Hey! Look at this! I actually did do an interview with deputy city manager, Brent Sjoberg, executive lead on the waste water sewage plant P3. Just last week. And I transcribed the whole dang thing.
Maybe I’m not such a lazy toad, afterall.¹
I basically asked Sjoberg the same questions I asked the Mayor in that interview excerpt I posted yesterday. Sjoberg’s answers, though, were a little more… erm… comprehensive. (Interview clocks in at a whopping 3,000 words.)
So, as for why aren’t sewage treatment companies supporting the Yes side and trying to stop these P3s from happening, Sjoberg gave me a very detailed answer that ends with…
One of the factors is with P3s, they are a long term contract. And they are larger contracts. I mentioned in this case the P3 would not only be in construction but in the ongoing operations and maintenance. Instead of, to use the P3 numbers, instead of a $224 million project it’s a $760 million project over 30 years. That’s a big project. It’s attractive and that’s the business that they’re in. So usually they’re well versed on various different models and they do assessment of each project and determine that there’s something for them and that’s part of our process.
On the subject of how water rates will be set through the P3, I was under the impression that the waste water portion of the rate could fluctuate and so the private partner might be able to influence the rate over the lifespan of the project. Sjoberg says no.
What ends up happening under a P3 procurement and contract is the rates paid to the private consortium for operating and maintenance are determined in advance. For the duration of the 30 years. So that’s the I guess a little bit of the benefit of having a competitive process. So each of the consortiums are bidding on the project not only for the construction portion but they’re also bidding on it for the 30 year maintenance.
And as for what kind of reporting requirements will be on the private partner and what form they’ll take, Sjoberg explained it this way…
The contract that is structured with them has a whole level of performance requirements and reporting requirements. There’s compliance reviews and all kinds of work going on on a regular basis. At the administrative level they would be reporting to the city more often than they would be to council. I can’t say specifically if there’s a requirement for them to report to council. In any event the administration would do that as part of our regular process.
In the interest of providing maximum pre-referendum info-dumpage, I’m posting the entire interview below.
Prairie Dog: Wasn’t Dorian Wandzura handing this P3 negotiation? [Wandzura was until recently the city’s Deputy City Manager of the City Operations Division. He left to take a position in Edmonton.]
Brent Sjoberg: That’s right.
PD: So you’re doing this now?
BS: I’m doing it now.
PD: You’re doing the P3 for this and for the Regina Revitalization Initiative?
BS: Indeed. Yes.
PD: So you’re pretty freaking busy.
BS: Fortunately or unfortunately, yes. I’m executive lead on the wastewater project as well as the RRI stuff.
PD: Are they going to get someone else to do the waste water P3 or are you on your own?
BS: No. At this point… obviously we’ve got the staff working on the project. But at this point I’m executive lead for carrying both of them through.
PD: Well, congratulations then, I guess.
BS: Thanks.
PD: I was calling because I was talking to the mayor about how we’re going to be setting the water rates under the P3. City council sets the water rates and I wanted to know how that’s going to happen. Because obviously, you’re not going to be setting those rates in a vacuum. If there’s a private partner you’re going to have to consult from year to year on what’s a fair rate…
BS: Not necessarily. Let me try to explain that to you and see if it answers the question. One important piece to consider is the water rates cover more than just the plant, right. So water rates also cover the pipes in the ground they cover investments in the Buffalo Pound Plant, there are pump stations. There are all kinds of things in the whole system, right? So I think you know, the city has created the utility, kind of a separate accounting function to keep track of al, that. So it’s more than just plant, is the simple piece. That’s why in this case certainly going forward city council always sets the water rate because they have a number of factors to consider and one being the rates support more than just the plant. So, they’ll take all that into account at every rate setting cycle.
What ends up happening under a P3 procurement and contract is the rates paid to the private consortium for operating and maintenance are determined in advance. For the duration of the 30 years. So that’s the I guess a little bit of the benefit of having a competitive process. So each of the consortiums are bidding on the project not only for the construction portion but they’re also bidding on it for the 30 year maintenance.
So a lot of the numbers have focused on the construction cost — being the the $234 million under a P3 — the long term 30 year equivalent I believe is $760 million. So just like in anything it was the same with the stadium, the operating and maintenance for a large asset like this can be equivalent or more than the up front capital cost. But the process here is that obviously we go through the same process of short listing and selecting one to carry out the project. Throughout that process the contract is established and the firms bid.
So there’s a competitive nature obviously, price is a component of firms winning. So that’s factored into that. Basically there’s a contractual arrangement set between the city and the eventual proponent so they’ll have bid knowing what they’re going to be held accountable to over the 30 years. They’ll understand all the contract provisions and typically, just like any other contract similar, there would be some provision in there related to inflation. So they’ll bid a certain amount competing with other firms and knowing that there’s going to be some provision in there that covers inflation. So typically in contracts like this, we would use some kind of third party proxy for inflation.
PD: What do you mean by “proxy”?
BS: Might not be CPI [Consumer Price Index], but it might be some equivalent. So you use some objective figure so that during the course of time you’re not arguing how much inflation is. It’s set up front. ANd they bid the contract knowing what that looks like.
The only thing that might change that is if there was some unexpected event that came out along the way where typically it would be things where the city changes it’s expectations.
So somewhere along the line, say 10 years in, the city says, “Oh, by the way, we need you carry out this additional service or do something different than what was structured in the original contract.” And then typically in that case there would be some negotiation of a fee to cover that.
Those would be the typical pieces.
SO that’s where there’s a separation between rate setting and the p3 process. It’s basically the cost to the consortium is known up front. the provisions are structured in the contract and then the eventual cost is following the competitive bidding process.
Does that make sense?
PD: Yeah. It does. They’re getting a portion of the water rate but they can’t suggest, “Oh, we need an extra couple bucks a year to cover maintenance.”
BS: No. They have to understand that up front. And that’s part of their bid up front competing with others obviously to win the contract. THat’s all established up front. And the only caveat is some type of unexpected event and obviously the contract has a mechanism to deal with that. AN d it’s usually set up to not hamstring the city in a contract like that. Somewhere along the lines if expectation s change there’s an ability and a process to have the contractor carry out additional work and so on and negotiate a fee for those.
PD: That’s one of the things that we’ve heard when we’ve spoken to experts on P3s, that if the city starts changing the parameters of the project that’s a real red flag because that’s when you get this snowball effect of extra costs piling up. You say you guys are taking that into account?
BS: It’s the case in a traditional procurement. Typically, speaking where one of the areas where a traditional procurement go over time and over budget is changing scope and expectations of the project. So in those the decision making process can take a while and sometimes obviously the politicians get influenced by certain things in the community who might say we need to deal with this so lets add this to the scope of the project while at the end of the day you pay for it.
In a P3, it would be exactly the same. The only difference being the process from a P3 requires the city to set out its expectations up front. So there’s lots of work done up front to try and cover off any eventualities. As well as the fact that the requirements for the project are dealt with in different ways. So in a traditional procurement usually because the processes are split up, so you design it you take bids on building it, and on and on so that they’re separated. With a P3 obviously it’s all done together with the consortium. So those kinds of things you would do your due diligence up front to avoid any change orders. Would be the same though in a P3 if you somewhere along the line decided to change things it gets repriced. The contractor comes along and says, “you didn’t have that in your upfront expectations and so let’s talk about a price for that.”
The approaching the P3, the specifications are outcome based. You’re familiar with the stadium so an example there is if you remember the things around wind and sun, right? So that was kind of a key feature of the reference design. So what would end up doing in the document for the bidders is say we expect a certain level of performance, so we expect maybe no higher wind than a certain calculation or the sun to be dealt with in a certain way. But we don’t tell them how to do it. In a traditional procurement, the way the process is set up, you actually have to determine how it’s going to be done. So you do the design first and then obviously the builder comes along and bids and in that case you can end up in situations where the builder comes along and says the designer didn’t think about this so the conditions are different, or whatever things happen along the way. Whereas in a P3 it’s more performance based. We don’t dictate to them how they do it, we just tell them this is what we want and the contract requires them to meet that performance requirements and if they don’t they don’t get paid or get some penalty.
PD: One of the lines we’re hearing [from the No side] is that the risk is all transferred away from the city and onto the private partner. We own the plant, we set the rates, all the city employees continue to be employed, unions stay intact, benefits stay the same…
BS: Let me just clarify one piece on that. Not all of the risk is transferred. So what we do is we go through a process and assess who is best able to take certain risks. There would be a long list of potential risks but in some cases the city is better off handling certain risks. And in other cases the private sector would.
I’m trying to think of examples of how to make sense in terms of ones the city would continue to accept as opposed to the private sector. Usually the ones the city continues to accept would be things that would be more within our control. So…
PD: Like, say, if the community demanded something extra or…
BS: Yeah… so… that’s kind of a bit of a change scope, so that would be one piece I guess that would be clear that once the performance specifications were set out the city retains the risk of changing it. So it doesn’t say you can’t change it but it says if you do the risk is you’re going to have to pay for that. The private sector won’t simply absorb those costs of changing expectations.
There would be typically things… one that tends to come up is there are things around say geotechnical risk is one. So things of that nature in most large projects like these ones there’s lots of studies and analysis done and experts come in and in a typical case all that material is shared with the private sector bidder. They see through the procurement process the result of all that testing and everything and the geotechnical as related to soil and the type and for them considering what type of structure they’re going to put on it they carry that risk going forward. They’re fully informed of the status and they carry that risk going forward. So the city says, your’e fully aware of the conditions and you’ve got all the information and they bid knowing that if they start digging something changes or whatever else that’s their cost. It’s going to cost them more.
There could be things like environmental risks might be one that it’s hard to depending on the nature of the site in general environmental risk is one that’s hard to identify ahead of time. And it can be big or small. So usually there’s lots of discussion between the sponsor, the government, the city and the private consortium in terms of working through that. And sometimes they split it. And sometimes it stays with the city. It just depends on the nature of it.
We go through a whole long list of potential risk areas and there are certain ones that it makes sense for the city to continue to hold because in some cases transferring that risk to the private sector, as has been talked about, the private sector will price that in. And sometimes like so we would do an assessment of saying how likely is that risk to occur and are we comfortable retaining the risk versus like in insurance paying the private sector to take on that risk. Sometimes you look at it and say the risk is fairly small the impact might be high depending on that item but you do an assessment and say well the impact might be high but we think the chances of it occurring are really low so we don’t want to pay somebody for that, we’ll retain it and manage it ourselves.
PD: Okay. So with all this, and especially if there are cost overages because of whatever, it seems that this is a very good deal for the city.
BS: M-hmm.
PD: Then why aren’t private waste-water management companies funding Regina Water Watch and trying to keep these P3s from happening? They seem to be giving up a lot of benefits they would have under a traditional Design Bid Build procurement. What additional benefit are they getting out of a P3 to make it worth their while?
BS: Well, for one they’re in the business, right? Waste water is the business that they’re in and so most of the firms that would bid on projects like this would also bid on traditional procurement. IT’s not really their choice what the procurement model is. Obviously the sponsor in this case, the city, they decide how they’re going to procure a certain asset. And the private sector typically speaking will participate in either process.
Now certain firms out there have different objectives that they’re looking for so in some cases P3s might be more attractive to them. They might come harder at P3 projects. Maybe they’re more comfortable with traditional projects so they maybe they have an expertise in terms of that method.
The other thing to keep in mind though is that there’s a lot more than just two models. So in our case to start out the process the city reviewed 12 different procurement models. So the private sector is well-versed in each one usually. Firms have certain experience. Maybe there’s certain models that they’re more comfortable with versus others. At the end of the day they’re in this business. They have expertise to bring to the table and obviously if they’re successful they’ve proven they can generate a profit form these.
The other thing to keep in mind is I’m not familiar with the details but what I have heard is anecdotally, and this would be in the US where from an economic standpoint they’ve been through a downturn over the last number of years, there are private sector firms that are bidding on projects at basically no profit or very low just to be able to keep their staff working, to keep their firm going through a downturn in the economic cycle.
So we don’t fully ever know what the motivation of a private sector firm is to be involved. Obviously we know they’re there to generate a profit which they would do in any model. So traditional P3, construction managed, all these models that are out there, they’re going to generate a profit in any one, that’s why they’re in business.
In this case, one of the factors is with P3s, they are a long term contract. And they are larger contracts. I mentioned in this case the P3 would not only be in construction but in the ongoing operations and maintenance. Instead of, to use the P3 numbers, instead of a $224 million project it’s a $760 million project over 30 years. That’s a big project. It’s attractive and that’s the business that they’re in. So usually they’re well versed on various different models and they do assessment of each project and determine that there’s something for them and that’s part of our process. It’s structured in the policy that council set out. So one of the early tests in determining whether a P3 makes sense for a project or not is a market sounding process. So we did that with the stadium and we did it with this project. And that’s really going out to the market before getting to far into and saying here’s the general features of the project that we’re looking at, give us feedback on whether it’s a viable P3 project and whether or not your firm would be interested and participating in that.
Early on in the process we get a sense as to whether or not it makes any sense as a P3 and are able to gauge the level of interest.
PD: On the reporting side, I’m assuming there will be some way that the P3 consortium will be reporting about how things are going at the plant every year. Would they be doing some kind of report to administration that would then go through to council? Would they make a presentation every year or whatever before council? What kind of requirement would be on them?
BS: I’ll have to double check. At the very least it goes to administration. The contract that is structured with them has a whole level of performance requirements and reporting requirements. There’s compliance reviews and all kinds of work going on on a regular basis. At the administrative level they would be reporting to the city more often than they would be to council. I can’t say specifically if there’s a requirement for them to report to council. In any event the administration would do that as part of our regular process. Whether that is the annual budget process is related to various rate setting, w’er e obviously reporting to council on a regular basis and so irregardless that information would go to council on a regular basis and I can’t say how often but that’s the general nature of how things would work. It has some fairly detailed reporting administratively to the city overseeing it and then on a periodic basis that information would go to council as well.
—————————————————————
FOOTNOTE
¹ Do not be fooled. I am a lazy toad.
