light rail funding LRT, BY STEPHANIE W. KAM, ESQ., NOSSAMAN LLP, AND DANIEL P. LOSCHACOFF, KPMG LLP THE P3 WAY Canada may be commonly known for its ice hockey, poutine, maple syrup and the colloquial “eh?”, but when it comes to infrastructure, the P3 delivery model is also well entrenched, particularly for LRT. anadian taxpayers are not Although P3 approaches may vary from and maintenance functions to a private accustomed to user-pay or jurisdiction to jurisdiction, public transit sector partner over a long term, the private revenue generating infra- agencies in Canada have typically used one party has an incentive to implement life- structure, and public transit of three P3 delivery models for LRT projects: cycle cost management before the project is generally runs at a loss, DBFOM, DBFM and DBF (listed in decreas- transferred back to the public sector. Higher Crequiring large subsidies. Yet since the ing order of risk to the private sector). expenditures on design and construction 2000s, billions on offer from federal and can be justified if operation and mainte- provincial programs have helped spur DESIGN-BUILD-FINANCE- nance costs will be reduced later on. The municipal decisions to develop light rail OPERATE-MAINTAIN (DBFOM) integration of all project phases also helps transit (LRT) under complex, long-term Canadian DBFOM projects are largely minimize costs, since there is an opportu- contractual agreements between public financed by leveraging availability payments nity to start the next phase before the prior agencies and the private sector. from the public owner to secure private debt phase is finished (commencing construc- Canada currently has two LRT projects financing. The DBFOM approach is partic- tion before the design has been approved). procured as a P3 (public-private partner- ularly well-suited to optimizing operational The Canada Line on Vancouver’s ship) in operation, with another five under performance. By bundling and transfer- SkyTrain rapid transit system was the inau- construction and five under procurement. ring the design, build, finance, operation gural transit infrastructure project in North Region Waterloo 26 Railway Age // April 2018 railwayage.com light rail Funding Ontario (pictured, opposite) is using the Although the DBFOM model used for the DBFOM method. Canada Line was examined, it was deter- mined not to be appropriate due to the DESIGN-BUILD FINANCE- greater economies of scale that could be MAINTAIN (DBFM) achieved with the Evergreen Line being The DBFM approach is similar to DBFOM, operated and maintained as part of the except the public owner retains operational SkyTrain system. Ridership on SkyTrain responsibilities and related risks vis-à-vis and the Canada Line has steadily increased the private sector partner. While some since the opening of the Evergreen Line. operational elements may be transferred to the private sector partner, such as cleaning, CDPQ INFRA these services are typically limited in scope. CDPQ Infra is a subsidiary of Caisse de Metrolinx has been utilizing the DBFM dépôt et placement du Québec and was model for both the Eglinton Crosstown launched in July 2015. It has since intro- and Finch West LRT projects in Toronto, duced a new alternative delivery model into leveraging the local transit service’s years the Canadian infrastructure market. The of experience operating rapid transit. CDPQ Infra model is distinguished from a Similarly in Ottawa, LRT operations are traditional P3 with the transfer of respon- outside the scope of P3 contracts and will sibilities and related risks from the project be managed by the local transit service. owner to CDPQ Infra, a public institution Having an existing public transit service, with investment expertise in public transit however, does not always translate in the and greenfield projects. adoption of the DBFM model for LRT CDPQ Infra has selected two private project delivery, particularly when there is sector teams to develop Montréal’s auto- political interference. The Hamilton LRT mated Réseau électrique Métropolitain procurement was stalled for four months under two separate contracts: (1) infra- because of operational concerns. The city structure engineering, procurement and reaffirmed its original approach to using construction (EPC), and (2) provision of the DBFOM delivery model after it agreed rolling stock, systems, operation and main- to include a requirement during contract tenance (RSSOM). While the EPC contract negotiations for the future LRT operator to is not alternative delivery, the RSSOM unionize its staff. The project will now go contract adopts a DBF + OM model, where through another election process because of the private consortium assumes some expo- the delay and serves as a good reminder of sure on operations and maintenance. America adopting a P3 model. The local the importance of mitigating political risks government’s decision to deliver the Canada throughout the entire procurement process. LAUNCH OF CANADA Line as a DBFOM was, however, controver- INFRASTRUCTURE BANK sial. The project was first described as a pie- DESIGN-BUILD-FINANCE (DBF) PPP Canada was a Crown corporation in-the-sky system that would never achieve The DBF model entails an agreement for a established by the Conservative govern- its break-even ridership threshold. Unions private contractor to design, construct and ment in 2008 that invested more than C$1.3 criticized P3s as a form of privatization that finance the capital cost of a project for a billion in 25 infrastructure projects, includ- provided no real benefits to the public. fixed price by a fixed date. The public owner ing the Edmonton Crosstown LRT and Shattering negative expectations, the identifies the level of funding it will provide Sheppard East Rail Maintenance Facility. system was completed on budget and put and requires the developer to finance The current Liberal government has now into service three months early, in time for project costs in excess of the public funding phased out PPP Canada and launched a new the 2010 Winter Olympics. SNC Lavalin over a specified period of time. In return, C$35 billion Canada Infrastructure Bank built a longer LRT line than anticipated the developer typically receives periodic or (CIB). The CIB’s purpose is to invest in through the cost-saving cut-and-cover milestone payments from the owner during revenue-generating infrastructure projects method of construction, rather than boring and for some time following construction, and attract private sector and institutional the whole line, the latter of which was pursuant to the contract’s schedule for investment. Since almost all Canadian P3s proposed by Bombardier, whose ART linear repayment of project costs. have been structured as performance-based induction motor technology was used for The procurement decision to use a DBF availability payment deals, there is a possi- the SkyTrain Expo and Millennium Lines. model for the Evergreen Line, an 11-km bility that future LRT projects will leverage The Canada Line’s ridership goal was (6.8-mile) extension to the SkyTrain system project-generated revenues, such as transit reached three years ahead of projections. in Vancouver, was based on a thorough fares. The benefit of transferring demand Waterloo Region Waterloo The Kitchener-Waterloo LRT project in analysis of different procurement options. risk is often offset by cost increase of private railwayage.com April 2018 // Railway Age 27 light rail funding financing. The P3 industry will have to wait and see how the CIB’s mandate will unfold. P3s, though, have become the backbone of Canadian LRT development and opera- tions. Project pipelines have grown dramat- ically through comprehensive, coordinated policies that implement the P3 model, such as PPP Canada’s previous mandatory P3 viability screen for projects with capital costs over C$100 million. The past decade of realizing new LRT projects has created a significant public transit success story, providing an opportunity to focus on life cycle maintenance and line expansion. Stephanie Kam is an Attorney in the Infrastructure Practice Group at Nossa- man LLP. Daniel Loschacoff is the Head of the Global Infrastructure Rail Practice at KPMG LLP. They have represented various public owners in connection with complex procurements and contracts for rail projects throughout the world, and can be reached on Twitter @P3Law and @GlobalRailK- PMG, or by email at [email protected] and [email protected]. ARE YOU A CERTIFIED DBE WITH THE GEORGIA UNIFIED CERTIFICATION PROGRAM? KINKISHARYO IS LOOKING FOR QUALIFIED DBE VENDORS! CONTACT US AT [email protected] 28 Railway Age // April 2018 railwayage.com.