LRT Inquiry: Rail projects are a gamble with unfavorable odds for project owners, commissioner hears

According to one researcher, 80 years of data has indicated that two out of every 1,000 rail projects are on budget, on schedule and on profit, and there is a 70% risk that a rail project will go over budget

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Perhaps the city of Ottawa was doomed from the start of planning for a new LRT system.

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“If you decide to build rail projects, you have the odds stacked against you,” Bent Flyvbjerg, an expert on megaprojects, told the LRT commissioner of inquiry during a roundtable discussion on Thursday.

Judge William Hourigan heard presentations from three experts on the subject of the contracting projects as he gathered more information about the circumstances that led to the failures on the Confederation Line.

The panel was the last scheduled session for the investigation before participants present their final presentations to the commission and Hourigan writes his final report.

Flyvbjerg, a researcher and author, has been an advisor to governments and companies. he is a teacher at Oxford University Saïd Business School and Copenhagen IT University.

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According to Flyvbjerg, 80 years of data has indicated that two out of 1,000 rail projects are on budget, on schedule, and on profit. He said there is a 70 percent risk that a rail project will go over budget.

Flyvbjerg said there are challenges for both government and private companies under traditional procurement models and public-private partnerships (P3s).

The LRT commission of inquiry investigated the justification for the acquisition of Ottawa’s $2.2 billion LRT Stage 1 system, whose design, build and maintenance program is based on a P3 model with Rideau Transit Group (RTG).

RTG’s parent companies are ACS Infrastructure, SNC-Lavalin and EllisDon.

The investigating commissioner heard that the city’s original $2.1 billion budget for Phase 1 set in 2009 did not account for inflation. The city changed the design, especially with the downtown tunnel, to protect the budget.

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There has been $115 million in council-approved contingency spending on the project, bringing the cost up to $2.245 billion for Stage 1. The railway was contracted for completion in May 2018, but did not open until September 2019. after a significant delay in construction. A sinkhole swallowed part of Rideau Street above the LRT tunnel in 2016.

Flyvbjerg said that project planners in general often assume there will be no geological problems and underestimate the risks. Some assume theirs is a “unique” project that can’t be compared to any other, so nothing can be learned from other projects, she said.

Following a review of the sump incident in 2017, then-city director of rail construction Steve Cripps said in an interview RTG’s tunneling experts were intimately aware of the soft ground conditions in that area.

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“There was a lot of geotechnical research in that area. Everybody knew this. RTG knew it. They took due precautions. (RTG has) world-class tunneling experts as part of that team. They took the appropriate steps, but there are risks with tunneling and these things happen,” Cripps said.

Flyvbjerg also criticized the use of “custom” elements that have not been used in other projects during Thursday’s discussion.

The Alstom Citadis Spirit train was designed for the Ottawa LRT.

There has been intense scrutiny during the investigation into the P3 approach to acquiring the LRT project. The model required RTG to secure funding and meet milestones to unlock city payments. The contract continues through the maintenance period, with RTG’s maintenance affiliate receiving payments from the city based on LRT availability.

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Matti Siemiatycki said that P3s have been used in Canada for 30 years, noting that they were created to address the problem of “misaligned interests” in acquisitions.

Siemiatycki, the University of Toronto dThe director of the School of Cities Infrastructure Institute said that P3 models generally cost more money, but governments like to use P3s to transfer the risks of a project to the private sector organization. Governments pay more up front so that the private sector can take the risks.

“It’s like having an insurance policy against the materialization of risks,” Siemiatycki said.

The P3 risk transfer and “fixed price” contract were a big selling point for the LRT project in Ottawa.

Siemiatycki described the emerging “alliance” model for contracts where a joint organization is created between the public and private organizations and the team works in the same office.

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Anne Stafford, Professor of Accounting and Finance at Alliance Manchester Business School at the University of Manchester, said the public sector still bears significant costs in P3s, even if it believes all risks are transferred to the private sector partner.

Stafford said that accountability in a P3 is often confused because a private organization is more accountable to its shareholders, not the public. Project finances are less transparent to the public, especially since the private partner requires business confidentiality, Stafford said.

“The project as a whole straddles the border between the public and private sectors and therefore we have a lack of clarity on public responsibility,” Stafford said.

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