CG/LA Infrastructure's InfraBlog
Since Infrastructure Ontario was created in 2005, it has injected billions of dollars into the Ontario economy on behalf of the provincial government.
Infrastructure Ontario (IO) is an arm’s length Crown corporation that reports to the Minister of Infrastructure, and is dedicated to renewing and rebuilding Ontario’s core public assets. Through its loan program, it provides Ontario municipalities, universities and other eligible public sector clients with access to affordable loans for the building and renewal of public infrastructure. IO has facilitated the financing of hundreds of infrastructure projects that shape the landscape and culture of Ontario, such as the construction of roads, bridges, hospitals and facilities. IO is also responsible for the delivery of large-scale infrastructure projects using the Alternative Financing and Procurement (AFP) model. Since 2005, IO has brought dozens of these mega-projects to market, worth a combined $16 billion.
AFP-Alternative Financing and Procurement
AFP is designed around five set principles which guide IO. These principles are ensuring that public interest is paramount, that value for money can be demonstrated, that appropriate public control and ownership be preserved, that there is accountability at all times and that all processes are fair, transparent and efficient.
IO is not responsible for the financing on the projects, rather the consortium that builds the projects arranges the financing themselves. Contractors have high incentives to deliver projects on time and on budget: in the AFP model, they are responsible for construction financing, and they must bear any financial penalties for cost or schedule overruns.
“We use AFP because we want the lender to scrutinize the plans to build the project—the design, the construction plan, their due diligence—and once the project is awarded and started, we do not pay until substantial completion,” explains John McKendrick, Senior Vice President, Project Delivery. “That motivates the consortium typically made up of a developer, a contractor, a group of lenders, and a facilities management company, motivating them to get the project done on time, we only pay when the project is completed.” Essentially, AFP brings discipline and due diligence and on budget project delivery to the construction process.
How well has the program been working since its inception? McKendrick says that project completion has been very successful under this model. “Our projects have a high degree of cost and time certainty and are certainly better than previous projects,” he says, and the numbers bears this out. To date, 12 projects have been completed have been completed on-time and on-budget; 20 projects are under construction (three which will start shortly); and 20 projects in procurement. “Our projects have created significant number of jobs; an estimated 74,000 new construction jobs in Ontario since we started the program.”
AFP was designed to kick-start infrastructure projects in Ontario while ensuring value for money is achieved. In essence, AFP transfers appropriate risks over to private sector, to people with greater expertise than the government which helps ensure that cost and schedule overruns are controlled.
Since the AFP program started, it has brought $16 billion into the economy of Ontario, a figure which is increasingly important in context of the financial market crisis and the recession which saw a slowdown in private sector spending. “There was less spending in construction at that time, in particular,” says McKendrick. “It was an excellent time for us to take advantage of lowered construction prices and less demand in the construction sector and create jobs and continue building to support the downturn in the economy.”
“When we started back in 2005, we were assigned about 50 projects. It’s fascinating to look back and see we’ve basically worked our way through most of the projects, and we are starting to get down to the last Requests for Qualifications being issued,” he continues.
About 20 per cent are finished, 62 per cent are under construction, and 14 are in procurement, and five per cent are in pre-procurement. There are 34 hospitals and health care facilities, three court houses, one youth justice facility, one data centre, one detention centre, the Pan Am games that has been assigned (athletes villages, aquatic centre, Pan Am centre), new assignments in the civil infrastructure area like the Windsor Essex Parkway, and the Highway 407 east expansion, to name a few.
Established in 2003, the IO Lending Program has expanded significantly in the past few years beyond municipalities and has extended to service universities, long-term care facilities, and culture and tourism operations. Most recently, in 2009, the IO Lending Program has been expanded to also incorporate non-profit art training (the National Ballet School is a beneficiary, for example), non-profit social programs and affordable housing.
“The Lending Program is about assisting smaller municipalities that have difficulty being able to raise these finances on their own,” says Bill Ralph, Senior Vice President, Infrastructure Lending and Chief Risk Officer. Unlike with AFP, capital for the lending program is raised by IO, in the capital markets, the most efficient source of financing, according to Mr. Ralph. “It gives them access to long-term financing, of 25 to 30 years, at fixed rates for the full-term of the loan, which they can’t get on their own.”
Because the lending program is there to help public sector borrowers, it always prioritizes the lowest rates, access to capital market financing without any fees or commissions and may be used for depreciable capital expenditure.
“Non-profit departments of government have greater difficulties finding financing,” says Ralph. “Without the IO financing, a lot of these projects probably wouldn’t have gone ahead. The repayment structure is exactly the same as your personal mortgage—it’s a blended principal interest payment over the loan term.”
To date, the IO has advanced more than $3 billion in financing for over 1,400 projects at the local level.
One area where there is crossover between the lending program and the AFP program is project management and oversight. When IO lends money to a project, both of these departments have a role in the project management process. “By that, we would have one of the project delivery specialists that work on the AFP projects assigned to work with this project and make sure there is project management and representation in place. What we are doing is using our project delivery expertise to ensure that the large projects we lend to be delivered as efficiently as possible,” continues Ralph.
McKendrick elaborates. “We talk hard numbers all the time, but it is very gratifying to come into a community and help them build their hospitals. A lot of these people have been waiting a long time and have done their fundraising . To help them drive their project forward to get it built on time and on budget and to achieve their vision really combines the best of what public service is all about and doing public service effectively and efficiently. It brings the business angle to the government and making sure taxpayers can trust us with their money.”
IO has had third-party validation of our methods from the Conference Board of Canada, a highly respected organization. The AFP program achieves a high degree of cost certainty and its projects are considerably more transparent than traditional projects. As an example, all contracts are posted on the IO website and are publically accessible.
IO highly competitive
IO is recognised by international infrastructure organizations as being world leaders thanks to a diligent focus on budget, quality, schedule and investing wisely. There are a lot of international players in the infrastructure industry. As economies elsewhere, like Spain, have been going into a recession, a lot of the international infrastructure players have seen the speed with which Ontario has been able to roll out its infrastructure program.
IO’s track record of producing projects while always maintaining an eye on the bottom line has established Ontario as a good place to do business with, streamlined processes and exemplary project delivery and execution. Infrastructure Ontario is continuing Ontario’s tradition of a safe, healthy and prosperous place to live.
Taken from The Canadian Business Journal: http://www.cbj.ca/business_in_action/municipal/ontario.html