As published in The Erin Advocate
The Town of Erin should be wary of allowing a private firm to finance and maintain its bridges and other infrastructure. Eventually, however, it may be forced to go that route.
Municipalities have responsibility for bridges, but often cannot afford to repair and replace them. They must go begging for grants, which are subject to political whims and the occasional need to stimulate the economy.
A report released last month from the Ontario Good Roads Association (OGRA) and the Residential and Construction Alliance of Ontario (RCCAO) studied the bridges and culverts of Wellington County.
It estimates that over the next seven years, the county and its local municipalities will have to spend about $132 million for upgrades and replacements. That is $19 million per year, in 2011 dollars, not accounting for inflation. The annual cost should drop to about $11 million after 2020, but only after the massive current backlog of bridge work is done.
There are 635 bridges and culverts in Wellington, with the county owning 194 and local municipalities responsible for the rest. Erin has 48, including 9 bridges and 8 culverts that should be completely replaced by 2015, the report says, with an estimated life cycle cost of $8 million. The Town still has six bridges that were built between 1910 and 1920.
Sticking close to provincial policy, the report encourages the use of Alternative Financing and Procurement (AFP), also known as Public-Private Partnerships (PPPs or P3s).
“The recent positive AFP experience in Ontario should inspire partnerships to be developed with the private sector, the Ontario government, and neighbouring municipalities,” says the report, which will be reviewed by the Town.
“The AFP model brings together private and public-sector expertise in a unique structure that reduces the risk of project cost increases and improves project delivery schedule when compared with traditional project delivery methods.”
Not all AFP experiences have been positive, most famously the Brampton Civic Hospital about 10 years ago, when P3s were new. The auditor general later found that $200 million could have been saved if it had been a public project.
More checks and balances are in place now, but AFP’s still have two major financial drains. Private firms have to pay higher interest rates than governments to raise the required funds, and they have the right and obligation to make a profit. Can these be outweighed by entrepreneurial efficiency, while maintaining high quality? The federal and provincial governments say, “Yes!”
AFPs are attractive to governments because they get a fixed price with delayed payments, and technically are not borrowing as much. But the revenue stream still flows from the wallets of taxpayers. For bridges, the Town would have to make regular payments to the company doing the construction or maintenance.
The strategy remains hotly debated, with opponents citing studies that show higher costs. Part of the confusion comes from the difficulty in putting a value on the risks that are transfered to the private sector.
The Wellington report says most AFP projects are done on time or early, and with cost savings estimates ranging from 13 to 30 per cent. Savings are expected to come from reduced design, pre-engineering and construction management costs, and from bidder innovation and value engineering based on performance-based specifications. Taxpayers would be shielded from cost overruns, and an accelerated schedule could reduce financing costs.
The report also envisions a county-wide consortium of municipalities that would bundle their bridge projects into a long term contract – for example, a 10-year plan to design and build, or a 30-year plan to design, build, finance, operate and maintain.
There would certainly be economies of scale, but Erin would have to make long-term budget commitments. The Town would not control negotiation of the contract, and might not have as much control as it would like over how and when their bridge work is done.
The Town would have to do a Value-for-Money analysis for any type of AFP, and should question all the projected benefits and possible cost savings before making any commitments.
All the province has to do to promote an AFP system is to be stingy with their grants until municipalities get truly desperate, or to favour AFP-based projects in their funding decisions. If it becomes a choice of getting with the program or getting left out in the cold, it’s not really much of a choice.
