Public Private Partnership: Eleonor W. Graham Middle School and Moncton North School

Audited Entity

• Department of Supply and Services

Audit Scope and Objectives

• To determine the process for identifying the two school project as a potential P3.
• To assess the business case on which the Department’s decision to adopt the P3 approach for the two school project was based.

Audit Criteria

• All significant assumptions made by the Department should be supported and documented;
• All assumptions made by the VFM consultants should be reviewed and challenged (by the Department);
• VFM analysis should be in-line with common industry practice; and
• Due diligence should be performed to review the value-for-money report.

Main Audit Findings

• The audit found no evidence that a formal preliminary analysis was performed to support the decision of adopting a P3 approach before it was publicly announced. The audit team was unable to determine the rationale for the decision. Subsequent to the announcements, the Department of Supply and Services decided to prepare a value for money (VFM) assessment to see whether the P3 approach would deliver value for money.
• The project was not included in the capital estimates (i.e. for approval by the Legislative Assembly) until fiscal year 2010-11, although the Province had already signed multi-year agreements with a successful bidder in September 2009. The Legislative Assembly had no opportunity to debate this commitment in advance of the decision being made.
• The audit found that assumptions associated with discount and inflation rates, as employed in the VFM analysis, were supported. However the audit team did not agree with the Department’s assumption to include an additional net present value (NPV) of $14.2 million for the traditional model to reflect the maintenance and life cycle deficit. The assumption was based on the expectation that the Province would not adequately fund these costs under the traditional model.
• Based on the VFM analysis, the Department concluded the P3 approach provided $12.5 million VFM to taxpayers for this project over the traditional approach. However, after adjusting for the effect of the maintenance and lifecycle cost assumption (NPV $14.2 million), the traditional model would deliver $1.7 million VFM over the P3 approach.
• There was little documentation available showing that the Department had reviewed the assumptions upon which the VFM analysis was based.
• The audit noted three areas where the VFM analysis was deficient in comparison with common industry practice. These included:
  • sensitivity analysis (i.e. only risk quantification was subject to this analysis);
  • timing of preliminary VFM analysis (i.e. the analysis was not completed prior to announcing the P3 project); and
  • reporting of VFM results (i.e. the Department did not comply with the government’s P3 protocols that require fair and transparent reporting).
• The only review of the VFM report was an informal one completed by departmental employees who had been involved in developing the report, and therefore were not independent.

Audit Recommendations

• The Department of Supply and Services should conduct a preliminary assessment to identify the best procurement approach prior to a Cabinet decision on how to proceed (P3 or traditional approach).
• The Department of Finance should have the government obtain approval of the Legislative Assembly, during the budget process, for future year P3 funding commitments in advance of entering into such contracts.
• The Department of Supply and Services should document the development of significant assumptions for VFM analysis, especially the assessment of their reasonableness.
• The Department of Supply and Services should review assumptions made by its VFM consultant. Reviews and important discussions should be properly documented.
• The Department of Supply and Services should obtain the discounted cash flow model from its consultant as part of the arrangement for future P3 projects.
• The Department of Supply and Services should perform a sensitivity analysis which includes all key variables in the project cost estimate process.
• The Department of Supply and Services should inform the public of key information in the P3 process.
• The Department of Supply and Services should perform an independent due diligence review of the value for money assessment for each proposed P3 project.
• To ensure provincially owned schools are properly maintained over their useful lives, the Department of Supply and Services in cooperation with the Departments of Finance and Education should:
  • develop and implement an asset management system that provides for and prioritizes multi-year maintenance and capital repair needs of the schools; and
  • implement budgeting measures to protect the long-term funding stream required for sufficient ongoing maintenance of the schools.
• The Department of Supply and Services should tender or solicit multiple fee estimates when engaging advisors for P3 projects, given the significant cost of these services.

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