Negative impact of private-sector contractor’s bankruptcy

One of the most recent news stories that draws the wisdom of privatizing highway snow clearing into question involves the collapse of UK-based Carillion PLC in January 2018.

It is significant that Jennifer Wells, business columnist for The Star, wrote that Carillion’s collapse shows limits of our drive to outsource.

One week after the collapse of its parent company, Carillion Canada filed for creditor protection in Ontario. At the time of the insolvency, Carillion Canada held contracts to maintain 40,000 kilometres of highway in Alberta and Ontario.

Carillion held three of eight Alberta highway maintenance contracts making it responsible for roughly 43% of Alberta’s highways. It controlled more than 300 snowplows – approximately half the snowplows working on Alberta highways — and employed about 300 workers during the winter and up to 500 during the summer months.

In March of 2018, the Government of Alberta announced it would provide up to $8.9 million to help Carillion Canada continue its highway maintenance operations, pay its employees, and continue doing business with suppliers in that province.

According to government, the cash injection was to ensure there was no disruption in snow clearing through to the end of April. The money also covered outstanding amounts Carillion owed to other vendors.

In August, a bankruptcy court awarded the three Carillion contracts in Alberta to another company. One contract was extended, while the Alberta government agreed to pay out $2.75 million more for each of the other two contracts. Total value of all three contracts was $482 million.

Carillion already had a rocky history in Ontario. On multiple occasions, it was slapped with fines for failing to perform its contractual obligations to clear the province’s highways.

In September 2017, prior to the collapse of its UK parent, Ontario’s MOT announced it was terminating Carillion’s road-maintenance contracts effective September 2018 and retendering them. Carillion held 8 of 20 winter road maintenance contracts in Ontario. The 11-year contracts, valued at roughly $1.2 billion, weren’t due to expire until 2023. Carillion’s collapse early in January of 2018 left Ontario in a precarious position.

Ontario

In 1996 the Government of Ontario began to privatize highway snow clearing services. It said privatization would save the government at least five per cent compared to the public sector cost. But a 1999 provincial Auditor General’s report revealed that of the first four maintenance contracts, three actually cost $2 million more than having the public sector do the work. It also found that after awarding highway maintenance contracts, MOT hired the contractors to perform additional work without going to tender.

As well, the Auditor General found the MOT sold off snow clearing equipment, paid for by taxpayers, to private contractors for pennies on the dollar without going through the required public auction. This helped ensure it would be next to impossible to return highway snow clearing to the public sector.

At the time, MTO purchasing officer, George Kerhanovich, speculated that “Perhaps the biggest danger to taxpayers from managed outsourcing is that MTO equipment gets given away at fire-sale prices. It’s happening now. Contractors are picking up MTO plows and trucks for a song. Taxpayers are not getting fair value.”

By 2000, Ontario had fully outsourced all its highway snow clearing. In 2009, the MOT introduced a new performance-based contract model in an effort to reduce overall expenditures.

Under this new model, contractors are not required to use the MOT’s historically proven best practices to determine things like the type and amount of equipment to keep the highway system safe.

Companies won contracts without having enough equipment to fulfill them. They cut costs by short-changing on salt, sand, and other materials. And it took them twice as long to clear the highways.

Investigations uncovered hundreds of shortcomings. Companies were fined but often failed to pay the fines, and yet they were allowed to continue to do the work, and they were paid for it.

Even more significant than the financial losses from privatization were the safety issues noted by the Auditor General: “There were concerns that individual patrol areas were too large to adequately monitor the work of contractors to ensure that provincial highways were safe, usable and protected from untimely deterioration.”

In January of 2014, the MTO revealed that three highway maintenance companies in the northwest had been fined for failure to meet service standards. The MOT would not say how much the fines were, and a contractor said the company was not allowed to comment publicly on maintenance issues. This in itself confirms a common criticism of government contracts with private companies: they allow both governments and contractors to hide information from the public about how public funds are spent.

Provincial investigations in 2012-13 and 2014-15 uncovered more than 300 cases where private contractors failed to provide proper winter road maintenance services.

Road maintenance contractors were fined more than $47 million by the Ontario government over a five-year period for failure to provide services. According to the MOT, some of the fines may have been reduced or waived by the government.

Carillion Canada faced $900,000 in fines for failing to properly clear the QEW of snow and ice during storms in November and December 2014. The MOT investigation into the 2014 storms found Carillion was late in deploying snow clearing and de-icing equipment, and did not apply enough salt on the highway. Carillion was also investigated by the MOT after a series of accidents in Peel and Halton regions on New Year’s Day 2016. The MOT was checking to see exactly when the company dispatched salt spreaders and how much salt was applied on the Queen Elizabeth Way and on sections of Highways 400, 401, 403, 410, and 427 during a January 1, 2016 storm. About 20 accidents were reported on highways west and north of Toronto that day.

In a special report on winter highway maintenance, Ontario’s Auditor General found that by 2015 Ontario was saving money on road maintenance contracts but at a cost that included taking twice as long to clear highways of snow or ice than it did previously – nearly five hours in some cases. She also reported that private road maintenance companies were using insufficient salt and de-icing fluid.

As recently as March 2014, the Ontario government was reported to be reconsidering the privatization of winter road maintenance in the province after a report from Global News raised questions about road safety. A poll released to Global News suggested more Ontarians than not feel road quality in the province is getting worse.

Personal injury lawyers contacted Global News suggesting both the government and private contractors could be opening the door to litigation if safety standards are not maintained in road maintenance.

The Minister of Transportation at that time suggested that the government was looking at a potential overhaul of the privatized system.

If we’re going to manage the liability on behalf of the people of Ontario . . . then I would rather have that done directly by the public sector who is directly accountable to the legislature and the people of Ontario than a contractor who at this point in time has not met the terms of the contracts they’ve signed.

Québec

While it is difficult to determine what percentage of highways in Québec are maintained by private sector contractors in any given year, a few things are perfectly clear.

• The number of people employed by the provincial ministry of transportation has declined steadily – between 2009-10 and 2015-16, it fell by 41%. There have been additional cuts since.
• There is a shortage of qualified snow plow operators in Québec.
• Québec does not require snow plow operators to have a special license or specialized training, but at least public sector snow plow operators receive specialised training.
• Snow clearing contractors in Québec did not provide specialized training to their snow plow operators until pressured to do so as a result of a media exposé.
• There is no limit on the number of hours a private sector snow plow operator can work in Québec.
• Private snow-clearing contractors in Québec have been convicted and fined for price fixing but allowed to continue providing highway snow clearing services to the province.
• In 2015-16, the ministry of transportation issued 95 notices of reprimand to subcontractors “for breaches that compromised public safety.”
• Following a highway snow clearing disaster, the minister responsible for transportation at the time vowed to return at least 50% of highway snow clearing to the public sector but was unable to hire enough qualified snow plow operators to meet that commitment.
• A 2017 report by Québec’s Auditor General revealed the department, which contracts out 95% of its work, was unable to determine it was getting the best price available or to ensure the quality of the work being done. Small firms were often excluded from the process, and cost estimates were not being conducted properly.