LRT Procurement Questions and Answers.

Tonight Regional Council decides which type of procurement we want to go with to build the LRT. Here are some of the questions people have sent me and the answers from the staff.

Q: Who will control the advertising on the LRT?

A: The Region will control the advertising on the LRT.

Q: Is there any LRT or transit system that has gone through the 30 years or are we the first?

A: Municipalities around the world began using DBFOM to procure and deliver transit projects in the 1990s. These early projects are well into but have not yet reached the end of their project term. For example, the Hudson Bergen DBOM (New Jersey) has been in service since 2000 and is approaching the end of its initial 15-year O&M term. Deloitte discussions with New Jersey Transit indicate that New Jersey is very happy with the outcome of the project. The construction was completed on schedule. Operationally, performance has been good – 98% or 99% of service quality indicator (above target of 96%). They believe that the integration of DB and O&M functions have yielded positive results and the discipline of scheduled lifecycle maintenance payments has also been good.

Q: Couldn’t we hire consultants for the parts where we don’t have expertise, as we usually do?

A: The Region will be hiring the required expertise to implement LRT, through the DBFOM procurement. The main benefit of the DBFOM procurement of this expertise is that that Region avoids multiple contracts with multiple suppliers (engineers, constructors, operators, maintainers, etc.) – these multiple contracts are replaced by a single contract with one Contractor. This Contractor is then responsible for coordinating and managing all of the suppliers needed to design, build, maintain and operate the project (which avoids “finger-pointing” when performance targets are not met and which improves the overall quality of the project).

Q: Where do the savings come from for the 18 per cent of DBFOM. E.g. from labour costs?  From buying a large order of cars because the private company has many projects and can buy in bulk (found in Deloitte full report)?

A: The DBFOM procurement model provides the Region with estimated value of approximately 18 per cent (consisting of savings and the value of avoiding certain risks), when compared with the traditional design-bid-build (DBB) model. The 18 per cent is the overall benefit to the Region that is achieved by 1) transferring project risks to a Contractor that is more experienced in dealing with these risks, 2) integrating design, construction, operations and maintenance with one Contractor to promote efficiencies and permit more innovation, and 3) providing incentive for the Contractor to design, construct, operate and maintain a high-quality LRT system because the Region will pay (or withhold) construction payments to the Contractor in instalments based on the Contractor meeting performance standards.

Q: Where does the company’s profit come from. E.g. the concern that it is from lower labour costs or no benefits, etc.?

A: The Contractor’s bid will include a profit margin for design, construction, and O&M services. This is similar to profit margins included in any contractor’s work, such as design or construction services procured by the Region through the traditional DBB process. As well, the Contractor will include a profit margin for equity investors, based on the risks assumed by investors in delivering the project.

Q: Can you provide a list of rapid transit projects that have not done so well?

A: The DBFOM model generally provides a high degree of success for on-time construction and overall service quality. However, there are lessons to be learned from other rapid transit projects. Focusing on procurement issues, some examples are:

• The Hudsen Bergen (New Jersey) rapid transit DBOM, while very successful for operational performance, is near the end of its 15-year term. The short project term is ending at a time when the system is approaching the need for major refurbishment. Bidders for the next contract will have to factor in the lifecycle costs of major refurbishment, with significant uncertainty surrounding the amount of legacy risk left over from the first contract.

• The Nottingham rapid transit DBFOM started Phase 1 with a 30-year operating contract that did not account for Phase 2. To proceed with Phase 2, Nottingham had to negotiate termination of their Phase 1 contract. For the Phase 2 tender, Nottingham built in flexibility for future phases.

• The Sydney Airport Rail Link is a 9-km subway link between the Sydney Airport and Sydney, Australia. With this project, the ridership and revenue risk was transferred to the Contractor. Ridership fell significantly short of projections and the project went into receivership. The Contractor walked away from the project.

Q: Are there any protections that Canadians will get part of the light rail vehicle contract?

A: It will be a requirement of the province’s funding agreement that the light rail vehicles (LRV) have 25 per cent Canadian content. LRV suppliers generally meet this requirement by having the LRV parts shipped to and assembled in Canada. The assembly work accounts for the required Canadian content.

Also,here is the report which includes more FAQ and some interesting risk charts. http://rapidtransit.region.waterloo.on.ca/pdfs/2012_RECOMMENDED_STAGE_1_LRT_PROCUREMENT__DELIVERY_OPTION.pdf