Estimates go as high as $1 Billion. They apparently knew for years (2007) that the project would be in trouble and the City's investment would be at risk, but I didn't hear anything until the credit crisis conveniently came along in late 2008 to blame it on.
There was a secret deal (that's what in camera means) to lend $100 Million to the project in fall of 2008, and now we are in it up to $1 Billion.
That is unfortunately the down-side of PPP (Public Private Projects) the Private gets all the profits and the Public walks off with the losses. What else should we expect when we get Wall Street financiers and Developers signing contracts with council-folk who spend most of their time wondering how to increase hockey hours on the local ice-rinks. Lamb to be sheered.
The question is - who advised the CITY? Which law firms or financial institutions-anyone know. What is their liability in all this?
How much is $1 Billion? Well hopefully the city won't lose that much, but to put it in perspective, it is one year's total annual revenue +/- or it is double the current outstanding debt.
As for our debt rating, I checked and the city's short term debt seems to be holding up well - comparable to the banks but that could change
It is truly a scandal as Gary Mason says and if it bites the COV badly then we can look forward to reduced services.
PPP (Public Private Partnership - not Project) has nothing to do with the Olympic village. Don't blame the private sector or PPP (which you don't seem to know what it's all about) for the mistakes of the Province and COV. Ultimately, they decide and the consultants/lawyers just make their decisions happen.
ReplyDeleteUnlike what you said, PPP in the Province have been very successful (unlike other part of the world) and have saved millions of tax-payer money.
If the COV had let the BC stadium roof the way it was, they would have saved $500m, way enough to cover the losses on the Olympic Village...
Ummm, I am fairly sure the CoV has nothing to do with replacing the roof on BC Place. Replacing the roof is a provincial initiative.
ReplyDeleteAnon- true it is Partnership not Project. My wrong.
ReplyDeleteHowever I do NOT agree with your premise. The only PPP that work are those which have gaurenteed tax-payments associated with them.
Like hospitals or nursing homes. Easy to make money when you have a pre-determined steady stream of public money coming in.
This project should have been either :
1) Private. You get free/cheap land. Biuld it, house the Olympic athletes for the ir fun and frolics, then sell it- good luck
2) Public. We pay to build it and then it goes to social housing or we try and sell it and WE KNOW we are going to take a known loss.
What we got is a soup, where Fortress out of Wall Street and Millenium and the City had convuluted deals which ended up with the tax-payer being on the hook.
I have not seen the agreement so I can only guess at it. And I guess that there were lots of clauses that allowed the financing company and the developer 'outs' if they weren't going to make a profit.
That is terible way to do business. Again who avised the City- anyone willing to find out under the Freedom of Info act.
Well Fish, it did allow the government to say the Olympic costs weren't that high pre-Olympics, and only afterwards they fessed up to the huge OV liability. So it saved a lot embarrasement.
ReplyDeleteFish,
ReplyDeleteThe problem is you're mixing things. A PPP is a specific type of contract that usually requires a private consortium of companies to Design, Build, Finance, Operate and Maintain (a PPP is also called a DBFO or DBFM or DBFOM) an infrastructure. The best example in Vancouver is the Canada line, that was build ahead of schedule and for much cheaper than anticipated (remember the mess on Cambie Street? I can tell you it saved a sh*t lot of money to the Province).
In a PPP contract, the authority (Translink in this case) sets up performance requirements that the operator has to comply with. If the operator can't meet the required performance, it get penalized quite heavily. That's why, in most cases, PPP works.
Another example is the Golden Ears Bridge. The Province doesn't put any tax money into it, it's being paid by the Tolls collected from vehicles that cross the bridge. You might not agree with me, but that doesn't mean you're right...
I'm a consultant and do work everyday in setting up these kind of contracts (not just me, I'm just part of usually huge teams of engineers, financiers, lawyers, etc...). I can talk for hours about this topic, but I would get everybody falling asleep quickly. There are some controversies with PPP, but they are not what you think/implied in your message.
To finish my point, what happen at the Olympic Village is different and, again, this was not a PPP. I don't know all the details but from what I've heard/read, the developper was not strong enough financially and couldn't find the financing on the market to finish the project. As someone said above, the City had the choice between bailing the project out or be in the world most embarrassing situation (the developer was virtually bankrupt at that point).
Did they really have the choice? No.
Did somebody screwed up along the way? Yes, for sure. But four years ago, who could have predicted that the wold was going to go through the worst financial crisis ever? Did you?
You're writing a blog that I enjoy reading.But your position of blaming/criticizing is much more comfortable than the position of people that make things happen. A contract like Canada Line or Golden Ears takes months, sometimes years to set up. Very bright and smart people work on it. They do their best to mitigate risks and deliver projects with the best value for money. The only thing they don't have is a cristal ball where they can read the future.
To finish my (too long) message, in my opinion, the person that screwed up on the Olympic is the one that believed it was possible to sell condos for $1,000/sq.ft. at this terrible location. I don't know who that is, but I wouldn't like to be in his shoes.
Part One:
ReplyDeleteAnon
I don't agree. The OV was a foolish decision - the whole Olympics were IMVHO- but the OV was the icing on the cake.
Fortress probably had clauses which committed this 'weak' developer to get other funds , for which they turned to the city. (of course none of us plebs who will pay for this will ever see the contract)
The CFO of the COV had been warning on the project in 2007, well before the credit crisis.
There were reports in the media coming out at the same time.
Then it hit the fan due to $60 Million in cost over-runs and weakness in the housing market in late 2008 and luckily the credit crisis gave everyone someone else to blame.
Part Two
ReplyDeleteIn late 2008 Peter Ladner was strongly defending giving another $100 Million to the developer- money that came from the City's 'social housing budget'. Social housing money for $1000/foot apartments!!
This $100 Million was ON TOP of the $193 Million in loan guarantees to keep the lender Fortress content and a previous $30 Million payment to Fortress on behalf of the developer.
The decisions were made in camera, as the negotiations were so 'sensitive and critical'. Well it doesn't sound like we did very well out of these negotiations. Though of course without information, we can only guess.
So slowly we have become more and more immersed in this financial obligation.
If right off the top, we had been told that the OV may cost the city up to $1 Billion, now vote. But the Pro-Olympic group could use the PPP to show that the cost to us would be very little.
Most contracts have clauses to penalize late/failed projects- in ours - we bailed out the developer- isn't that always the case. Those with power and money find a way of accessing even more tax-payer money even when they fail- like AIG and Wall Street and the banks.
As to the 'being embarrased in the eyes of the world' screw it! better to say to the IOC- we will not keep handing over tax-payer's SOCIAL housing money to keep this project afloat. DIg in to your huge reserves and fix it or house your athletes (condoms and all) in Kelowna's hotels!
Now we are the big swinging **^&s who managed to pull it off and will pay for it for years- like Greece and Montreal and all the other places who let egos drive them into this morass.
I agree. If the credit crisis was the excuse used by the developer for a bail-out, why didn't the city use the same excuse to get money from the IOC. I even remember the IOC saying something about helping if absolutely necessary when the mood in the city was turning against the bail-out.
ReplyDeleteYou're much more informed than me on the OV topic and I'm not arguing against you. I'm a tax payer and I keep shaking my head every time I pass by the OV. I'm angry too, like most of the tax payer in this city.
ReplyDeleteYou wrote in your article "Which law firms or financial institutions-anyone know."
Well these firms are what they are: Advisors. Ultimately, it's the politic that take the final decision. And I can tell you that in many cases, for political reasons, the politics don't follow the advice given to them.
This project is a failure. The politicians behind it should pay the price for it. It's up to the voters to decide.
Final point. If a PPP had been set up for the OV, it would have looked/felt much different and cost a lot less. All the projects that have been done through a PPP for the olympics have worked (on budget, on time, on scope) well: Sea-to-Sky highway, Canada Line. All the projects managed directly by a public entity failed: OV, Conference Centre. Now, ask yourself why?
Anon- I don't mean to drag this on forever, but I do like to learn and correct any errors...mine or others.
ReplyDeleteI can see how Canada Line was a PPP, but how was See-to-Sky or the Conference Centre. Were they not just- build us this and here is the money- both over-budget - of course.
As to direct management. The city only got involved when the developer Millenium, which was not really that weak- they had just finished Water's Edge in West Van , a huge development- over-sterched themselves...
With a conference/retail centre PPP in Nanaimo- which they had to stop work on
And a large development in West Van, the Evelyn, which last I looked had also ground to a halt.
They may have had other projects too.
In any case when you have Wall Street financiers and developers negotiating with city officials and with councillors, we will always lose.
They should have made sure Millenium had the money IN THE BANK period. No games. There were other bidders. There is no way they should have gotten involved in providing gaurantees for the developer's financiers- that had nothing to do with the city!
Would you be a bank Gaurantor for your builder's loan?!
We know how high the ethics on Wall Street is and we see how many people is this town have been left trying to fix up shoddy construction when the developers have walked away and washed their hands.
This was a bad deal IMVHO. I still ask who were the advisors and did the COV ignore the advice or follow it. If they followed it, there may be a case to recover some funds. Since you seem to be inside some of these projects, do you know who they were?
I am not a lawyer, just an angry citizen.
"why didn't the city use the same excuse to get money from the IOC"
ReplyDeleteBecause if they did, they wouldn't be invited to the "right" parties during the Olympics.
"If a PPP had been set up for the OV"
ReplyDeleteWell I don't know where you draw the line with what constitutes a PPP and not, but what do you call The OV project? Millenium and Fortress are awfully "private," the City is awfully "public," and the contract is awfully "partnershippy."
Fish and Jesse,
ReplyDeleteA PPP is a specific type of contract. I can't really get into much detail of explaining you how it exactly works in just a few words, but basically, a PPP is set up in such a way that:
- the contract is usually over a very long period of time (from 25 up to 60 years)
- the contractor (or consortium usually) design, build, finance (that point is important), operate and maintain the infrastructure over that period of time
- the price set at the beginning can't be changed once the bid has been awarded (it's called "financial closing")
- in case of the Sea to Sky highway, the Province pays a set monthly fee to the Consortium minus penalties if the performances are not met. For the Golden Ears Bridge, the lenders get their money back through tolls (in reality, it's a bit more complicated).
- The lenders (ie the banks), on these type of contracts, are the real bosses. Because if the designer/builder fails, they'll take the loss (except under very specific circumstances, that are extremely rare).
- the philosophy of a PPP is to allocate risks related to a project to the entity that is best able to manage it (usually, the private sector is better for managing certain risks while the public sector is better to manage others)
To answer Jesse's point, every project has a public and a private component. The ministry of transportation never build a road. It's always a private company that builds it. The difference between a PPP and a classic contract is the way the project is being financed (plus other details). In a classic contract, the Province will pay directly for it and take all the risks. In a PPP, the bank will finance it, take some risks, and will get paid back through a monthly fee over an extended period of time.
I can go on and on. My point is that there is a misunderstanding in the public about what a PPP is. In BC, this program has been very successful for the Province and for the tax payers.
The OV is not a PPP. There is no question that the private developer and the COV totally screwed up. Don't blame it on the PPP.
In my opinion, the City and the developer probably got too greedy, thinking that the RE market will go up forever and that they would make $zillions. That failure reminds us all how costly greed and speculation can be...
On the contrary- sounds like the OV was a PPP that morphed into a COV take-in to save face.
ReplyDeletefranck,
ReplyDeleteThe OV was not and has never been a PPP. It was a private development with COV involvement. That's it.
If you guys want to know the projects that are PPP in this province, go to http://www.partnershipsbc.ca/
The contracts are public, everybody can see them, unlike the one for the OV...
@Anon "The contracts are public, everybody can see them"
ReplyDeleteSuccessful P3s are successful because of their carefully designed processes. When these processes are usurped in the name of convenience, expediency, or hubris, it rarely ends well.
The fact the OV deal was not a P3, or at least failed to follow established P3 protocols, is an egregious mistake and the council deserved to be thrown out on the street. I commend Fortress at picking up on how poorly managed it was, and doing well for its investors.
That said, if OV were a P3 it doesn't necessarily mean it would have been successful.
"if OV were a P3 it doesn't necessarily mean it would have been successful"
ReplyDeleteSurely not, but if it was not successful, the banks, not the City, would have taken the hit.
A P3 for the OV would have been very difficult to justify anyway (there are some conditions for a P3 to be doable). I'm getting back one more time on the problem of people not understanding what a P3 is...
"but if it was not successful, the banks, not the City, would have taken the hit."
ReplyDeleteWell the timeline and deliverables were set up such that failure was not an option. Not surprising the City wanted control to ensure it completed on time.
Why wouldn't a P3 model have worked for a condo development, out of curiosity? Was it because they wanted to sell much of the structure off? If the entire building was rental it's not much different in concept from a bridge or a subway: capital asset with ongoing revenue streams and maintenance obligations. Sounds mighty similar. I'm curious.
"Why wouldn't a P3 model have worked for a condo development, out of curiosity?"
ReplyDeleteIn theory, it would be possible, but in reality, a P3 is set up for infrastructure that have a big "O&M" (Operations and Maintenance) component. In a condo development, the operations and maintenance part is very limited, compared to a transit system like skytrain or a hospital. It would be too costly to set up a PPP for a simple condo development. The usual way works (generally) fine, except in cases like the OV.
What makes a PPP works in general is innovation and efficiency. Innovation in the Design (much more flexible when the government doesn't get in the way) and Construction Method (productivity is higher in PPP) and efficiency over the long term in operating the infrastructure. To take a simple example that I worked on in another country, the city had 25 people to maintain the street lighting network. After a PPP was set up, the operator only had 9 people to do the same work, and was better at doing it... Innovation also allowed the city to save millions in energy costs.
There are some controversies around PPP. They work really well but:
- they are extremely costly to set up (about $25 millions of consultant fees (lawyers, engineers, financiers, etc.) for a $1b+ project)
- the financing part is done at market rates, usually higher than what the government can get.
- it allows the government to hide debt and start lots of project at the same time it couldn't afford without PPP. A PPP is like "get it now, pay later": sounds familiar?
In BC, this process has been managed fairly well in my opinion, except for one project that is coming (I can't talk about it unfortunately).
"P3 is set up for infrastructure that have a big "O&M" ... component"
ReplyDeleteOperations of a large development like the OV isn't negligible. If it is set up as rentals there is constant turnover, landscaping and cleaning, dispute resolution, security, etc. I don't see how the magnitude of these activities precludes it being a P3.
What would preclude P3 is the fact that apartment rentals at current land prices are a bad investment. The City would effectively have to bequeath the land to make the return for a private property manager adequate, notwithstanding the insistence of "green" initiatives and other such appendages.
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