Why did the city let the LRT consortium off the hook for $1M?
City officials, including mayor, have been wily about — or didn't know — what contract says
When it became clear the international consortium building Ottawa's $2-billion light rail system would not make its May 24 delivery date, there was every reason to expect the delay would cost them $1 million.
After all, the people of Ottawa have been hearing for ages about the $1 million in damages the Rideau Transit Group (RTG) would have to pay if it missed that deadline.
In a presentation given by OC Transpo boss John Manconi in December about the light rail timeline, one of the overhead slides plainly read: "The proponent is responsible for the delivery of the system on the date prescribed in the project agreement."
The next slide described "numerous tools" the city had at its disposal for incentivizing a "timely completion" of the project, including "contractual compensation to the city of $1 million."
So any reasonable person would have assumed that if RTG missed the completion date spelled out in its contract with the city, the consortium would have to fork over the money.
Mayor said there would be penalties
The mythical stature of the million-dollar fine was further fortified just last month when Mayor Jim Watson appeared on CBC Radio's Ottawa Morning.
During a wide-ranging interview, host Hallie Cotnam asked the mayor about the May deadline for the LRT project.
"There is some money attached to the date," Cotnam said. "Will the city impose penalties on RTG for the delay?"
"Absolutely," proclaimed the mayor.
But that's turned out not to be true. And that's a problem.
What the contract says about the $1M
Section 26.7 of the contract spells out the damages the city is entitled to, should RTG not meet the so-called "revenue service availability date" — lawyer-talk for the day the consortium has to hand over a completed Confederation Line to the city.
The date stated in the contract is May 24, 2018.
Six months before that date — so Nov. 24, 2017 — RTG was to notify the city whether or not it was on track to meet the May deadline. If RTG confirmed then that it was going to be finished by May, but then didn't deliver on time, the city would be entitled to $1 million.
But if RTG notified the city in November that it would miss its May deadline, then the builder could move the final delivery date without facing that penalty.
It gets stranger.
If RTG failed to provide any notification to the city by Nov. 24, the city was to assume that RTG would not meet its deadline, and again, not be on the hook for $1 million.
Just to recap, because it sounds so bizarre to a layperson: if RTG said in November it would not meet the May 24 date, or if it just gave no notification whatsoever, it would not have to pay the city $1 million.
No one knew about loophole
So what actually happened in November? Well, RTG gave the city notice that was ambiguous, to say the least: they said they could make the May deadline, but there was also a risk they might not.
Many discussions ensued. Lawyers were involved. In the end, the city decided that the fuzzy letter meant RTG was telling them it wouldn't make the delivery date, so another one could be set without penalty.
That new deadline is Nov. 2. If RTG misses it this time, it will have to pay the $1 million.
Puzzled by today's news - that a $1 million fine will not be imposed on RTG as a result of the announced <a href="https://twitter.com/hashtag/LRT?src=hash&ref_src=twsrc%5Etfw">#LRT</a> delay - given the attached Dec 15th, 2017 update had suggested it was an option that the City "has at its disposal". <a href="https://t.co/hMBi29E3Zb">pic.twitter.com/hMBi29E3Zb</a>—@tobi_nussbaum
This massive contract — the largest in the city's history — was approved in 2012.
But Tuesday was the first time most people, including councillors, had heard of the surprising stipulation that RTG could unilaterally move the delivery date.
No real 'penalties'
There is no doubt, however, that RTG group will pay a price for the delay.
The city will be deferring a significant bulk payment to RTG that's due only when the LRT is handed over. The exact sum is confidential, but it's in the tens of millions of dollars. The city will also be delaying what's known as "milestone payments," cheques that are written when specific parts of the project are completed.
And because a division of RTG will be maintaining the light-rail system for the next 30 years, the city's monthly service payments of about $4 million will also be deferred.
Now, RTG will be getting this money eventually, but months after it expected to — which will certainly cost them, as they have their own creditors and suppliers to pay.
But these financial consequences are not penalties, despite what some city officials, including Watson, may suggest.
A penalty is a punishment imposed for breaking a law, a rule or a contract. Deferring payments until work is completed is simply common sense and normal business practice.
$1M symptomatic of lack of transparency
We've heard this week that $1 million is a drop in the bucket of a $2-billion project. And we've heard that the six-month delay will cost RTG significantly more than the $1 million of damages it doesn't have to pay the city.
Both points are surely true. And they are beside the point.
For a project so important, so exciting to this city, the lack of clarity surrounding the details is startling.
As early as last April, CBC News had reported that it appeared LRT could be late. At that time, city officials refused to confirm the May delivery date, even though it was stated in the contract and older versions of the Confederation Line website said the "launch of full service" would occur in the spring of 2018.
Why the obfuscation in the face of documentary evidence?
And why, when councillors asked about the consequences of an LRT delay on the 2018 budget, were they not told that RTG would likely miss its deadline by officials who were already in the know?
That the Confederation Line is late is not a surprise to anyone. A six-month delay isn't unusual for a project of this size, especially when one considers the massive challenge that RTG faced dealing with the Rideau Street sinkhole. (It must be said, however, that from the time the sinkhole occurred in June 2016 until Nov. 24, RTG claimed the sinkhole was not delaying the project.)
What is unsettling is how clarity on this project keeps coming only at the last possible moment.
The mayor would have us believe that the May 24 date was just a friendly suggestion. It's easier to be "on time and on budget," as Watson likes to say, if the deadline proves so fluid.
But this entire million-dollar dodge has shown that city officials, including the mayor, either didn't understand the details of the contract, or they failed to come clean about what it would take for the penalty to kick in.
Neither is acceptable. Worse, the double-talk we've heard this week inevitably casts doubt on other aspects of the LRT. That's the last thing we need for the largest city-building project in our history, turning what should be a source of pride into a subject of skepticism.