The Ontario government is struggling to attract bidders for its major infrastructure projects, partly because companies are hesitant to take on too much financial risk under the government's preferred procurement model, the province's auditor general has found.
Auditor Shelley Spence examined Infrastructure Ontario's (IO) procurement processes for hospitals, highway work and other large infrastructure projects, finding, that over the past decade, the number of bidders on these projects has fallen from more than five to half that in the 2020-2023 period.
The small number of bidders — as few as a single one in some cases — makes it hard for the government to ensure it's paying a competitive price for these major projects, the auditor found.
"It's the risk-sharing of the model," Spence told reporters at her press conference Tuesday when asked what's keeping potential bidders away. "So if you have a fixed price and your prices go up, you're the one that's going to be losing the profits from that. So it really is how much risk is being shared with the government and how much they're taking on themselves."
The ability to put the burden of the risk of cost overruns onto the private sector is one of the things that makes the public-private partnership (P3) models used by Infrastructure Ontario (IO) attractive to the government in the first place, the report says.
The typical P3 model allows the province to lock in a fixed price when the contract is signed for all design, construction, financing and, when appropriate, operating and maintenance costs. This model is preferred because it allows the province to have certainty over costs, and the province does not have to pay a substantial portion of the cost until the project is complete, the report says.
By contrast, in the traditional construction process, the province first contracts with a company to design the project, and then this design is used to procure a contract with a construction company to build according to the design plans, the report says. In that model, the province retains more risk throughout the project and makes progress payments as work is completed instead of paying for a majority of the construction costs when the project is completed.
However, because of the lack of bidders, IO has changed its P3 process so that the government takes on more financial risk — but it hasn't worked, the auditor found, as the number of bidders on projects has decreased.
Under the new "Progressive P3" model, IO selects a "development partner" through a competitive process and works collaboratively with it through a "development phase" to finalize the design for the project, negotiating the prices and how risk is transferred from the province to the partner at that time, before awarding the contract to the development partner.
However, because IO is working with a single company at that point, it "has limited leverage... so there is a risk that the price offered by the development partner is not competitive," the AG found. To address that, IO retains a third party to create a "shadow bid" to compare to the development partner's price estimates.
And the auditor also finds that transferring risk to the private sector does not come free: "In general, the more risks that are transferred to the private sector, the higher the project costs for the province," the report says.
The report states that this is only cost-effective for the province if the private sector can more effectively manage that risk — transferring risk it cannot manage leads to higher premiums for the province.
The other reason the province is struggling to attract bidders for its projects is their size — a limited number of construction companies with a presence in Ontario have the capacity to deliver large projects, the AG found. Of four projects over the past 10 years where there was only one bidder, each was above $1 billion.
Just one bidder on major hospital
One was the Trillium Health Partners Mississauga Hospital, which the auditor examined in detail and is to be built with the Progressive P3 model but is still in the development phase. The Ottawa Hospital project also received just one bidder — the same proponent as the Mississauga hospital, the auditor found.
"The total (Trillium Health Partners) project cost has not yet been finalized, but according to the latest cost estimates in October 2024, it is expected to exceed $16 billion, comprising of design, construction, financing, maintenance over 30 years and ancillary costs," the report says. "This is $4 billion more than the current approved budget. These costs represent an estimate at the most recent design and cost milestone, and the Province has the right to negotiate and not accept the contract at this price."
The cost escalations include increases to the scope of the project and construction costs, and fall within an accepted margin of the shadow bid. The auditor general recommended ways the Progressive P3 could be changed to reign in costs, such as requiring the development partner to share the assumptions used in arriving at its cost estimates.
Long-term care beds target may be slipping out of reach
The auditor also examined the cost of a pilot project the province undertook to build long-term care homes quickly during the pandemic and found the process to be about 50 per cent more expensive than its traditional model of financing the private construction of new and redeveloped homes through ongoing payments once the homes are operational.
"Overtime premiums paid during construction, the more expensive modular construction method chosen and supply chain issues during the COVID-19 pandemic also contributed to the higher costs," the report said.
However, the auditor also found the government is almost 40,000 beds short of this target to build 30,000 new LTC beds and redevelop 28,000 more by 2028-29, which relies on that model almost exclusively.
While approvals are in place, "it is not certain that these beds will be built by 2028/29 since operators may not begin construction on time," the report says.
Highway 427 expansion
There were also cost overruns on the Highway 427 expansion project, which was delivered through a traditional P3, a year late and about $98 million over budget. One of the reasons for this was that the province transferred the responsibility for conducting quality checks to the private partner, which did not follow the Ministry of Transportation standards for quality control processes and testing procedures.
The auditor also found that disputes between the province and the company were brought to an arbitrator as part of the dispute-resolution process in
May 2021, three-and-a-half years after the first potential delay was identified, and remain in that process.
Government's response
Infrastructure Minister Kinga Surma was not present at Queen's Park to respond to the report, and the press was told she was sick.
Michael Lindsay, the president and CEO of Infrastructure Ontario who was recently appointed interim president and CEO of Metrolinx, defended the government's record on infrastructure projects.
"The last four to five years here in the province of Ontario have been remarkably successful in respect of the number of major capital projects that have been initiated annually — 36 alone at Infrastructure Ontario in the last four years," he said. "So I would say across government, Infrastructure Ontario, Metrolinx, ministries, we have 100 per cent demonstrated the ability to make progress on major capital projects."
