Last month the annual report from Ontario’s Auditor General criticized Ontario’s use of the Alternative Financing and Procurement (AFP) model, which the government uses to leverage the private sector to design, build, finance, and maintain major infrastructure projects.
According to the report, the government would have paid $8 billion less if large infrastructure projects were managed within the public sector and finished on-time and on-budget. Those are big “ifs” and a baffling set of premises. Here’s why: this conclusion assumes a perfect government track record on large and complex capital projects. In reality, government has a poor track record in this area.
Consider Ontario’s recent experience with construction projects procured and project managed in-house by government: the Union Station revitalization is 24 percent over budget; the St Clair Right of Way construction was 63 percent over budget; the Thunder Bay Health Sciences Centre was 75 percent over budget; and the Sudbury Hospital was 154 percent over budget. These four government managed projects alone amount to $537 million in additional costs.
These kinds of cost overruns are why Ontario started using AFP in the first place.
These kinds of cost overruns are why Ontario started using AFP in the first place. Successive PC and Liberal administrations recognized that government simply did not have the capability within individual ministries to manage complex capital projects. The shift is paying off: 97 percent of Ontario’s AFP projects have been completed on or under budget over the past ten years.
The Auditor’s report glosses over the primary benefit of the AFP model, which is to shift risk from the taxpayer onto the private sector. The report assumes that government has the capacity to deliver 100 percent of projects on time and on budget. In reality, infrastructure projects often cost more than originally projected. The beauty of an AFP model is that business, not the taxpayer, bears the burden of cost overruns.
But, certainty comes at a price. According to experts, government has transferred $14.6 billion worth of risk through an investment of $8 billion. This sound and strategic thinking has protected the taxpayer to the tune of $6.6 billion.
Even the authors of the report are uncertain that government is capable of managing large, complex infrastructure projects in-house. They concede that realizing value for money under public-sector project delivery would only be possible if, among other things, “there is a willingness and ability on the part of the public sector to manage the contractor relationship and enforce the provisions when needed.”
Most government ministries do not possess this level of complex procurement expertise.
This, again, is a big “if”. As several reports from the Ontario Chamber of Commerce show, most government ministries do not possess this level of complex procurement expertise, nor do they have the capacity to manage large scale contracts, either on capital infrastructure or service delivery.
Probably the biggest endorsement for Ontario’s AFP model is the fact that it is being exported globally. The Toronto Financial Services Alliance tells us that jurisdictions around the world are looking to Ontario and Canada for support in undertaking their own infrastructure projects. For example, PCL Constructors Canada has leveraged their extensive AFP experience in Ontario to win the contract for a $1 billion health centre in Australia.
So as government reviews the findings of the Auditor General’s report, it must consider what the Auditor did not: the value of shifting risk onto the private sector, and ultimately, the value of certainty for, and the protection of, the taxpayer.