Cities turn to new financing models to deliver much-needed transit corridors.
RELATED ARTICLE: Toronto’s Transit Saga
Within the next 10 years, nearly 242 kilometres (kms) of commuter rail, light rail, and bus rapid transit lines will be built in Denver, Colorado. It will be one of the largest transportation redevelopment projects in North America. Consider it Denver’s Big Dig.
Originally, the entire program was designed to be delivered through a traditional model. After the Regional Transit District’s (RTD’s) FasTracks program was developed in 2004, Denver voters approved a 0.4 per cent sales tax to help build or expand ten rapid transit corridors—six new rail lines and three extensions to existing rail corridors—at a capital cost of US$4.7 billion.
But things soon changed. “Construction costs for transportation infrastructure went through the roof,” says Kevin Flynn, public information officer for RTD’s Eagle P3 project. Costs went up by 52 per cent. By 2007, FasTracks’ capital cost was estimated at $6.1 billion. “Then the recession hit, and suddenly, over a 30-year estimate, the project was no longer going to produce $13 billion in revenue,” he says. New estimates had the lines bringing in from $7-8 billion. That new, lower return affected what the project proponents could raise in bonds.
Three of the six new rail corridors were already paid for with help from a federal Full Funding Grant Agreement. But there were still lines waiting to be built.
“We started to look at a public-private partnership (P3) as an option,” says Flynn.
Denver’s Eagle P3 project
In 2008, RTD released a request for qualifications to design, build, operate, finance, and maintain (DBOFM) the four lines that make up the Eagle program: the East Corridor, Gold Line, Commuter Rail Maintenance Facility, and a small segment of the Northwest Rail Corridor.
The contract was awarded to Denver Transit Partners (DTP), a special purpose company owned by Fluor Enterprises, Uberior Investments, and Laing Investments. Macquarie Capital Group is also a project sponsor. Other firms involved in the team include Ames Construction, Balfour Beatty Rail, Hyundai-Rotem USA, Alternative Concepts Inc., Fluor/HDR Global Design Consultants, PBS&J, Parsons Brinckerhoff, Interfleet Technology, Systra, and Wabtec.
DTP has arranged around $450 million of private financing for the project, which allows RTD to spread the large upfront costs of a project over 30 years. In return, RTD will make service payments to DTP based on their performance with the operation and maintenance of the project.
The rest of the money comes from the federal government ($1.03 billion, the largest new starts grant ever from the Obama administration), and a remaining amount from bond proceeds for a total project cost of US$2.1 billion for the four lines. To put that in perspective, Toronto would have to spend about CAD$1 billion to build two or three subway stops along the Sheppard line (according to Toronto’s Mayor Rob Ford).
Transit P3s in Canada
P3s like Denver’s are still a rarity in the United States. In Canada, where many Provinces have P3 agencies, it’s a well-known, maybe even notorious model for delivering public infrastructure. While it’s tough to sell P3 in the United States, Canada has been steadily building an expertise in the delivery model, with a pipeline of projects across the health care, transportation, education, and water sectors.
Vancouver’s most recent mega-project, the 19.2-km Canada Line, was delivered through a P3. Now the model is being suggested for transit projects in Toronto and Edmonton.
RTD is happy with its decision, reporting a savings of about $300 million which, according to Flynn, will go toward other transit projects, including a new park n’ ride to handle overflow from a nearby station built as part of Denver’s Transportation Expansion Project—an initiative that Flynn calls “a victim of its own success.”
Given these successes, is this model an obvious choice for other Canadian transit projects looking for capital in an increasingly capital-poor environment?
That’s a question Edmonton City Council was asking itself in February.
Edmonton’s North LRT to the Northern Alberta Institute of Technology (NAIT), a 3.3-km extension from the Churchill LRT Station in downtown Edmonton northwest to NAIT, made ReNew Canada’s Top 100 list in 2010. It’s the first segment of a planned LRT expansion to Edmonton city limits near St. Albert and is part of the transportation master plan vision to expand LRT service to all sectors of the City by 2040. The $725-million project has already secured $100 million through the federal Building Canada Fund, $497 million through the provincial Green Transit Incentives Program (GreenTRIP), and $158 million from the City through a combination of reserve, tax-supported debt, municipal sustainability initiative (MSI), and other programs.
This March, Edmonton approved the P3 procurement route to deliver the new line. The City may be aiming to apply to PPP Canada’s fourth round of funding, which launched in April.
To P3 or not to P3
Edmonton City Council’s trepidation may be due, in part, to the handful of costly P3 failures that have led to increased taxes and, in the case of the Las Vegas Monorail, bankruptcy. The government buyout of the underperforming Croydon Tramlink LRT in London, England, is a particularly jarring tale for any city considering the model. (Details about that failure here.)
These failures, rather than deterring the public sector from pursuing P3s altogether, should teach government to pursue P3s more carefully.
As David Wright wrote in ReNew Canada in December 2010, “Failure by government to invest considerable effort in communicating the advantages and disadvantages of a complex scheme leads to unnecessary conflict born of ignorance.”
A P3 doesn’t mean private money in place of public spending. Within a bidding team on these projects, there’s a lender that’s willing to put money into the project, to finance it up to completion—that’s the private financing element. But the public sector will pay that money back at substantial completion.
“It’s important to understand that the full cost of the infrastructure will ultimately be paid for by the public sponsor,” says a representative for crown corporation P3 Canada.
The advantage of a P3 is that it delivers VFM—or it should, if the project suits the model. According to P3 Canada, VFM is critical to evaluating a project for P3 viability. One of the key considerations in a VFM analysis: the risk transferred to the private sector.
Along with risk, the public sector will often transfer the revenue stream generated by a project to the private sector proponent. But transit P3s can make that scenario a little tricky. Transit projects rarely cover all of their operating expenses, let alone capital costs. To do transit P3s, governments typically have had to provide capital grants and ongoing subsidies to repay any initial private sector investment. With no guaranteed revenue stream, it’s a riskier endeavour for any proponent.
There was some revenue sharing on the Canada Line project, but not a lot. There is none in Denver’s Eagle P3. The payment model for Denver’s Eagle P3 is an availability. The concessionaire is paid to make the trains available for use by the travelling public by delivering a service that runs to a prescribed schedule. RTD will keep all toll revenue and pay the concessionaire the negotiated amount over the course of the contract. The consortium can also lose up to 25 per cent of its annual payment if the trains don’t run properly, or it can receive a bonus of up to five per cent if it exceeds expectation.
Transit-oriented development is one way to make a business case for investment in transit infrastructure. Most jurisdictions look at how they can extract the density/value uplift generated by a new station.
Even without that guaranteed revenue stream, John Laing, part of the consortium behind the Eagle project, would jump at the chance to win a contract for Edmonton’s LRT project. Director for the company’s North American operations, David Rushton, says, “The Edmonton LRT is something that John Laing is keenly interested in and we are following it closely. If it is confirmed as a long-term, privately financed P3, then we would expect to form a consortium to bid.”
With players such as John Laing waiting for an opportunity to bid on a major transit project in Edmonton, it falls to the City to decide whether there’s value in allowing the private sector to finance and deliver the project. It’s not a straightforward decision, but it may help to consider both best practices and failures.