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Roundtables

Risky Business

As cities tighten up budgets and assets age, risk is becoming a hot potato and insuring infrastructure is more complicated than ever. In collaboration with Zurich, ReNew Canada invited a group of diverse players to discuss the greatest challenges for cities and which of those risks can be mitigated.

Posted on February 7, 2013

St. John’s is the oldest English-founded city in North America. So if anyone understands the pressures associated with trying to insure older assets, it’s Betty Clarke, risk manager for the centuries-old city. “We actually still have infrastructure that’s over 100 years old,” said Clarke.

“Right now, the City is facing increased pressure to provide infrastructure and service improvements because we’re growing,” said Clarke. Housing starts for Newfoundland and Labrador’s capital city have averaged over 600 homes per year. Commercial development has grown by $424 million over the same period, and the total building permits issued by the city over the past six years is an impressive 1.8 billion. Revenues from all sources have increased by 36.8 per cent, or 63.3 million over the last five years.

These and other factors have left the city’s credit rating at Aa2, the same level as its provincial government. “This very favourable credit rate allows the city to borrow for infrastructure at its lowest rate ever,” said Clarke.

It also allows the City to more easily protect itself by insuring its infrastructure and systems. A City of St. John’s Act (Chapter C-17) protects it in the case of damage to property resulting from flooding by water occasioned by rainstorms or thaws, or the breaking of a watermain or sewer pipe for a cause over which the City has no control.  “It may be an older city,” said Clarke, “but it has a lot of protection in regards to claims and against incidents such as rainfall damage, water and pipe breakage, and nuisance.”

Economic growth may be strengthening the revenue base for St. John’s, but at the same time, growth means more assets to maintain and more pressure to deliver services. While St. John’s partners with other municipalities in the region for delivery of essential public services including drinking water, wastewater treatment, solid waste management, and fire protection, there is still a lot to inspect and maintain. The total cost of delivering these services for 2012 has been estimated at $56.2 million.

Clarke listed some recent engineering spends, and they’re very water-focused: a new Windsor Lake treatment plant, $50-million worth of improvements to a trunk storm sewer system, lots of stormwater upgrades and diversions to eliminate flooding problems during major storms.

Yogesh Shah, manager of asset management for Cambridge, a more mid-sized city in Ontario, said his water sewer budget comprises two thirds of the overall budget (the rest going primarily to road and storm).

Water infrastructure is such a big cost because it’s taken on by the City, and it’s responsible if peoples’ basements are flooding. Other assets, especially at the municipal level, are less of a stress. Bridges, for instance, are mostly owned by the Province.

As manager of asset management, Shah’s work revolves around calculating risk: determining which assets are in most urgent need of attention to avoid, in a worst-case scenario, a major failure. Typically, his department takes action to keep a high level of service for residents.

But, as Rebecca McDiarmid, a senior project manager with Ledcor Renew, said, “There are those risks you can plan for, and there are those you can’t.”

 

Bad documentation

One of the hardest risks to plan for is unknown conditions, a challenge made more difficult by incorrect  documentation.

McDiarmid discussed a common scenario on the buildings side. “All the documentation that you’ve been given to date says the systems that you’re working with are going to operate one way, but 20 years and multiple building owners and operators ago, somebody made a change. All of a sudden, the switch that is supposed to turn off the air to a certain part of the building doesn’t, or the water pipes have been crossed.”

Shah said Cambridge runs into those same problems with subsurface assets—maybe even worse as it’s harder to inspect underground infrastructure. “Sometimes even CCTV technology can’t tell you if, for instance, a pipe is made of asbestos of concrete,” he said.

“Having incomplete or inaccurate as-built drawings is a chronic issue and it’s not going away,” said Shah. “Cities have to do more with less, so many are not doing the quality assurance/quality control (QA/QC) necessary.” Shah said the situation isn’t improving—in fact, current drawings are often less reliable than some older ones.

“Especially with older cities, certain projects can be a Pandora’s box. In a rehabilitation or renewal, a transfer of liability will create some challenges,” said Julie Boyd, head of public sector for Zurich Canada.

It is difficult to insure against this. “For many of these older facilities—we’re talking 100-year-old assets–you have what you have in terms of your set of record drawings,” said BLG’s Sharon Vogel. The best thing for an owner to do is make it clear in your contract documents that there may be inaccuracies, and you’re not accepting liability for any inaccuracies or errors [in the original drawings].” Of course, that means the contractor may be taking on the risk of certain unknown conditions. “From the contractor’s perspective, they will be looking for the best records available and looking for that risk not to be placed wholly on them,” said Vogel. There is, of course, another player involved, and that’s the designer or design-builder who prepares the as-builts when a project is completed. “They have certain obligations in connection with the proper preparation of those drawings to meet [the applicable] standard of care,” said Vogel.

That’s why partnering with certain design-build companies, as the City of St. John’s has done for many of its road projects, is so smart, said Boileau. “Someone who really knows your system will have a better sense of where assets are and what state they are in.”

But it’s not the typical scenario. Boileau said, “For a lot of municipalities, there are so many different contractors competing on bids that the profit margins are extremely slim. Then, when you run into one of these issues, the City may not be prepared to deal with it.”

 

Transferring liability

For the City of Cambridge, it’s worth enough to put an extra employee on the case. It now employs an in-house field surveyor who goes out to construction sites with the drawings in hand and records any changes. “Essentially, that person does all the QA/QC on the work and then hands it to a project manager,” said Shah.

But Vogel cautioned that verification role the City is taking on may transfer liability back into their lap. “If there’s a major problem resulting from a design error there may be insurance in place to protect you. But a field inspector employed by a municipality, for instance, may not be covered [for professional negligence under a policy of insurance],” she said. “If there’s an error in design, then you look to the professional who is responsible and whether or not they’ve been negligent,” elaborated Vogel.

Shah explained that the field inspector verifies only the drawing’s accuracy, not the design. In any event, he feels it’s worth it to get more accurate information.

St. John’s mitigates some of its risk by contracting work, especially in the roads sector, out to the private sector. “We don’t do a lot of that kind of work ourselves,” said Clarke. “And when we contract it out, we try to transfer risk wherever we can.” The City works with one design-build engineering firm on the majority of complicated jobs, so it doesn’t have to go to tender for design engineer services. Any professional services does not require the City to tender under the Public Tender Act.

The most critical part of this is getting the contract right. Clarke said, “There’s usually an extra clause put in our contracts, so that if something comes up we can go back a revisit the tender.” In the event that a project is delayed, there is a clause protecting the City against liquidated damages.

Many cities are covered by wrap-up insurance programs which cover the owner, contractor, and sub-contractors.

This works well for the owner, but can be a sticking point for private contractors. PCL’s insurance risk manager, Scott Matheson, said, “When municipalities start putting together a wrap-up, they hand you a risk contract with the indemnity agreement included, yet they push this insurance package across the table that lays it out their way. They like that consistent approach, but some of the larger contractors have their own fairly sophisticated approach to insurance. Owners are giving us all this risk, but then telling us how to manage that risk.”

A great number of the projects to which Matheson referred are public-private partnerships (P3s). A much-touted benefit of P3s is risk transfer. A vocal P3 supporter, Edmonton’s Mayor Sam Katz, says that another benefit of this model is the guaranteed attention to a project’s long-term operations and maintenance. When Katz spoke at last year’s National Infrastructure Summit, he said that because a P3 proponent is often taking responsibility for that asset in the long term, more budget is devoted to maintenance than municipal budgets tend to allow.

Boileau said it’s not difficult for contractors to take on construction risk for a P3 because they tend to be massive projects, which means a lower per cent of risk. “With a smaller total project value, if anything goes wrong, the profit margin is just gone. Whereas on these multi-billion-dollar projects, most cost overruns are a smaller percentage of the overall cost. The risk is not as high on those types of projects.”

What about smaller projects that aren’t suited to the P3 approach? McDiarmid said an alternative to the P3 for some of these smaller projects is a more integrated design process, much like the agreement St. John’s has with that design-builder. “You’re able to convey what your requirements are to the design team. If you have a constructor on board in the early stages of a project, obviously that’s a best-case scenario. You might not have somebody paying for the operation for 25 years, but the design and construction team will absolutely know what criteria you need to project to meet to keep your operational costs down,” she said.

 

Heritage

This approach would be most useful in complex rehabilitations of older assets. “Heritage issues pop up when we’re planning a reconstruction project in an older neighbourhood,” said Shah. “Residents wants to maintain the existing culture of neighbourhood and that adds to the project cost. That has to be communicated to the team at the planning stage.” Clarke said these projects can be extremely sensitive because, in the event that a certain element is damaged or destroyed, it may be irreplaceable—that ups the stakes.

Boyd said, “Based on the neighbourhood or the city bylaws, the insurance to value on these projects can be much higher, especially if there is damage to the existing asset.”

Boyd pointed out that this applies, not only on heritage assets, but any older asset that may need to be brought up to code. “If an older building hasn’t received a historical designation, it may still need to be brought up to code. But some municipality representatives aren’t aware of all the bylaws, which can make it difficult to place a proper valuation on the building.” In Ontario, a building that is designated as historical will have to be rebuilt exactly as is (both the facade and the interior).

Boyd added that not all contractors are qualified to do heritage work, and that can affect how Zurich would cost-out the insurance.

In some ways, it’s impossible to place a value on these older buildings and structures. PCL is currently working on revocations to West Block on Parliament Hill in Ottawa. “There’s a fairly iconic structure in Canada,” said Matheson. “So, we’re going to make sure that we’re not damaging or harming the stone façade, for instance, even if there’s insurance in place.”

Even if physical damages are covered, there’s a soft cost involved that’s harder to quantify. “You know the hard cost is covered by the insurance, the cost of your company’s name splattered on the news can be phenomenally higher,” said Boileau.

 

Crisis communication

Boileau says this applies even to much less sensitive projects. “A typical utility project, where they’ve dug a hole and then someone injures themselves, the reputation of that contractor is at stake. That’s why it’s important not only to put all the right systems in place to prevent that from happening, but also to have plan to manage the fallout if it does happen.”

Zurich actually consults with PCL and has performed an external audit on its behalf, talking to everyone from employees up to senior management.

Crisis management coverage actually exists for the public sector. Cities will use the limit on that insurance to hire a public relations firm if the situation warrants it.

All of these steps are part of a city’s continued attempt to mitigate risk and avoid unexpected costs. While there are some risks against which you simply can’t insure, there are others that it may not be worth trying to mitigate. Cities have to ask themselves what their risk tolerance is, said Boileau. “Anything is avoidable. The question is, How far do you want to go to make sure drawings are correct? How much money do you want to spend upfront to verify things? There are always ways of finding out, it’s just a matter of what it’s worth to you.”

Shah and Clarke both agree that there are two aspects to what they do: one is managing the risk and the other is protecting citizens. At the end of the day, everything beyond protecting the health and safety of a city’s residents falls into that grey area, and cities must decide how much it’s worth to them to protect themselves.

 

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