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World's P3 Kings Bid in B.C.

Over 30 huge but little known global firms are behind bids for a single B.C. highway contract. Despite conflict concerns, some also advise government on its P3 strategy.

By Claudia Cornwall 20 Sep 2004 |
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When we, the taxpayers of B.C., pay for the new Sea to Sky by-pass over Eagle Ridge Bluffs, we will, in effect, be buying a relationship rather than a road.  The Ministry of Transportation (MOT) has decided on a P3 arrangement under which it will pay yearly fees to a consortium to design, build, finance and operate the highway, probably for a period of 25 years.  

"Structuring a P3 is not an easy task.  It's a significant contracting challenge because it's over a long-term. So much can change.  Your costs can sky rocket. Your revenues can be higher than anticipated," said Tom Ross, an economist and the director of the Centre for the Study of Government and Business at the Sauder School of Business at UBC.

"I think it can be managed, but it's not trivial."

We all know that in a relationship, the crucial question is, "Who are you dealing with?"  So, who is the government proposing we tie the knot with?  MOT has already decided to award the contract to one of three consortia--Black Tusk Highway Group, S2S Transportation Group, or Sound Highway Development Consortium.  Each of these entities is composed of several companies.  A total of 32 are involved in the bid.  Eight of them have headquarters in BC, 11 elsewhere in Canada and the rest abroad--France, the UK, the US, Germany, Australia, Hong Kong.

Jack Davidson, the president of the BC Road Builders and Heavy Construction Association, told The Tyee, "In the bid, B.C. road builders are prominently represented." He's right when it comes to the actual construction and maintenance of the highway.  Some of the B.C.-based companies have been fixtures on the local scene for years.  Emil Anderson on the Black Tusk Group built the Hope Princeton Highway in 1945.  UMA Engineering on the S2S Transportation Group was involved in building the Island Highway from Victoria to Campbell River.

But when it comes to financial services, management, and administration, the consortia are not using B.C.-based companies. They are turning to companies whose home is elsewhere in Canada or abroad.

Black Tusk bid includes European, Asian firms

The names of these international businesses are not exactly household words.  Nevertheless, unlike the B.C. companies, these publicly traded corporations are very, very large. The Black Tusk group, for example, includes Bilfinger Berger BOT, the second largest contractor in Germany with civil engineering and construction projects all over the world and annual sales (in 2003) of U.S.$5.7 billion.

Another company on the Black Tusk team is Cheung Kong Infrastructure Holdings Ltd. whose chairman, Li Ka Shing is reported to be the richest man in East Asia.  (His eldest son, Victor Li, was involved in a recent unsuccessful bid to restructure Air Canada.)  Black Tusk also includes AMEC, a huge British management company with annual sales of £ 4.7 billion.  It was recently awarded three contracts worth U.S. $780 million for the re-building of power and water delivery infrastructure in Iraq.

Huge profits recorded

Vinci Concessions, a member of the Sound Highway Development Consortium, is a division of the French Vinci Groupe.  According to McGraw Hill Construction, an on- line magazine about the construction industry, Vinci Groupe's revenues were U.S.$22 billion last year.  To put the matter in perspective, compare the revenue of this one company to the total GDP of British Columbia--about $147 billion in 2003--1/7 the GDP of the whole province. Profitability is a hallmark of companies in this sector. Macquarie North America Ltd., a member of the S2S Transportation, is a division of the Australian MacQuarie Group, which has revenues of A$ 2.4 billion.  Since Macquarie was listed on the Australian stock exchange in 1992, it has always posted healthy profits and sales, but in 2004, its profits shot up 48 percent--to A$ 494 million.

Vinci Concessions, the financial services arm of Vinci Groupe, generates only 11 percent of its parent company's sales, but is responsible for over half of its annual operating profits of U.S.$635 million. While the title of the McGraw Hill article about the French mega corp, Vinci can pick the plums, will no doubt cheer investors, it may give the taxpayers of British Columbia a reason to pause.

'Expensive and unnecessary escapade' 

The saga of what went wrong between Borealis Infracture Management Inc., a member of the Sound Highway Development team, and OMERS, the Ontario Municipal Employees Retirement Board, one of Canada's largest pension plans, might make B.C. taxpayers even warier.  OMERS started Borealis in 1998 to manage some of the properties it owned and to make investments in the P3 world. By 2002, Borealis was one of Canada's biggest players in real estate and infrastructure development. It had an interest in the Confederation Bridge between Prince Edward Island and New Brunswick. In 2003, it was part of a consortium that won the contract to build the William Osler Hospital in Brampton, Ontario in a P3 arrangement.

 But OMERS lost control of Borealis.  It was stung by the high fees Borealis was charging for its three managers' expertise--jumping from $16 million in 2002 to $46 million in 2003.  An investigative piece in the Globe and Mail in May 2004 called the deal an "expensive and unnecessary escapade." When OMERS decided to get control back, it was expensive.  It had to buy-out various shareholders and that ended up costing the fund another $50 million.  In February 2004, a new CEO of OMERS dissolved Borealis Infrastructure Management and re-established it as Borealis Infrastructure Corp.  However, a breathtaking irony is that Michael Nobrega, one of the managers during the first incarnation of the company is still there.

Worldwide projects include burning money

The companies bidding on Sea to Sky are involved in P3s and other construction projects all over the world.  Vinci owns nearly half of the consortium responsible for financing, constructing and operating the Confederation Bridge.  Through a local subsidiary, it has a stake in the $640-million Fredericton-Moncton Highway.  In France, Vinci Concessions' biggest asset is a two-thirds stake in Cofiroute, which operates a 900 km network, the country's only private toll road, spreading southwest from Paris.

Borealis was part of a P3 project to build schools in Nova Scotia, (a deal that was scathingly reviewed by the auditor general of Nova Scotia.)

The Canadian Highways Infrastructure Corporation (CHIC) is part of the Sound Highway Development Consortium.  On its web site, this Scarborough-based company bills itself as "a world-renowned toll highway development company specializing in public-private partnerships."  CHIC had a hand in the development of the now controversial Highway 407 in Ontario.  More recently, it led a consortium building an 85 km. Cross Israel toll Highway near Tel Aviv.  So innovative was the financing arrangement for the toll road, that CHIC was given "The Deal of the Year Award" by Project Finance, an international organization which promotes P3 financing.

In 1999, Klohn Crippen Consultants Ltd. of Vancouver, on the Sound Highway team, joined the Louis Berger Group of companies with headquarters in New Jersey.  Berger recently rebuilt the highway between Kabul and Kandahar in Afghanistan.  (A more unusual assignment: the U.S. and Afghan governments recently hired Berger to collect the existing paper money, incinerate it and replace it with the new national currency.)

Penalties tough to collect

P3 deals are notoriously complex.  They are rife with performance clauses.  For example, a highway upgrade will guarantee a delivery date, promise that motorists will experience minimum delays and that maintenance will involve only a certain number of highway closures.  The contract will set out penalties, should the performance clauses be breached.  Dan Cohn, an assistant professor of political science at SFU, says, "This involves an heroic assumption--that if something goes wrong, the government will actually collect.  Improvements to the Lions Gate Bridge had enormous cost over runs and I'm not sure the government of B.C. imposed the penalties allowed in the contract."

Cohn is correct.  The bridge was not a P3, but the contract the B.C. government had with the American bridge builder, Surespan, involved a number of tough performance conditions regarding night delays, delivery date etc.  As many North Shore residents will vividly remember, these were not met, but when the bridge was finished, B.C. ended up paying Surespan an additional $7.5 million.  Why? Surespan alleged that some of the engineering provided by the government was flawed.  Rather than battling the firm in court, B.C. caved.

Questions about conflicts

The complexity of the P3 deals raises another problem.  It means the government needs help developing the contracts and structuring the deals.  For the Sea to Sky upgrade, MOT has hired several companies to consult. According to a Registration of Interest Document published by MOT, "these advisors will be ineligible for participation with any proponent team in connection with the DBFO arrangements."  Meaning: they can't advise the government and bid on the Sea to Sky deal at the same time.  That would be a conflict of interest.

However, this principle doesn't seem to preclude one of the advisors, SNC-Lavalin Group, from bidding on another B.C. project: RAV.

And while a second advisor, Ernst & Young, is scrutinizing the various bidders on Sea to Sky, it is also, in Alberta, assisting one of them in a P3 project. In Edmonton, Ernst & Young is advising Bilfinger Berger BOT about its bid on the Ring Road.  And while Macquarie is one of the Sea to Sky bidders, it has also been on the watch dog side in the RAV project.  In 2001, Macquarie was asked to write a report about the feasibility of going ahead with RAV as a P3.  The verdict was favourable.  Subsequently, Macquarie was retained by Partnerships BC to continue to advise it in regard to the commercial and financial aspects of RAV while at the same time, bidding on Sea to Sky.

'Extensive review process'

Richard Fyfe, director of the DBFO Sea to Sky project, is confident conflict of interest is not a problem. "We have put in place an extensive relationship review process which we require everyone to go through on the project because we do want to make sure those sorts of issues don't become a concern."  Partnerships BC has engaged a lawyer, Les Petersen, as a conflicts adjudicator.  Says Fyfe, "If there are relationships that require detailed review, he will interview the parties to see whether a conflict of interest or unfair advantage exists."  If so, measures, which could include disqualifying a bidder, would be taken."

According to Fyfe, if bidders are disqualified, the public would find out about it, but the lawyer's findings would not be published in detail because that might reveal "competitive information."

Asked about the review process, Dan Cohn said, "They're certifying that the government took the usual and customary precautions to make sure it was a fair process.  That's not for the public's benefit. That's to protect the government's ass in case somebody accuses the government of running a rigged process and sues them. All it will do is determine whether industry standards are met."  But according to Cohn, the process won't help those who are questioning those standards.

'Nature of the beast'

In general, UBC economist Ross is not overly anxious about the corporate links.  "It's the nature of the beast--of consulting.  These people are experts because they are in the business."  However, he did allude to a "bit of a concern."

"The one place you might have a concern," Ross said, "is if you asked one of these firms should we do a P3. It's an exaggeration to say there's a conflict of interest. But you can see how they would be torn.  Say you have project, you want bridge. You ask should it be a P3.  Even though they are only retained as advisors, and they know they will not be able to bid on it, they might have an inclination to beat the drum for P3's, to raise the market generally. They are hoping you will do this bridge as a P3 and then do another bridge which they will bid on. If you go to someone who does P3's and you say should we do this as a P3, you might worry."

But finding advice from sources with less bias is not easy. Ross went on to say, "At UBC, we were struck by how much information out there is by people in the P3 industry--the firms that do P's or the government agencies whose job it is to promote P3s.  You have all these people whose livelihoods depend on having P3's producing all the information on P3s.  Finding objective academic work was harder."

North Vancouver-based journalist Claudia Cornwall is a frequent contributor to The Tyee.   [Tyee]

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