ADMINISTRATIVE REPORT

Date: April 6, 1998

Author/Local: R. Birch/7292

CC File No. 5801

TO:	Vancouver City Council
FROM:	General Manager of Engineering Services
SUBJECT:	Review of Proposed Partnership with Richmond for the Joint Production of Asphalt

RECOMMENDATION

THAT Council authorize the General Manager of Engineering Services to pursue financial partnership with the City of Richmond for asphalt supply and report back to Council for final approval.

COUNCIL POLICY

There is no applicable Council policy.

PURPOSE

This report presents the results of an independent analysis of a proposed partnership agreement between Vancouver and Richmond for the production of asphalt, and recommends that the partnership proceed.

BACKGROUND

On August 1, 1996, Council approved the acquisition of 900 East Kent Avenue Site as a superior site for the primary use as an Aggregate Handling and Asphalt Plant Operation.

On June 26, 1997, Council approved a project budget of $13,306,000 for the construction of an Aggregate Handling and Asphalt Plant operation, at 900 East Kent Avenue.

On October 30, 1997, Engineering staff reported that an opportunity existed to develop a partnership arrangement with the City of Richmond, and requested Council’s authority to negotiate such an arrangement with Richmond and others. Opposition to this concept was expressed by various members of the asphalt industry. At that time, Council adopted the following resolution:

"THAT Council obtain an independent financial analysis of the viability of the full costs and benefits of an asphalt plant with or without a partnership with Richmond, to include:

- the impacts of the proposal to the City

- the impact of the partnership to the City of Richmond."

An independent analysis by KPMG has now been completed. Copies of KPMG’s report (limited distribution) are available with the City Clerk. Additional copies are available from the Office of the General Manager of Engineering Services. This report summarizes the results of the KPMG analysis.

DISCUSSION

(a) Development of Terms of Reference

Following the direction given by Council in October 1997, City of Vancouver staff met with staff from the City of Richmond with the following objectives:

-to obtain written confirmation of information which had previously been provided verbally related to Richmond’s current costs and volumes of asphalt purchases;

-to obtain agreement in principle on a partnership framework which would be sufficiently detailed to allow an independent review of the costs and benefits to both parties.

Under the agreed partnership framework, Richmond would make an initial contribution towards the capital cost of the City’s costs of construction, and would thereafter be entitled to receive asphalt from the City at an agreed average cost of production. This latter cost would include all operating and material costs, but no capital costs. The initial contribution would be on a sliding scale, and would depend upon the annual tonnage which Richmond would wish to acquire at average cost. At this time, Richmond appears most likely to favour an arrangement whereby the initial contribution is $500,000, and the annual tonnage secured at average cost is 5,000 tonnes.

The consulting firm KPMG was retained to perform an independent analysis of this proposal. The KPMG review concluded that the proposed partnership agreement has a Net Present Value benefit to Vancouver of $947,000 and to Richmond of $132,000. No employment impacts are anticipated from shifting Richmond’s production to a City plant. The report stated that "the benefits for Vancouver are significant and the proposed agreement should be welcomed".

(b) Analysis

As part of their study, KPMG undertook a "due diligence" process to check the capital cost, operating cost and production projections which had been made previously. The review, updated with 1998 information, indicated that costs were substantially in agreement with the figures that had been provided to Council previously by Engineering staff. The "most realistic" projection of City cost per tonne for asphalt produced by the proposed facility was determined by KPMG to be $31.27. The previous estimate provided to Council by Engineering staff was $32.10 per tonne. The difference in these figures is mainly attributable to KPMG’s projected use of 10% recycled asphalt (compared to 0% assumed previously). However, this was offset somewhat by a reduced estimate of the annual output of the City plant from 100,000 tonnes/year to 95,000 tonnes/year.

The projected selling price to Richmond under KPMG’s "most realistic" case is $28.24, plus taxes. Information provided in writing by Richmond staff confirmed that at the time of the October 30, 1997 Council meeting, Richmond’s cost to purchase asphalt at their supplier’s plant was in the range of $46.95 - $60.95, not including PST and GST. Subsequent to that meeting, Richmond’s supplier approached the City of Richmond with an offer to reduce these prices to $39.50 per tonne, plus PST and GST. These figures confirm our previous observations of a significant difference between "market" prices and actual costs of production. Richmond has already benefitted from the proposed partnership through reduced current asphalt prices; the proposed partnership would see their costs reduced further.

(c) Viability

The KPMG review confirmed the viability of the proposal to replace the City’s existing asphalt plant facility with a new facility.

If the City also enters into an agreement with the City of Richmond, in accordance with a framework which has been agreed to in principle by Richmond staff, the City will receive an additional benefit of an estimated $947,000 over the next 25 years, $500,000 of which will be realized immediately.

The KPMG review also determined that the proposed partnership arrangement will be to the advantage of Richmond by $132,000, even when considering the significantly reduced prices offered recently by their supplier. Sensitivity analysis showed that Richmond’s business case is sensitive to key assumptions about asphalt consumption and RAP usage. These issues will be left for Richmond staff to resolve.

(d) Cost

The cost of this study was approximately $10,000, which has been charged to the Asphalt Plant Replacement Project.

CONCLUSION

The KPMG analysis asserts that both Vancouver and Richmond would benefit significantly by entering into a partnership agreement. The benefit to Vancouver of the agreement is projected to be $947,000 net present value over 25 years. In addition, the close relationship of KPMG’s results with previous analyses performed by City staff confirm the viability of a City-owned facility. Therefore, staff reiterate their recommendation that Council authorize the negotiation of a partnership agreement with the City of Richmond.

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(c) 1998 City of Vancouver