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City water-meter deal was changed at 11th hour
Shift in key elements took financial risk away from contractor

Gazette Civic Affairs Reporter
August 20, 2009

Journal The Gazette (Montréal)

MONTREAL – In 15 years, the city of Montreal will inherit 30,500 water meters that will be on the verge of wearing out.

In 25 years, it won't own or control the equipment that opens and closes underground municipal water mains.

And city taxpayers will have paid for all of that equipment up front.

These are some of the elements of the city's $355.8-million water-management contract with the consortium Génieau, The Gazette has learned.

But they are contrary to what the city intended when it launched the process to award the largest contract in its history, hundreds of pages of tender documents obtained from the city reveal.

The city did an about-face on key elements of the project a few weeks before the 16-month bidding process closed in October 2007. The changes, made Sept. 14, 2007, did not have to be presented to city hall's elected decision-making bodies for approval.

In May 2006, the city executive committee authorized the city manager in advance to launch "all required calls for tender" to award the contract.

And Mayor Gérald Tremblay's administration outsourced the work of writing the contract specifications and overseeing the bidding process to engineering-consulting firm BPR. Legal work was also outsourced.

A Gazette investigation has found: The contractor's obligation to maintain, repair and replace the water meters and their components was slashed from 25 years to 15, which is around the time water meters begin to wear out.

The financial risk in the project shifted from the contractor to the city. The city went from paying the contractor for the purchase and installation of equipment through monthly instalments spread over 25 years to paying for it up front.

The city went from owning all of the equipment in the contract to having the contractor own the telecommunications equipment - the water-management system's brain.

That means Génieau will own the equipment that opens and closes the valves on municipal water mains after the contract ends in 2032. However, city officials contend it's a minor matter because the city has 25 years to plan whether to buy equipment or issue a new contract.

The performance standard demanded of the contractor so it can be eligible for its monthly fees was lowered, and a bonus for any performance above the lower threshold was introduced.

"It's not in the interests of the taxpayer at all," Jean-Claude Lauret, managing director of water meter manufacturer Master Meter Canada and a critic of the Génieau deal, said when told of the changes.

"They're (giving) a gift to the contractor and the city's taking on the risk."

The contract is currently on hold pending the results of an investigation by the city's auditor-general.

Tremblay ordered the probe in April in response to allegations that city hall is paying too much for some of the equipment in the deal. It also followed revelations that former city executive committee chairperson Frank Zampino vacationed on a yacht owned by the head of one of the partners in Génieau during the bidding process.

The Sûreté du Québec has also launched an investigation into the deal.

The city has answered questions for The Gazette's inquiry into the contract until now. Last week, however, city hall officials refused to comment on the contract changes uncovered by The Gazette.

The city has decided it won't comment again on the deal until the auditor's report is released on Sept. 21, "out of respect for the auditor's work," city spokesperson Philippe Sabourin said.

Three consortiums, including Génieau, were selected to bid for the contract in a qualifying round held in 2006. A fourth bidder failed to qualify.

The three consortiums were then permitted to "provide comments and/or suggestions in order to improve the request for proposals," said a civil service report recommending the city executive committee award the contract to Génieau.

The civil service followed the "usual practices, bylaws and interests of the city," it said.

But the report doesn't say what was modified.

The changes that were made on Sept. 14 were among the last of 14 sets of changes made to the tenders between April and October 2007. The bidders were informed of the changes in writing by an employee in the city's purchasing department.

The changes made on Sept. 14 followed a meeting involving an unspecified number of city officials and bidders on Sept. 11, the tender documents show.

The city says it has no written record of the meeting. The city can't even say who attended because no minutes exist, Sabourin said, but he did confirm the changes sprang from the meeting discussions.

Under provincial guidelines, contract tenders can be modified during a bidding process, but the changes cannot create an unfair advantage for any bidder.

Lauret contends the changes to the parameters of the water-management contract on Sept. 14, 2007, should have prompted the city to start the bidding process again. Firms might have decided not to bid in the qualifying round because of the elements of the tenders that were later changed, he said.

"They're a major change," he said. "The city should have gone back to tenders."

Lauret says his firm didn't vie for the contract because the city put what he contends are two distinct projects together as components of the same contract.

One component, worth about $100 million in the Génieau contract, calls for the contractor to install and maintain water meters that transmit data to the city in industrial, commercial and institutional buildings. The other, worth about $250 million, calls for the contractor to install and maintain flowmeters and pressure-management controls on the underground water main network.

The tenders for the qualifying round said the contractor would "finance the civil engineering work and all of the equipment and systems" for the pressure-management component.

Bidders were told to propose a financing structure for the water meters planned for industries and institutions.

The financing component was given weight in evaluating which companies would advance to the second round.

Meanwhile, the request for proposals in the second round spelled out that Montreal was supposed to pay the contractor monthly instalments over 25 years to pay for the purchase and installation of all equipment, including accessories, and certain construction work, called for in the contract.

The same payment system is used in the Quebec government's public-private partnerships, or PPPs, said Frédéric Choquette, director of policies and procedures at the Agence des partenariats public-privé du Québec, a government advisory body.

In PPPs worldwide, the private partner has tended to finance 80 per cent of the project while the public authority puts up 20 per cent, he said.

The city even distributed a copy of the province's PPP handbook to the bidders.

Getting the private partner to pony up gives it an incentive to get the job done right and on time, experts on public-private partnerships say.

If the equipment isn't delivered or doesn't work as it should, the government can withhold its monthly payment, said Richard Deslauriers, a managing director at PricewaterhouseCoopers in Montreal who has advised the Quebec government on such PPPs as the Highway 25 extension.

"It's a way of ensuring they're really taking the risk involved," he said.

But on Sept. 14, 2007, Montreal's water-management contract changed to a more conventional contract.

About $285 million of the $355.8-million contract with Génieau covers the cost of equipment, installation and construction work, which the city will pay up front, with 90 per cent paid on delivery and the remainder due about a year later.

It appears the city will only pay $70 million, for maintenance and repair service by the contractor, in monthly instalments over 25 years. These payments require the contractor to meet monthly performance standards.

But the performance standard for the water meter component was lowered in the Sept. 14, 2007, changes.

The contractor's obligation to provide 95 per cent of required daily water-meter readings to the city on 90 per cent of the days in a month was dropped to 90 per cent of daily water-meter readings on 85 per cent of the days in a month.

The changes also introduced a payment bonus to the contractor for "very good performances."

By comparison, Lauret said, his company is bidding on a water-meter contract in North Bay, Ont., in which 98.5 per cent of daily readings is required.

By reducing the contractor's obligation to maintain, repair and replace water meters from 25 years to 15, the meters will become the city's financial responsibility just as they begin to wear out.

Studies show a water meter's accuracy diminishes enough after 15 to 20 years of use to warrant replacement.

With proper maintenance, water meters can be useful beyond 20 years, Lauret said. But the manufacturer's warranty on a meter generally ends at 15 years, he said. It means the city will be on the hook if any meters break after 15 years.

The tender documents during that first round called for the future contractor to replace every meter at 20 years of service, calculated from the date of its manufacture, as well as ensure that meters work properly during the 25-year contract.

Moreover, the documents said each meter's components must have at least 10 years of useful life left when the equipment is transferred to the city at the end of 25 years.

However, neither requirement was put in the request for proposals or the contract.

The contract calls for Génieau to guarantee the meters' precision within its 15-year commitment.

Long-term contracts often prescribe a number of years of remaining useful life for assets as they're transferred back to a public authority.

"Normally, you wouldn't want the contract to end at about the same time as the assets reach their useful life because then you're essentially being handed back something that's worn out and has to be replaced," Deslauriers said.

It's also standard practice for all equipment to revert to the public authority, he said.

Initially, Montreal's tender documents said all equipment supplied by the contractor would be the "complete and exclusive property of the city, which can dispose of it as it likes." An exception was introduced for the telecommunications equipment in the Sept. 14, 2007, changes.

The various changes would have made the contract more attractive to potential bidders during the qualifying round, Lauret contends.

The city's original intention was to install water meters in industrial, commercial and institutional buildings and charge those water users for their consumption.

The project acquired the pressure-management component when the city awarded BPR a contract in 2005 to oversee the bidding process. BPR has argued the pressure-management component will allow the city to locate water-main breaks and save money on water production using data from the individual water meters and the metering to be installed on water mains.

However, instead of buying water meters and automatic meter-reading technology directly from manufacturers, as such cities as Toronto, New York, and London, Ont., have done, the city is paying Génieau to buy the equipment.

Génieau is composed of engineering consulting firm Dessau Inc. and builder Simard-Beaudry Construction Inc.

Génieau has refused to comment because of the auditor's probe. BPR has also refused to answer questions because of the probe. BPR has also said it's bound by a confidentiality clause in its contract with the city

Water-meter numbers murky

City officials contend Montreal’s $355.8-million water-management contract will pay for itself, but the savings they expect to generate with the 25-year project are based on speculation and fluid numbers, a Gazette investigation reveals.

“This project represents an investment with a return on investment,” Pierre Lavallée, president and CEO of BPR, the engineering consulting firm hired by the city in 2005 to write the contract specifications and analyze bids, said in a presentation to defend the project at a Montreal city council meeting on April 21.

“We’re talking about saving a minimum of $20 million a year, and it could easily rise to $35 million, $40 million, $50 million in the following years after the project is set up.”

However, the $20-million savings claim is several times higher than the savings that were projected by a consultant’s report given to the city in 2002, the investigation shows.

The report, by accounting firm PricewaterhouseCoopers, calculated the city would save $67.8 million over 20 years if it:

* Installed meters in residential and non-residential buildings.

* Launched a public awareness campaign to reduce water use.

* Spent billions of dollars to replace crumbling city pipes.

That’s an average of $3.39 million a year in savings generated by the combination of measures, well below BPR’s “minimum” $20 million in annual savings generated by the $355.8-million contract.

The contract, awarded to the consortium Génieau in November 2007 but suspended in April pending the results of an investigation by the city’s auditor-general, has two components.

The first calls for installing water meters in industrial, commercial and institutional buildings on the island.

The second component is known as pressure management. It involves dividing the city’s underground water-main network into zones and installing meters and controls in each zone to monitor and adjust pressure according to demand. That should save water and help detect leaks.

Both PricewaterhouseCoopers and BPR say the first component – installing water meters in industrial, commercial and institutional buildings – would induce businesses to cut their water use by 20 per cent.

However, PricewaterhouseCoopers calculated the 20-per-cent reduction would save the city $13.08 million over 20 years. That’s $654,000 a year.

BPR calculates the reduction would save the city $4.8 million a year. Those savings would add up to $96 million in 20 years, seven times the PricewaterhouseCoopers projection.

Another baffling element is that BPR expects to see the 20-per-cent drop in water consumption even though Montreal won’t be billing non-residential building owners for the amount of water they use after they get meters.

Montreal’s initial project called for metering and billing non-residential building owners, city documents reveal. However, the plan morphed when the city hired BPR to write the contract specifications. The plan to bill owners was dropped and the project acquired the pressure-management component.

BPR officials refused The Gazette’s request for an interview to explain the numbers.

Pierre Hamel, a researcher at Quebec’s Institut national de recherche scientifique who is opposed to water meters because research has shown they don’t change consumption patterns, calls BPR’s savings projection “totally ridiculous.”

Most of the cost to produce water in Montreal is fixed cost, he said.

“So whether you produce a little or a lot, it changes nothing of these costs.”

Yet even proponents of water meters scratch their heads why the city would install meters to measure exact water usage and then not charge owners for what they use.

“I’m not sure if you’re going to see that same reduction because there’s no incentive for the customer to reduce,” Carl D. Yates, the general manager of the Halifax Regional Water Commission, said. Halifax is a leader in pressure management and water-loss control.

Research shows metering brings an immediate 20-per-cent reduction in water usage, Yates said. But the incentive comes from being billed for what you use, he said.

“The customer that’s paying per cubic metre that goes through the meter … is very aware of their use because the more they use the more they pay,” he said.

“If they’ve still got the same rate as before, I’m somewhat confused why that (installing meters) would make the difference.”

Montreal officials say they’ll decide whether to start billing customers once all 30,500 meters in the Génieau contract are installed in five years.

“There will eventually be a payment system,” city spokesperson Philippe Sabourin said.

“But we’re not there yet. … For the moment, we’ve evacuated the payment issue.”

In the meantime, the city will continue to charge a flat rate for the cost of water within property-tax bills.

“On that basis, I’m not sure if the research can back them up,” Yates said.

On top of saving $4.8 million per year on water production, BPR calculates the city will save another $15 million a year on repairing fewer water-main breaks.

Less water usage will mean less wear and tear on the city’s distribution pipes and therefore fewer breaks, Lavallée explained in April.

The city says it can’t lower the pressure at the moment because water is pumped through the network of underground pipes by force of gravity.

Hamel remains unconvinced of the need to spend $355.8 million, however.

“It doesn’t take incredible logistics to reduce the pressure,” he said.

Meanwhile, the calculations behind the projection of $15 million in annual savings vary depending on who you ask.

The city and BPR concur that 1,000 water-main breaks occur in Montreal in a given year.

Lavallée told councillors on April 21 the city can expect to reduce the number of breaks by 25 per cent. He also said the city spends $20,000 to repair a break. So $15 million can be saved on repairing 250 fewer breaks that would each cost $20,000 to repair.

The $20,000 figure is “very conservative,” Gilles Robillard, the assistant city manager responsible for infrastructure and the environment, assured councillors at the meeting.

“That’s why the figures mentioned are very conservative and we’re sure once the system is put in place, these savings could be a lot bigger than what we’re estimating now,” he said.

However, The Gazette asked city hall to check on those numbers. Sabourin said it costs $10,000 to fix a broken, average-sized water main. He then said in a second conversation that the figure was $15,000 after checking with the city’s environment department again.

Sabourin also said the city estimates it will reduce the number of breaks by 30 per cent. Moreover, it expects to reduce the 2,000 service entry breaks as well as the 1,000 water-main breaks by 30 per cent, he said.

The city is basing its projection on a study that was presented at a 2007 conference by the International Water Association, he said. The study showed the number of new breaks decreased by 53 per cent in 10 countries where pressure management was used.

The decreases ranged from 23 per cent in Halifax to 94 per cent in Palmira, Colombia.