finance it. So it had to built using more conventional public sector financing – which, like I say, was cheaper.

So can someone please explain to me why we have to pay EGRT to finance this project as well as design and build it? I do understand that there are economies of management when contracts to design and build are let. And sometimes – but not in this case – operate and maintain too (like the Canada Line). But since this is an extension of the existing SkyTrain system, the operate and maintain bits are still with the Translink subsidiary British Columbia Rapid Transit Company Ltd.  And while the Translink web page is open about its operating companies, there are other companies it owns that do things that provide much better value for money than going to outside commercial ventures. Their own insurance, for instance. A nice little earner is also the sale of rolled coins – where Translink beats the banks, if you need lots of rolled change.

While right wing politicians have long made it an act of faith that the public sector is inefficient and wasteful, the reality is quite different. Some places do indeed compare P3s to public sector comparators – and the private sector doesn’t always win. Our own Partnerships BC has a quite different method of operations – “Our mission at Partnerships BC is to structure and implement partnership solutions which serve the public interest”  and indeed the Evergreen Line is one of their projects. You won’t find a public sector comparator on their site.

In case you missed the announcements, in the same edition of IRJ is the announcement of the 47km extension to RER Line E in Paris/Ile de France  for €2bn and of a recommended second Cross Rail project in London for £12bn. Now that’s what I call transit investment. The only equivalent size projects here are, of course, highways.

Written by Stephen Rees

February 7, 2013 at 11:09 am

14 Responses

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  1. Good question – the website indicates that the government contributions will total $1.4B (I think the Province topped up their amount to fill the gap of about $100M). (Province $583M; Feds $417M; TransLink $400M)

    Looking at page 4 of the Request for Qualifications here:

    http://www.partnershipsbc.ca/files-4/documents/EVRG_RFQ_and_Appendices_FINAL.pdf

    The financing appears to be “bridge” financing during construction, to cover the difference in expenditures incurred during constutcion and the amounts of money received from government during construction.

    1.5.2 Financing
    It is anticipated that the value of the work to be undertaken by the Primary Contractor will be
    approximately $900 million to $1 billion. The Primary Contractor will be responsible for obtaining the
    financing required to complete the design and construction of the Evergreen Line in excess of the
    payments available during construction
    as described in section 1.6.1 below. The amount of financing
    required is estimated to be approximately $400 million. [emphasis added]

    1.6.1 Payments
    It is anticipated that partial progress payments will be available to the Primary Contractor during
    construction, the amount, timing and terms and conditions of which will be set out in the Project
    Agreement, and that the balance of the contract price will be payable upon completion of the Project in
    accordance with and subject to the terms and conditions of the Project Agreement.

    This actually makes for a more secure contract, as the contractor will not be fully paid until the work has been satisfactorily completed.

    I don’t necessarily see that as “financing’ per se (i.e. it’s typical of contracts to have partial payment and the contractor would bear the cost of labour and purchasing materials, etc. until completion), but it would appear that that’s the terminology used.

    Guest

    February 7, 2013 at 2:19 pm

  2. Thanks for doing that research. There was a little issue with formatting in your reply that I cleaned up

    Stephen Rees

    February 7, 2013 at 2:50 pm

  3. […] Financing the Evergreen Line (stephenrees.wordpress.com) […]

  4. Another illucidating piece. Let me put this in plain, non-economist-speak, and you tell me if I have it right.

    The construction itself costs $1 billion. The financing (interest) costs are $400 million. This totals $1.4 billion.

    The three levels of government have agreed to pay $1.4 billion for the project, but they will only put out the funds on an as-constructed basis, and only after the phases of construction are completed and it is certified that the work is good.

    But, when constructing anything, a portion of the funds need to be paid out well before a component is completed, for supplies, labour, design, etc.

    So, someone has to “finance” that by laying out funds that they will later get paid back by someone else.

    So, let’s say that EGRT has a contract to build the line, for $1 billion. And it takes 5 years to build the project, from design through to commissioning. And, they have an agreement with the government that, at the end of the day, they will get $1 billion for the project, and $400 million for the financing component of the project.

    If they, EGRT, can find construction financing, to pay out over the five year period, as they need it, for less than $400 million, then the difference between $400 million, and what they had to pay, is their profit, at least on the financing component of the project.

    And it stands to reason that they should be able to find that financing for less than $400 million. Even without taking compounding interest and periodic drawing into consideration, that is 40% over five years. In other words, $80 million a year over a five year period, which would total $400 million. On a $1 billion loan, that would be 8% per year. If they can find a finacier who will loan them the money they need at less than 8% per year, then that is where their profit is.

    The question is, is it a good idea for the government to agree to forego that profit margin, in return for giving up all those administrative headaches?

    Adam Fitch

    February 8, 2013 at 6:00 pm

  5. The pingback from governing uncertainties is an interesting read.

    mezzanine

    February 9, 2013 at 12:10 am

  6. But that article fails to notice both the lack of a public sector comparator – something the British and Australians both require – and also the number of P3s here where little or no risk is actually transferred to the private sector. The revenue risks for both the Canada Line and the Golden Ears Bridge remain with Translink.

    Stephen Rees

    February 9, 2013 at 4:24 pm

  7. I wonder if the original RFP is available for public perusal. That is the document that stipulates the design criteria and expected performance of consultants and contractors, and informs the selection / short list process. Let’s hope profits for Lavalin and its sunsidiaries on this project are not realized by cheapening the design and robbing future capacity as it did with the Canada Line.

    Design-build may not be an absolute P3, but it’s the next thing down the scale, in my opinion, that affords too much control to those who’s objective is to maximize profit. Good luck getting fair prices on the inevitable change orders, which will undoubtedly be hugely inflated in value.

    Good old fashioned direct consultant RFPs and competive tendering remain in my view the best way to leave control in the hands of those who serve the public who will use the product. Change orders are usually fewer because the construction documents are often more detailed or less biased toward cheaper materials and methods, and adequate hours are budgeted to completing the construction documents.

    Neither P3s or DBs were essential on this project which is not overly large for the province or TransLink to manage. It’s not exactly a series of 50 km tunnels through the mountains serving a trans Canada high speed rail project. Private sector risk taking and involvement would then be absolutely necessary with some kind of lease-back agreement, but the way to minimize the private sector control and fees charged against passenger and freight rates even in such large projects is to maintain a significant equity share by government, who will also maintain control of the design criteria often with more regard to high safety and design standards.

    P3s and DBs are not the way to go even on the largest projects, otherwise you’re not only transferring financial risk, but safety, engineering and desig quality to the private sector.

    MB

    February 13, 2013 at 3:55 pm

  8. @MB, to play devil’s advocate, if the Canada line construction ran publicly, and not as a P3, how would you think the cambie village controversy would have been handled?

    mezzanine

    February 16, 2013 at 12:40 am

  9. My understanding, mezz, is that the Lavalin group won the project contract after all proponents submitted bids for bored tunnels. Lavelin’s was probably an alternative to their original bid. I don’t have access to the original RFP but know one of the subconsultants on the Bombardier team whose bid was about $300 million higher. I also gleaned that from news reports over a lawsuit from a business owner who went under as the result of the open trench construction process, or do she said.

    If the province managed the project then it would have been responsible for its construction impacts. Whereas it did manage the project at the beginning i.e in making the initial decision to make it a P3, it hid behind Intransit and the Lavelin group once it got underway. Most large transit projects around the world are managed better (RER, Crossrail, Jubilee Line …) and hsve adequate budgets to engineer and manage the impacts better then we saw here in the colonies in 2007-09.

    MB

    February 16, 2013 at 6:28 pm

  10. Would like to respond to Adam Fitch and everyone else here, I think I have this figured out.

    The way I understand this, the primary contractor work value was anticipated in the RFEOI at $900 miillion-$1 billion. The remaining $400 million-500 million capital cost actually has to do with “early work” that is being done by other contractors. According to an e-mail posted on Connect2Edmonton forums, this includes:
    – North Road widening project. Building an additional lane on this major commuter route to replace the lane that will be lost with guideway running up the centre of North Road. Building the new lane now means the prime contractor will be able to keep traffic moving during guideway construction. This project also moves utilities out from under the guideway right of way including hydro, gas and optic fibre lines.
    – Power supply upgrades. There are several places along the project where there was not sufficient existing power capacity needed to power the Evergreen Line. Additional power was needed at Lougheed and Barnet, Como Lake and Clarke, Pinetree Way, Falcon Avenue, Mariner Way, and at the Port Moody tunnel portal additional power was needed both to drive the SkyTrain system but also to power the tunnel boring machine.
    – Rail track relocation. There is a short section of track in Port Moody that needs to be shifted slightly to the north (along Clarke Street between Queens and Grant). This will make room for the guideway to be built between the existing rail tracks and Clarke Street. This work also included relocation of several underground utilities.
    – Building demolitions / modifications. The construction of the Evergreen line requires several building demolitions and a few building modifications. Much of this work is being done as early works to help expedite the construction schedule for the prime contractor.

    Whereas the RFEOI describes that an anticipated $400 million of the financing will be deferred, this is WITHIN the $900 million-$1 billion value set out in the primary contract, not outside of it. The agreement therefore entails that $500-600 million is to be financed to the primary contractor immediately during construction through progress payments, whereas the other $400 million has been deferred and is to be paid to the primary contractor once construction is finished; the primary contractor is responsible for financing that $400 million that is not to be paid immediately.

    The guest commenter is right in that this certainly makes for a more secure contract. Also, the primary contractor does not actually stand to potentially profit from this.

    Another thing I’d like to point out is that the final primary contract value was stated in a press release/announcement at $889 million, which is below the $900 million-$1 billion estimate. This means that it is actually extremely likely that the final capital cost for the Evergreen Line will be as much as $100 million under budget. See: http://skytrainforsurrey.org/2013/02/02/evergreen-line-likely-under-budget/

    Daryl

    February 18, 2013 at 1:23 pm

  11. Oh, addition to above…. the $400-500 million cost outside of the primary contract, in addition to including early works costs, should also include the order for 28 new SkyTrain cars. The e-mail posted on Connect2Edmonton lists that all the additional costs are as follows:

    “To answer your question the 1.4 billion budget includes a lot more than the guideway, tunnel and new stations that will be built by the prime contractor. The budget includes new cars, all the studies (environmental, socio-economic and geotechnical to name a few) that went into the planning stage, preliminary engineering, property acquisition, community relations, consultations with the communities, and numerous “early works” projects.”

    http://www.connect2edmonton.ca/forum/showpost.php?p=472074&postcount=28

    Daryl

    February 18, 2013 at 1:27 pm

  12. Thank you Daryl for a pretty thorough analysis.

    Outside of the P3 comments, it never ceases to amaze me that light rail aficianados are habituated to avoiding the issue of high frequency service and to underestimating construction costs, mainly by ignoring the underground utilities, pre-construction consultant studies, and contingencies for the unforseen. Such unprofessionalism really doesn’t help their case when arguing against the “high cost” of SkyTrain when in fact it performs superbly.

    MB

    February 20, 2013 at 11:41 am

  13. Hey MB,

    I’m a fairly pro-SkyTrain guy and I see where you come from. I, for one, believe that there’s far too much focus on the capital cost; one of the things that needs to be considered is the net present cost – capital cost + operating cost annualized over project life-span.

    At-grade, driver-manned light rail transit has a higher operating cost, period. That’s not just something I believe, that’s a fact. The Expo Line and M line require about just $76 per revenue service hour. Other N. American LRT systems with comparable vehicle capacity require $140-200 per revenue service hour. http://skytrainforsurrey.org/2013/02/11/light-rail-transit-has-a-high-operating-cost-per-service-hour/.

    Operating costs are also usually a TransLink liability almost exclusively, whereas capital costs are usually split between TransLink and the provincial/federal governments, and (sometimes) private investors. I fear what higher operating costs could do to expansion needs across the wider-spread bus network.

    Daryl

    February 20, 2013 at 11:59 am

  14. At Stephen and everyone,
    The Evergreen Line project final project report has been released. http://www.partnershipsbc.ca/files-4/documents/Evergreen-Final-Project-Report_2012-03-27.pdf
    It confirms that the theory I brought forward earlier regarding what the DBF contract is about is correct.

    Daryl

    March 28, 2013 at 9:24 am


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