Project Report: Achieving Value for Money William R ... Project Report: Achieving Value for Money – William R. Bennett Bridge Project Purpose of this Document In all of its procurement

Project Report:Achieving Value for Money

William R. Bennett Bridge Project

September 2005

i Project Report: Achieving Value for Money – William R. Bennett Bridge Project

Purpose of this Document

In all of its procurement processes, including publicprivate partnership agreements, the Province iscommitted to a high standard of public disclosure toensure accountability. This report describes therationale, objectives and processes that led to theuse of a public private partnership for the William R.Bennett Bridge project, giving the public a clearsense of how and why the decision was reached toproceed with that option. It explains how value formoney was measured and how it is expected to beachieved in the context of current market conditions.

For more on the Province’s Capital AssetManagement Framework, please go tohttp://www.fin.gov.bc.ca/tbs/camf.htm

For more on public private partnerships in B.C.,please go to www.partnershipsbc.ca

Before entering into a public private partnership,Partnerships BC undertakes an analysis of the valuefor money expected over the life of the partnership.Value for money is a broad term that captures bothquantitative factors, such as costs, and qualitativefactors, such as service quality and protection ofpublic interests.

Value for money is one of six key principles guidingpublic sector capital asset management in BritishColumbia. The others are:

◗ sound fiscal and risk management;◗ strong accountability in a flexible and streamlined

process;◗ emphasis on service delivery;◗ serving the public interest; and◗ competition and transparency.

Since 2002, these principles have guided the B.C.public sector’s approach to acquiring and managingassets such as roads and health care facilities.Under the Capital Asset Management Framework,ministries and other public bodies are encouragedto consider all available options for meeting theirservice objectives. They analyze the options and,after considering the qualitative and quantitativeadvantages and disadvantages of each, choose theone that overall best meets service delivery needsand makes the best use of taxpayers’ dollars.

In some cases, the best option may be traditionalprocurement – where assets are purchased entirelywith taxpayer supported debt and operatedexclusively by the public sector. In other cases,agencies may find innovative ways to meet theirservice needs without acquiring capital assets. In all cases, agencies are publicly accountablethrough regular budgeting, auditing and reporting processes.

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Table of Contents

1. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1Project Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1Achieving Value for Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1Capital Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2Final Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2Competitive Selection Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

2. Project Background, Rationale and Objectives . . . . . . . . . . . . . . . . . . . . . . .3Public Private Partnerships in Transportation . . . . . . . . . . . . . . . . . . . . . . . .3Project Background and Rationale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3Project Objectives and Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4Project Planning and Procurement Options Analysis . . . . . . . . . . . . . . . . . .4Expected Benefits of the Preferred Option . . . . . . . . . . . . . . . . . . . . . . . . . .4

3. Competitive Selection Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5Project Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5Process and Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6Contract Finalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Competitive Selection Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

4. Changes in the Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Capital Cost Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Life Cycle Cost Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

5. The Final Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Profile of the Contractor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Key Terms of the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

6. Achieving Value for Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

7. Ongoing Contract Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

8. Expected Budget Reporting and Accounting Treatment . . . . . . . . . . . . . . .13

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1. Executive Summary

Project Background

The Province has entered into a contract withSNC-Lavalin to provide a new bridge acrossOkanagan Lake to satisfy traffic demand andimprove safety.

The Okanagan Lake Bridge is part of Highway 97;it links the City of Kelowna on the east side ofOkanagan Lake to the west side of the lake and thecommunities along Highway 97 to the U.S. border,and to Highway 5. The existing bridge, whichprovides the only crossing of the 120-kilometre longlake, cannot meet current and projected trafficdemands, and has a high accident rate. The floatingstructure is in an advanced state of deterioration andcannot practically be repaired beyond the short term.

The new William R. Bennett Bridge will form part ofHighway 97, crossing Okanagan Lake betweenKelowna and Westbank, at a location immediatelyadjacent and parallel to the existing Okanagan LakeBridge. In addition to the new bridge contract, boththe Ministry of Transportation and the City ofKelowna will be upgrading the east and westapproaches to the bridge to improve traffic flow.

The contract between SNC-Lavalin and theProvince, for the delivery and long term operation ofthe William R. Bennett Bridge, was finalized June 30,2005 and meets the Province’s objectives to:

◗ satisfy immediate and mid-term traffic demand; ◗ achieve value for money; ◗ ensure the usable 75-year design life of the

bridge is secured by way of the optimized 27-yearturn-over condition commitment; and

◗ improve and ensure long term safety on the crossing.

By completing this project as a public privatepartnership, the Ministry of Transportation expects todeliver a bridge which will benefit from privatesector knowledge and expertise, resulting in thelowest possible life-cycle cost to taxpayers, and thesafest possible structure.

Achieving Value for Money

The contract with SNC-Lavalin offers value formoney on both a financial and qualitative basis.

The public private partnership contract, whencompared to traditional public sector procurement,is expected to deliver both quantitative andqualitative value for money. The net present valuecost for the project, as delivered by SNC-Lavalin, isestimated at $170 million. This compares favourablyto the estimated net present value cost if theproject was completed by the public sector, whichis $195 million. Net present value is a risk-adjustedcalculation of the estimated stream of payments tobe made over the term of the agreement, expressedin today’s dollars.

The William R. Bennett Bridge contract offersexpected savings of $25 million on a net presentvalue basis over the 30 year life of the agreement.

Artist rendering of the William R. Bennett Bridge

2 Project Report: Achieving Value for Money – William R. Bennett Bridge Project

Capital Cost

The capital cost of the project has increasedsince it was announced three years ago.

When this project was announced in 2002, the capitalcost was estimated at approximately $100 million.Since that time, construction material and labourinflation, along with changes in the Province’sdesign standards, have resulted in an estimatedcapital cost increase of $44.5 million. The increaseis due largely to construction material and labourinflation experienced in the B.C. market since theproject was initially considered. Inflationarypressures would have had an impact on projectcosts under traditional procurement or the publicprivate partnership model.

Final Contract

The Province will set and monitor theperformance standards for the bridge.

Under the contract, the Province sets and monitorsperformance standards for the new crossing, andlicenses the right of way to SNC-Lavalin. SNC-Lavalin will design, construct, operate, maintain andrehabilitate the bridge and is responsible formeeting the Province’s performance standards forthe term of the contract, along with the provisionsfor turning over the asset to the Province at the endof the term. In addition, SNC-Lavalin willdecommission the existing bridge, once the newbridge is in operation.

The Province will pay SNC-Lavalin annual servicepayments of approximately $20 million a year,assuming there are no performance deductions.Over the 30-year term of the contract, using adiscount rate of eight per cent, these annualpayments are equal to approximately $170 million innet present value terms.

Competitive Selection Process

This project benefited from an open and faircompetitive selection process.

Partnerships BC was engaged as the transactionand procurement manager for the project.

Five teams responded to the initial Request forQualifications in the Spring of 2004. Three teamswere chosen to proceed to the Request for Proposalstage which concluded in December 2004. A Bestand Final Offer stage involved negotiations with twoqualified teams to achieve the best possibleagreement on behalf of taxpayers. A ConflictAdjudicator was retained to ensure there were noconflicts in the evaluation process. A FairnessAuditor was retained to observe and report on theevaluation process. The Fairness Auditor concludedthat the process was fair. The Fairness Auditor’sreport is available at www.partnershipsbc.ca.

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2. Project Background, Rationale and Objectives

Project Background and Rationale

In 2002, the Province determined the need toproceed with replacing the aging OkanaganLake Bridge.

The Okanagan Lake Bridge, a part of Highway 97, isa vital link in B.C.’s transportation network. Thebridge connects the City of Kelowna and pointsnorth, on the east side of Okanagan Lake, to thewest side of the lake and the southern communitiesalong Highway 97 to the U.S. border and toHighway 5. The bridge provides the only crossing ofthe 120-kilometre long Okanagan Lake.

◗ The existing bridge was opened as a two-lanefacility in 1958 and was modified in 1984 toaccommodate a three-lane counter-flow operation.

◗ The 47-year-old structure has serious deteriorationproblems with pontoon concrete integrity anddeck and electrical system failure. The bridgecannot be repaired beyond the short-term.

◗ Since 1984, traffic has increased about 200% withaverage daily traffic exceeding 46,500 vehicles.Daily traffic is significantly higher during thesummer months, with average daily trafficexceeding 57,700 vehicles. These traffic volumesexceed the current bridge’s capacity, and thecapacity shortfall is compounded by as many aseight lifts of the bridge lift-span per day, duringthe summer, to allow for marine traffic, and byclosure of the centre lane for emergency vehicles.

◗ The safety performance of the bridge andapproaches is poor; the accident rate is higherthan the provincial average.

Public Private Partnerships inTransportation

Public private partnerships are used in thetransportation infrastructure sector around the world.

Internationally, public private partnerships havebeen used for many years in the transportationsector. In B.C., the Ministry of Transportation isencouraged to pursue public private partnerships,where they can deliver value for money and servethe public interest, as laid out in the Capital AssetManagement Framework.

In such partnerships, the private sector typicallydesigns, builds, maintains, operates, rehabilitatesand finances roads, bridges and highways to meetdetailed performance standards set by the Provinceand embodied in a binding contract. The Provincetypically owns the asset and performance paymentsare paid according to the standards outlined in thefinal project agreement.

The partnership model is designed to capture thestrengths of both the public and private sectors,recognizing that private companies have alwaysplayed a part in delivering infrastructure such asroads, bridges and other facilities. Key differencesbetween the public private partnership approachand traditional project procurement are the inclusionof performance based payments, and the transfer ofmany of the risks inherent in capital projects, suchas construction schedule, to the private sector. Of particular importance is that the projects arestructured on a whole life cycle costing basis; thisresults in achieving efficiencies through theintegration of both capital and operating costs.

Public private partnerships are part of the Province’splan to provide affordable infrastructure that meetspublic needs in a timely manner. As transportationdemands increase, this procurement model has thepotential to maximize the value of taxpayers’investments in new and improved infrastructure.

Map of the Okanagan Bridge area


Project Objectives and Scope

The Ministry of Transportation established objectivesfor the project.

◗ Deliver a new Okanagan Lake Bridge servicethat will: • satisfy medium term traffic demand; • achieve value for money for taxpayers; • ensure the existing bridge serves traffic demand

during construction of new service; and • ensure the usable 75-year design life of the

bridge is secured.

Project Planning and ProcurementOptions Analysis

The project team reviewed options anddetermined that a public private partnershipoffered significant benefits.

Consistent with the requirements of the CapitalAsset Management Framework, the Okanagan LakeCrossing Project Team considered two traditionalprocurement models and one public privatepartnership model for this project. Each option wasanalyzed on the basis of financial and qualitativecriteria. The project team recommended the publicprivate partnership model because it concluded thatthis model would:

◗ provide an opportunity to achieve value for moneyfor the taxpayer in partnership with the private sector;

◗ provide an opportunity to transfer appropriaterisks to the private sector for a very technicallychallenging piece of transportation infrastructure;

◗ deliver priority transportation infrastructure in atimely manner.

Expected Benefits of thePreferred Option

Through the options analysis, the project teamidentified a number of expected benefits of thepublic private partnership option.

◗ The public private partnership would provideincentives to the contractor to manage theproject and the facility in an efficient manner. Forexample, the contractor would not be paid until thefacility was built, thereby encouraging completionof the project on schedule and on budget.Incentives for the contractor to meet operatingand maintenance standards would also beincorporated in different elements of the paymentmechanism. For example, the contractor wouldhave an incentive to maximize lane availability,maintain customer satisfaction, and improve thesafety record of the route.

◗ The public private partnership is flexible to allowfor private sector innovation. The project hassignificant design and construction challenges,which would benefit from private sector involvement.

◗ The public private partnership would be based onthe principle that risks should be allocated to theparty in the best position to manage them. Forexample, the contractor would assume risksassociated with design, construction, facilityoperation and maintenance. The Province wouldretain risk for changes to legislation and for forcemajeure (events beyond the control of either party.)

◗ The contractor would make a significantinvestment of equity and debt in this project.This money would be at risk to varying degreesthroughout the term of the agreement and wouldbe dependent on the contractor’s performance.For example, the return on equity which theprivate partner could expect would varydepending on both highway condition andhighway performance. If significant constructioncost overruns were experienced, the contractor’sequity capital could be at risk.

◗ The Province would retain oversight of the project,and would remain accountable for seeing that theproject met its intended objectives.

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3. Competitive Selection Process

Project Implementation

A governance and management structure was put inplace to guide project development andprocurement. It included a project board, whichwas responsible for key decisions throughout theprocurement process. The board consisted of:

◗ the Deputy Minister of Transportation;◗ the Assistant Deputy Minister of Operations

(Ministry of Transportation); and◗ the Chief Executive Officer of Partnerships BC.

Reporting to the project board, and implementingthe procurement process, was a project managementcommittee with resources from the Ministry,Partnerships BC, and external advisors. The projectwas led by a Ministry of Transportation ProjectDirector and a Partnerships BC Procurement Director.

The procurement process was managed byPartnerships BC. An independent Fairness Auditoroversaw the procurement process to ensure that allproponents were treated in a fair and equitablemanner. A Conflicts Adjudicator was used to ensurethat the evaluation process was clear of any conflictof interest. Evaluation of submissions during thecompetitive selection process was managed by theevaluation committee, with sub-committees fortechnical, legal, financial and commercial analysis.

Process and Timetable

The project team anticipated a competitive field ofbidders, despite the specialized nature ofqualifications required in the areas of marinestructure design and construction. The competitiveselection process did generate strong initial interestfrom the market with five teams responding to theRequest for Qualifications. The selection processprovided sufficient competitive pressure to result inadded value for the Province, as the teamscompeted to provide the best value for money inorder to be selected as the contractor.

Work starts on the pontoons for the new bridge


Evaluation

The evaluation committee reported to the project board and included: the Assistant Deputy Minister incharge of the project; the Project Director from Ministry of Transportation; and the Chief Project Advisor fromPartnerships BC.

Evaluations were conducted by:◗ Ministry of Transportation representatives;◗ Partnerships BC representatives;◗ Ministry of Attorney General representatives;◗ Financial/Business Advisor (Macquarie North America Ltd.);◗ Engineering/Design Consultant/Technical (Westmar Consultants) ;◗ Operations and Maintenance Advisor (Geoplan / Opus);◗ Legal Advisor (Miller Thomson); and◗ Traffic Consultant (Halcrow/TSI).

Milestone

Request for Expressions ofInterest issued.

Request for Qualificationsissued

Submissions evaluated andshort-list developed

Request for Proposals issued

Proposals due

Best and Final Offer stage

Final negotiations

New crossing to open

Date

October 28, 2003

December 30 2003

May 2004

May 31 2004

December 1, 2004(technical proposals)December 13, 2004(financial proposals)

January 2005

June 2005

July 1, 2008

Outcome

The REOI closed on November 25, 2003. 17 companiesexpressed interest in the project.

Five proponents responded.

Three proponents were short-listed as a result of thisevaluation. The teams were:• Bouygues Travaux Publics• Okanagan Crossing Group, and• SNC-Lavalin Inc.

Bouygues Travaux Publics chose to withdraw from thecompetition before the deadline. Proposals submitted by :• Okanagan Crossing Group, led by Ledcor Projects Inc., and• SNC-Lavalin Inc.

Both proponents proceeded to this stage.

SNC-Lavalin was chosen as the Selected Proponent andfinancial close was reached.

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Evaluation criteria were divided into two broadcategories:

◗ technical evaluation criteria; and◗ legal and commercial evaluation criteria, including

value for money.

Technical evaluation was on a pass/fail basisdetermined by baseline expectations related tofunctional design and detailed design aspects ofthe project.

Commercial evaluation focused on such items aslegal structure of the final contract, construction andoperating costs, and financing structures andguarantees. Again, baseline expectations ofacceptability were established for criteria such as:

◗ consortium legal organization (joint venture,limited partnership, incorporation);

◗ level and type of contractor participation; ◗ parent company financial guarantees;◗ minimum equity levels and equity payback

period; and◗ committed financing packages.

The proponents’ pricing proposals consisted of astream of performance-based payments for the termof the agreement. Value for money was calculatedby comparing the present value of the stream ofpayments to the benefits arising from each proposal.Present values for both proposals were calculatedusing a consistent discount rate that was deemedappropriate for the level of risk involved with thisproject. These net present values were comparedto a public sector comparator, a financial model thatestimated the cost of the project if it was built usingconventional procurement methods.

Contract Finalization

The contract was finalized in a timely way tokeep the project on schedule.

Once SNC-Lavalin was chosen in March 2005 asthe preferred proponent at the Best and Final Offerstage, the Province’s project team began intensivenegotiations that lasted until mid-April. Commercialand financial close was achieved on June 30, 2005.

Competitive Selection Costs

The William R. Bennett Bridge is one of the firstmajor transportation projects to be initiated andimplemented as a public private partnership by theProvince. As such, this project will serve as a guidefor future transportation projects.

Procurement costs capitalized as part of the project,including the costs of engineering, transaction andlegal advisors from the issuance of the RFP throughto the completion of financial close, were $5.3 million.This represents approximately three per cent of theproject’s net present value, or four per cent of thecapital cost. For evaluation purposes, the cost ofprocurement was added to SNC-Lavalin’s proposalto ensure that procurement costs were accountedfor in the value for money assessment.

Early in the planning stages, the Province spent an estimated $7 million on advance planning andfeasibility studies which were used to make thedecision to proceed with procurement of the new bridge.


4. Changes in the Project

Life Cycle Cost Comparison

Over the whole life cycle of the project, thepublic private partnership model is expected tocost taxpayers less than a traditionalprocurement contract would have cost.

When the Province proceeds with a public privatepartnership, it often uses a hypothetical financialmodel, called a Public Sector Comparator (PSC) tocompare the cost of the project under conventionalprocurement with the costs as proposed byproponents competing for the project. This financialmodel is a risk-adjusted estimate of the costs for theProvince to undertake the project under aconventional delivery process. Under a conventionaldelivery process, the Province retains substantialdesign, construction, operations and assetmanagement risk. These risks are accounted for inthe financial model. The PSC provides a benchmarkagainst which the cost of the project can beassessed. It takes into account all of the assets,services, staff, consumables, and other elementsrequired to deliver the project to the same standardsand level of certainty required of the private sectorunder a public private partnership.

During the competitive selection process for theproject, an independent cost estimate wasprepared and a public sector comparator wascalculated and compared with the cost of eachproposal. For the comparison, both proposals andthe PSC used a market-based discount rate of eightper cent, which is an estimate of the private sectorweighted average cost of capital for a project of thistype. The comparison was also analyzed atdiscount rates of seven and nine per cent, and theSNC-Lavalin proposal showed the best value in allcases. The sensitivity analysis showed value formoney of $14.5 million to $33.7 million at thosediscount rates.

Capital Cost Comparison

The capital cost of the new bridge is higher thanoriginally estimated.

The capital cost of the William R. Bennett Bridgewas initially estimated at $100 million in 2002.Since that time, construction cost inflation andlabour cost inflation have increased dramaticallyacross the Province.

Between now and the 2010 Olympics, at least $12 billion worth of major infrastructure, institutionaland commercial construction projects are plannedfor the province. There is also high constructionvolume in other provinces, including Alberta,Ontario and Newfoundland. As demand forconstruction increases, so do construction prices.

According to an independent survey conducted byBTY Group, British Columbia has experienced rapidconstruction inflation over the past five years.Between 2002 and 2004 alone, concrete formworkinflation was 50 per cent, concrete material inflationwas 20 per cent, and reinforcing steel inflation was40 per cent. In addition, oil prices have increasedby about 100 per cent since January 2004,including an increase of 35 per cent in the firstquarter of 2005 alone. Oil is a major source ofenergy for both production of materials andtransportation, and as such, price increases herehave a major impact on large construction projects.

Largely as a result of these inflationary pressures inthe construction market, the capital cost of the newcrossing is estimated at $44.5 million higher thanoriginally estimated. The revised estimate wasverified by an independent third party reviewundertaken for the Ministry of Transportation.Capital cost increases would have occurred undereither traditional procurement or the public privatepartnership model.

However, the contract with SNC-Lavalin will protectthe Province from any future cost escalations.

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5. The Final Contract

◗ ensure that, at the end of the contract term, theasset meets the turn-over conditions specified bythe Province; for example, the bridge must meetthe remaining life profile criteria at the end of thecontract term.

The Province will make annual payments to SNC-Lavalin based on performance achievedcorresponding to user satisfaction, lane availability,public safety and traffic use standards as defined inthe contract. The Province will not start thesepayments until the bridge is open to the public.Moreover, if SNC-Lavalin does not meet the standardsset by the Ministry, it will face financial penalties.

The following graph demonstrates the anticipatedpayment stream to SNC-Lavalin over the term of theagreement. This graph assumes no bonuses orpenalties. Using a discount rate of eight per centover 30 years, these annual payments are equal tothe $170 million net present value of the project.

Financing

SNC-Lavalin is financing the project through aprivate placement with Sun Life AssuranceCompany of Canada and the Ontario Teachers’Pension Plan Board.

30

25

20

15

10

5

02009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035

Millions $

Fiscal Year

Annual Service Payments(Nominal Dollars assuming two per cent inflation)

Profile of the Contractor

The SNC-Lavalin team includes:

◗ SNC-Lavalin Constructors (Pacific) Inc. andVancouver Pile Driving Ltd. (design-build);

◗ SNC-Lavalin ProFac, a wholly owned subsidiaryof SNC-Lavalin Group Inc. (operations andmaintenance);

◗ Sun Life Assurance Company of Canada and theOntario Teachers’ Pension Plan Board.

Key Terms of the Contract

The term of the contract is 30 years, comprising athree-year construction period and a 27-yearoperation period.

SNC-Lavalin will provide the Ministry ofTransportation with a new crossing acrossOkanagan Lake. The new crossing will becompleted by July 1, 2008 and will meet or exceedthe performance standards in the contract. Inaddition SNC-Lavalin will provide the operations,maintenance and rehabilitation services on the newcrossing in a manner that meets or exceeds theprovincial standards for the next 27 years. Underthe terms of the agreement SNC-Lavalin will:

◗ design and construct the bridge in accordancewith the agreement including both the specifiedrequired scope of work as well as any additionalworks that SNC-Lavalin commits to provide;

◗ decommission the existing bridge;◗ provide financing for the design, construction,

operation, maintenance and rehabilitation of thenew bridge and the decommissioning of theexisting bridge;

◗ provide the operation, maintenance andrehabilitation (OMR) services for the new bridgeincluding providing the resources, materials andequipment to manage, plan and deliver the OMRin accordance with the requirements specified bythe Province; and


Contract Termination

The contract can be terminated by either party, based on specific conditions or events, as defined in thefinal agreement.

Risk Allocation

Generally, SNC-Lavalin bears risks related to design, construction, operations, maintenance, and rehabilitationof the new bridge. This adds value for taxpayers because the Province is protected from the possibility ofcosts associated with unexpected issues related to these areas. The Province retains risks that are outsidethe control of SNC-Lavalin and most of the risks resulting from changes to legislation. A more detailedbreakdown of the risk profile is presented below.

Public (Ministry of PrivateRisks relating to: Transportation) (SNC-Lavalin) Shared

Design of bridge and long term impacts ✔

Design standards prescribed in the Concession Agreement ✔

Design of bridge meet required obligations (for example, noise levels, vibrations) ✔

Geotechnical or subsurface risks ✔

Construction costs, and schedule ✔

Construction safety ✔

Construction materials ✔

Completion of bridge in accordance with standards ✔

Causeway fill and preload (This work was completed as a separate contract in the summer of 2005.) ✔

Availability of approach roads (MoT has committed to SNC that the roads will be available at a certain time and will be able to accommodate pre-defined traffic levels.) ✔

Graving dock (MoT provided the site to SNC, SNC is responsible for designing, constructing, and deconstructing the graving dock site and complying with all required permits.) ✔

Unexpected site conditions (for example, rock and soil quality) ✔

Environmental issues dealing with construction method, operation of new bridge, and required environmental monitoring. ✔

Permitting, for example, permits not received in timely manner, permit requirements result in higher costs, and missed or unknown permits ✔

Traffic management needed during the construction of the new bridge or traffic management during operations ✔

Force majeure ✔

Financial – inflation and financing costsPerformance payments during the operations phase will be indexed to inflation. Inflation risk during the construction phase has been transferred to SNC-Lavalin. ✔

Operations and maintenance – equipment availability, labour action ✔

Operations and maintenance – latent defects discovered in new bridge ✔

Operations and maintenance – changes in traffic composition mayimpact operations and maintenance costs ✔

Operations and maintenance – changes in required standards ✔

Operations and maintenance risk associated with existing bridge ✔

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6. Achieving Value for Money

The contract also offers qualitative benefits totaxpayers. SNC-Lavalin has committed to aperformance-based contract. The contract ensuresthat SNC-Lavalin has incentives to meet or exceedlong term safety, reliability and capacity objectivesset by the Ministry of Transportation. Furtherincentives are included to minimize road delays andclosures, improve predictability and complete theproject on time. Payments to SNC-Lavalin, whichwill not start until the new bridge is open to the public,are based on provincial standards for user satisfaction,lane availability, public safety and traffic use.

The expected qualitative and quantitative benefits ofthe agreement were confirmed by two independentbusiness advisors.

Macquarie North America, the business advisor tothe Province for this project, compared the finalagreement with SNC-Lavalin to a hypotheticaltraditional procurement, and concluded that “theproject represents good value for money for theProvince, relative to conventional delivery.”

In addition, the Province retained Ernst and YoungOrenda Corporate Finance Inc. (“Ernst and Young”)to conduct an independent third party review of thefinal agreement. Ernst and Young concluded thatbased on the documents they reviewed, “the OLCproject provides a robust value for money proposition,”and that the final agreement represents “areasonable commercial transaction for the provincewhen taking into account the risks of the project.”

The ultimate success of the project is contingent onimplementation of the next stages of the project,including detailed design, construction and ongoingoperations and maintenance of the bridge.

The contract with SNC-Lavalin offers value formoney on both a financial and qualitative basis.

The public private partnership contract, whencompared to traditional public sector procurement,is expected to deliver both quantitative andqualitative value for money. The net present valuecost for the project, as delivered by SNC-Lavalin, isestimated at $170 million. This compares favourablyto the estimated cost if the project was completedby the public sector, which is $195 million. Netpresent value is a risk-adjusted calculation of thestream of payments to be made over the term of theagreement, expressed in today’s dollars.

The William R. Bennett Bridge contract offersexpected savings of $25 million on a net presentvalue basis over the 30 year life of the agreement.This benefit is a direct result of:

◗ using a whole life cycle costing approach to thecontract over the contract term to optimizecapital, operating, maintenance and rehabilitationcosts; and

◗ achieving an optimal allocation of risks betweenthe contractor and the Province through thecompetitive procurement process. SNC-Lavalin isbearing the risks for design, construction,financing, and operations. For example, SNCLavalin assumes responsibility for cost over-runsin the design and construction phases, and willincur financial penalties if the new bridge is notconstructed and open to traffic by July 1, 2008.


7. Ongoing Contract Monitoring

The Province will monitor the contract to ensurethat SNC-Lavalin is meeting the requiredperformance standards.

The Ministry of Transportation will set and monitorthe performance standards for the bridge,throughout the term of the agreement.

If SNC-Lavalin fails to meet the performancestandards specified by the Province, the Province willbe entitled to make deductions from the performancepayment in accordance with the agreement.

For example, if SNC-Lavalin was three months latein having the bridge open to traffic, the Provincewould reduce payments by about $4.9 million in2008 dollars.

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8. Expected Budget Reporting and Accounting Treatment

The total capital cost of the project will berecorded as debt by the Province.

The William R. Bennett Bridge project will be treatedas an asset by the British Columbia TransportationFinancing Authority and consolidated into thefinancial statements of the Province. Theperformance payments will be considered anobligation, with the component of the performancepayments related to capital costs treated as debt bythe British Columbia Transportation FinancingAuthority and consolidated into the financialstatements of the Province. Upon completion ofconstruction, the recorded book value of the projectwill be amortized over 40 years for bridge structuresand highway roadbed and over 15 years for paving,fencing, signage, traffic control equipment and mostother assets attached to the project.

Project Report: Achieving Value for Money William R ... Project Report: Achieving Value for Money – William R. Bennett Bridge Project Purpose of this Document In all of its procurement

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