Project Report:

Achieving Value for Money

for the Sierra Yoyo Desan

Resource Road Upgrade Project

November 2004

Report on Value for Money for the Sierra Yoyo Desan Resource Road Upgrade Project

Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

1. Project Background, Rationale and Objectives . . . . . . . . . . . . . .4

2. Competitive Selection Process . . . . . . . . . . . . . . . . . . . . . . . . . .8

3. The Final Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

4. Outstanding Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

5. Ongoing Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Introduction

As part of its commitment to public accountability,the Province releases a project report,demonstratinghow value for money has been achieved for eachmajor public private partnership agreement it enterson behalf of British Columbians. Value for money isa broad term that captures both quantitative factors,such as finances, and qualitative factors, such asservice quality and public interest.

Value for money is one of six key principlesguiding public sector capital asset management inBritish Columbia. The others are:

◗ sound fiscal and risk management◗ strong accountability in a flexible and

streamlined process◗ emphasis on service delivery◗ serving the public interest, and◗ competition and transparency.

Since 2002, these principles have guided publicsector agencies’ approach to acquiring andmanaging assets such as schools, roads andhealth-care facilities. Under the Capital AssetManagement Framework, ministries, school districts,health authorities, Crown corporations and othersleading capital projects are encouraged to considerall available options for meeting their serviceobjectives. They analyze the options and, afterconsidering the qualitative and quantitative pros andcons of each, choose the one that best meetsservice delivery needs and makes the best use oftaxpayers’ dollars.

In some cases, the best option may be traditionalprocurement – where assets are purchased entirelywith taxpayers’ money or debt and are operatedexclusively by the public sector. In other cases,agencies may find innovative ways to meettheir service needs without acquiringcapital assets. In these instances,agencies are publicly accountablethrough regular budgeting, auditing andreporting processes.

In the case of major public private partnershipagreements, the Province is committed to a highstandard of public disclosure to ensure accountability.This value for money report describes the rationale,objectives, and processes that led to thepartnership, giving the public a clear sense of howand why the decision was reached to proceed withthat option. It explains how value for money wasmeasured and how it was achieved for this specificproject. Where applicable, it also compares keyaspects of the final agreement to other optionsconsidered for the project.

For more on the Province’s Capital AssetManagement Framework, go tohttp://www.fin.gov.bc.ca/tbs/camf.htm

For more on public private partnerships in B.C.,go to www.partnershipsbc.ca

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2 Report on Value for Money for the Sierra Yoyo Desan Resource Road Upgrade Project

Highlights

The Sierra Yoyo Desan (SYD) Resource Road Upgradeis part of the Province’s Oil and Gas DevelopmentStrategy, led by the Ministry of Energy and Mines.The capital cost of the road upgrades is estimatedat $40 million. Over the term of the agreement, theoverall project – including design, construction,operations, maintenance and risk transfer – isvalued at $60 million in present value dollars.

Value for Money

The project demonstrates value for money for B.C.taxpayers by:

◗ improving and maintaining the primary route intoB.C.’s northeast oil and gas fields, facilitating aone-time, but sustained increase in annual oil andgas royalties paid to the Province of B.C. ofapproximately $50 million to $60 million;

◗ completing the necessary road improvements atno direct cost to taxpayers. Payments in therange of $8 to $9 million per year will be borne byindustrial road users and offset by royalty rebatestotaling 50 per cent of these fees and levies, orapproximately $4.25 million per year;

◗ protecting B.C. taxpayers from project risks suchas cost overruns because the private partnerassumes most of these project-related risks;

◗ helping to create jobs and increase economicactivity in the Northeast;

◗ maintaining free and open public access to theroad, and equitable access for industrial users;

◗ tying payments to performance levels; the privatepartner must meet agreed-upon standards beforeit is paid for improvements and maintenance.

CriticalProject and Private Public FinalProcurement Sector Sector PartnershipObjectives Delivery Delivery Agreement

Deliver an ✔ ✔ ✔

improved, safe road with the desired characteristics

Minimize costs ✔ ✔

to taxpayers

Minimize risk ✔ ✔

to taxpayers

Maintain support ✔

from, and effectiveparticipation in decision making by,industrial road users

Ensure continued ✔ ✔

free public accessto the road

The Table below illustrates how the SYD partnershipagreement offers clear advantages over the otheravailable options in terms of meeting the Province’scritical project and procurement objectives.

The SYD Road Upgrade

◗ The 180-kilometre SYD Road is located near FortNelson. In the past, this road was not developedto the standards required by the oil and gasindustry due to fractured ownership andinconsistent maintenance. As a result, growth inresource activity was hindered, costing theProvince up to $25 million a year in foregoneroyalty revenues.

◗ Recognizing their shared interests in the oil andgas sector, the ministry and industrial usersagreed on the need for a long-term strategy toupgrade the road and provide regular, year-roundmaintenance. They developed a partnership tosupport the industry’s growth and to: ensurecontinued public access, maintain equitableindustrial access, and minimize costs to both thepublic and private sectors.

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◗ Oil and gas companies using the improved SYDRoad are expected to contribute up to $275 millionto $300 million to provincial royalty revenues in2004/2005 alone, supporting priority programssuch as health care and education. In itscurrent condition, however, the unimproved SYDroad cannot support this higher level ofeconomic activity.

The SYD Road Project Objectives

◗ Deliver an improved road that supports all seasonoil and gas activity.

◗ Provide operation and maintenance to ensure theroad can support required loads.

◗ Improve road safety.◗ Maintain involvement and support of road users.◗ Respect the interests of the local community and

Fort Nelson First Nation.◗ Maintain free public access to the road.◗ Ensure affordability for taxpayers.

The public private partnershipagreement

◗ Under the SYD Road partnership, Ledcor ProjectsInc. (“Ledcor”) will invest approximately $40 millionin the first two years to upgrade and improve theroad, and another estimated $2.5 million a year tomaintain the road for another 14 years.

◗ In return, Ledcor will receive an annual paymentbenchmarked at approximately $8 million to bepaid entirely through fees collected from industrialroad users based on their assets and activities inthe area. General public access will continue tobe free.

◗ Ledcor’s payments will be tied to performance intwo specific areas: availability of a good, usableroad to standards specified in the partnershipagreement; and operations and maintenance,also consistent with standards specified in theagreement to ensure a safe, year-round road.

◗ Ledcor is a BC-based company with more than50 years of experience building and maintainingroads. Ledcor will assume most of the risks in theproject, including construction risks such aspotential cost overruns.

◗ The Province will offset road users’ costs througha royalty rebate, equal to 50 per cent of users’total fees and levies. That means the project willbe completed at no direct cost to taxpayers.The cost of rebates will be more than offset byincreased royalty revenues because the improvedroad will enable an increase in oil and gas activity.

Before

After

4 Report on Value for Money for the Sierra Yoyo Desan Resource Road Upgrade Project

1. Project Background, Rationale and Objectives

In 1998, the SYD Road was consolidated as apublic roadway, under the ownership of the B.C.Transportation Financing Authority (BCTFA).Upgrading and maintenance work was done by aprivate contractor and financed through a system offees and levies charged to the road’s industrialusers. The fees were applied to active and inactiveoil and gas wells and to certain types of oil and gasactivities, such as drilling and rig moves. A smallamount was also paid by forestry companies, basedon the volume of harvested timber hauled on the SYDRoad. General public access has always been free.

Project rationale

The oil and gas sector is one of the leadingcontributors to B.C.’s economic growth, and mostactivity is in the Northeast, including in the regionaccessed by the SYD Road. Exploration in the areahas increased dramatically in recent years,attributable in part to the Province of B.C.’s Oil andGas Development Strategy for the Heartlands, whichis working to make B.C. the most competitive oil andgas jurisdiction in North America.

Between 1993 and 1997, about 50 wells a yearwere drilled in the area – mostly in the winter whenfrozen ground (of the SYD road and the oil and gasleases) better withstands the weight of heavyequipment. Adaptation of drilling-mat technologydeveloped in the southern United States to allowdrilling in swamp lands has created the opportunityfor year-round drilling activities in the areasaccessed from the SYD road. In addition, newshallow drilling technologies and new royaltyincentives have created an opportunity to greatlyexpand oil and gas resource developmentopportunities in areas accessed from the SYD road.The existing condition of the road is a barrier both torealizing current activity and to future opportunities.

In 2004, more than 130 wells were expected tohave been drilled in the summer season, and theyear-round total is expected to reach about 400 –

Background

The SYD Resource Road is a 180-kilometre routerunning east and north of Fort Nelson, providingprimary access to over 27,000 square kilometres ofoil and gas exploration territory. It currently starts15 kilometres from the Alaska Highway at the end ofClarke Lake Road, southeast of Fort Nelson, andextends through rugged terrain and muskeg to theHelmet Airstrip.

The SYD Road is located nearFort Nelson in Northeastern BC

The road is used almost exclusively by oil andgas, forestry and pipeline companies. Prior to 1998,it consisted of various fragments, under the controlof a variety of owners including oil and gascompanies, the Ministry of Transportation and theMinistry of Energy and Mines. Withoutimprovements and sufficient maintenance, theroadbed deteriorated under the stress of heavyequipment and adverse weather conditions thatfrequently made the road inaccessible.

5

eight times the level of activity recorded in the mid-1990s, as illustrated in the Table above. Wintertraffic on the road can be up to 900 vehicles perday. Royalty revenues from the area (fees paid byindustry to government for extracting resources fromCrown land) are expected to increase to about$275 million to $300 million in 2005.

The increase in drilling activity noted in Table 1cannot be sustained without improvements to theroad. With improvements, however, the new SYDRoad is expected to catalyze a one-time, butsustained increase, in annual royalty revenues ofabout $50 million to $60 million over the life of thepartnership arrangement.

The upgrade also addresses the serious safetyand other concerns raised by users. Specifically:

◗ the road is not available in all seasons, and thisrestricts access and limits the potential for furthergrowth in summer exploration and development;

◗ the road’s condition restricts access from theAlaska Highway;

◗ the surface condition is poor, damaging vehiclesand increasing costs to industrial users;

◗ many sections are too narrow to safelyaccommodate industrial traffic, such as oil andgas rigs;

◗ many sections are unsafe, bridges need repairand users have identified a number of hazards,such as steep switchbacks and deterioratingroad conditions.

Even at the lower levels of activity recorded in the1990s, the Province has forgone an estimated $25million a year in royalty revenues because of theroad’s poor condition. Further deterioration of theroad would lead to even greater losses.

Project Objectives

The upgrade of the SYD resource road, using apublic-private partnership model, is designed toachieve the following objectives:

◗ deliver an improved, gravel-surfaced resourceroad to promote all-season oil and gas activityand generate economic growth as part of theProvince’s Oil and Gas Development Strategy.The road will have the following features:- a direct connection to the town of Fort Nelson

at the end of Airport Drive, which meansbuilding a new, 22-kilometre bypass and a newmajor bridge across the Fort Nelson River;the bypass will move heavy industrial trafficfrom provincial highways onto the SYD road;

- widening and surface improvements to the SYDRoad beyond kilometre 30.5 to the Yoyo Tee (atabout kilometre 121);

- replacement of, or upgrades to, some of theexisting bridges on the road, notably thebridge across the Snake River and the twoPetrocan bridges;

1990 - 91

1991 - 92

1992 - 93

1993 - 94

1994 - 95

1995 - 96

1996 - 97

1997 - 98

1998 - 99

1999 - 00

2000 - 01

2002 - 03

2001 - 02

2003 - 04

400

350

300

250

200

150

100

50

0

Num

ber o

f Wel

ls D

rille

d

28 16 1241

5774

50 49

110151

210

136

322

404

1 1 2 6 1 3 6 012 19 27 32

106133

Summer Wells Drilled Total Wells Drilled

Driving Force for Improving SYD - Increasing Drilling Activity off the SYD Road

6 Report on Value for Money for the Sierra Yoyo Desan Resource Road Upgrade Project

◗ provide ongoing operation and maintenance to astandard that ensures the road can continuecarrying specified legal axle loads, safely, atprescribed speeds;

◗ improve road safety by improving sight lines atsharp turns and improving the quality of the road surface;

◗ maintain involvement and support of road users,including their willingness to pay the cost ofupgrades and improvements;

◗ respect the interests of the local community andthe Fort Nelson First Nation;

◗ maintain open public access to the road, at no charge;

◗ ensure affordability for taxpayers.

Procurement Options

The Ministry of Energy and Mines examined threeoptions for meeting the project objectives. Each ofthese options assumes a user-pay approach thathad already been established for this road.

◗ Private sector delivery: Identify one or moreprivate companies to upgrade and maintain theroad. These companies already design, build,finance and operate resource access roads. Ifthe SYD Road were operated on this basis, thecompany, or companies, responsible couldcharge other companies for using the road andthe road would be entirely privately managedand operated.

◗ Public sector delivery: Undertake to design, build,finance and operate the road through a publicsector agency, perhaps through a long-termcontract with the Ministry of Transportation andthe B.C. Transportation Financing Authority. It isimportant to note, however, that management ofresource roads is not a core business of theprovincial government and this option wouldrequire the establishment of a new program tomanage these types of roads.

◗ Public private partnership delivery: Have aprivate partner finance, design and build theupgrades and maintain the road, under a long-term contract with the Province, with thepartner compensated on the basis ofperformance payments.

Options Assessment

Under the Province’s Capital Asset ManagementFramework, public agencies assess potentialoptions based on both their qualitative andquantitative factors. In some cases, quantitativefactors are compared through the use of a publicsector comparator (PSC). A PSC is a risk-adjustedestimate of overall project costs in today’s dollars, ifthe project were delivered wholly by the public sector.

In this case, a PSC was not developed becausedevelopment of this resource road is not themandate of the provincial government. Instead, theoptions assessment focused on how well the variousalternatives would meet the project objectives.Their pros and cons are summarized in thediscussion that follows.

◗ Private sector delivery would have been based ona structure referred to as a PetroleumDevelopment Road (PDR). PDRs are not publichighways under the Highway Act. Accordingly,provisions of the Highway Act and Motor VehicleAct concerning traffic control and vehicle anddriver licensing and insurance requirements donot apply.

This option would have had the lowest cost fortaxpayers because road improvements andmaintenance would have been funded entirely bythe private sector with no oversight or involvementof the Province. This option would also haveraised serious public interest issues, however,including questions about public access andcontrol since it would no longer be a publicroadway. This option was also deemed to beunacceptable to road users because they wereconcerned that this option might not ensureequal, unfettered access for all categories of road

7

users, since only one or a small group ofcompanies would have control of access, roadusage, maintenance and fee decisions.

◗ Public sector delivery would have addressedpublic interest and access issues. However, itwould have faced significant challenges.

First, there is no public sector entity whose corebusiness includes building, operating andmaintaining oil and gas resource roads. As such,a new program would have had to be establishedto oversee the project and coordinaterequirements with road users. This would haveadded considerably to costs, and would haveextended the time required to achieve the projectobjectives. Second, road users had concernsthat public sector delivery would undermine theirongoing need for influence over road usage,improvements and associated costs for whichthey pay. Third, in a public sector model,taxpayers would have shouldered almost all thecosts and risks. This would be inconsistent withthe project objectives. Given the lack ofexperience of government in managing thesetypes of roads, it is reasonable to assume thatadditional uncertainty and risks may have alsoresulted. Given the costs, risks and uncertaintiesassociated with this option, the ministry chosenot to pursue it further.

◗ Public private partnership delivery allowed for thework to be completed at no direct cost totaxpayers. It also offered advantages in areassuch as risk transfer, continuing public accessand securing private investment. This optionfaced no major impediments, was supported bythe neighbouring community of Fort Nelson andallowed for continued free public access to theroad and provincial control of public interestissues such as driver licensing and traffic control.It allowed the public and private sectors tocontinue to operate the road jointly, enhancingthe model developed in 1998. This option alsoreflected the preferences and objectives ofindustrial users whose fee and levy payments will

cover the cost of the upgrades, operations andmaintenance. Industrial users achieve operatingcost efficiencies on the improved road and betteraccess to their investments. At the same time,the Province of B.C. capitalizes on producers’ability to increase the production of oil and gas inthe area through increased royalty payments

Benefits of the Preferred Option(Partnership)

The partnership delivery option meets the Province’scritical project and procurement objectives,including stimulating economic growth andminimizing costs and risks to taxpayers whileensuring that the road would continue to beavailable to the public.

Project-specific benefits:

◗ the work is done by a company, chosen through acompetitive selection process, with specificexpertise in building, operating and maintainingresource roads (whereas resource roads are notpart of the Province’s core business);

◗ the private partner is paid through fees andlevies from road users; the Province’s onlyfinancial contribution is an annual royalty rebate toroad users, equal to 50 per cent of their road-usefees and levies; and

◗ road users continue to have a role in setting roadmanagement priorities.

In addition, it has the characteristics of a strong,viable public private partnership, including:

◗ private, rather than public sector investment atrisk in the project;

◗ transferring risk to the private sector partner forthe elements of the deal under its control, such asconstruction, maintenance and operation costs;

◗ the private partner stands to lose money if it failsto achieve performance targets;

◗ appropriate incentives for early completion of theupgrades and for appropriate maintenance in thelong-term; and

◗ public control of key public policy issues; the SYDRoad remains a publicly accessible road.

8 Report on Value for Money for the Sierra Yoyo Desan Resource Road Upgrade Project

2. Competitive Selection Process

Project Team

A project team led by the Ministry of Energy andMines (MEM) was established to manage thisproject, develop a competitive selection process,write procurement documents, establish evaluationcriteria and performance measures, and evaluateproposals from the private sector.

Other members of the project team included thefollowing advisors:

◗ Partnerships BC, which advised the ministry onthe business transaction and worked with theproject team to manage the procurement process;

◗ KPMG, which served as the business and financialadvisor to the project team, providing financialmodeling, cost analysis and risk analysis;

◗ Fraser Milner Casgrain, which provided legalcounsel to the project team and managed thedrafting of the agreement;

◗ N.D. Lea, retained by MEM to provide technicaladvice to the project team, such as developingthe evaluation framework and conducting theevaluations.

Detailed Process

The procurement followed a four-stage process:

Stage 1 – Registration of Interest: this stage wasdesigned to identify companies that may have aninterest in the project. Participation in this step wasnot a requirement for participation in the rest of the process.

Stage 2 – Request for Qualifications: at this stage,potential proponents formed teams and submittedproposals that demonstrated their experience andcapabilities, including financial capacity, to carry outthe work to required specifications. Based on a setof pre-determined evaluation criteria, a shortlist ofqualified proponent teams was then selected toreceive the Request for Proposals.

Ledcor was chosen through a fair, transparent, openand competitive selection process, consistent withprovincial practices and policies. All procurementdocuments are publicly available athttp://www.partnershipsbc.ca

In addition to project objectives, the followingobjectives were established for the competitiveselection process:

◗ build the best possible bypass and bridge andachieve the best and most road improvements,and meet safety requirements, at the least cost;

◗ obtain the best ongoing maintenance at theleast cost;

◗ optimally allocate risks to the parties that canbest control them;

◗ provide a contractual structure which road userswill support and which will allow them toparticipate in making project scope and costdecisions;

◗ provide an approach that faces the fewest andmost easily resolved impediments in terms ofobtaining government approvals and theparticipation of relevant agencies;

◗ ensure that selection processes are fair, timelyand competitive.

April 2004 - SYD new bypass

grade preparation

Clearing the SYD bypass

9

Stage 3 – Request for Proposals: at this stage, theshortlisted proponent teams submitted detailedproposals for meeting project objectives. Theproposals were evaluated, based on pre-determinedcriteria, and a preferred proponent identified.

Stage 4 – Negotiations: at this stage, the projectteam negotiated with the selected preferredproponent with a view to reaching a final agreement.

Competitive Selection Timetable

ROI StageThe Registration of Interest (ROI) was advertised inthe Vancouver Sun, the Vancouver Province, theAlaska Highway News, the Fort Nelson News, thePrince George Citizen and the Journal ofCommerce. It was also posted on BC Bid and thePartnerships BC website, and posted to allbusinesses registered with Partnerships BC’s onlineBusiness Directory.

Twenty-one potential proponents, representingconstructors, engineering firms and financial firmsfrom B.C., Canada and internationally, responded tothe ROI.

RFQ StageThe Request for Qualifications (RFQ) was advertisedin the Vancouver Sun, the Vancouver Province, theAlaska Highway News, the Fort Nelson News, thePrince George Citizen, the Journal of Commerceand the Calgary Herald. It was also posted on BCBid, the Partnerships BC website, and posted to allbusinesses registered with Partnerships BC’s onlineBusiness Directory. In addition, the ROIrespondents received a copy of the RFQ directly.

Five proponent teams responded to the RFQ.The proponent teams were made up of more thanhalf of the original 21 firms that expressed interest.The evaluation criteria at this stage were categorizedinto four components in order to assess theproponent teams’ qualifications in these areas:

◗ construction;◗ road operations and maintenance;◗ technical; ◗ financing.

Registration of Interest Issued June 27, 2003

Request for Qualifications Issued July 18, 2003

Request for Proposals Issued September 29, 2003

Request for Proposals Closed November 14, 2003

Preferred Proponent Selected December 15, 2003

Concession Agreement Negotiated with Preferred Proponent and Lenders Direct Agreement Negotiated with Lenders January 2004 to June 2004

Agreement Signed (Contractual Close) June 21, 2004

Competitive Selection Results

The SYD road project was the subject of a vigorouscompetition, which saw more than 20 firms registertheir interest. Five teams competed on the basis oftheir qualifications and the short-listed threesubmitted proposals that demonstrated their design,construction, and operations and maintenanceabilities, and included their best financial offers.

Summary

Stage Number of respondents

ROI (interested parties) 21

RFQ 5

RFP(invited to submit) 3

Proposals received 3

Preferred proponent 1

10 Report on Value for Money for the Sierra Yoyo Desan Resource Road Upgrade Project

The evaluation team selected three qualified teams from the five proposals submitted. The shortlistedfirms were:

Shortlisted Proponents Proponent Team Members

Ledcor Group Ledcor Projects, McElhanney Consulting Services, Buckland & Taylor,Trow Associates, Triton Environmental Consultants

Walter/SNC-Lavalin Joint Venture Walter Construction, SNC-Lavalin, Allnorth Consultants, Kledo Construction,Ruskin Construction, GTM Consulting, Hatfield Consultants

Emcon-Tercon Tercon Construction, Emcon Services, Surespan Construction, Stantec Consulting,AMEC Earth and Environmental, Delcan Corporation, QR Engineering,Macquarie North American

RFP StageA Request for Proposals (RFP) and draft concessionagreement (contract) were issued to the three shortlisted proponents on September 29, 2003. The RFPprovided detailed specifications and requirementsof the project. By the November 14th deadline, allthree teams had submitted detailed project proposals.

Evaluation Process and ResultsThe SYD Road project team established anevaluation committee in November 2003. Chairedby MEM, the team included representatives ofCanadian Natural Resources Limited, Penn WestPetroleum, EnCana Corporation, Anadarko CanadaCorporation, the Ministry of Transportation andPartnerships BC.

The committee’s mandate was to evaluate thedetailed proposals submitted by proponents, usingthe criteria set out in the RFP. Those criteriapertained to four areas:

◗ legal and commercial;◗ design and construction;◗ operation and maintenance;◗ financial offers.

Sub-committees were established to focus onthese areas. They reviewed the proposals in detailand reported to the evaluation committee that:

◗ all the proposals complied with the legal andcommercial criteria in the RFP;

◗ two of the three proposals met the criteria fordesign and construction criteria, operation andmaintenance, and demonstrated financialcapability;

◗ the Ledcor proposal represented a better risk-adjusted financial offer. The risk-adjusted presentvalue cost of the upgrades, additions andservices was clearly lower than that in thecompeting proposals.

Ledcor was, therefore, chosen as the preferred proponent.

There were no changes to the scope, cost orother key aspects of the project during theprocurement process.

11

Competitive Selection Costs

The ministry engaged a number of advisors to assistin the competitive selection process. The associatedcosts are outlined below and represent approximatelythree per cent of the project’s net present value, whichis considered typical for a project of this magnitude.

Preliminary Engineering and Cost Estimates . . . . . . . . . . . . . . . . .$ 50,000

Business consultants (KPMG) . . . . . . . . . .465,000

Legal Advisors (Fraser, Milner Gasgrain) . .300,000

Owner's Engineer (ND Lea) . . . . . . . . . . . .900,000

Partnerships BC . . . . . . . . . . . . . . . . . . . . .250,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,965,000

One of the benefits gained in this project is theability to apply the model developed for the SYDRoad to future similar resource road projects.Partnerships BC expects to apply the Best Practicesgained for this project such as procurementdocuments, evaluation criteria and performancemeasures for future such projects, thereby reducingprocurement costs for these projects.

12 Report on Value for Money for the Sierra Yoyo Desan Resource Road Upgrade Project

3. The Final Agreement

Highlights of the Agreement

Key elements of the partnership agreement withLedcor are:

◗ term of concession: from June 17, 2004 to June 17, 2020;

◗ the road remains a public highway, owned by theProvince, and leased to Ledcor for the term ofthe agreement;

◗ value of investments: The capital cost of theconstruction of the bypass, the Fort Nelson RiverBridge, and the upgrades on the rest of the SYD,is about $40 million. The present value ofLedcor’s investments and spending on roadmaintenance and improvements are in the orderof $60 million;

◗ design and construction matters: Ledcor mustbuild a new bypass from the end of Airport Drivein Fort Nelson to kilometer 30.5 on the existingSYD Road. The remainder of the road to the YoyoTee, at about kilometer 121, will be widened to 8meters, and the road surface will be improved toa prescribed, consistent standard;

◗ environmental matters: Ledcor is responsible forobtaining environmental permits and respectingenvironment regulations as they apply toconstruction and road operations and maintenance;

Profile of the selected partner

Ledcor is a B.C.-based company with extensive roadconstruction experience. The company has beenbuilding roads for the oil and gas industry since1947 and has worked in areas such as the NorthwestTerritories and Northern Alberta, where conditionsare similar to the region surrounding the SYD Road.

Ledcor gives preference to appropriatelyqualified, experienced local contractors andsuppliers, helping to maximize project benefits forneighbouring communities.

The company’s website for the SYD project is atwww.sydroad.com. For more information on Ledcor,go to www.ledcor.com.

Scope and level of service

Under the public private partnership agreement,Ledcor will:

◗ design and build a 22-kilometre bypass, includinga new bridge over the Fort Nelson River,connecting the SYD Road to Highway 97, alsoknown as the Alaska Highway*; this work will becomplete by November 30, 2004;

◗ improve key sections of the road by November2005; this will include widening some sectionsand addressing safety issues in others (e.g.,where switchbacks exist);

◗ upgrade three smaller bridges known as theSnake River Bridge and Petro-Canada bridges #1and #2;

◗ maintain the road to prescribed standards over 16years; at the end of the term, the road will bereturned to the Province;

◗ Finance the improvements, valued atapproximately $40 million;

◗ Receive payments from industrial road usersbenchmarked at $8 million per year. The Provinceof B.C. makes no direct contribution to the annualpayments made to Ledcor; rather, road users feeswholly finance the payments to Ledcor.

Construction on the Snake River Bridge joint

*The Province, through the Ministry of Transportation, designed, built and maintains the airport connector, which connects the SYD Road to the Alaska Highway.

13

◗ insurance and bonding matters: Actual insurancepayments are a direct flow-through cost to roaduser fees. Insurance must be to a prescribedlevel and coverage, and the Province has theright to provide insurance;

◗ default and remedies: In the event Ledcor fails tomaintain and keep available the road to thestandards in the concession agreement, theProvince has the right to impose penalties,undertake the required improvements ormaintenance at the expense of Ledcor and,should the performance failure be serious andongoing, terminate the agreement;

◗ contracting parties: The Province as representedby the Minister of Energy and Mines and SYD RoadLimited Partnership (the general partner is Ledcor);

◗ termination: At the end of the agreement term theroad reverts to MEM at no cost. Ledcor isrequired to maintain the road in good conditionuntil that time and return it in good condition.

◗ termination prior to end of term: The agreementcan be terminated prior to the end of its term forany one of three reasons: 1) as noted above,Ledcor defaults; 2) a delay is imposed on Ledcoror an act of force majeure (unforeseencatastrophe) keeps the road closed for at leastone year; or 3) the Province defaults on itsobligations under the agreement or decides forother reasons to terminate it.

If Ledcor were to default, it would receive ontermination the lesser of the fair market value of theconcession or outstanding debt. In either scenario,the financial amount Ledcor would receive issignificantly less than the value of the asset and thevalue of the investment made by the private partnerin the project. In other words, taxpayers would havefinancially gained by the work invested in the projectto date.

In the case of termination due to an event thatkeeps the road closed for a year or more, Ledcorwould receive the greater of fair market value or thevalue of the outstanding debt, except if that event is aforce majeure (unforeseen catastrophe) in whichcase Ledcor would receive the greater of 95 per centof fair market value or the amount of outstanding debt.

Finally, if the Province were to default or terminatethe agreement, Ledcor would receive the greater offair market value or the value of the outstanding debt.

The lenders agreement provides lenders withstep-in rights should Ledcor default and theProvince and road users give notice to terminate.The lenders agreement also sets out noticeprovisions and the timeframe during which thelenders have the opportunity to find a replacementfor Ledcor.

Airport Connector - Highway 97N

14 Report on Value for Money for the Sierra Yoyo Desan Resource Road Upgrade Project

Risk Allocation

Allocating project risks to the partner best able tomanage those risks is a fundamental goal of publicprivate partnerships. Optimal risk allocation occurswhere each party takes responsibility for the risks itis best able to manage. The SYD partnershipagreement achieves optimal risk allocation, asillustrated below.

Type of Risk Ledcor Road Users Province

Design failure: such ✔

as bridges incapable of bearing appropriate industrial loads

Construction cost ✔

overruns due to time delay or increases in the cost of materials and labour

Financing Costs: such ✔

as interest rate increases

Operations and ✔ ✔ ✔

Maintenance Costs related to the annual traffic volume

Traffic Volume (revenue) ✔

Environmental and ✔

Permitting processes that could lead to delays

Force Majeure (major ✔ ✔ ✔

catastrophic events) (minority of risk) (shared with Province) (shared with users)

Overall, the risks that are more likely to materializerelate to design, construction and maintenance.These risks rest with the private partner. Furtherinformation on the shared risks allocated to eachpartner is outlined below.

The Province and road users share most of therisks related to force majeure events such asearthquakes and catastrophic floods.

The Province and Ledcor share some of the risks related to operations and maintenance. Forperforming maintenance on the improved SYD Roadand the new bridge and bypass, Ledcor will receivean annual benchmarked payment of approximately$2.5 million but will share the cost of major variationsfrom this benchmark. This arrangement isdescribed in greater detail in the section titledPerformance Payments (below).

Performance Payments

Ledcor will be paid two types of fees: an availability fee for providing a good, usable roadof a prescribed level of construction, and a separatefee for operations and maintenance. These aredescribed in greater detail below.

◗ Availability feeThis will be paid in two stages. A first tier of feeswill be implemented when the bridge and bypassare completed (likely by November 30, 2004).The second tier payment level will take effect onlywhen the additional upgrades to the road arecompleted and will be paid monthly until thetermination of the agreement. Availability fees willnot be adjusted for inflation.

◗ Operations and Maintenance FeeThis has three components: a) the base paymentamount, which varies depending on actual costs;b) a payment based on the number of rig moves;and c) a road user satisfaction payment, asapplicable. The payments are made on amonthly basis, but calibrated annually, based onactual costs and rig moves.

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◗ Base PaymentThe base payment starts at a baseline amount of just over $2.5 million per year, and the payment isadjusted from this amount based on actual cost. For example, if actual annual costs are above thebaseline, then Ledcor receives 50 per cent of the difference between actual and baseline costs, up toactual costs of just over $3 million. If actual annual costs are less than the baseline, the payment toLedcor is reduced by 50 per cent of the difference between the baseline and actual costs. Below thatamount, no further payment reductions are made. Base payment fees will be adjusted for inflation.

The payment schedule and its relationship to actual costs are shown in the graph below.

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

Paym

ents

1,500,000 2,000,000 2,500,000 3,000,000 3,500,000

Actual Costs (in Millions $)

Actual Costs and Payments ($)

Actual Costs Payment

◗ Rig move paymentsThese are calculated as $1,000 for each rig moveduring the winter and $3,000 during the non-winterseason, and are forecast for the year. Monthlypayments are based on the forecast andreconciled at year end with the amount owing forthat year, based on the actual number of rigmoves completed. These payments will beadjusted for inflation.If there are more than 200 rig moves on the roadin any year, or there is a fundamental change intraffic one year, then Ledcor will be paid theactual costs of operating and maintaining the road. Detailed standards to which the road must bemaintained are set out in a schedule to theconcession agreement. Generally, the road mustbe keep clear of snow and debris and have agood, gravel-covered, free-draining surfacecapable of carrying industrial traffic at 80kilometers per hour. Ledcor will be penalized according to a scheduleof penalties for any shortcomings in maintenanceperformance.

◗ Road user satisfaction paymentsA system is being developed to measure users’satisfaction. Based on these measures, anadditional payment may be made, to the amountof 5 per cent of the total of the other twopayments (above).

16 Report on Value for Money for the Sierra Yoyo Desan Resource Road Upgrade Project

Provincial Financing and RoyaltyRevenues

The SYD Resource Road Upgrade is being financedin such a way that taxpayers make no directcontributions. As illustrated in the Table below, theProvince’s contributions will be in the form of royaltyrebates, equal to 50 per cent of the fees and leviespaid by industrial road users, most of whom are inthe oil and gas sector.

Because the upgraded road will facilitate furthergrowth in oil and gas activity, even with the rebates,the Province expects to realize a significant netincrease in royalty revenues, as outlined below. Alldollar amounts are expressed in millions.

2004/05 2005/06 2006/07 2007/08

Ledcor Investment $27.3 m $13.2 m $2.5 m $2.5 m

Royalty Rebate $4.25 m $4.25 m $4.25 m $4.25 m

Increase in $14 m $50 m $50m $60 mRoyalty Revenues (before rebate)

Industrial road users’ contributions will be in theform of fees and levies collected under the Build BCAct. These include a levy on wells and a fee fordrilling and rig moves. Annual fees and levies areexpected to be in the range of $8 million to $9 million.

Payments will be made to the B.C. TransportationFinancing Authority and kept in a separate account,from which Ledcor will be paid. The funds will becontrolled by road users and the Ministry of Energyand Mines.

Budget and Accounting Treatment

The project team worked to develop an agreementthat provides best value overall for taxpayers.Details of financial reporting such as how thisagreement will impact the Provincial Budget will bedetermined by the Office of the Comptroller Generaland/or the Auditor General.

It is expected that the property and improvementswill be recorded as assets on Ledcor’s financialstatements and will not appear on the financialstatements of the Province or any of the road users.However, as stated above, this judgment is made bythe Office of the Comptroller General and/or theAuditor General.

Project timetable and milestones

Project TimetableNegotiation of Concession Agreement with January 2004 toLead Proponent and Lenders Direct May 2004Agreement with Lenders

Preliminary work begins on the bypass and Fort Nelson River bridge January 2004

Final agreement signed June 2004

Concessionaire assumes road maintenance responsibilities August 1, 2004

Bypass and Fort Nelson River bridge completed November 2004

Improvement to the rest of the SYD Road completed November 2005

Concession agreement expires;

Province resumes responsibility for road June 2020

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4. Outstanding issues

At the time the agreement was signed, there werethree outstanding issues. These are outlined below,along with notes on the status of these issues at thetime of this report’s publication.

1. The Ministry of Energy and Mines (MEM) androad users must formally establish the SYD RoadUsers Committee, under which the partnershipagreement will be jointly managed.Status: This committee was established in June2004 and continues to develop policies andprocedures for good governance of the SYD Road.

2. The Road Users Committee will have to developa user satisfaction measurement system. This willlikely be based on a survey of users and tied to asystem of performance payments, adding furtherincentives for Ledcor to respond to users’ needsand concerns. Status: The parameters of the incentive mechanismare expected to be in place by early 2005.

3. The Road Users Committee and Ledcor willdevelop a protocol which describes how issues ofcommunication, safety, operating practices, roadusage including periodic weight restrictions willbe conveyed to all categories of road users. Status: This protocol is expected to be in place byend of December 2004.

5. Ongoing contract monitoring

The terms of the contract (partnership agreement)will be monitored under the auspices of the SYDRoad Users Committee, established jointly by roadusers and the Province (through the Ministry ofEnergy and Mines). Actual administration of thecontractual terms of the agreement will rest on thefollowing arrangements.

◗ MEM and the SYD Road Users Committee will relyon reports from road users (through the RoadUsers Committee) to assess Ledcor’sperformance and to be alerted if there arefrequent, unreported performance failures.

◗ Direct responsibility for monitoring the contractand ensuring the quality of Ledcor’s performancewill rest with the Ministry of Energy and Mines.

◗ Ledcor is responsible for reporting onperformance quality. If it fails to reportperformance failures that are the object ofpenalties, and the failures are found on audit, theapplicable penalties will be doubled.

The costs of administering the agreement will berecovered from road user fees and levies. MEM willwork with road users to determine an appropriatelevel of enforcement, and the level of spending andresources this enforcement activity will require.

On behalf of the SYD Road Users Committee,MEM expects to contract for an owner’s engineer toprovide advice on the road’s state of repair andLedcor’s performance with respect to upgrades andimprovements.

Visit www.partnershipsbc.ca or www.em.gov.bc.ca/subwebs/oilandgas/infrastructure/syd/syd.htmfor more information and updates on this project.