Implementation and Operation of Service Areas – Special Audit

Audited Entities

• Ministère des Transports (MTQ)

Audit Scope and Objectives

The audit had the following objectives:

• To ensure that the agreement entered into rests on recognized best practices in the awarding of public-private partnership contracts;
• To ensure that the Ministère des Transports du Québec (MTQ) conducts an adequate follow-up of the partnership agreement with the private partner.

Audit Criteria

• The project responds to justified needs.
• An analysis shows that the P3 approach adds the best value for the MTQ and the Department ensures that this value is maintained throughout the project, namely during amendments.
• A rigorous process ensures a competitive and fair treatment of proposals throughout the different stages (call for interest, call for qualifications, call for proposals, etc.).
• The Department ensures the financial viability of the project and the proposals received.
• Responsibility and risk sharing between public and private sectors, compensation mechanisms and guarantees allow for the best VFM throughout the duration of the agreement.
• The agreement specifies the type of information the partner must provide in order for the Department to effectively monitor compliance of the project implementation against requirements, as well as frequency of reports.
• The agreement clearly states the process to be followed in the event of a dispute.
• The Department has clearly stated the responsibilities and tasks with regard to contract management.
• MTQ carries out a rigorous follow-up of the management of the risks related to the agreement.
• Performance monitoring is systematic and based on sufficient and reliable management information.

Main Audit Findings

• The MTQ has not demonstrated that the services required in each service area are linked to needs. Service area locations were based on the principle of establishing one every 100 km, but the MTQ has disregarded the existing services near highways exits.
• The analysis conducted to demonstrate that the PPP is the best solution is incomplete. The government has not obtained sufficient information to assess the project concerning the seven service areas, in particular information on cost-effectiveness and risks that each implementation method involves.
• The soundness of the sole tenderer’s financing plan has not been demonstrated. Given the large margin of error possible in the assumptions and the financial model of a 31-year project, more rigour and cautiousness during the assessment of the proposal would have been necessary.
• Despite a higher-than-expected public financial participation, the financial model remains “fragile.” The large uncertainty that surrounds the key assumptions and the sensitivity of the project’s cost-effectiveness to small variations in those assumptions explain this “fragility.”
• The guarantees that were granted limited the partner’s and the lenders’ risks and increased those of the MTQ. The fact that the MTQ guaranteed the repayment of the debt and the indemnities in case of cancellation of the agreement modified the sharing of risks that was initially established.
• The risks related to construction permits and environmental requirements were not subject to a rigorous follow-up. The MTQ did not take the necessary steps in a timely manner to mitigate the risks of cancellation of the agreement. Starting work was delayed by several months, and the MTQ had to pay indemnities of $4 million.
• Despite the significant consequences of partner’s default, the Department made no follow-up of its financial situation. It did not asses the consequences on the partner’s financial health nor on its own situation due to the fact that it paid the partner almost no performance bonuses and bonuses related to tourist offices.

Selected Audit Recommendations

The Department should:

• Ensure that services deployed in each service area are linked to needs byconsidering in particular the services already available nearby.
• Present a complete analysis of the infrastructure projects to decision makers, including the cost-effectiveness of each project, the comparison of the different methods, the costs related to each method, the risks and the sensitivity analyses.
• Limit negotiations allowed with the selected candidate in order to increase the efficiency of the call for tenders process.
• Carry out a rigorous analysis of the tenderers’ proposals in order to identify all the risks related to the financial model and assess their effects on the project’s self-financing.
• Assess the impact of public guarantees on risk distribution related to the project and their future repercussions on public finances and, where necessary, use these guarantees as an incentive to attract a larger number of tenderers.
• Ensure an optimal distribution of the risks by providing for measures in the agreement such as financial rebalancing, should the project prove to be more cost-effective or less cost-effective than anticipated.
• Carry out a rigorous follow-up of the partner’s performance and risks that the MTQ assumes in order to identify potential problems early to limit their impact and clearly define the responsibilities and actions to be accomplished in this regard.

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