Private money to build North Bay hospital: cost over-runs at hospital projects in Greater Sudbury and Thunder Bay factored into the government's decision to demand value for money and fiscal accountability through a process that is fair, transparent and efficient.

North Bay's proposed new hospital will be one of the first three major public capital projects in Ontario financed through private sector investment.

Funding of the $220-million North Bay Regional Health Centre project will be done through the province's new Alternative Financing and Procurement (AFP) process, says Wilson Lee, spokesperson for Minister of Public Infrastructure Renewal David Caplan.

While the details have yet to be worked out, the province has issued two Request for Proposals (RFP) on its MERX Website (www.merx.com) for two advisors to help securing financing from capital markets and to assist in process advisory services.

The advisers will assist hospital and ministry officials in preparing a financial plan. Preparatory work at the Highway 17 site continues this summer. Once a ministry-approved financing plan is in place, the project is expected to go to tender sometime this fall. The start of construction is anticipated by spring 2006.

Last April, the Ministry of Health and Long-Term Care gave the green light for North Bay to proceed with the project, which is expected to attract many major private investors, says Lee.

"We've got many big players interested in the growing Ontario AFP market."

Alternative Financing and Procurement projects are part of Renew Ontario, the government's five-year infrastructure investment plan to design, build and finance major capital construction projects, particularly new hospitals, by going to the private sector.

A new provincial agency, the Ontario Infrastructure Projects Corporation (OIPC), will report to Caplan.

The agency's mandate is to use 'best business practices' for all areas of infrastructure planning, financing, construction and management.

Cost over-runs at hospital projects in Sudbury and Thunder Bay factored into the government's decision to demand value for money, and fiscal accountability through a process that is fair, transparent and efficient.

"It's no secret that the private sector seems to manage these types of projects much more effectively than does the public sector," says Lee. "This is one of a series of strategies to ensure that projects are delivering on time and on budget."

Paul Landry, the North Bay Regional Health Centre project's executive director, did not return phone calls to Northern Ontario Business. A North Bay General Hospital spokesperson deferred all inquiries to the Ministry of Public Infrastructure Renewal.

North Bay joins Ottawa's North-South light rail transit project and the Durham project in being funded by the private sector. Bidders for the Durham project were recently shortlisted to include CIBC World Markets, the Labourers' Pension Fund, TCL Construction and Ellis-Don Construction.

"Players like those could be interested in the North Bay hospital project, but I couldn't tell you specifically until we issue the RFP and see who is bidding," says Lee.s

Though it's unknown what investment groups, lenders or pension funds will be approached for the North Bay project, Lee says, "I can tell you there are consortia and groups quite ready to jump into this opportunity."

The Ontario government is the largest buyer of construction in the province. They are planning to spend more than $30 billion on infrastructure investment over the next five years, with $2.6 billion coming from private sector investment.

Lee says only a "modest amount" of projects will be privately financed through this initial phase-in period to allow the industry to adapt and scale up.

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The vast majority of Ontario projects will still be delivered using traditional Crown construct methods.

For now, AFP projects are being restricted to large, complex projects valued at more than $100 million.

Labour groups, including the Ontario Federation of Labour, are campaigning against the scheme fearing these public-private partnerships, first introduced by the previous Conservative government as P3 projects, could lead to the eventual privatization of new hospitals.

Lee says plant operations in hospitals, known as "heart facility maintenance," would "definitely" be considered for private operation, but not administration.

"In some instances it's possible, but it's really a hospital board decision," like contracting out security and food services.

The Harris and Eves governments began using public-private partnership methods to build two hospitals in Brampton and Ottawa, before the Liberal government took back public ownership of the projects.

The process has also been used extensively in British Columbia, the United States, Australia, New Zealand, Ireland and Great Britain.

Lee says Ontario is getting into the game relatively late compared to other jurisdictions in opening up to the financial markets, but will have the benefit of learning from the experiences of others.

He adds all parties will have to approach projects with more rigour and discipline because there will be financial penalties for consortia undertaking these projects.

"There are opportunities for good returns but also risks for failing to deliver," says Lee. "We expect these private consortia to manage these risks because that's what they're being paid to do. That means no cost over-runs or they bear the penalty."

With a new process in place, it's up to Ontario's construction industry to make the adjustment, says Lee.

Council of Ontario Construction Association (COCA) president David Frame calls this public-private funding scheme a "mixed blessing" for the industry.

Sharing project risks may force contractors into different business arrangements that some may not be entirely comfortable with, Frame says, while others, with a higher tolerance to risk, may be interested in these projects.

Initial feedback from his Ontario membership is mixed. Generally, they agree the province needs to invest and find money beyond the traditional methods, but there are members who do not like this way of doing business.

He says it's generally acknowledged Queen's Park can no longer fill Ontario's health-care, education and transportation infrastructure needs over the next 30 years using traditional methods of financing projects.

And having taxpayers pay "up front" for hospital projects, which really represent a 40 to 60-year investment, is not reflected in the use of those buildings, he says.

The process is similar to a mortgage, Frame says.

"It makes sense to do public-private partnerships ... just because you pay for it over (the) lifetime of the project."

Frame says hospital projects are notorious for constant change orders, which slow down the process and increase costs.

He finds the creation of a new government agency to co-ordinate capital projects and lay out a long-term strategy as ultimately good for the industry.

"In the long run, the problem we've had is budgeting and planning (for public capital projects) have gone year to year, or at most in three- or four-year circles. Overall, it doesn't work.

"One of the big issues is we know what the demand is next year, but we don't know what the demand is three years and out.

"The government is putting together 10- and 30-year plans that are badly needed, and we have to recognize these long-term needs. The overall approach is good and it's certainly on the right track."

www.coca.on.ca

www.pir.gov.on.ca

www.merx.com

By IAN ROSS

Northern Ontario Business