Background

5.1	There are a number of reasons why we feel it is important that 
we look at the Fredericton-Moncton Highway project. First, it 
represents a large commitment of public money. Additionally, it is the 
largest public-private partnership arrangement ever entered into by the 
Province, and the first toll road to be constructed in New Brunswick. 
There is also a high degree of public interest in this project, particularly 
related to the tolling issue. For all these reasons we feel reporting from 
our Office on this project should be of considerable interest to the 
Legislative Assembly. 

5.2	The agreements for the Fredericton-Moncton Highway project 
are now signed. However, we do not feel that our work will simply be a 
historical review. There may well be some lessons learned that can be 
applied to future provincial public-private partnership arrangements. It 
is in those areas where our recommendations are targeted.

5.3	We also feel that our review provided us with valuable 
information on the government decision-making process in general and 
that our recommendations may provide some guidance for future 
government decision-making.

5.4	In this chapter we will be addressing the decision-making 
process that led up to the issuance of a Request for Proposals to three 
short-listed bidders on the project on 27 March 1997. By that date, all 
substantive decisions about structure, financing, tolling, risk transfer, 
and the role of the private sector partner in design, construction, 
operation, and maintenance of the highway and tolling system had been 
made and approved in principle by the government.

Fredericton-Moncton Highway 
Project description and 
chronology

5.5	In our 1998 Report, we included a description of the 
Fredericton-Moncton Highway project, along with an analysis of the 
accounting treatment of the transaction. The project represents a 
commitment on the part of the Province to make “sub-lease” payments 
totalling $1.514 billion over the first 30 years of the agreement. In 
addition, the Province is committed to fund operation, maintenance and 
rehabilitation (OMM) costs of the highway and tolling system over that 
period. (Highway OMM payments are fixed at $168 million plus 
adjustments for inflation over the first 20 years. Tolling system OMM 
payments are fixed at $35.2 million plus adjustments for inflation over 
the first 10 years.) The Province will receive an estimated $321 million 
in concession fees from the project over a 30 year period, mainly 
consisting of toll revenues in excess of what is required to fund 
toll-based debt repayments and interest.

5.6	On 4 April 1997, the Minister of Finance formally announced 
the Province’s intention to create a public-private partnership to build 
the Fredericton-Moncton Highway. It was noted that it would be the 
biggest public works project in New Brunswick history. That 
announcement included confirmation that the business model had been 
developed by RBC Dominion Securities Inc. Appendix I shows a 
chronology of key milestones in the decision-making process for the 
Fredericton-Moncton Highway project. It covers the period up to the 
date of issuance of the Request for Proposals to the three short-listed 
bidders. 

Scope

5.7	Our audit objective for our 1999 work on the 
Fredericton-Moncton Highway project was as follows:

To determine if the Province employed an adequate 
decision-making process in planning the existing structure for 
the Fredericton-Moncton Highway project.

5.8	In doing our work we considered significant decisions made, 
relating to the highway, up to 27 March 1997, the date the Request for 
Proposals was issued to the three short-listed proponents. We first 
reviewed the government objectives set for the project. We then looked 
to see how these objectives were translated into specific terms in the 
Request for Proposals. Our approach was to establish whether the 
decision-makers had access to sufficient, accurate information, that 
alternatives were considered, and that the decisions made seem 
reasonable in light of available information. 

5.9	Our work included discussions with representatives of the 
Department of Transportation and the Department of Finance. We also 
reviewed documents provided by those representatives, along with many 
other pertinent documents, including Hansard, the government’s new 
public-private partnership guidelines, and other government information 
releases. Additionally, we prepared our own analyses as required.

5.10	Our work was intended to examine the provincial decision 
making related to government objectives for the Fredericton-Moncton 
Highway and the contents of the Request for Proposals. We did not 
attempt to determine whether government objectives had been or were 
likely to be met, as that was beyond the scope of our planned work for 
1999. 

Results in Brief

5.11	Selection of government objectives for the project was made 
at the ministerial level over a period of several years. For the most 
part, we were unable to find any documentary support for the 
objectives chosen, where alternatives existed.

5.12	Three financial objectives were developed and provided to 
RBC Dominion Securities Inc. by the government and were intended 
to form the basis for their structural recommendations. Ten general 
project objectives were developed by departmental staff and hired 
consultants for inclusion in the Request for Qualifications (RFQ) 
and Request for Proposals (RFP). Taken together, we feel that these 
objectives should be considered the government objectives for the 
project.

5.13	The structure of the Fredericton-Moncton Highway project 
was closely based on the public-private partnership model 
recommended by RBC Dominion Securities Inc. Other structural 
options for the project were proposed and analyzed, but the option 
chosen appears to have been the only one that would allow for the 
achievement of all government objectives as defined. 

5.14	The Province has the option of buying back the highway at 
the end of the lease term at fair market value. A fair market value 
payment will be required despite the fact that all lease-based and 
toll-based debt will be paid off by that time.

5.15	In June 1996 the government announced its intention to 
pursue a four-lane highway project between Fredericton and 
Moncton. The decision-making process from that point up to the 
issuance of the RFP appears to have been well co-ordinated. 
Responsibility was assigned to various individuals or groups for each 
decision that had to be made. In addition, the Province hired a 
process consultant (KPMG) who was involved in the decision-making 
process after the June 1996 announcement and provided a positive 
opinion after the process was completed.

5.16	The gross interest cost between the issue date for the 
lease-based debt of 19 February 1998 and the commencement of 
repayments will total approximately $214 million on the original 
$540 million debt. 

5.17	The terms of the RFP provide for the transfer of significant 
additional risks to the private sector over the traditional Department 
of Transportation highway construction approach. Departmental 
representatives indicated that all decisions made were subject to 
extensive discussion between departmental representatives and hired 
consultants. However, we did not see documentation supporting the 
decision to transfer those risks on cost benefit or other bases. 

5.18	The additional costs associated with having project debt 
issued by a third party were significant. There were benefits 
accruing to the Province from this decision. However, we did not see 
analyses that established that the value of these benefits met or 
exceeded the additional costs incurred.

5.19	The decision to allow RFP bidders to place more than the 
minimum amount of toll-based debt will have negative cost 
consequences for the Province.

5.20	Proposed Fredericton-Moncton Highway toll rates are 
comparable with those in other jurisdictions in North America. 

5.21	Board of Management approved the tolling protocol and 
certain other items pursuant to their approval of “Financial 
Parameters for the Fredericton to Moncton Project – Finance” on 
27 February 1997. Otherwise, the contents of the RFP were not 
approved by the Board of Management or Executive Council. Those 
bodies relied on departmental staff and hired consultants to ensure 
the RFP contents were appropriate.

Detailed Findings

Groups or Individuals 
Involved in 
Decision-Making Process

5.22	Government financial objectives for the project were decided 
upon at the ministerial level with reference to consultants’ reports. Other 
objectives, specific to the project, were developed by departmental staff 
with the assistance of hired consultants. Co-ordination of all 
decision-making starting with the formal project announcement in June 
1996 was assigned to the Project Manager, a senior government official 
from within the Department of Transportation. From that point, all steps 
in the process appear to have been completed within established 
timeframes. The contents of the Request for Qualifications (RFQ) were 
based upon the RBC Dominion Securities Inc. interim report. The 
contents of the Request for Proposals (RFP) were developed by a 
number of small committees that included representatives of government 
and various private sector consultants who were hired by the Province to 
provide their expertise. Certain of these consultants also provided some 
input to the RFQ and were involved in the assessment of responses to 
that document. 

5.23	Departments represented in the decision-making process up to 
the issuance of the RFP included the Department of Transportation, the 
Department of Finance, the Department of Natural Resources and 
Energy, the Department of the Environment, the Department of Justice, 
the Department of Economic Development and Tourism, the Department 
of Supply and Services, the Department of Agriculture, and the 
Department of Municipalities, Culture, and Housing.

5.24	The planning/decision-making phase of the project included 
fairly heavy reliance on consultants. Many of the consultants who were 
hired had significant previous experience working on public-private 
partnership arrangements in other jurisdictions in Canada and elsewhere. 

Decision-Making 
Information

5.25	There were a number of reports upon which decision-making 
was based for the Fredericton-Moncton Highway project. The key report 
was prepared by RBC Dominion Securities Inc. It dealt with the 
feasibility of a public-private partnership arrangement for the 
Fredericton to Moncton highway and recommended the structure that 
was subsequently adopted for the project. Material from that report was 
used extensively by decision-makers. Other reports that provided 
important input included the provincial white paper “Highways for the 
Next Century”, the “Feasibility Study for Toll Highways and Private 
Sector Involvement for Highway Development in New Brunswick” 
prepared by ADI Limited, and the traffic study prepared by Wilbur 
Smith and Associates. All these documents are discussed in more detail 
in the project chronology presented in Appendix I.

5.26	Aside from reports, we were told that valuable information was 
obtained through dialogue with other jurisdictions that had employed 
public-private partnership models for similar projects. Those projects 
included the Ontario 407 highway, the Nova Scotia highway, and the 
Confederation bridge.

5.27	We noted one case where information used by decision-makers 
may have been misleading. The RBC Dominion Securities Inc. report 
includes the comment, “…a public private partnership approach could 
be used to achieve: i) construction cost savings estimated by ADI Ltd of 
$60 million…” The $60 million figure came from a report by ADI 
Limited. That company was requested in 1996 to provide an independent 
assessment of cost estimates for design and construction of the proposed 
Trans-Canada highway between Fredericton and Moncton. Terms of 
reference included the following statement.

“Review current plans for the highway and develop estimates 
of the cost of the work to be done (both design and construction 
separately). Separate estimates are required on the basis of 
traditional approach to designing and building through a 
number of tendered contracts, and on the basis of a single 
design-build project…Costs of designing and installing toll 
facilities have not been addressed in this estimate.”

5.28	ADI made the following comments in their October 1996 report.

“.…When the Highway 407 project in Ontario was initiated, 
design-build costs were estimated at 90% of traditional 
methods. This has since proven accurate.... Anticipated 
savings on design-build projects are not as much a function 
of the type of project (traditional vs. design-build) as they are 
to the scale of the undertaking. Design-build economies are 
maximized through large scale ventures such as the 
Fredericton to Moncton Highway Project. However, this 
project is sufficiently large that cost savings could also be 
significant should the decision be made to break the work into 
several sections.”

“A design-build proponent would expect to achieve economies 
on highway design and construction through the following 
measures:

•	   Longer sections of highway under construction at the same 
time within the same contract will encourage more efficient 
balancing of cuts and fills, especially through use of large 
off-road earth moving equipment.

•	   Large contracts will permit establishment of specialized crews 
for specific and repetitive tasks, hence more efficiency. 
(i.e. Excavation, borrow, sub-base, etc.)

•	   Due to the size of design-build contracts, mobilization costs 
will be reduced.

•	   Under a design-build approach, the design review process 
will be streamlined.”


5.29	The report goes on to list areas where economies could be 
expected on bridge structures construction.

5.30	The RBC Dominion Securities Inc. report implied that the $60 
million cost savings could be attributed to the public-private partnership 
structure. However, the original ADI report clearly indicates that the 
savings relate to economies of scale, not project structure. Therefore, 
we feel that the RBC Dominion Securities Inc. report may have misled 
decision-makers in the design-build area.

Departmental comments

5.31	We believe that the RBC Dominion Securities report is quite 
clear and not misleading when it states “...a public private partnership 
approach could be used to achieve: i) construction cost savings 
estimated by ADI Ltd of $60 million...”. It does not attribute the savings 
to the public private partnership but rather states that this is one 
possible way to achieve the savings identified by ADI Ltd. as possible in 
a Design-Build project. The source of the savings was understood by the 
decision makers.

Fredericton-Moncton 
Highway Project Objectives

5.32	In our opinion, the selection of government objectives for the 
Fredericton-Moncton Highway project was one of the two key decisions 
made for the project. (The other was the decision to sign the final 
agreement with the Maritime Road Development Corporation.)

5.33	The basic government goal for the Fredericton-Moncton 
Highway project was to increase public safety by improving the highway 
system between Longs Creek and Moncton. More specific government 
objectives for the highway project were formulated at the ministerial 
level over a number of years of preliminary planning starting with the 
provincial “White Paper” in 1993. We feel that it would have been 
appropriate to limit these government objectives to such broad 
statements as “for lowest cost to the Province” and “as quickly as 
possible” rather than providing more specific objectives to provincial 
staff. Doing this would have enabled provincial staff to be more creative 
in completing the project, while still meeting the broader goals and 
objectives of government. Departmental representatives indicated that 
the financial goals selected by the government, and the resulting 
public-private partnership structure for the project, limited their ability 
to identify acceptable alternatives for many of the project objectives that 
they later formalized. 

5.34	We found lists of objectives in two places. Three government 
financial objectives were provided to RBC Dominion Securities Inc. 
when they were contracted to provide structural recommendations for 
the project. In addition, a list of ten project objectives considered 
relevant to bidders was developed by departmental representatives with 
the assistance of hired consultants and presented in the Request for 
Qualifications (RFQ) document. This list was prepared after the RBC 
Dominion Securities Inc. interim report was issued and the structure of 
the project had been decided. It appeared again in the Request for 
Proposals (RFP) with slightly modified wording. Some of these 
objectives, such as the four-year completion goal, had already been 
referred to by government in their previous announcements. We 
consider the three government financial objectives combined with the ten 
project objectives to encompass the government objectives for the 
project. 

5.35	The three government financial objectives provided to RBC
Dominon Securities Inc. were:

•	to avoid an increase in provincial debt;

•	to achieve a reasonable cost of funds; and

•	to achieve an optimal degree of risk transfer to the private sector.


5.36	Upon consideration of these financial objectives, RBC Dominion 
Securities Inc. recommended the project be structured as a 
public-private partnership with at least a minimum level of funding 
being provided by third party (i.e. toll and ancillary) revenues. This 
recommendation was accepted by decision-makers and project planning 
proceeded to the RFQ phase under the assumption that a public-private 
partnership structure would be adopted. 

5.37	Departmental staff said that the government objectives for the 
project were sometimes competing. For example, they understood that 
transferring risks and requiring certain construction and environmental 
standards would lead to additional cost for the Province. These 
objectives had to be balanced when deciding what to include in the RFP. 

5.38	Our work on government objectives for the project included 
developing a clear understanding of the meaning of each objective. We 
then attempted to determine if reasonable alternatives existed to those 
selected. Where reasonable alternatives did exist, we determined if 
analyses had been prepared that compared the alternatives and made 
decision-makers aware of the limitations their selection would make on 
structural options for the project as well as the benefits. We then 
assessed the objective selected for reasonableness given the information 
presented. Government objectives for the project are discussed 
individually below. 

5.39	In doing our review of objectives, we noted a lack of 
documentation supporting the selection of specific objectives where 
reasonable alternatives existed. Lack of staff involvement may be the 
reason for this deficiency in the case of government financial objectives. 
The Departments of Transportation and Finance indicated that they only 
became involved in the decision-making process for this project after the 
official announcement that the project would proceed, in June of 1996. 
However, there is evidence that these issues were discussed at the 
political level prior to that date, including the various reports that were 
requested as previously discussed and Hansard documentation from the 
Legislative Assembly. Departmental representatives indicated that very 
tight timelines for planning the project led to the lack of documentation 
supporting project objectives selected for inclusion in the RFQ and RFP. 
They did note, however, that decisions related to project objectives were 
subject to intensive discussion and debate between departmental staff 
and hired consultants.

Government financial 
objectives

5.40	As previously noted, RBC Dominion Securities Inc. was given 
three government financial objectives in their work for the Province 
early in 1996. Two of them related directly to financing aspects of the 
proposed project. They were, “to avoid an increase in provincial debt”, 
and “to achieve a reasonable cost of funds.” They are discussed below. 
The third relates to risk transfer and is covered under “Project 
Objective 4” later in this chapter.

To avoid an increase in 
provincial debt

5.41	This objective can be interpreted as requiring the Province to 
enter into an operating lease arrangement and to have an arm’s length 
third party arrange for the financing of the project. The obvious 
alternative would be not to have such an objective, thereby permitting 
the Province to finance the project.

5.42	There were two arguments made supporting the need for this 
objective. The first was the possible effect of more provincial borrowing 
on the provincial debt rating, and therefore future borrowing rates. The 
second was the requirement of the Province to live within the financial 
boundaries established by the provincial balanced budget legislation.

5.43	The argument that additional borrowing by the Province may 
adversely affect the future borrowing rate supposes that the debt rating 
agencies would ignore debt issued by a third party, but supported by 
government payments. In fact, in their 1997 report, RBC Dominion 
Securities Inc. made the following statement in referring to the likely 
effect of project debt being issued by Project Co.

“... Credit rating agencies will count $580 million 
commitment (89% of capital costs) now ...”

5.44	Their opinion was confirmed in a November 1998 Standard and 
Poors report that discussed the 1 June 1998 affirmation of the Province 
of New Brunswick’s credit rating.

“Tax-supported debt (net of cash holdings), which includes all 
provincial direct and guaranteed debt as well as municipal 
debt, but excludes the self-supporting obligations of NB 
Power…rose once again in fiscal 1998. This was entirely due 
to the issuance of lease-based debt (not directly by the 
province, but by the New Brunswick (F-M) Project Co., a 
not-for-profit company incorporated earlier this year) to help 
finance the construction of the Fredericton-Moncton Highway 
project. While this debt does not represent a direct obligation 
of the New Brunswick government, and therefore does not 
affect provincial direct debt…, Standard and Poors considers 
it appropriate to treat it as tax-supported debt because the 
province (through its Crown Corporation, New Brunswick 
Highway Corp.) is ultimately responsible for making the 
sublease payments to cover the debt service on the lease-based 
debt. These payments will be a charge on the province’s 
consolidated fund, are statutory appropriations that are not 
required to be voted on annually by the Legislative Assembly 
of the province, and must be paid from the date that the 
highway is fully open to traffic for the full term of the 
lease-based debt.”

5.45	So, the only debt that the Province would have avoided in their 
credit rating evaluation would have been the toll-based debt of $174.5 
million. That is because it will not be repaid through provincial tax 
revenues, but rather by highway user tolls. The Province was aware of 
the RBC Dominion Securities Inc. opinion on the likely treatment of the 
lease-based debt, and chose to adopt the public-private partnership 
structure anyway. Therefore, we do not feel that the possible effect on 
the provincial credit rating of additional debt should have been a 
significant factor in the adoption of this objective. 

5.46	The other argument made for adopting this objective would be 
that balanced budget legislation would not be met if highway design and 
construction costs were treated as capital expenditures over a four year 
construction period. This issue was also covered in the RBC Dominion 
Securities Inc. report to the Province of New Brunswick dated 25 June 
1997. The report states, “To achieve the Province’s fiscal objectives, it 
is important that the financing approach achieves operating lease 
treatment and does not result in consolidation of the project financing 
onto the accounts of the Province.”

5.47	On 19 December 1997, the Minister of Finance made the 
following comments in the Legislative Assembly:

“We could probably build it if we decided we would not touch 
one single kilometre or mile of road anywhere else in the 
province. Over the next four years, if we dedicated every 
single penny of capital construction to this project, we 
probably could do something. However, if we followed the 
normal fiscal framework, if we took into account the fact that 
we have balanced budget legislation that we have to respect, 
it would take us between 15 to 20 years to accomplish this. 
All we are saying to you is that it is not uncommon for a 
jurisdiction to move into this area of partnering with the 
private sector to accomplish projects that would otherwise 
take a lot longer for us to do. … Why are we doing the project? 
Why is it a better deal? It is a better deal because we would 
not have the project if we didn’t do it with the aid of the private 
sector partnering. We simply cannot afford to do it in the 
normal circumstances because of our financial situation.”

5.48	Also on 17 December 1997 in the Legislative Assembly the 
Minister of Transportation made the following statement. “The decision 
was made by Cabinet that we would have a toll highway.....But the fact 
of the matter was with no toll highway, we would not have a highway...” 

5.49	In our opinion, these comments do not refer to a lack of 
available borrowing room for the Province. They would have needed 
only to borrow and service an additional $174.5 million in toll-based 
debt. Rather it refers to the need, alluded to by RBC Dominion 
Securities Inc., to have at least 11% of total funding for the project come 
from outside of government. This minimum level of toll revenue was 
necessary to ensure the project would qualify for operating lease 
treatment under current accounting rules.

5.50	In our opinion, the provincial balanced budget legislation led to 
decision-makers adopting the objective “to avoid an increase in 
provincial debt.” However, we saw no evidence that consideration was 
given to making a one-time exception and ignoring the balanced budget 
legislation for the Fredericton-Moncton Highway project. Since the 
balanced budget legislation does not impose any penalties on the 
Province when it is not met, we feel that such an option should have 
been considered. Not setting this objective for the project would have 
freed the Province up to issue debt for the project directly. The 
implications of direct provincial debt issuance will be discussed later in 
this chapter. 

To achieve a reasonable cost of 
funds

5.51	This objective is related to the value-for-money objective, but 
recognized that the borrowing cost for this project would be somewhat 
higher because debt would be issued by a third party rather than the 
Province. This higher borrowing cost was effectively payment for 
transfer of certain repayment risks to the private sector.

5.52	RBC Dominion Securities Inc. reflected this in comments in 
their 1997 report.

“....We estimated a cost of funds of 30 basis points above the 
Province’s 30 years bullet bond rate for the lease-based debt 
and a cost of funds of 100 to 125 basis points over Canada 
bonds of similar duration for the toll-based portion. On a 
blended basis, the cost of funds then represents a 36 to 38.5 
basis point premium to the Province’s 30 year bullet bond 
rate.”

5.53	This objective is closely linked to the previous objective “to 
avoid an increase in provincial debt.” In order to meet that objective, it 
was necessary to have debt issued by a third party. The debt could have 
been issued at the provincial borrowing rate had the Province chosen to 
guarantee its repayment. However, this would have precluded meeting 
the first financial objective because the full amount of the sub-lease 
commitment would have had to be recorded as debt. Conversely, had the 
Province guaranteed repayment of the debt, or had debt been issued 
directly by the Province, a “cost of funds” objective would not have 
been needed. 

Other government project 
objectives as documented in the 
request for proposals

Project Objective 1, “To ensure the safety of the travelling public.”

5.54	The provincial white paper “Highways for the Next Century” 
that was released on 28 September 1993 identified safety as a major 
concern with the existing highway between Fredericton and Moncton. It 
was felt that by expanding the Trans-Canada Highway to four lanes, it 
would be safer for travellers. We did not attempt to identify alternative 
highway structures or determine if statistical evidence supported the 
improved safety claims surrounding the four-lane option. As we have 
already stated, we feel that the basic goal of the project was to improve 
public safety. There is no reasonable alternative to this objective.

Project Objective 2, “To ensure that the Highway is developed, designed, 
constructed, operated, managed, maintained and rehabilitated in a 
manner that meets or exceeds current Provincial standards.”

5.55	The reference to provincial “standards” refers to the New 
Brunswick Department of Transportation (DOT) standards. An 
evaluation of DOT’s standards was beyond the scope of our work, so we 
are assuming that they are appropriate in the circumstances. Therefore, 
we feel that there is no reasonable alternative to this objective.

Project Objective 3, “To ensure that the Highway is developed, designed, 
constructed, operated, managed, maintained and rehabilitated in an 
environmentally responsible manner.”

5.56	“Environmentally responsible manner” is defined for purposes 
of this objective as complying with provincial environmental laws and 
regulations. As with the DOT standards, it is beyond the scope of our 
work to evaluate provincial environmental standards. Therefore, we are 
assuming that they are appropriate in the circumstances and that there is 
no reasonable alternative to this objective.

Project Objective 4, “To share the risks of the Project between the 
private and public sectors.”

5.57	This objective was developed once it was decided to consider 
adopting a public-private partnership model for this project. Since all 
highway projects completed in the Province involve the sharing of risk 
to some degree with the private sector, the objective appears reasonable 
as written. However, it appears that the intent is more in line with one of 
the financial objectives provided to RBC Dominion Securities Inc. by 
the Province in their engagement to analyze the feasibility of applying a 
public-private partnership approach to the Fredericton to Moncton 
Highway project. That objective was “to achieve an optimal degree of 
risk transfer.” Therefore, it appears that the definition of Project 
Objective 4 exceeds traditional DOT practice. The RFP summary of 
various risk components of the project and who will bear them confirms 
this interpretation. 

5.58	Much of the risk sharing analysis that was completed was 
performed by RBC Dominion Securities Inc. pursuant to the assignment 
discussed above. However, we found no indication that cost benefit 
analyses were performed by RBC Dominion Securities Inc. or the 
Province covering the transfer of additional risks to the private sector. 
Additionally, we saw no evidence that other risk transfer options were 
considered. We were told that departmental representatives and outside 
consultants held extensive discussions relating to risk transfer and felt 
the objective selected was most appropriate in the circumstances. 
However, this decision was not supported by documented analyses. 

5.59	We did some quantitative analysis on financing risks transferred 
that is discussed later in this chapter.

Project Objective 5, “To obtain optimal value for money for New 
Brunswick Highway Corporation (NBHC).” 

5.60	CCAF/FCVI defines value for money as “the term that 
summarizes three separate but interrelated values: economy, efficiency, 
and effectiveness..." For this project, departmental representatives told 
us that it was initially defined as “lowest cost, best quality with 
consideration of risk.” It was subsequently changed to make it more 
specific, but not until after the RFP was finalized. We feel that the 
Province should always strive to achieve optimal value for money in 
every project it undertakes. In our opinion there does not appear to be a 
reasonable alternative to this objective.

Project Objective 6, “To minimize the financial contribution of NBHC to 
the Project.”

5.61	Our understanding is that this objective means to minimize gross 
provincial payments to the Project Co. through NBHC. The objective 
does not factor in the cost of tolls to provincial taxpayers. Additionally, 
it does not consider the netting effect of concession fees (i.e. excess toll 
revenues) to be paid to NBHC by Project Co. This second omission is 
discussed later in this chapter.

5.62	A reasonable alternative to this objective would have been “to 
minimize the financial contribution of New Brunswick taxpayers to the 
Project.” As the provincial government represents the taxpayers of the 
Province, we would have expected this option to have been considered. 
However, we found no evidence that this or any other alternative was 
considered. Additionally, we saw no quantitative or qualitative analyses 
supporting the objective that was selected, and no evidence that 
Executive Council was made aware of the effect their selection of this 
objective would have on other decision-making for the project.

Departmental comments 

5.63	The RFP was issued on the premise that, if the Project 
proceeded, it would be a toll highway. In that context minimizing the 
financial contribution of NBHC minimizes the cost to taxpayers. To the 
extent that budgetary expenditures are lowered, the taxpayers benefit.... 

5.64	It was estimated that use of the highway will provide savings 
approximately equal to the cost of the tolls for commercial vehicles. For 
non-commercial users, since there is an alternate route, motorists 
choosing to use the four-lane highway will do so because they consider 
the benefits to equal or outweigh the cost of the toll. 

5.65	It should also be recognized that to the extent that a number of 
users of the highway will be from out of province, this would transfer 
cost and risk from New Brunswickers.

Project Objective 7, “To open the entire Highway for safe operation by 
November 30, 2001 and to fully complete the Highway by June 30, 
2002.”

5.66	It has been publicly stated that the rapid construction was due to 
the Province’s concern for public safety on the route. Therefore, the 
decision to set an objective to have the highway completed within four 
years appears to have been due to the requirement to build the highway 
as quickly as possible. According to DOT engineers, four years was the 
minimum time in which the route could be completed, given the 
complexity of certain aspects of the highway construction (i.e. bridge 
construction). Obviously there are many other alternatives for the timing 
of completion of this highway up to and including the fifteen years 
identified as being the time to complete the highway under traditional 
practices. The option of building the highway in sections according to 
relative safety risk could also have been considered. However, we were 
unable to determine if other options for completion date were considered 
or what effect they might have had on the cost of the project. We did not 
see any cost/benefit analyses comparing alternative completion dates that 
would have been used as input to this decision.

Project Objective 8, “To defer payments by NBHC for the Project (other 
than on account of highway operations and maintenance) until after the 
opening of the completed Highway.”

5.67	This objective was intended to defer the start of operating 
sub-lease payments by NBHC to Project Co. until a point after the full 
traffic availability date for the highway. Provincial representatives felt 
that it would be prudent business practice to defer payments on the 
highway until after the completion of construction. Additionally, they 
noted that at the time this objective was being set, it was felt that four 
years out the provincial surpluses would be in the range of $60 to $75 
million. Those surpluses would cover the costs of the highway when 
sub-lease payments began in 2003. We were not provided with 
documentation to support this opinion. Additionally, we saw no 
evidence that other alternatives were considered for a start date on 
sub-lease payments. We did note that the gross interest cost between the 
issue date for the lease-based debt of 19 February 1998 and the 
commencement of repayments was approximately $214 million on the 
original $540 million debt. We feel that cost benefit analyses of various 
commencement dates should have been completed and provided to 
decision-makers.

Project Objective 9, “To maximize the economic and industrial benefits 
to the citizens and industries of New Brunswick.”

5.68	This objective deals with the economic development benefits to 
the Province from the Fredericton-Moncton Highway project. This 
objective would have had cost consequences for the project, since it 
would somewhat limit the use of suppliers, sub-contractors, etc. by 
restricting their ability to find the lowest cost providers. However, to the 
best of our knowledge, analyses of these cost consequences were not 
prepared and no other options were considered. It may well be that the 
“price” of this economic development opportunity was quite low for the 
Province, but we would have expected it to be analyzed before this 
objective was decided upon.

Departmental comments

5.69	The Government wished to ensure that New Brunswick benefited 
from the construction of this project. Compliant proposals were 
evaluated on the basis of lowest overall net cost for the Project. 
Economic and Industrial Benefits were to be used only in the event of a 
“tie”. Therefore, while it required proponents to make a commitment to 
this objective and to their plan for Economic and Industrial Benefits we 
believe there was little if any additional cost to the Province resulting 
from the adoption of this objective.

Project Objective 10, “To provide a high level of service to the Highway 
users at a low cost.”

5.70	This objective established that the highway would be tolled. It 
related project objective two “To ensure that the Highway is developed, 
designed, constructed, operated, managed, maintained and rehabilitated 
in a manner that meets or exceeds current Provincial standards” to a 
user pay system of tolls. The tolling option was first raised in the 1993 
provincial White Paper.

5.71	The effects of charging user tolls on the highway were analyzed 
for the reference of decision-makers. Specifically, it was determined that 
toll revenue at the levels proposed would lead to operating lease 
treatment for the project on the provincial books. This would allow the 
achievement of one of the financial objectives previously discussed, 
namely, “to avoid an increase in provincial debt.” Additionally, a toll 
highway would contribute to the achievement of project objective 6 as 
interpreted by the Government, “to minimize the financial contribution 
of NBHC to the Project.” Departmental representatives also indicated 
that it was felt that a system that required users to make a contribution 
was desirable in that it would somewhat reduce the burden on New 
Brunswick taxpayers in other parts of the Province who would not be 
using the highway. We did not see analyses documenting the net benefits 
of a tolling system (i.e. gross toll revenues less related costs).

5.72	A reasonable alternative to this objective would have been to 
have no tolls on the highway. This would have required either increased 
federal funding or an increase in planned provincial sub-lease payments. 
We saw evidence that additional federal funding was pursued and that 
tolling was seen as an option if federal funding was not available. The 
Province was unable to obtain additional federal funding during the 
period in which decisions were being made about the Fredericton-
Moncton Highway. However, we saw no evidence that the option of 
larger sub-lease payments was considered. Actual provincial sub-lease 
payments are expected to be in the order of $58 million per annum with 
the tolling system now in place. Projected sub-lease payments without 
tolling would have been approximately $71 million per annum. 

Departmental comments

5.73	The decision to toll falls out of the government financial 
objectives not out of this objective. This objective was achieved by 
establishing standards for the Developer and the Operator and through 
the use of the Toll Protocol to ensure reasonable toll rates.

Recommendations 
Government objectives for the 
project

5.74	Because of the importance of selecting appropriate project 
objectives, we would like to make the following recommendations to 
apply to the selection of objectives for future public-private 
partnerships and government decision-making in general.

•	For each type of objective under consideration, alternatives 
should be identified, where applicable.

•	Each alternative should be analyzed for its effect on the cost of 
the project, its effect on the structure of the project, and its 
effect in helping achieve the planned outcome of the project. 
These analyses should be clearly documented for reference by 
decision-makers.

•	Consideration of the alternatives by decision-makers should 
include reference to analyses and the rationale for decisions 
taken should be documented.

•	The Province should ensure for accountability purposes that the 
list of project objectives is complete, clearly documented and 
that objectives are clearly understood by all parties involved in 
the project.


Departmental response

5.75	It is our position that the issues you have raised were addressed 
through consultation with the appropriate experts and discussion with 
senior management and the Government. We are confident that 
alternatives, issues and risks were properly considered in reaching all 
decisions.

Project Structure

5.76	RBC Dominion Securities Inc. proposed and analyzed three 
structural alternatives for the project. They were:

•	New Brunswick Highway Corporation issues stand alone revenue 
bonds;

•	arm’s length entity owns, finances against tolls and provincial lease; 
and

•	private sector owns, finances against tolls.


5.77	An interim report was issued by RBC Dominion Securities Inc. 
on 28 October 1996. In it they recommended the second option and 
documented a model for how the arrangement should be structured. 
Their report stated:

“Given the Province’s three financial objectives for the 
highway project .... a business and financial model was 
developed utilizing an arm’s length not-for-profit corporation 
funded through debt raised by the successful RFP proponent 
and through debt raised by this Project Company against a 
long-term operating lease commitment of the New Brunswick 
Highway Corporation.”

5.78	It went on to say:

“In summary, our analysis of the Fredericton to Moncton 
Highway project indicated that a public private partnership 
approach could be used to achieve:

  i)  construction cost savings estimated by ADI Ltd. of $60 
million;

 ii)  time savings estimated by the Department of Finance of 
14 years;

iii)  meaningful risk transfer to the private sector in both the
construction and operating phases of the project;

iv)  no direct increase in provincial debt; and

 v)  a  cost  of  funds 36 to 38.5 basis points greater than the 
Province’s rate for long-term government bonds.”

5.79	Based on our understanding of the government’s financial 
objectives for the project, a public-private partnership that involved 
leasing appears to have been the only structure under which the project 
could have proceeded. The objectives as set precluded alternatives such 
as:

•	public-private partnership for all aspects of the project except 
financing;

•	public-private partnership without tolls;

•	straight contracts for design, construction, and operation; and

•	straight contracts for design, construction, operation, and tolling.


5.80	Under terms in the final agreement, the Province has the option 
of buying back the highway at the end of the lease term at fair market 
value instead of for a nominal amount. What makes that option unusual 
is that the lease-based and toll-based debt will be paid off by the end of 
the lease term. The requirement to have the final agreement structured 
this way was clearly specified in the recommendations contained in the 
RBC Dominion Securities Inc. report. The only apparent reason for this 
requirement relates to accounting rules for operating leases. An 
arrangement does not qualify for operating lease treatment for 
accounting purposes if there is any sort of “bargain purchase option” 
available at the end of a lease term. As has already been discussed, this 
arrangement had to qualify as an operating lease or the project would not 
have proceeded. 

Request for Qualifications

5.81	A Request for Qualifications (RFQ) was issued on 18 December 
1996 to identify parties qualified to be the private sector partner for the 
project. At the time of the announcement of the RFQ, the Ministers of 
Transportation and Finance indicated that a public-private partnership 
approach had been selected. The project structure described in the RFQ 
(and later in the RFP) mirrored the model laid out in the RBC Dominion 
Securities Inc. report. 

5.82	Five submissions were received in reply to the RFQ. Once the 
submissions were received, there was a clearly laid out process, with 
groups being assigned specific duties. 

5.83	As noted in Appendix I, the process consultant involved in the 
design and implementation of the RFQ and RFP processes was KPMG. 
In a letter dated 4 May 1998, KPMG provided the following opinion to 
the Department of Transportation.

“Based on our review and our involvement in the matters 
discussed in this letter .... we are of the opinion that the 
evaluation process leading to the selection of the preferred 
proponent was:

•	.   designed to be fair and equitable in its treatment of 
proponents and their proposals,

•	    conducted in accordance with a pre-established process,

•	    carried out using pre-established criteria, which were 
consistently applied.


And that as a result, the evaluation and selection process was 
undertaken in a diligent, fair and equitable manner.”

5.84	We were told that the Province was strongly advised by its hired 
consultants to select three proponents to advance to the RFP stage. It 
was felt that because of the cost to bidders of preparing an RFP 
submission, the Province would get more competitive bids if the field 
was limited. The Minister of Transportation announced the three 
finalists in the Legislative Assembly in February 1997 and the three 
short-listed proponents were sent a copy of the Request for Proposals on 
27 March 1997. The remainder of this chapter deals with the decisions 
made translating project objectives into terms in the Request for 
Proposals.

Request for Proposals

5.85	Once the government’s project objectives were finalized, it was 
necessary to translate them into detailed specifications for the project as 
shown in the RFP. Contents of the RFP were prepared by staff of 
various government departments, along with representatives of various 
private consultants hired to provide input to the project.

5.86	For purposes of our review of the decision-making process for 
the RFP, we looked at several key areas. These areas included risk 
sharing, design-build, operations and maintenance, tolling, financing, 
and final authorization of the RFP contents. These key areas covered 
certain of the project objectives as previously discussed. We wanted to 
examine in more detail how these objectives were rolled out into the 
RFP and how that decision-making process worked. 

Risk transfer

5.87	According to the Province’s recently-released guidelines for 
public-private partnerships, “The essence of a public-private partnership 
arrangement is the sharing of risks. Central to any successful 
public-private partnership initiative is the identification of risk 
associated with each component of the project and the allocation of that 
risk factor to either the public sector, the private sector or perhaps a 
sharing by both. Thus, the desired balance to ensure best value (for 
money) is based on an allocation of risk factors to the participants who 
are best able to manage those risks and thus minimize costs while 
improving performance.…The transfer of risk for various elements has a 
value that must be quantified where possible.”

5.88	The provincial project objective regarding risk transfer was “to 
share the risks of the Project between the private and public sectors.” 
The Province clearly specified the risks to be transferred to the private 
sector, and those to be retained by the Province, in a table near the front 
of the RFP document. That table divided project risks into four 
categories:

•	development, design and construction risks;

•	demand risks (related to tolling);

•	operation and maintenance risks; and

•	financing risks (related to debt issuance).


5.89	From our review of the risk transfer table with departmental 
staff, we feel that the RFP does provide for the transfer of significant 
additional risks to the private sector over the traditional DOT approach. 
However, we were not provided with analyses supporting the decision to 
transfer those risks on cost benefit or other bases, and we were unable to 
develop any substantive evidence supporting risk transfer decisions on 
our own. We had to rely on anecdotal evidence from the departments. 
Departmental representatives stated that they wanted risk to be assigned 
to the party best able to bear it, thereby lowering the overall cost of the 
project. They also indicated that all risk-transfer decisions were subject 
to intensive discussion between themselves and hired consultants prior to 
being made.

5.90	We were also unable to compute the ultimate cost of risks 
transferred or establish whether the cost was reasonable, except for the 
financing area. Results of that analysis are presented later in this 
chapter. Risk transfer as it relates to specific areas of the RFP is covered 
further in the sections that follow.

Development, design and 
construction risks

5.91	For this project the Province decided to transfer more risk to the 
private sector in this area than the traditional DOT practice. Normally 
design work, operations, and maintenance on highways in the Province 
are done separately, mainly by DOT staff. However, in the case of the 
Fredericton-Moncton Highway, the Province wanted to transfer risk by 
including all phases of highway work in the RFP. Aside from 
preliminary surveying work and preliminary soil tests, the RFP made 
bidders responsible for everything including final detailed surveys, soil 
tests, and all design work. There were also a few risks transferred in 
construction, most notably “weather risk” which was to be borne by the 
successful bidder, but is normally the responsibility of the Province. It 
was not possible to determine how much it ultimately cost the Province 
to achieve this degree of risk transfer as it was built into the MRDC bids 
for design-build and operations and maintenance. However, we feel that 
the decision to reduce risk by combining the design-build and 
maintenance components of the project into one agreement provides 
some protection for the Province against unforeseen future maintenance 
expenditures.

Operation and maintenance 
risks

5.92	We were told that the rationale for including operations and 
maintenance on the highway along with the design-build component was 
to reduce the risk to the Province of design or construction deficiencies. 
Design or construction deficiencies subsequently discovered would be 
the responsibility of the successful bidder under the operations and 
maintenance part of the agreement. That is because the exact amount to 
be paid by the Province, and the level of service to be provided, would 
have already been established. 

5.93	Operations and maintenance agreements as proposed in the RFP 
were divided into two sections, highway operations and maintenance, 
and tolling operations and maintenance.

5.94	The RFP required a twenty-year time commitment from bidders 
to highway operations and maintenance. There were no analyses 
prepared supporting this position. However, departmental 
representatives indicated that the decision was subject to extensive 
discussion prior to being taken.

5.95	Our concern is that there are no hand-back standards in the RFP 
for the end of year 20, even though the initial maintenance agreement 
ends at that point. Hand-back standards were only set for the end of year 
30 or in the event of a default by the successful bidder under the RFP. 
The successful bidder will continue to maintain the highway during 
years 21 to 30, but the cost schedule will have to be negotiated between 
the successful bidder and the Province at that time. Therefore, we feel 
that despite the standards that are to be met on a year-by-year basis as 
documented in the RFP, some risk remains that some maintenance 
activities will be postponed by the successful bidder until after the initial 
20-year period has passed. Whether this will have a significant dollar 
cost to the Province during the period from year 21 to year 30 is not 
possible to estimate at this point. The Province expects that much of the 
major maintenance work required during the first 30 years will have 
been covered by the end of year 20 (e.g. replacement of bridge decks). 
However, if the intention of the RFP was to ensure that the Province got 
what it paid for (ie. a four-lane highway with a thirty year life) we feel 
that a thirty year highway maintenance agreement would have been more 
appropriate.

Recommendation

5.96	We recommend that where future public-private 
partnerships “bundle” construction and ongoing maintenance 
activities for bidding purposes, either:

•	a fee schedule for maintenance activities should be set at the 
beginning of the agreement to cover the term of the agreement; 
or

•	hand-back standards should be included in the agreement for the 
date at which the initial maintenance agreement ends.


Departmental response

5.97	The optimal length of the initial fixed cost period for highway 
operations and maintenance was set at 20 years after lengthy discussions 
with the consultants. The difficulty of projecting maintenance costs so far 
into the future was recognized. Project staff and consultants agreed that 
a 20 year period was realistically the maximum time period that should 
be considered. It was agreed that a substantial premium would be paid 
for committing a developer to a longer term. Automatically setting the 
term of the fee schedule to match the term of the agreement could result 
in an arrangement that is not cost-effective. 

5.98	While recognizing that there is risk in trying to look forward
20 or 30 years, the contract as you note does contain standards 
regarding ongoing maintenance and rehabilitation which protect the 
Province.

5.99	The RFP also required a ten-year commitment from bidders for 
tolling operations and maintenance. The rates specified in the agreement 
covered that ten-year period. The rates for subsequent five year periods 
have to be renegotiated and the Province has the option of seeking an 
alternate operator of the tolling system after the first ten years of the 
agreement. The shorter time frame for tolling operations and 
maintenance was due to recognition of likely technology changes in 
future that would reduce costs. Since the Province assumed that costs of 
tolling would actually drop over time, they did not want to “lock in” 
tolling operations and maintenance payments over a longer term. Again 
there were no analyses supporting this decision. However, the verbal 
explanations we were given were reasonable.

Demand risks

5.100	The demand risks covered in this section refer to the risk that 
tolling revenues collected will not be as high as projected, thereby 
impacting on the availability of that stream of revenue for toll-based debt 
servicing and concession fees. This risk can be broken down into two 
components, the risk that there will be problems in collecting monies 
due, and the risk that traffic volumes will be lower than expected. We do 
not expect collection risk to be significant. However, we have some 
concerns regarding the conclusions drawn about traffic volume risk.

5.101	The planning estimate of likely toll revenue over the first 
30 years of highway operation was $650 million. This revenue stream 
was to be used first as a source of funds with which to service the 
toll-based debt, and second as a pool of “excess toll revenues” to be paid 
to the Province as concession fees. Toll-based debt servicing was 
projected as totalling $329 million over that period. “Excess toll 
revenues” were estimated to be approximately $321 million. 

5.102	A traffic study of the Fredericton-Moncton corridor by Wilbur 
Smith and Associates estimated that about 58% of toll revenues 
(i.e. about $377 million) will come from commercial traffic. The other 
42% will come from non-commercial traffic. Since commercial traffic is 
obliged to use the toll highway, it is practical to assume that commercial 
toll revenue is guaranteed. Based upon these estimates, even if there was 
no non-commercial traffic, toll-based debt could be serviced. The effect 
of short term fluctuations in toll revenue would be mitigated by the 
tolling reserve fund which will be sufficient to cover one year of 
toll-based debt servicing and must be fully funded before excess toll 
revenues are paid to the Province. Even with the effects of a serious 
recession, we feel that a minimal level of non-commercial traffic would 
ensure sufficient revenues to cover toll-based debt servicing. Therefore, 
in our opinion, the possibility of toll revenues not being sufficient to 
cover toll-based debt servicing is remote. Consequently, we feel that 
little demand risk has been assigned to the toll-based lenders.

5.103	On the other hand, the Province loses $1 for every $1 drop in 
toll revenue from $650 million down to the $329 million required to 
service the toll-based debt. 

5.104	This opinion contradicts what is documented in the RFP risk 
transfer schedule. It appears that the Province believed it was 
transferring significant demand risks to the toll-based lenders and had 
paid a risk premium on interest rates to cover that risk transfer. In fact 
toll-based lenders may well have built a very low risk premium into their 
interest rates relating to demand risk, although we have no way of 
confirming if that was the case. There is also no way to determine what 
effect a more equitable sharing of demand risks for the Fredericton-
Moncton project would have had on the interest rates on the toll-based 
debt.

Recommendation

5.105	We recommend that care be taken in the RFP to accurately 
identify risks being transferred between the Province and their 
private sector partner pursuant to the terms of the RFP.

Departmental response

5.106	Presenting the toll-based debt service and the estimated excess 
revenues in nominal dollars is misleading. These amounts are very 
different as the larger excess toll revenue amounts are in the later years. 
A net present value calculation for each would be more appropriate.

5.107	The comment that:  “….it is practical to assume that commercial 
toll revenue is guaranteed.” is incorrect. Although trucks are required to 
use the highway, the amount of toll revenue anticipated to be generated 
from trucks is only an estimate. The toll-based lenders are the only 
lenders who are bearing the demand risk. The only source of funds for 
the payment of interest and principal on their investment is the toll 
revenue. If there are not sufficient funds to pay those amounts, they will 
lose their interest income as well as their initial investment. Toll revenue 
in excess of that required to service the toll-based debt accrues to the 
Province since it is providing the right of way upon which the highway is 
being built.

5.108	Demand risk was transferred to the toll-based lenders as 
indicated in the RFP. The market is efficient and prices such risk. Had 
the market perceived that there was little risk transfer, the interest rate 
on the toll-based debt would have been lower.

5.109	The comments on demand risk also ignore the risk associated 
with any development of alternative transportation routes or methods.

Financing risks 

5.110	The terms documented in the RFP transfer some financing risk 
away from the Province. They require all debt funding for the project to 
be issued by a third party. They also specifically identify how the 
repayment of that debt is to be funded and when and under what 
circumstances repayments are to commence. 

5.111	The lease-based debt was to be issued by the Project Company. 
The Department of Finance was to provide assistance in identifying 
parties willing to invest in the lease-based debt. It will be repaid 
commencing in November 2003 through sub-lease payments received 
from the Province. Provincial payments are subject to statutory 
appropriation, meaning that they do not have to be voted on by the 
Legislative Assembly each year. This constitutes, in effect, a guarantee 
to lease-based bondholders that the Province will make sub-lease 
payments regularly once the highway is completed. The Minister of 
Finance made the following statement in the Legislative Assembly on 
19 December 1997 when referring to the lease-based debt. “.... By 
doing it through statutory appropriation, we bring the risk down in the 
minds of the bankers and the bondholders. If it is done through statutory 
appropriation as opposed to yearly budgeting, there is a lower cost.”

5.112	The interest rate on the lease-based debt ultimately turned out to 
be 33 basis points above the provincial rate because it was issued by 
Project Company. The cost of this decision therefore turned out to be 
$25 million in 1998 dollars, meaning that where Project Company was 
able to borrow $540 million, the Province would have been able to 
borrow $565 million with the same repayment schedule.

Departmental comments

5.113	The interest rate on the lease-based debt issued by the Project 
Company was higher than the Provincial borrowing cost for a number of 
reasons: the lenders accepted completion risk, the issue contained an 
amortizing feature, the issue was relatively large, etc. It is therefore 
inappropriate to compare the issue to a typical Provincial debenture 
issue.

5.114	The Province received two benefits from the decision to have 
lease-based debt issued by Project Company. First, they were able to 
transfer the risk of non-completion of construction of the highway to the 
bondholders. In other words, if the highway is not completed, the 
Province will not have to make scheduled sub-lease payments. Second, 
having the debt issued by an arm’s-length organization (i.e. Project 
Company) and partially funded by revenue sources from outside the 
government was necessary to ensure that it would not show up as 
provincial debt for accounting purposes. There appears to be no ongoing 
financing risk transfer related to lease-based debt once construction of 
the highway is completed. However, interest rates will be higher for the 
duration of the repayment period.

5.115	The toll-based debt was to be placed by the successful bidder on 
behalf of Project Company. Toll-based debt was broken down into 
senior and subordinate groupings. The interest rates for senior toll-based 
debt totalling $149.5 million ultimately turned out to be 60 (for $138.0 
million) and 100 (for $11.5 million) basis points above the provincial 
borrowing rate. The interest rates for the two groupings of subordinate 
toll-based debt totalling $25 million will be 286 (for $15 million) and 
486 (for $10 million) basis points above the provincial borrowing rate 
when they are issued. 

5.116	The Province received three benefits from the decision to have 
toll-based debt issued by Project Company. First, as for the lease-based 
debt, they were able to transfer the risk of non-completion of 
construction of the highway to the bondholders. In other words, 
regardless of whether the highway is completed or not, the Province will 
never be liable to make toll-based debt repayments. Second, the 
bondholders bear a small percentage of the traffic and collection 
(i.e. demand) risk as previously discussed, because the only source of 
funds for repayment of toll-based debt is toll revenue. Third, having the 
debt issued by an arm’s-length organization (i.e. Project Company) and 
funded by revenue sources from outside of the government was 
necessary to ensure that it would not show up as provincial debt for 
accounting purposes.

5.117	MRDC arranged the toll-based debt structure. For its part, the 
Province has tried to make the toll-based debt issues as attractive as 
possible to potential lenders by managing construction risk through 
bonding, insurance, and developer selection, by establishing a clear 
tolling protocol and by pre-funding a debt service reserve fund before 
taking any concession fees.

5.118	As is now stated in the recently-released provincial guidelines 
for public-private partnerships, we feel that the optimal allocation of risk 
between partners in a public-private partnership must be based upon 
which partner is best suited to manage and/or mitigate each risk. We 
feel, in general, that the partner best suited to deal with risk will be the 
one who can deal with it on the lowest cost basis. On that basis, it 
appears that the Province was best able to deal with the financing risk on 
this project because it had access to the most favourable financing rates. 
The Province did receive some benefits from additional costs incurred 
and it did take all possible steps to lower financing costs. However, as 
analyses comparing the extra cost of funding with the benefits received 
were not prepared, we cannot confirm that the decision to have debt 
issued by a third party was appropriate.

Recommendation

5.119	We recommend that the Province prepare cost benefit 
analyses prior to making the decision to have project debt issued by 
third parties for public-private partnerships when financing costs 
will be higher than provincial rates. Specifically, the cost of higher 
interest rates should be compared with the benefits accruing from 
this decision.

Departmental response

5.120	Consultants were hired to bring a broad based knowledge of the 
alternatives and the associated risks. The fact that the financing cost of 
the lease-based debt was higher than the Province’s borrowing cost 
indicates that risk was transferred and that a cost was placed on that 
transfer by the market. Capital markets are viewed to be efficient; 
therefore the risk transfer was properly priced.

5.121	In our 1998 Report we indicated we would try to determine the 
rationale and potential consequences of issuing most of the debt required 
for the project in advance. In fact, the model for the public-private 
partnership, as presented by RBC Dominion Securities Inc. in their 1996 
interim report, actually recommended this approach. “.... our financial 
model envisions borrowing 100% of the requisite debt at the outset of the 
project, to lock in current rates and to fully transfer financing risk away 
from the Province. There is a cost to the negative carry on undrawn 
debt, minimized by short-term investing and any tolls collected as 
segments of the road are opened.”

5.122	The benefit of this decision to the Province was that it would 
lock in interest rates, thereby eliminating one aspect of financing risk for 
the project (i.e. the risk that interest rates would go up during the period 
when debt was being issued). Representatives of the Department of 
Finance informed us that this is no different than what the Province does 
on its own debt issues. This approach appears to be reasonable. It also 
appears, based on the statement by RBC Dominion Securities Inc., that 
the cost of this decision would be reasonable and manageable.

Other Issues

Minimum level of toll-based 
debt

5.123	The RFP required that the successful bidder guarantee the 
placement of at least 13% (i.e. $114.01 million) of the total capital cost 
of the project of $877 million as toll-based debt. The Province appears 
to have had three reasons for making this requirement:

•	to transfer repayment risk in the event toll revenues would not cover 
toll-based debt repayment to the bondholders, thereby addressing the 
project objective of sharing risks between the private and public 
sectors;

•	to ensure that the transaction was treated as an operating lease for 
accounting purposes, thereby addressing the project objective of not 
adding debt to the Province’s books; and 

•	to reduce the provincial sub-lease payment to Project Company to as 
low a level as possible, thereby addressing the project objective of 
minimizing the financial contribution of NBHC to the project.



5.124	We question the rationale for the decision to allow the successful 
bidder to issue more than the minimum required level of toll-based debt. 
Because of the way in which debt servicing payments are made, it 
appears that it will, in fact, increase net costs to the Province. By 
allowing additional, higher interest rate toll-based debt to be issued in 
lieu of the same amount of lower interest rate lease-based debt, the 
overall total cost of debt servicing is increased. Departmental 
representatives were unable to describe tangible benefits accruing from 
this decision.

5.125	Using actual numbers, a total of $174.5 million in toll-based 
debt has been or will be issued for this project. That means $60.49 
million more toll-based debt than was required was placed by MRDC. 
To date $149.5 million of toll-based debt has been issued, $35.49 
million over the 13% minimum. Based on the difference between the 
lease-based interest rate of 6.47% and the toll-based rates of 6.74% and 
7.14%, the extra cost of financing has a net present value of $2.2 
million in 1998 dollars. This extra cost figure will be substantially 
increased when the additional $25 million in toll-based debt is issued 
before the end of the construction phase of the project. That toll-based 
debt will bear interest rates of 9% and 11% and will be held by the 
successful bidder, MRDC. 

5.126	Since the extra toll-based debt servicing cost comes directly 
from toll based revenues, it has the effect of reducing the excess toll 
revenues (i.e. provincial revenue) that would otherwise be paid to the 
Province. This reduction in excess toll revenues will exceed the 
reduction in provincial sub-lease payments. Therefore, the net effect to 
the Province of this decision is negative. We feel that this effect would 
have been noted had a cost benefit analysis been prepared. However, 
such an analysis was not completed prior to the issuance of the RFP.

Recommendation

5.127	We recommend that cost-benefit analyses be prepared prior 
to finalizing RFP terms where they would provide significant 
decision-making information.

Departmental response

5.128	The bidding structure allowed for as much toll-based debt as 
possible from an estimated stream of revenue. It was not known at the 
time of release of the RFP that Government would receive the excess toll 
revenue as bidders were given the opportunity to suggest a sharing 
arrangement for any excess toll revenue. None of the bidders proposed a 
sharing mechanism so any excess accrues to the Province.

5.129	Anticipated total toll revenue was based on estimates only and 
therefore there is no guarantee that the Province will receive any funds. 
However, the amount of lease-based debt is known and the annual 
sub-lease payment is fixed. Therefore, the risk and the cost to the 
Province are reduced by a lower amount of lease-based debt.

Toll rates

5.130	Decisions relating to toll rates were intended to address the 
project objective of providing a high level of service to highway users at 
a low cost. They also addressed the objective of mimimizing the 
provincial contribution to the project. Decision-making with regard to 
toll rates appears to have adequately addressed applicable provincial 
project objectives.

5.131	In September 1996 ADI Limited was contracted to conduct a 
traffic study of the Longs Creek to Moncton corridor in conjunction with 
Wilbur Smith and Associates of New Haven, Connecticut. As part of 
their work, they suggested maximum toll rates for the Fredericton-
Moncton Highway. A departmental representative told us that these rates 
were believed to be too high by the Premier and Minister of 
Transportation. Therefore the rates approved for inclusion in the toll 
protocol in the RFP were somewhat lower. At the time the RFP was 
being prepared, toll revenues to be collected over the thirty years of the 
sub-lease agreement were estimated to be $650 million.

5.132	As part of the decision-making process for toll rates, an analysis 
was prepared comparing proposed Fredericton-Moncton toll rates with 
those in other jurisdictions in North America. Proposed rates for the 
Fredericton-Moncton Highway equated to 3.5 cents per kilometre. This 
rate was comparable with other surveyed highways such as the Maine 
(3 cents per kilometre) and New Hampshire (6 cents per kilometre) 
turnpikes and the Coquihalla highway in British Columbia (5.1 cents per 
kilometre). Based on this analysis, proposed Fredericton-Moncton 
Highway toll rates appear to be reasonable.

5.133	RFP terms made the Project Company responsible for initiating 
toll rate increases. The RFP limited toll rate increases to 90% of the 
increase in the Consumer Price Index (CPI), and only allowed toll rate 
increases to be made after the highway was completed. The RFP also 
stated, “The Project Company may choose to implement toll rates which 
are below those permitted under the Toll Rate Protocol, provided that 
such decisions achieve an objective of maximizing gross toll revenues net 
of collection costs.” So, once toll rate increases are permissable, Project 
Company must raise toll rates annually by 90% of the increase in the 
CPI unless they can prove that a lower or no increase will improve net 
toll revenues. Without such a term, Project Company would have had no 
reason to raise toll rates. Because toll-based debt repayment amounts are 
fixed over the life of that debt, we feel that 100 percent of the benefit of 
toll rate increases accrues to the Province.

Departmental comments

5.134	The Project Company might default on the toll-based debt or the 
toll-based debt might not have been raised. The rate increases do not 
necessarily 100% benefit the Province. The increases in toll rates might 
or might not compensate in bad years for lower than anticipated 
volumes. Relating toll fee increases to changes in the NBCPI was part of 
the toll protocol considered by the lenders in pricing and sizing the 
toll-based debt.

5.135	The Province cannot raise toll rates itself. However RFP terms 
require the maximization of toll revenues by Project Co., thereby 
covering fixed toll-based debt servicing requirements and maximizing 
concession fees to be paid to the Province. This RFP term therefore 
addresses the provincial project objective of minimizing the financial 
contribution of the Province to the project by maximizing the concession 
fee they will receive from Project Co. It also protects the interests of the 
toll-based lenders and would likely have had an impact on the interest 
rates they offered. 

Concession fee

5.136	The RFP does not define the terms “concession fee” or “excess 
toll revenue.” However, they are referred to in Section 4.4.3, “Use of 
Toll and Ancillary Revenue.” 

“Gross toll revenue and ancillary revenue will be available to 
service Toll Based Debt. Any toll and ancillary revenue not 
required to service the Toll Based Debt will be for the account 
of the Project Company. Such revenue net of payments made 
pursuant to any incentive arrangement will be used to reduce 
subsequent sublease payments by NBHC. ...”

5.137	Departmental representatives explained that the concession fee is 
intended to be a way of making toll revenue not required for debt 
servicing available for provincial use. The concession fee was not just 
intended to be a fair market value payment for the use of the provincial 
land corridor upon which the highway is built. It is to pay for all rights 
conveyed to the Project Company with respect to the project. This 
becomes apparent when you consider that the total cost of land acquired 
for the highway by NBHC was in the range of $12.1 million, while the 
estimated concession fee over 30 years is $321 million. 

5.138	During the construction period, excess toll revenues will be used 
to build up a reserve fund on behalf of toll-based lenders. The reserve 
fund is to be enough for two years’ toll-based debt servicing during the 
construction period and one year’s toll-based debt servicing when the 
highway has been completed. 

Authorization of Project 
Decisions

5.139	In completing our review of decision-making for this project up 
to the Request for Proposals stage, we wanted to ensure that key 
decisions had been properly authorized. We feel that the 
recommendation to proceed to the RFP stage with a public-private 
partnership arrangement and the recommended contents of the RFP 
should have been prepared for submission to an authorizing body (Board 
of Management/Policy and Priorities Committee/Executive Council) in 
accordance with the “Procedures Manual for Executive Council 
Documents.” Authorizing bodies should then have properly approved 
these recommendations.

5.140	In our review, we noted that the Board of Management and the 
Policy and Priorities Committee approved a recommendation from the 
Committee of Deputy Ministers to advance to the RFP phase with a 
short list of three potential private sector partners. However, only 
certain of the tolling requirements, as documented in the RFP, were 
approved by the Board of Management. Specifically, they approved the 
tolling protocol and certain other items pursuant to their approval of 
“Financial Parameters for the Fredericton to Moncton Project -
 Finance” on 27 February 1997. Otherwise, the contents of the RFP 
were not approved by the Board of Management or Executive Council. 
Those bodies relied on departmental staff and hired consultants to ensure 
the RFP contents were appropriate. We feel that Executive Council 
approval of the contents of the RFP prior to issuance would have been 
desirable in order to ensure that government objectives for this 
important project were properly reflected in the terms to be met by the 
bidders.

Departmental comments

5.141	A number of presentations were made to Cabinet to keep them 
informed and to obtain approval at key points in the process. The 
material in the RFP is complex and involved several binders. The 
government depended on the experience of its staff and the experts it 
engaged for this complex project.

New Government 
Guidelines

5.142	We were pleased to note that the Province released a document 
on 28 January 1999 entitled “Public-private Partnerships (Guidelines 
and Protocols).” Under the “guiding principles” section of that 
document, the following comments were made:

“As with any proposal, the first step is a full evaluation to 
determine whether it is a government priority. A 
public-private partnership may be pursued only after 
alternative methods of delivering the project have undergone 
careful evaluation, it has emerged as the best alternative, and 
where it offers the best solution demonstrated through a sound 
business case......

All public-private partnerships will be based on the following 
guiding principles:

1.   Project definition: the project is of sufficient size and/or 
complexity to provide opportunity for the private sector to 
demonstrate its initiative, innovation and expertise in 
providing best value to New Brunswick.

2.   Competitive private sector market: sufficient qualified 
private sector proponents exist to ensure a competitive 
process.

3.   Shared rewards: the public receives “value for money” 
from the initiative, while the private sector can reasonably 
expect to receive a fair return on its investment.

4.   Premise of risk transfer: risks are allocated to the partner 
best suited to assume the risk.

5.   Procurement process: must be fair and transparent and 
will be subject to due diligence.

6.   Signed contract: the acceptance of a usually long-term 
relationship established through signed contractual 
arrangements.

7.   Communications: a proactive, ongoing and transparent 
communications plan designed to keep people informed is 
implemented.”

5.143	We feel that the document will provide a useful benchmark for 
future public-private partnership initiatives undertaken by the Province.

Conclusion

5.144	In June 1996, the government announced its intention to pursue 
a four-lane highway project between Fredericton and Moncton. In our 
opinion, the decision-making process after that date was effective in 
translating government objectives into specific requirements for the 
project. However, we are less comfortable with the process that lead up 
to the June 1996 announcement. Government objectives were set prior to 
that date which severely limited the ability of departmental staff to adopt 
flexible approaches in pursuing the project. Setting these objectives was 
certainly a very important part of the decision-making process for the 
project. For that reason we feel that objective-setting by the government 
should have been subject to the same rigor and analyses that was applied 
in later decision-making by departmental staff and consultants. We 
would encourage future decision-makers to adopt a more formal 
approach to decision-making and to adequately document the rationale 
for their decisions. 



Appendix I



Fredericton-Moncton Highway Project Chronology


The provincial white paper “Highways for the Next Century” was released on 28 September 1993. It 
formally introduced the idea that the government of New Brunswick would be considering partnership 
arrangements with private sector interests to build and finance certain portions of planned highways. It 
also indicated that the government would actively pursue the implementation of tolls on portions of 
new highways so that traffic which benefits from the new transportation links would share in the cost 
of the project.

The final report of the Select Committee on New Brunswick’s Highway Policy (All party committee) 
was presented on 8 April 1994. The Committee recommended that appropriate funding mechanisms to 
allow the completion of the national highway system be determined and agreed upon in the near 
future. They also recommended that the Province obtain a significant commitment of funds from the 
federal government. 

In June 1994, the report “Feasibility Study for Toll Highways and Private Sector Involvement for 
Highway Development in New Brunswick” was completed for the New Brunswick Department of 
Transportation and the New Brunswick Department of Finance by ADI Limited, Price Waterhouse, 
and Transroute Consultants. It was prepared to examine the feasibility of toll highways and private 
sector involvement in highway development in the Province. 

The Act creating the New Brunswick Highway Corporation was signed by the Lieutenant Governor on 
29 March 1995. The Act introduced the concept of tolling into legislation. NBHC was intended to be 
abusiness enterprise established to design, construct, operate, maintain, toll and own certain 
highways. We made some comments relating to the intended purpose of NBHC in our 1995 Report.

The routing decision for the Fredericton-Moncton Highway project was announced on 11 June 1996. 
The Lieutenant Governor in Council approved the Trans-Canada Highway routing presented and 
studied in the Environmental Impact Assessment with certain provisos.

The official announcement that the project would proceed was made on 14 June 1996. It was 
announced that the four-lane section between Longs Creek and Moncton would be completed by 2000. 
It was also announced that RBC Dominion Securities Inc. had been engaged by the Province to do a 
financial feasibility study of the project. The Province identified federal-provincial funding as the 
preferred option. In the absence of federal funding, it was indicated that the Province was prepared to 
look at other options such as a public-private partership, tolls and/or gasoline and diesel fuel taxes.

On 26 June 1996, the Board of Management and Executive Council approved the engagement of RBC 
Dominon Securities Inc. to analyze the feasibility of applying a public-private partnership approach to 
the proposed Fredericton-Moncton Highway project. RBC Dominion Securities Inc. was provided 
with the following fiscal objectives of the Province, which had to be met by any proposed structure. 


They were:
-  to avoid an increase in provincial debt;
-  to achieve a reasonable cost of funds; and
-  to achieve an optimal degree of risk tranfer to the private sector.

On 2 July 1996 the Project Office was set up for the Fredericton-Moncton Highway project and 
various experts from across government were seconded to the project. Until that time, departmental 
involvement in the project had been limited to that of senior civil servants.

During summer and fall of 1996, four other key specialist consultants were retained including KPMG 
(public-private partnership process), Delcan (engineering), Goodman Phillips & Vineberg (legal), and 
Washburn & Gillis (environmental).

In September 1996 ADI Limited was contracted to conduct a traffic study of the Longs Creek to 
Moncton corridor in conjunction with Wilbur Smith and Associates of New Haven, Connecticut. The 
Toronto-based IBI Group was also involved. 

The interim report on the Fredericton to Moncton Highway project for the Province of New 
Brunswick was issued by RBC Dominion Securities Inc. on 28 October 1996. It presented three 
structuring alternatives and indicated RBC Dominion’s recommended proposal (a carefully-structured 
public-private partnership) that has subsequently been implemented.

A Request for Qualifications (RFQ) was issued on 18 December 1996 to identify parties qualified to 
partner for the project. At the time of the announcement of the RFQ, the Ministers of Transportation 
and Finance indicated that a public-private partnership approach had been selected. They also 
indicated that the highway would include user tolls. The revised deadline date for completion of the 
highway was announced as 2001.

By the deadline date of 23 January 1997, five RFQ submissions had been received. Four evaluation 
teams of government staff and consultants had been established to evaluate the five responses received 
to the RFQ. The teams included a development team, a technical team, a financial team, and an 
operational and maintenance team.

All four evaluation teams signed off on their evaluations of the five proposals on 19 February 1997. 
The Steering Committee also signed off, approving the advancement of three proponents to the RFP 
stage on the same date. The Steering Committee was primarily composed of senior officials from the 
Department of Transportation, but also included representatives of the Department of Finance.

The Committee of Deputy Ministers signed off approving the advancement of three proponents to the 
RFP stage on 21 February 1997. This committee was established for review purposes and was made 
up of the Deputy Ministers of Transportation, Finance, Justice and a senior representative from the 
Premier’s Office.

On 25 February 1997, the Board of Management and Policy and Priorities Committee recommended 
to Executive Council that a shortlist of three proponents advance to the RFP stage in accordance with 
the process identified in the RFQ document. Included in the shortlist were the Maritime Highway 



Corporation, the Maritime Road Development Corporation, and Peter Kiewit Sons Co. Ltd. The 
Executive Council approved the advancement of the three proponents to the RFP stage on the same 
date and a public announcement of the shortlist of proponents was made.

On 27 February 1997, the Board of Management and Executive Council approved the following 
financial parameters for inclusion in the RFP.

i)    A ban on through trucks on the existing Trans Canada Highway. Special permits for trucks
      with local business.
ii)   Government will make the Province’s sub-lease payments a statutory appropriation.
iii)  An initial minimum toll for trucks of $22 one way.
iv)  An initial toll for cars in the range of $6.75 to $7.00.

A final traffic study report was issued by ADI Limited on 21 March 1997. It indicated the most likely 
toll revenue for the first 30 years of the sub-lease would be in the range of $650 million.

A Request for Proposals was issued to three short-listed proponents on 27 March 1997. On that same 
date an Order in Council proclaimed changes to the New Brunswick Highway Corporation Act and 
stated that the changes would come into force as of 27 March 1997. These changes gave NBHC the 
ability to contract with a private partner.