KVH Project Value for Money Report - Interior Health...i Project Report: Achieving Value for Money...

November 2008

Project Report:Achieving Value for Money

Kelowna and VernonHospitals Project

i Project Report: Achieving Value for Money – Kelowna and Vernon Hospitals Project

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In all of its procurement processes, including publicprivate partnership agreements, the Province iscommitted to a high standard of public disclosure toensure accountability. This report describes therationale, objectives and processes that led to theuse of a public private partnership, and the need forthe Kelowna Vernon Hospitals project, giving thepublic a clear sense of how and why the decisionwas reached to proceed with that option. It explainshow value for money was measured and how it isexpected to be achieved in the context of currentmarket conditions. It compares key aspects of thefinal agreement to other options considered for theproject. It also describes the benefits of the projectas a whole.

For more on the Capital AssetManagement Framework, go towww.fin.gov.bc.ca/tbs/camf.htm

For more on public Private Partnerships in B.C.,go to www.partnershipsbc.ca

Partnerships BC in conjunction with the InteriorHealth Authority, is accountable for the contentsof this report, including the reasonableness of facts,assumptions and professional opinions thathave been presented.

Before entering into a public Private Partnership,Partnerships BC works with its clients to undertakean analysis of the value for money expected overthe life of the partnership. Value for money is abroad term that captures both quantitative factors,such as costs, and qualitative factors, such asservice quality and protection of public interests.

Value for money is one of six key principles guidingpublic sector capital asset management in BritishColumbia. The others are:

1. Sound fiscal and risk management2. Strong accountability in a flexible and

streamlined process3. Emphasis on service delivery4. Serving the public interest5. Competition and transparency

Since 2002, these principles have guided the B.C.public sector’s approach to acquiring and managingassets such as bridges, roads and health carefacilities. Ministries and other public bodies such ashealth authorities are encouraged to consider allavailable options for meeting their serviceobjectives. Under the Province’s Capital AssetManagement Framework, options are analyzed and,after considering the qualitative and quantitativeadvantages and disadvantages of each, the onethat overall best meets service delivery needs andmakes the best use of taxpayers’ dollars is chosen.

In some cases, the best option may be traditionalprocurement – where assets are purchased entirelywith taxpayer supported finance and operatedexclusively by the public sector. In other cases,agencies may find innovative ways to meet theirservice needs without acquiring capital assets.In all cases, agencies are publicly accountablethrough regular budgeting, auditing andreporting processes.

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Purpose of this Document . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i

1. Executive Summary and Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

2. Project Background, Rationale and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . .3

3. Competitive Selection Process and Results . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

4. Final Project Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

5. Ongoing Project Agreement Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

6. Project Benefits and Innovations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

7. Achieving Value for Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Appendix 1 – Project Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

1 Project Report: Achieving Value for Money – Kelowna and Vernon Hospitals Project

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The Interior Health Authority (IHA) has establishedplans and secured resources to meet its goals andstrengthen its role as a health care leader in BritishColumbia (B.C.) and to meet a number ofchallenges it faces. These include growing demandfor modern, high quality health care and inadequateaging facilities.

As part of IHA’s vision to build more patient care forthe Southern Interior of B.C., the Kelowna andVernon Hospitals (KVH) project includes a newPatient Care Tower at Kelowna General Hospital(KGH), a new University of British ColumbiaOkanagan (UBCO) Clinical Academic Campus andparkade at KGH, and a new Patient Care Tower atVernon Jubilee Hospital (VJH), which will providemore state-of-the-art facilities and services to meetthe growing needs for health care in the region.

The KVH project will be delivered using the publicprivate partnership (PPP) delivery model. However,there are additional project elements that arerequired to support the KVH project, such as a sitepre-load at KGH. These additional project elementswill be procured using the traditional delivery modelas a series of projects over the 2008-2012timeframe.

The total project capital cost is $432.9 million1; thecapital cost of project components being deliveredusing the partnership delivery model is fixed at$382.8 million, and the remaining being deliveredtraditionally is $50.1 million.

PPrrooccuurreemmeenntt DDeecciissiioonn

A thorough analysis of a variety of procurementoptions, including both traditional and partnershipdelivery methods, showed project objectives andpatient needs can best be met by jointly procuringthe projects at KGH and VJH and taking a DesignBuild Finance Maintain (DBFM) approach. Usingthis procurement method, the successful proponentdesigns, builds, finances and maintains thefacilities.

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A rigorous and thorough competitive selectionprocess was undertaken and resulted in theselection of Infusion Health – a consortium ofcompanies, each with distinct roles andresponsibilities – as the Preferred Partner. Anindependent Fairness Advisor confirmed the validityof the process.

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Under the PPP agreement, Infusion Health will buildthe new Patient Care Tower and UBC medical schoolbuilding and parkade at KGH, and a new PatientCare Tower at VJH. Infusion Health is responsible forcompleting and commissioning the new facilities byDecember 3, 2009 for the medical building andparkade at KGH, May 30, 2011 for VJH and byAugust 13, 2012 for KGH.

The capital cost of the PPP project is fixed at $382.8million. Once construction is complete, InfusionHealth will receive an annual service payment for 30years. Part of the annual service payment is to repayInfusion Health for designing, building and financingmost of the capital cost of the project, and part of theannual service payment is for services such asphysical plant maintenance, including major repairsand replacement of building elements. Actualpayments will be made monthly and contingent uponservice performance, facility availability and servicequality. Deductions will be made for non-availabilityof the facilities or failure to achieve defined servicequality levels. For the first full year of operations theannual service payment is $23.9 million (Fiscal Year2013/2014), assuming no deductions.

Infusion Health will provide a range of non-clinicalfacilities management services, and IHA will continueto be responsible for providing all clinical services, aswell as food services, portering, security andhouse-keeping.

IHA will own the site and the new facilities at KVHand VJH.

1. The total project capital cost increased from when the project was first announced in 2007. The factors that led to this increase are described in Appendix 1.

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The KVH project is a major initiative for IHA and theProvince, combining extensive upgrades at KGHand VJH into a single project to enhance patientcare, improve patient outcomes and achieveefficiencies. The project delivers numerous benefitsand innovations to best meet the health care needsof Okanagan residents while delivering value formoney to B.C.’s taxpayers. The project featuresmodern new facilities, equipment, services andsupporting infrastructure at both sites. Highlightsinclude:

KGH

• A new six-storey, 33,500 square-metre PatientCare Tower comprised of general clinics, daysurgery, diagnostic services, renal dialysisservices, and specialized services, as well as arooftop helipad, and full integration with theexisting hospital;

• Two shelled-in floors for future patient beds;• A new two-storey, 3,200 square-metre UBCO

Clinical Academic Campus building, housing a180 seat lecture theatre, distance educationrooms, clinical skills rooms and library;

• A new multi-level parkade; and• A modernized emergency department with

expanded facilities and services on the groundfloor of a new Patient Care Tower.

VJH

• A new seven-storey, 16,800 square-metre PatientCare Tower comprised of a new intensive careunit, a new expanded outpatient program, aseparate outpatient (day procedure) entrancefrom upper parking lot, consolidated andcentralized operating rooms, maternity andpaediatrics ward with direct link tooperating rooms;

• A modernized emergency department withexpanded facilities and services with highvisibility ground level access; and

• Two shelled-in floors for future patient beds.

KGH and VJH

• Provision of plant maintenance and relatedservices for both new and existing facilities atKGH and VJH to be provided by the privatepartner. The private partner is accountable forbuilding the new facilities and maintaining newand existing facilities in accordance with theterms of the Project Agreement.

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Under the traditional delivery model, project design,construction, operation and maintenance are rarelyintegrated and, as a result, the public sector retainssignificant risk. One of the key advantages of a PPPis the sharing of the burden of risk. For example,the public sector is better able to determine whetherthe design of a hospital meets a health authority’sclinical functionality needs, and so retains that risk.Similarly, the private partner is better able to ensurethe design will be cost-effective from an operationaland maintenance perspective over the facility’slifecycle, and so accepts that risk.

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Value for money is a broad term that captures bothquantitative factors, such as costs, and qualitativefactors, such as service quality. Partnerships BClooks at a broad range of factors in determiningwhether a project offers value for money totaxpayers, including comparison of the finalagreement to other benchmarks – in this case, theexpected results of a hypothetical traditional deliverymodel (public sector comparator), and the expectedresults of the actual partnership delivery model.

Partnerships BC and IHA analyzed the net presentcost of the project and compared it to the netpresent cost of the public sector comparator.Together, Partnerships BC and IHA determined thatthe net present cost of the KVH project, deliveredtraditionally, is an estimated $468.1 million. The finalagreement with the private partner, Infusion Health,has a net present cost $442.7 million. Thus, usingconservative assumptions, in financial terms, thenegotiated deal is expected to achieve value fortaxpayers’ dollars of $25.4 million.


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PPrroojjeecctt BBaacckkggrroouunndd

Both KGH and VJH are administered by IHA and playcritical roles in health care delivery in the southerninterior of B.C.

KGH is the Central Okanagan’s primary acute carehealth facility and, along with the Royal Inland Hospitalin Kamloops, is a tertiary referral hospital offering high-level, specialty medical care to the region’s residents.Of the total hospital gross floor area, 69 per cent isover 30 years old, and the 15 per cent is 65 years old.The buildings were constructed over the 68 years from1939 to 2000, with the exception of the new parkadecompleted in 2006. Examples of KGH’s vital healthservices include emergency medicine, cardiology,oncology, paediatric chemotherapy, obstetrics andgeriatrics. KGH also provides tertiary services fortrauma patients, those with multi-systems failure, andpatients requiring acute dialysis, vascular surgery,thoracic surgery and neurosurgery.

VJH was constructed in 1947 with numeroussubsequent additions. It is one of four Service AreaHospitals in IHA, and one of two in the OkanaganHealth Service Area, serving residents in Vernon andthe North Okanagan with high quality, core medicaland specialized surgical patient care. VJH provides avariety of valuable health services, including medicineand surgery, psychiatry, maternity and paediatrics.

While both KGH and VJH provide strong health careservices to Okanagan residents, opportunities remainto better serve the expanding needs of the region. AJanuary 2007 business case identified the pressuresleading to the need for change and making the casefor investment to replace and expand the aginginfrastructure at both KGH and VJH. IHA identified theconstruction of two new Patient Care Towers at bothKGH and VJH as the preferred solution. Projectapproval and funding was subsequently announcedby the Province in May 2007. This step was followedby a two-stage procurement process whichculminated in a signed project agreement withInfusion Health in August 2008.

The KVH project will be delivered using the DesignBuild Finance Maintain (DBFM) partnership deliverymodel, financed through contributions from IHA, theNorth Okanagan and Columbia Shuswap RegionalHospital District, the Central Okanagan RegionalHospital District, and debt and equity financingprovided by the private partner. Other elements of theproject required to support the KVH project will betraditionally procured as a series of projects over the2008-2012 timeframe.

The focus of this report is to describe the projectrationale, objectives and processes that led to the useof a public private partnership for the KVH project.

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A team of architects, engineers, analysts, andrepresentatives of IHA and Partnerships BC prepareda business case to consider major improvements tothe hospitals. The business case articulates theoverall broad project objective as the need to enhancepatient care, improve service efficiency and patientflow, through building new state-of-the-art medicalfacilities that will incorporate the latest in global healthcare innovations and design. These new facilities willbe fully integrated with the existing facilities at KGHand VJH, and will modernize and consolidate thedelivery of outpatient services, and diagnostic andtreatment services. These new facilities also includenew emergency departments so that KGH and VJHcan deal more effectively with emergency roompressures.

Specifically, the business case identifies severalcritical areas of need:

KGH

• Aging facilities: Nearly 70 per cent of KGH’s grossfloor area is over 30 years old, and 15 per cent is 65years old. Configurations do not support efficientpatient flows or staff workflows;

• Emergency Department capacity issues: The KGHEmergency Department is facing considerablepressure to accommodate rising demand, and the

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existing layout is insufficient to handle increasingvolumes. The current department’s flexibility indealing with a growing range of patient care issueshas diminished since the facility was built 17 yearsago;

• Demographic pressures: The population in theservice areas is growing and aging, creatingincreased demand for services and driving theneed for investment. Additionally, the pattern of useof the services is shifting to reflect increasingprovision of outpatient and day-care services.

• Design and functional limitations: There are fivedistinct but physically connected buildings thatmake up the KGH site. The buildings arebecoming less functional over time and havenumerous constraints preventing the integration ofmodern clinical technologies and efficiencies; and

• Expansion constraints: The KGH site is fullyoccupied by buildings and parking facilities;however, many structures are single storey and lowrise, offering opportunities to densify the site.

VJH

• Aging facilities: VJH is over 60 years old andfacilities, including the emergency room, areoutdated. Configurations do not support efficientpatient flows or staff workflows;

• Demographic pressures: The population in theservice areas is growing and aging, creatingincreased demand for services and driving theneed for investment. Additionally, the pattern of useof the services is shifting to reflect increasingprovision of outpatient and day-care services.

• Outdated surgical services: VJH has only fouroperating rooms, built in 1947, which cannotaccommodate increasing volumes or newtechnologies;

• Limited Outpatient Services: Presently outpatientservices are scarce and scattered throughout thefacility creating operational inefficiencies. As well,the existing space limits expansion of outpatientcare activities.

• Design and functional limitations: Emergencyfacilities are undersized and operating rooms andthe critical and intensive care unit cannotaccommodate growing patient volumes and newtechnologies. Fortunately, there is capacity for futurebuilding growth at the VJH site.

PPrroojjeecctt OObbjjeeccttiivveessThe KVH project is expected to best meet the healthcare needs of Okanagan patients while deliveringvalue for money to British Columbia’s taxpayers.Initiated by the IHA Board of Directors, the projectaligns with the IHA vision “to set new standards ofexcellence in the delivery of health services in theProvince of British Columbia", and mission, “topromote healthy lifestyles and provide needed healthservices in a timely, caring and efficient manner, to thehighest professional and quality standards."

Working with focus groups comprised of clinical andexecutive leaders, IHA established key projectthemes and planning principles for the design andoperation of the new facilities, including:

• User-friendly, with particular acknowledgement ofthe needs of the elderly, who are both patients andvisitors;

• Culturally sensitive, recognizing the needs of thelarge and diverse Aboriginal communities in thearea and residents of non-Canadian heritage; and

• Non-institutional, using natural light and lighting,colour, sound, and way-finding measures tosupport an attractive, comfortable environment forpatients, staff and visitors.

Facilities and operations must also:

• Be efficient, optimizing the use of staff andtechnology and providing opportunities for reducedhospitalization now and in the future;

• Be healthy and safe “green” buildings to supportbetter health outcomes, improve environments forstaff and patients, and maximize energy efficiency;

• Recognize the synergies for patients and staff,fostering patient independence and theopportunities for consultation across disciplines;and

• Be ready for the future, providing adequatecapacity, flexibility and technological infrastructureto maximize opportunities for health improvementand patient and staff satisfaction in the yearsahead.

Hospital-specific objectives include:


KGH

• Consolidate, expand and modernize outpatientservices and programs currently dispersedthroughout KGH;

• Increase capacity and functionality of outpatientservices;

• Establish a clinical academic centre at KGH;• Provide a dedicated renal outpatient/day unit;• Increase surgical capacity and provide modern

operating rooms with new technology and sufficientspace; and

• Provide a fully reconfigured, larger emergencydepartment.

VJH

• Consolidate and modernize outpatient services;• Expand and modernize emergency department

services to meet demand and provide appropriatelevels of care;

• Modernize operating rooms and increase capacityto meet growing patient needs;

• Expand and modernize Intensive Care andCoronary Care Unit facilities to address the needsof an aging population;

• Modernize maternity and paediatric services; and• Expand and modernize central sterilization rooms.

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The project scope includes:

• A six-storey, 33,500 square-metre Patient CareTower at KGH comprised of general clinics, a daysurgery, outpatient services, renal dialysis services,and specialized services, as well as a rooftophelipad, a bridge link to the existing hospital, a two-storey, 3,200 square-metre UBCO ClinicalAcademic Campus and parkade;

• A modernized KGH emergency department withexpanded facilities and services on the ground floorof a new Patient Care Tower;

• A seven-storey, 16,800 square-metre Patient CareTower at VJH, including outpatient services, anemergency department, an intensive care/cardiaccare unit, a maternity/paediatrics centre, a surgicalsuite with operating and recovery rooms andcentral supply areas, and infrastructure toaccommodate future expansion capacity; and

• Full site facilities management, meaning the privatepartner is responsible for managing physical plantmaintenance across both sites, providing aseamless integration of fully functioning systems atboth old and new KGH and VJH facilities over theterm of the Project Agreement. These servicesinclude Physical Plant and Facilities Maintenance,Utility Management, Help Desk, parking lot andground maintenance.

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All medical and clinical services will continue to beprovided under the universal, publicly funded healthcare system, consistent with the Canada Health Act.Patients will use Care Cards to obtain service, as inother public health care facilities in B.C., and will notpay for health care services that are medicallynecessary and covered by the Medical Services Plan.

PPrrooccuurreemmeenntt OOppttiioonnss AAnnaallyyssiiss

As part of the procurement planning process, andconsistent with the Capital Asset ManagementFramework, both traditional and partnership deliverymodels were considered. IHA, with assistance fromPartnerships BC, selected the following procurementmodels for comprehensive analysis during thebusiness case phase:

Design-Bid-Build (DBB): Using a DBB model, anarchitect would be retained by the owner to develop adetailed design (working drawings) for the facilities.Once the working drawings are complete, a tendercall for a construction contract would be issued. Thelowest qualified price would be selected and anindustry standard fixed price construction contractwould be used. The construction contractor wouldtake responsibility for constructing the building to thespecifications detailed in the working drawingsdeveloped for the owner by the architect. The ownerwould remain responsible for design errors andomissions and monthly progress payments to thecontractor, whereas the contractor is responsible for allconstruction errors.

Once the building is completed, the owner would takepossession and maintain and operate the asset for its

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entire lifespan. The owner would retain key designand construction risks e.g., schedule, constructioncost, and lifecycle maintenance costs. Since separateparties design, build and maintain the facility,cooperation between consultants and contractors canbe less than ideal, and the opportunities for trulyintegrated design, construction and maintenance arenot maximized.

Individual Procurement Design-Build-Finance-Maintain(DBFM): In this process, the owner would set outputspecifications, invites competitive proposals to design,build, finance and maintain the asset, and then remitsan annual service payment to the private partner afterthe asset is delivered. The private partner would beresponsible for designing, building andcommissioning the facility, arranging the projectfinancing for its portion of the capital cost, providingfacilities management services and conducting life-cycle maintenance, and meeting defined hand-backrequirements at the end of the project term.

Jointly Procured Design-Build-Finance-Maintain(DBFM): Under this option, the Kelowna and Vernonprojects would combine in a single procurement. It isassumed that project design, proposal receipt andcommercial negotiation would take placesimultaneously, leading to a single contract award.Precise project construction sequencing is determinedbetween the owner and the private sector partner tooptimize costs while meeting the owner’s specificmilestone needs.

The business case analysis indicated that the twohospital projects should be procured using the DBFMmodel. Further, the analysis indicated that the twoprojects should be procured jointly as the best option.By jointly procuring the KGH and VJH projects as asingle, larger project, it was expected thatprocurement timelines would be streamlined andeconomies of scale would be realized in terms ofprocurement, construction and operating costs. Thecombined effect of these economies was expected toimprove the value for money proposition overprocuring the Kelowna and Vernon facilitiesseparately. Moreover, the combined project offered thepotential of greater market interest, resulting in a morerobust competition. This view was supported byformal market sounding.

The benefits of a joint DBFM procurement are:

• Innovation in design and construction;• Transfer of construction period risks to the private

sector;• Transfer of operating period risks to the private

sector;• Expected construction cost efficiencies;• An additional one percent capital (construction)

efficiency allowance;• Savings in overhead running costs for both the

private sector and the public sector partners; and• Opportunities for standardization in design across

sites key to the pursuit of efficient and safe workingpractices.

PPaarrttnneerrsshhiipp DDeelliivveerryy MMooddeell

The partnership delivery model is designed to capturethe strengths of both the public and private sectors,recognizing that private companies have alwaysplayed an integral role in delivering publicinfrastructure such as bridges, highways andhospitals. Partnership agreements build on that historyand clearly delineate areas of responsibility for bothsectors over the life of a long-term, performancebased agreement. The partnership delivery model hassuccessfully been used to deliver health care andtransportation infrastructure projects.

A PPP can provide better value for taxpayers’ dollars,transfer risk to the private sector and add valuethrough design and private sector innovation forprojects with certain attributes. It ensures greateraccountability for performance because ongoingpayments by the public sector are conditional on theprivate partner continuously meeting performancestandards.

The partnership model harnesses the respectivestrengths of the public and private sectors, and buildson the success of existing health care PPPs such asacute care hospitals, cancer centres, and long-termcare and outpatient facilities. As well, the modelclearly delineates areas of responsibility over the life ofa long-term, performance-based agreement.


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OObbjjeeccttiivveess

Three key objectives guided the KVH project competitive selection process:

1. Select a qualified, experienced partner to design, build, finance and maintain the facilities;2. Implement a fair, timely and competitive procurement process; and3. Achieve value for money.

The winning proponent, Infusion Health, was selected via a two-stage procurement process, including aRequest for Qualifications (RFQ) and a Request for Proposals (RFP). Three teams responded to the RFQand all three proponent teams were identified as having the development, construction and financialcapacity to undertake a project of this size and complexity. Therefore, all three proponents were selected toparticipate in the RFP stage.

The table below lists the members of each of the proponent teams:

The RFP invited the proponents to submit proposals to design, build, finance and maintain the KVH project.A draft Project Agreement was issued with the RFP; during bilateral/collaborative discussions proponentshad the opportunity to identify issues or provisions for amendment. These collaborative discussions coveredthree broad areas: design and construction, commercial/legal and facilities management.

RESPONDENT

Infusion Health

Okanagan HealthSolutions

Plenary Group

LEAD DESIGN

Stantec ConsultingLtd.

IBI + HDR HealthCare

B+H Architects

CONSTRUCTION

Graham DesignBuilders

Acciona Dominion,Joint Venture (AccionaInfraestructuras, S.A.)(The DominionCompany Inc.)

Stuart Olson

FINANCING

Bilfinger BergerProject InvestmentsSCA and John LaingInvestments Ltd.

Babcock & BrownCanada ULC andAcciona, S.A.

Plenary Group

FACILITIES

Black andMacDonald Ltd.

Honeywell Ltd.(Canada)

Johnson Controls

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PROCUREMENT STAGE

Request forQualifications (RFQ)

Request for Proposals(RFP)

Preferred ProponentSelected

Project AgreementFinalization

Project Development toService Commencement

OUTCOME

The project was marketed locally, provincially andnationally. Submissions from three respondents wereevaluated and three proponent teams were announcedSeptember 25, 2007:

• Infusion Health• Okanagan Health Solutions• Plenary Health

The three proponents submitted proposals. This stageincluded bi-lateral, collaborative discussions with proponents.

After evaluation of the proposals, Infusion Health wasselected as preferred proponent.

A Project Agreement was signed by IHA and InfusionHealth.

Detailed design and construction commences on the KVHproject, with delivery expected as indicated.

TIMING

May 7, 2007 toJune 4, 2007

September 25, 2007 toMarch 13, 2008

May 8, 2008

Financial close achievedAugust 20, 2008following negotiationsbetween the project teamand Infusion Health

UBCO Clinical AcademicCampus and parkingfacility: 2008 to 2009

VJH-Patient Care Towerand Treatment Building:2008 to 2011

KGH-Patient Care Tower:2008 to 2012

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IHA appointed an Evaluation Committee which, withthe assistance of area-specific Evaluation Teams,evaluated proposals using the evaluation criteriaand the evaluation procedure as set out in the RFP.The Evaluation Teams consisted of individuals withspecific expertise who were selected based on theirability to assist the Evaluation Committee with theevaluation.

Below is the outline of the competitive selection process and the timeline of key steps in the process:

There were three broad categories of evaluationcriteria:

• Design and Construction• Facilities Management• Financial and Commercial

Evaluation Teams were assisted by individualtechnical experts who were appointed by theEvaluation Committee to provide critical technicaladvice. These technical experts specialized in avariety of industry specific areas, including:architecture, structural, civil, mechanical,electrical and geotechnical.


Following a rigorous evaluation process, theEvaluation Committee issued a reportrecommending Infusion Health as the PreferredProponent. This recommendation was approved byIHA’s Project Board.

FFaaiirrnneessss AAddvviissoorr

A Fairness Advisor, Joan M. Young of HeenanBlaikie LLP, monitored all evaluation activities andcompleted a fairness report that was presented tothe Interior Health Authority’s Board of Directors,prior to final ratification.

In the report, the Fairness Advisor noted that,“My impression was that the overallprocurement process was open and transparent,in that the proponents received both a fairopportunity to bid on the project and that theirproposals were fairly assessed.”

PPrroojjeecctt AAggrreeeemmeenntt FFiinnaall iizzaattiioonnaanndd FFiinnaanncciiaall CClloossee

Among the significant accomplishments of the KVHproject is how expeditiously the Project Agreementwas completed, taking just 15 months from the RFPissue date on May 7, 2007 to Financial Close onAugust 20, 2008.

CCoommppeettiitt iivvee SSeelleeccttiioonn CCoossttss

The cost of the competitive selection process isfactored into the Value for Money analysis. The totalcompetitive selection cost for the KVH project fromapproval of the business case to Financial Close is$6.9 million, including partial compensation tounsuccessful proponents ($800,000 in total). Othercompetitive selection expenses include the cost ofdeveloping output specifications, preparingprocurement documentation, obtaining advice fromexternal advisors, and preparing a project report.

PPrrooccuurreemmeenntt BBeesstt PPrraaccttiicceess

As a centre of PPP procurement expertise,Partnerships BC continues to develop bestpractices. Partnerships BC continually transfersknowledge and experience gained from pastprojects to others, to improve efficiency and quality,and to streamline and expedite the procurementprocess to save time and money for the publicsector. Partnerships BC is represented on thesteering committees for all PPP projects to ensurethe application of sound governance principles andbest practices. For example, the use of certainprocurement documents across health careprojects, including the KVH project, has resulted inthe reduction of certain procurement-related costs.Procurement expertise is shared with ongoingknowledge transfer between projects in the varioussectors.

Vernon Jubilee Hospital Patient Care Tower Emergency Entrance

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44.. TThhee FFiinnaall PPrroojjeecctt AAggrreeeemmeenntt

PPrroojjeecctt CCoossttss

The project capital cost of the KVH and VJH facilities,to be delivered using the partnership delivery model,is fixed at $382.8 million.

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Infusion Health KVH Ltd. team has a significantpresence in B.C., and is well represented locally forthis project with offices in Kelowna and Vernon, B.C.Bilfinger Berger Project Investments Inc. and JohnLaing Investments are the joint lead developers andequity investors in Infusion Health KVH Ltd., and willjointly manage the project company, which alsoincludes Graham Design Builders, Stantec and Black& McDonald. The members of the Infusion Healthteam are:

Bilfinger Berger Project Investments Inc. BilfingerBerger Project Investments Inc. is the arm ofBilfinger Berger AG, a German company,responsible for the developmen, investment andmanagement of concession projects throughoutNorth America. From its North Americanheadquarters in Markham, Ontario, and offices inVancouver, B.C., Bilfinger Berger Project InvestmentsInc. is active in the transportation and socialinfrastructure partnership markets. The company hasraised $2 billion of capital for infrastructure inCanada as consortium leader and sole equityinvestor in the Kicking Horse Canyon Phase 2,Golden Ears Bridge, and Calgary and EdmontonRing Roads projects.

John Laing Infrastructure is a specialist owner,operator and manager of public sector infrastructureassets in the United Kingdom and internationally,with Canadian activities headquartered in Toronto,Ontario, with an office in Vancouver. John Laing hasapproximately $4 billion of investments on itsbalance sheet and is seeking growth in Canada. InFebruary 2007, John Laing is the private partner forthe Abbotsford Regional Hospital and Cancer Centreand the Gordon Leslie Diamond Health Care Centrein Vancouver.

Graham Construction and Engineering Inc. is partof an employee-owned, family of companies offeringgeneral contracting, project management, design-build and construction management services fromoffices across Canada and the Central and PacificNorthwestern United States. In B.C., the companyhas branch offices in Kelowna and Vancouver.

Stantec provides professional design andconsulting services in planning, engineering,architecture, surveying, economics and projectmanagement. The company provides support topublic and private sector clients in a diverse rangeof markets in the infrastructure and facilities sector atevery stage, from initial concept and financialfeasibility to project completion and beyond. Theirservices are offered through approximately 9,000employees operating out of more than 125 locationsin North America, including over 650 employees inB.C. from six offices.

Black & McDonald Ltd. is a Canadian company,established in 1921, providing expertise in technicalconstruction and maintenance services to NorthAmerica and selected global markets. Black &McDonald maintains offices throughout Canada,including Vancouver, B.C. with over 3,500employees. Black & McDonald Ltd. has been aleader in the field of facilities maintenance andoperation for 25 years.

Royal Bank of Canada (RBC) and Dexia CréditLocal will provide senior funding for the project.RBC provides personal and commercial banking,wealth management services, insurance, corporate,investment banking and transaction processingservices on a global basis. RBC employs more than70,000 full and part-time employees who serve morethan 15 million personal, business, public sector andinstitutional clients through offices in Canada, theU.S. and 46 other countries. Dexia Crédit Local is aEuropean bank with more than 36,500 employees in39 countries, including a branch in Canada where ithas led various major infrastructure financings overthe past three years. Dexia has one of the highestcredit ratings in the banking industry.


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Agreement StructureThe private sector partner has incorporated a single purpose entity, Infusion Health KVH, to enter into the projectagreement and undertake the project. Infusion Health is responsible for the entire cost of the design, construction,operations and lifecycle maintenance of the Kelowna and Vernon facilities as defined in the Project Agreement.Infusion Health has been granted an exclusive license to undertake the construction of the project, and then anon-exclusive license to provide the services as defined in the Project Agreement.

The organization chart below depicts the relationship between the signatories to the final Project Agreement.

Design and Key FeaturesInfusion Health is responsible for all aspects of thedesign, construction and commissioning of the newfacilities. Project deliverables for KGH include a newsix-storey, Patient Care Tower featuring a newemergency department four times larger than whatis currently available, combined and consolidatedoutpatient services into one facility, provide modernoperating rooms, appropriate links from the centreto the existing hospital, a rooftop helipad and twoshelled floors for future inpatient beds; a multi-level

parkade; and a two-storey UBCO Clinical AcademicCampus featuring 180 seat lecture theatre, distanceeducation rooms, clinical skills rooms and a library.At VJH, Infusion Health is responsible forconstruction of a new seven-storey Patient CareTower featuring outpatient centre space; maternityand paediatric units; surgical services; emergencydepartment; cardiac care unit services;intensive/critical care unit; and two shelled floors forfuture inpatient beds.

IHA

INFUSIONHEALTH KVH

Province of B.C.Funding Partner

Regional Hospital DistrictsFunding Partners*

* North Okanagan Columbia Shuswap Regional Hospital District* Central Okanagan Regional Hospital District

PROJECTAGREEMENT

Royal Bank of CanadaSenior Debt

Dexia Credit Local S.A.Senior Debt

Bilfinger Berger Investment S.A.Equity Investor

John Laing Investments Ltd.Equity Investor

Graham Design BuildersBuilders

StantecDesign

Black and MacDonaldFM Services

12

Refinancing: In the event Infusion Health refinances the initial

senior debt amount (except in a limited number ofspecified circumstances, the purpose of which, inbroad terms, is to ensure the continuance of theproject rather than to receive a financial benefit), theresulting gain will be shared on a 50-50 basisbetween the public and private sectors. This alsoapplies where equity is converted to senior debt onmore favourable terms to those in place atFinancial Close.

Construction ScheduleInfusion Health is responsible for completing andcommissioning the following three project phases:KGH-UBCO Clinical Academic Campus andparkade by December 3, 2009; VJH Patient CareTower by May 30, 2011; and KGH Patient CareTower by August 13, 2012.

OwnershipIHA owns the KGH and VJH sites and facilities.

Facilities Management Services,Infusion Health is required to provide facilitiesmanagement services for the new facilities as wellas for existing facilities at both KGH and VJHthroughout the term of the Project Agreement.Management services for existing facilities willcommence before completion of the new facilities.

Infusion Health is responsible for delivering thefollowing Facilities Management services:

• General management services;• Physical Plant services (facilities management,

including life cycle requirements);• Help desk services;• Utility management services;• Parking services; and• Environmental and sustainability services.

EquipmentInfusion Health is responsible for designing andconstructing the KGH and VJH facilities toaccommodate specified equipment. IHA assumesthe price and procurement risk for the majority of thespecified equipment. Infusion Health coordinates theinstallation of equipment.

Term of the ContractThe Project Agreement term is 34 years. Thisincludes a construction period and 30 years ofoperation from service commencement of the finalphase (KGH Patient Care Tower), which isscheduled to be August 13, 2012. The contractualexpiry date remains fixed regardless of whenservice actually commences – for example, anyconstruction delays reduce the operating periodwhile early delivery extends the operating period. Atthe end of the Project Agreement term, the facilitiesmust be returned to IHA in the specified hand-backcondition.

Performance-Based Payment PrinciplesOnce construction is complete and occupancypermits are in place, IHA is responsible for payingInfusion Health annual service payments for 30years. IHA is responsible for making monthlypayments to Infusion Health based on performance,facility availability and service quality. InfusionHealth’s performance will be continuously monitoredthroughout the operating period based on keyperformance indicators, and IHA may makedeductions from the monthly payments if ProjectAgreement standards are not met.

Vernon Jubilee Hospital Patient Care Tower Interior


Adjustments to PaymentsAnnual service payments may be adjusted to reflectspecific circumstances as defined in the ProjectAgreement, including:

• Indexation: A proportion of the annual servicepayment is fixed. Another proportion willincrement annually in line with the ConsumerPrice Index (CPI). Finally, a proportion of the ASP,representing underlying labour costs, willincrement annually in line with movement in abundle of relevant collective agreementsettlements.

• Energy: The annual service payment may beadjusted if Infusion Health fails to meet definedenergy consumption targets for the facilities.

• Change in Law: If there is a discriminatorychange in law, the annual service payment maybe amended to leave Infusion Health in no betteror worse position than if the change had notoccurred.

• Compensation Events: If an event occurs thatwarrants compensation of Infusion Health, theamount may be provided by adjustment to theannual service payment.

• Insurance: Insurance during the constructionand operational period will be placed with theProvince’s Health Care Protection Plan.

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Under the traditional delivery model, project design,construction, operation and maintenance are rarelyintegrated and, as a result, the public sector retainssignificant risk. One of the key advantages of a PPPis the sharing of the burden of risk. For example,the public sector is better able to determine whetherthe design of a hospital meets a health authority’sclinical functionality needs, and so retains that risk.Similarly, the Private Partner is better able to ensurethe design will be cost-effective from an operational

and maintenance perspective over the facility’slifecycle, and so accepts that risk. Some risks areshared, such as a relief event like an earthquake orflood. For every shared risk the project agreementstipulates how the risk will be allocated; for example,by providing thresholds for each party’sresponsibility for a certain risk. In the event of adifference in interpretation of the risk allocation, thedispute resolution mechanism applies.

The following table provides an overview of riskallocation for the project:

PUBLIC PRIVATERISKS RELATING TO: (IHA) (INFUSION HEALTH)

Design and Construction �

Financing �

Schedule �

Maintenance �

Commissioning �

Lifecycle capital �

Lifecycle capital-existing �

Geotechnical �

Systems and civil works integration �

Utility volume �

LEED2 Gold certification �

Ownership �

Program delivery/decision-making �

Legislative change �

Existing site conditions �

Utility unit costs �

Force Majeure � �

Changes in law � �

Relief event (e.g. fire) � �

Excusing event � �

(e.g.police shut down facility)

2. Leadership in Energy and Environmental Design

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This risk allocation is supported by the following provisions in the Project Agreement:

• IHA begins making performance-based payments to Infusion Health only when an independent certifierconfirms that the conditions for service commencement have been achieved.

• The expiry date of the Project Agreement is fixed, so any delays in completing construction will reducepayments to Infusion Health, providing a strong incentive for timely completion.

• Provisions are in place for payment reductions if Infusion Health does not meet agreed upon standards forfacility operation and maintenance.

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IHA is responsible for making monthlypayments to Infusion Health based onperformance, facility availability andservice quality. For the first full year ofoperations the annual service payment willbe $23.9 million (FY 2014), assuming nodeductions.

The graph (to the right) demonstrates theanticipated annual service paymentstream to Infusion Health over the term ofthe Project Agreement. The graph isexpressed in nominal dollars, whichassumes 2.5 per cent annual inflation forfacility management services. Paymentprojections assume no penalties and nodeductions.

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When the government began entering into PPP agreements, there was little in the way of guidance onaccounting treatment for PPPs. The cost of the total contract was known; however, for accounting andreporting purposes, it was unclear how much of the total project cost should be allocated to capital costsand how much toward operating expense.

Previously, reporting on the capital cost of PPPs focused on construction costs as the means of allocatingthe contract amount between capital costs and operating expenses. The Office of the Comptroller Generalhas established accounting guidelines for PPP projects which clarify that the costs allocated to capital mustalso include items such as interest during construction and project management costs. The total projectcapital value of $432.9 million reflects this accounting treatment.

THOUSANDS OF DOLLARS

$40000

$35000

$30000

$25000

$20000

$15000

$10000

$5000

02013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041

COMPONENTS OF ANNUAL SERVICE PAYMENT (NOMINAL DOLLARS)

LIFECYCLE COMPONENT FACILITIES MAINTENANCE COMPONENTCAPITAL COMPONENT


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The Project Agreement with Infusion Health includeschecks and public interest safeguards to ensureproject delivery, performance and high qualitystandards. Monitoring spans every phase of theproject, from Financial Close through design andconstruction and operations and maintenance overthe term of the agreement. There are a number ofmajor phases in the project-monitoring schedule,with roles and responsibilities assigned to projectparticipants at each stage.

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The project agreement is designed in a manner tomotivate the partner to ensure delivery, performanceand high standards of quality given the monetaryconsequences of not achieving these requirements.

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IHA will oversee activities in this phase through itsrole as members of the Design and ConstructionCommittee. Partnerships BC will provide supportduring these phases. In addition IHA representativesconduct monthly inspections and have full access tothe construction site, drawings and specificationsand report their observations to IHA. In addition, asite liaison official is responsible for proactivelyensuring patients, visitors and the community arekept up to date and engaged on current and futureproject activities, including those involving clinicalimpacts, patient and vehicle flows, parking issues,and other matters.

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The Project Agreement stipulates that IHA mustassign a representative to serve as a member of theOperations and Maintenance Joint Committee overthe 30-year term of the partnership. The committeeis a formal forum where parties consult andcooperate on all matters related to the facilityduring the operational term.

PPrroojjeecctt RReevviieewwss

IHA and the Ministry of Health Services areresponsible for designing and conducting fullproject reviews in years 15 and 26 of theoperational term.

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Partnerships BC will work with IHA and the Ministryof Health Services to design a process for reviewingthe Project Agreement at appropriate intervals suchas five, 10 and 15 years from the start of operations.The review process will enable the Province toestablish whether the Agreement is functioning asintended, and whether the expected benefits havebeen realized.

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IHA has established a Project Office responsible forleading project oversight and monitoring efforts. Anexperienced Project Officer, along with experts indesign and construction, clinical services, facilitiesmanagement services, and technical requirements,will serve full-time roles in the Project Office. TheProject Office is responsible for reporting to anexecutive steering committee on all aspects of theKVH project, and is required to adhere to a detailedProject Implementation Plan based on ProjectManagement Institute best practices.

To facilitate its mandate, the Project Office hasaccess to key IHA departments, including Facilities;Design and Construction; Purchasing; FinancialManagement; Strategic Business Development;Risk; Human Resources and executive committees.

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The design of the new facilities for the KVH Projectcombines global best practices in health care withInfusion Health’s design innovations and industryexperience. The designs and features include:

KGH

• Modernized emergency department quadruple insize, with ground level accessibility andambulance garage;

• New operating rooms;• Two additional shelled-in floors for future inpatient

beds;• Concentration of day procedures in one large, new

comfortable area for an optimal patientexperience;

• Full integration with the existing hospital;• Separate building to house UBCO Clinical

Academic Campus, including a 180-seat lecturetheatre.

• A new rooftop heli-pad;• A new parkade;• Vacated space in the existing emergency

department and outpatient clinic leaves space forfuture patient care developments; and

• Medical student on-call rooms and lounge areawithin the Patient Care Tower.

VJH

• Expanded and modernized emergencydepartment with high visibility ground levelaccess;

• Consolidated and centralized new operatingrooms;

• New maternity/paediatrics ward with direct link tooperating rooms;

• Two shelled-in floors for future patient beds;• Separate outpatient (day procedure) entrance

from upper parking lot and new expandedoutpatient program;

• Expanded and modernized facilities to provide abetter patient experience and improved patientflows;

• Full integration with the existing hospital;• New and more efficient central sterilization

services;• New ambulance garage; and• Vacated space in current hospital will leave space

for other programs and services.

Kelowna General Hospital Patient Care Tower Main Entrance


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Full site facilities management is a further key featureof the KVH project, meaning the private partner isresponsible for managing physical plantmaintenance across both sites. Physical plantmaintenance is a critical component of thepartnership because it ensures the private partner isaccountable for the provision of physical plantmaintenance and related services for all facilities atboth KGH and VJH, and for constructing andmaintaining facilities in accordance with the ProjectAgreement.

• An integrated single physical plant maintenanceservice on each site;

• Consistent standards and services across thewhole of both sites;

• A single help desk service for physical plantmaintenance services;

• A single set of operational polices and processesacross the sites; and

• Clarity of accountability for systems and servicespresent throughout all buildings such as the firealarm system, nurse call system, pipe work, andother systems.

Kelowna General Hospital Patient Care Tower

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Value for money is a broad term that captures bothquantitative factors, such as costs, and qualitativefactors, such as service quality. Partnerships BClooks at a broad range of factors in determiningwhether a project offers value for money totaxpayers, including comparison of the finalagreement to other benchmarks – in this case, theexpected results of a hypothetical traditional deliverymodel, and the expected results of a hypotheticalpartnership delivery model.

Financial value for money is the difference betweenthe net present cost of the annual service paymentsthat will be paid to Infusion Health over the life of theProject Agreement and the expected net presentcost of the capital cost, facility management andoperating costs, lifecycle maintenance costs andtransferable risk costs included in the referenceproject.

Based on the above, it was determined that the netpresent cost of the KVH project delivered traditionallyis an estimated $468.1 million. The final ProjectAgreement with the private partner, Infusion Health,has a net present cost of $442.7 million. Thus, usingconservative assumptions, in financial terms, thefinal Project Agreement is expected to achievevalue for taxpayers’ dollars of $25.4 million.

The significant factors in creating this value formoney include joint procurement; efficiencies fromintegrating the design, build and finance teams; andefficient transfer of risk.

Net present cost figures above were developedusing a discount rate, which represent the cost ofcapital over time taking into account factors such asinflation and interest rates. The discount rate usedfor the calculation of value for money is 7.8 per cent.Sensitivity analysis of the discount rate showed thatthe net present cost of the Project Agreement wouldhave been approximately $21 million less than that ofthe public sector comparator if the discount rate was50 basis points lower, and about $29.3 million less ifthe discount rate was 50 basis points higher.

FinalAgreement PSC

Capital Costs (includes RHD and IH) $256.9M

RHD and IHA Contribution toCapital Cost $178.6M

Lifecycle Costs $44.8M

Facility Maintenance Costs $113.8M

Risk Adjustment $1.2M $33.5M

Competitive Neutrality $9.3M $19.1MAdjustment (includes GST, insurance and public sector procurement costs)

ASP Payment to Infusion $253.6M

Total $442.7M $468.1M

Cost Differential $25.4M

Percentage saving from PSC 5.7%

NOTE: all numbers are NPC discounted at 7.8%


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As a result of the robust and competitive process toselect a Private Partner to deliver the KVH project,there are a number of additional qualitative benefitsthat contribute to achieving value for money. Theseadditional benefits are summarized below:

• Stand-alone UBCO Clinical Academic Campus:The private partner proposed an innovative newfree-standing facility to house a UBCO ClinicalAcademic Campus at KGH. The school featuresa 180-seat lecture theatre, distance educationrooms, clinical skills rooms and a medical library.The UBCO Clinical Academic Campus will serveas a centre for medical learning excellence andwill enhance the status of KGH as a teachinghospital. This stand-alone solution was not anopportunity conceived of within the IHA Teamprior to private partner participation through theDBFM model. In addition, the new facility andparkade will be delivered sooner than originallyplanned;

• Physical Plant maintenance whole site, includingexisting and new facilities: Physical plantmaintenance is a critical component of thepartnership because it ensures the privatepartner is accountable for the provision ofphysical plant maintenance and related servicesfor all facilities at both KGH and VJH inaccordance with the Project Agreement;

• Competition and innovation: The competitivenature of the bidding process encourages theprivate partner teams to develop innovative andcost effective solutions in all aspects of the projectfrom design, construction and through tooperations;

• Schedule and cost certainty: The private partneris only paid once the facility is available for use,thereby providing a financial incentive to completethe project on time and within budget;

• Integration: Because the private partner isresponsible and accountable for the design andconstruction, long-term maintenance andrehabilitation of the facility, there are opportunitiesand incentives to integrate these functions inorder to optimize performance of the facility overthe duration of the project agreement; and

• Lifecycle maintenance: The private partner isresponsible and accountable for ensuring the newfacilities (not applicable to existing site facilities)are maintained and rehabilitated over the durationof the Project Agreement, with financial penaltiesfor non-compliance.

Kelowna General Hospital Patient Care Tower

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AAppppeennddiixx 11 –– PPrroojjeecctt CChhaannggeess

The KVH project team was able to identify andincorporate several improvements to the projectduring the planning, design and implementationphases following approval of the original businesscase in 2007. There are a number of factors thathave resulted in additional benefits for Okanaganresidents and taxpayers, while ensuring the projectremained cost-effective and represents value formoney for taxpayers. Changes include:

• Procurement Schedule: The release of the RFPwas delayed by about four months;

• Project Schedule: The KGH construction schedulewas extended by nineteen months and the VJHby seven months due to the complexity ofbuildings and challenging site conditions;

• Market and project pressures resulting inincreased project cost:o Rising cost of construction materialso Increasingly tight labour market o Increased size and capacity of facilities

necessary to accommodate growing needso Requirement to pre-load KGH site due to soil

conditionso Added code requirements at VJH

• LEED Gold Certification: A new provincial policywas introduced in September 2007 requiring allmajor provincial capital projects to achieve LEEDGold certification;

• Facilities changes: o The addition of a new, two-storey building,

3,200 square metre UBCO Clinical AcademicCampus at KGH, housing a 180 seat lecturetheatre, distance education rooms, clinical skillsrooms and a library;

o A new multi-level parkade at KGH; o The installation of two shelled floors for future

patient beds at both the KGH and VJH PatientCare Towers, as well as expanded floor platesto accommodate site complexities and links toexisting buildings and building profiles; and

o Enlarged floor plate for the third to sixth floors ofthe VJH Patient Care Tower to accommodatefuture capacity increases.

The project was originally announced in the springof 2007 of a capital value of $200.1 million. InSeptember 2007, the capital value was revised to$251.1 million. As a result of the changes describedabove, the final total capital cost has increasedby $181.8 million.

Kelowna General Hospital Patient Care Tower Ambulance Entrance

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