ITAC and Osler present AFP/P3 model to IT vendors

Members of the private and public sector gathered at the Old Mill in Toronto this week to discuss Infrastructure Ontario’s upcoming procurement model for IT infrastructure projects.

The event, hosted by the Information Technology Association of Canada (ITAC) and business law firm Osler, Hoskin & Harcourt LLP, acted as bridge between Infrastructure Ontario (IO) and the IT vendor community.

Infrastructure Ontario will be handling the procurement of IT infrastructure projects related to the transformation of Ontario’s healthcare system, ITAC announced.

“The province has outlined a $2.3 billion agenda to address immediate clinical priorities and to build infrastructure which will provide the foundation for a province-wide electronic health record system. Infrastructure Ontario will be handling the procurement for these large projects,” states ITAC.

The arrival of Infrastructure Ontario changes the picture, according to Bernard Courtois, president and CEO of ITAC. “This is a significant change to the IT industry and the model they are used to dealing with. It is also a significant change for Ontario,” said Courtois.

IO introduced its Alternative Financing and Procurement (AFP) model, which uses private sector financing to assist the government, its agencies and the broader public sector to develop infrastructure projects while maintaining public ownership and control. AFP is a variation of Public-Private Partnerships (P3).

Under the P3 model, the legal title to the underlying asset is held by the private sector until the end of the term of the concession and then it reverts to the public sector, explained Michael Watts, a partner in Osler’s Toronto office and Chair of the firm’s National Health Industry Group.

Under IO’s AFP model, legal title to the underlying asset is not conveyed to the private sector, he said, but the benefits of the P3 approach, namely integrating a project’s design, build, finance and maintenance components, the allocation of risk, together with a disciplined procurement and deployment approach is maintained to achieve better value for money.

AFP is familiar to the bricks-and-mortar community and has been adapted to IT in other jurisdictions, particularly in the U.K. But it remains relatively new to the IT industry in Ontario.

“What we have done is adopted both what we’ve done here for infrastructure, but also what they’ve done for IT and used their lessons to apply a new form, a derivative form, of that,” said Renato Discenza, senior vice-president of IT Project Delivery for Infrastructure Ontario.

“We want to use the principles of using private sector resources to do public works, but we want to actually make sure it’s IT-friendly, so that’s my job – to take the principles and turn it into something that IT firms and IT companies can actually use and deploy,” said Discenza.

Discenza also announced the shortlisted proponents for the provincial diabetes registry: CGI Information Systems and Management Consultants Inc., TELUS Health Solutions GP and xwave, a Division of Bell Aliant Regional Communications LP.

While IO plans to use the AFP model, which includes Design Build Finance & Maintain (DBFM) and Build Finance (BF) streams, the details of its approach for IT infrastructure projects haven’t been announced.

The conference presented an important opportunity for the vendor community to interact with IO in respect of the planned DBFM for IT projects, according to Watts. “No one spoke to the specifics of the IO IT DBFM precedent agreement at the conference because they still have not been released.”

DBFM are used for large-scale bricks-and-mortar projects valued over $300 million, with the private sector designing, building, financing and maintaining the projects for a 20- to 30-year period, Watts explained.

Builders often seek financing to provide the cash flow for large projects because they don’t get paid until substantial completion, which could be one to three years down the road, according to Watts. But the big players in IT have the funds to finance the design and build of infrastructure IT projects, he pointed out.

“AFP projects are generally large complex projects where the benefits to the public sector of transferring risk to the private sector exceed the costs shared by the private sector in order to compensate for assuming the increased risk,” states IO.

The risks and complexity involved in AFP projects were addressed by multiple speakers.

Scope change is “absolutely the single biggest culprit” to AFPs gone wrong, according to Discenza, and the number one profit area for vendors.

“The more transformative the initiative is intended to be … the higher risk it is going to be,” said Paul MacMillan, national public sector leader industry at Deloitte & Touche LLP

“The benefit of doing this risk analysis is we are working to identify all the various risks in the lifecycle of the program and be very explicit about what is the province really retaining versus what is the partner taking versus what is going to be shared and how do we understand that so there is no surprises in terms of the exposure,” said MacMillan.

Tobor Emakpor, a partner in Osler’s Construction and Infrastructure Specialty Group, provided advice to IT vendors by sharing his experience with IT projects in the U.K. and analogies to bricks-and-mortar projects in Canada.

One important lesson that “begs repeating,” said Emakpor, is to avoid shoehorning an IT project around a brick-and-mortar project.

“People get very frustrated and people will end up walking because they just can’t get their heads around the risk they are being asked to take … there are very different risk profiles to a brick-and-mortar AFP procurement to an IT procurement,” he said.

Mixing output-based specifications with input-based specifications makes it difficult for the private sector to manage risks, Emakpor added. “If we are going on output-based specifications, let’s make sure it is a true output-based specification,” he said.

“There has to be some leeway given to the private sector in terms of those risks that are prescribed on them in terms of their ability to manage it. If that is done, then we will have a successful procurement,” he said.

Emakpor finds overly aggressive timetables another major challenge. The time scale presented by IO is “challenging” but “probably realistic,” he said. “It’s achievable and that’s key because that allows people to have meaningful dialogue.”

This will help ensure the contract is properly structured, signed and delivered on time “because they are not trying to second-guess what the contract said because they didn’t have the time to ask the proper questions during the procurement period,” said Emakpor.

ITAC tries to get buyers and vendors to understand each other in terms of “what are the buyers’ plans and requirements, what are the vendors’ perspectives,” said Courtois.

“I think we’ve started off today very well,” he said.

Emakpor presented the following tips for newcomers to the AFP market…

• Dedicate an in-house team with key members who are devoted to the project full-time. “This is especially important … we need people who are there most of the time.”

• Come in early to the transactions. “In my experience, those who come early … have won more than their fair share, I would say, over future projects in the same sector.”

• Team members need to approach the project with an open mind and avoid the “this is how we’ve always done it” mentality. “Don’t play at bidding on these projects. It will lose not just that project you are working on, but possibly others. People talk in this industry and you will get a reputation.”

• Pick the right technical, commercial and financial partners. “These are complex projects, so you want to make sure your buyers think like you, are equally committed to a positive outcome and pulling in the same direction and speed as you are.”

• Resource properly. “You don’t want to find yourself in the position where you are doing not just your job, but their job as well.”

• Pick an advisory team that knows what they are doing. “Especially for the first couple of projects, having a team that knows what they are doing is absolutely essential to navigate from the traditional procurement mindset to the P3 mindset.”

• Make a firm decision. “’We’ll see how it goes’ doesn’t work. Either make the decision that you’re going to do this and you’re going to do this seriously or don’t bother playing at all.”