January 21, 2013

“Overly optimistic” ridership projections for Air Rail Link: Ontario’s auditor general

TORONTO

The Auditor General of Ontario’s 2012 report concluded that Metrolinx’s initial assumptions about projected annual ridership on the Air Rail Link (ARL) may be overly optimistic and its risk assessment lacked actual experience.

As part of the Regional Transportation Plan (RTP), the 25-kilometre ARL will connect Union Station and Pearson International Airport primarily using GO Transit’s existing Georgetown South rail corridor. A new 3.3 km “spur” line connecting the Georgetown South line with the airport is also being constructed.

The ARL’s estimated cost is about $456 million. A significant number of enhancements are also underway on the Georgetown South rail corridor, primarily to support an increase in the level of service for GO Transit on that line; but the ARL will also benefit from these enhancements.

The estimated total cost of the enhancements on the Georgetown South rail corridor is about $1.5 billion.

At the time of the audit, the province had not specifically required that Metrolinx recover the cost of operating the ARL from revenues that services generate.

The audit recommends that “Metrolinx should work with the Ministry of Transportation to clearly define the business model under which the Air Rail Link (ARL) should operate to ensure that the ARL will be a viable and sustainable operation.

Given the importance of having a reliable estimate of projected ridership at the various possible fare levels, Metrolinx should periodically update its ridership forecast.”

In its response, Metrolinx agreed on the importance of reliable ridership forecasts and an independent analysis has been obtained to create ridership projections and it will work with MTO to finalize the business model.

On the basis of a positive value for money (VFM) assessment, Infrastructure Ontario (IO) decided to use the Alternative Financing and Procurement (AFP) model for the delivery of the spur line and a $128.6 million contract was subsequently awarded to private-sector consortium

The Auditor General found that the process of procuring the AFP contractor was competitive and fair to all respondents and using the AFP model would result in a net savings of about $20 million.

While the total of the base project costs and ancillary costs under the AFP approach was estimated to be about $22 million higher, this was offset by an estimated $42 million in savings related to the transfer of risks under the AFP model.

The two largest risks retained under the traditional delivery model are construction risk and design and tender risk, which account for two-thirds of total risk retained under this model.

The Auditor General said that while IO has significant experience in capital projects such as hospitals and courthouses, there was no evidence that the estimates of the risks delivering the spur line through traditional procurement were based on actual experience of similar traditionally procured transportation projects.

“The actual experience from these could have been used to assess the reasonableness of the values assigned to the risks that are seen as being retained under the traditional delivery model, especially given the significant $42 million risk differential between the two procurement alternatives, which was the deciding factor in going with the AFP approach,” said the report.

The report also said “because Metrolinx would be locked in very early on the specifications of the project under the AFP model, the additional cost that could be incurred as planning and design progress because of subsequent changes identified and considered necessary could also have been considered in the allocation and valuation of the risk retained under the AFP delivery model.”

IO’s procedures allowed the consulting firm that created the risk allocation matrix to later bid on a contract to provide engineering and technical advisory services to support the planning and procurement of the spur line under the AFP model. The contract was subsequently awarded to this firm.

The Auditor General recommended that when assigning values to transferable risks in the evaluation of value for money between procuring assets via the traditional method or AFP, actual experience from recent traditional infrastructure procurements and AFPs should be thoroughly assessed.

IO responded that “Infrastructure Ontario ensured that strict controls were in place to maintain objectivity of the firm conducting the value-for-money analysis and the engineering advisory services.”

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