Procurement alliances will be key to securing water work, C.D. Howe Institute report finds

Peter Kenter
Daily Commercial News and Construction Record
June 24, 2011

Contractors who want to be part of addressing Canada’s massive sewer and water infrastructure deficit need to align themselves with consortiums capable of delivering design-build-finance-operate (DBFO) contracts and to become active in promoting policies that will see such contracts become commonplace, says Elizabeth Brubaker, executive director of Environment Probe.

“Construction companies who can position themselves to work with those who offer the full DBFO package have the most to gain from the coming boom in infrastructure projects,” she says. “These aren’t necessarily only large multi-national corporations, but smaller companies with local and specific expertise.”

Brubaker, author of last month’s report, A Bridge Over Troubled Waters, for independent policy think tank the C.D. Howe Institute notes that sewer and water system construction projects frequently rack up cost overruns. Part of the problem is a lack of on-staff project management and engineering experience.

“But I think there’s an additional, and more important, explanation of cost overruns,” says Brubaker. “Municipalities are short on incentives to estimate costs accurately.”

She points to studies by Oxford University professor Bent Flyvbjerg who charges that cost estimates are often “strategic misrepresentations” designed to get infrastructure projects rolling.

“A high benefit-cost ratio increases the likelihood that a project will go forward and is in the interest of all who will benefit from the project, from politicians, to consulting engineers, to construction firms,” says Brubaker. “In a public project, all of these parties have incentives to underestimate costs, and few incentives to control them. In the event of cost overruns, they will suffer few penalties.”

According to the report, DBFO contracts are game changers.

“Private projects have different accountability mechanisms and change these incentives,” she says. “Under a well-designed DBFO, shareholders rather than taxpayers will suffer if costs escalate. Private consortia have powerful incentives to keep costs under control. If, after a competitive bidding process, you issue DBFO contracts over an extended contract period, with a contract incentive to build on time and on budget, you can be sure that they’re building something that offers long-term efficiency over the life cycle of the facility.”

Even large municipalities are often lacking in water system maintenance and operating expertise, when compared to private companies, some of which have more than a century of accumulated experience, she says.

While municipalities are quick to take advantage of government grants to build up sewer and water infrastructure, Brubaker says grant programs are a double-edged sword.

“When they get the money, they often overbuild the type of infrastructure the grant targets,” she says. “Some municipalities have built to 40 per cent overcapacity and they’re now on the hook for the operating costs of the unnecessary infrastructure.”

The Ontario government estimates that municipalities will need to spend as much $34 billion between 2005 and 2019 to meet their water and wastewater needs. That deficit could be financed with private funds, says Brubaker. Canadian pension funds, in particular, are eager to finance such operations, but are investing money outside the country where such public-private enterprises are more commonplace.

Brubaker argues that before we can assess the country’s actual water and wastewater infrastructure deficit, we need to move to a full-cost recovery model. Municipal water revenues in Canada cover only a fraction of the cost of service provision, construction and the environmental costs of water and wastewater operations.

“We’re not even sure how much going to full cost will affect the use of water services,” she says. “Until we start charging the right price for water, we can’t make a judgment about whether we need to expand capacity or whether capacity is already adequate.”

Brubaker advises contractors to not only press for legislation that mandates water pricing reforms, but also to advocate for more private financing of sewer and water infrastructure.

“Municipalities aren’t going to build infrastructure if they don’t have sufficient capital or operating funds,” she says. “Sufficient funds are simply not going to be coming from upper levels of government. If the infrastructure is going to be built, it’s ultimately going to have to be paid for by those who use and benefit from it.”


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