Podcast – Metrolinx CEO talks inflationary pressures in the transit world

The cost of everything from fuel to materials has gone up recently. How has that affected Metrolinx projects and operations? Metrolinx President and CEO Phil Verster gives his view on that in the latest episode of Between the Lines: A Metrolinx Podcast.

If you’ve bought gas or groceries recently, you’ve experienced a rise in prices.

In February of 2022, drivers paid 32 per cent more for gas than the year before.

Food prices were up 7.4 per cent – all according to Stats Canada.

While that effect is being felt on a personal level, it’s also impacting major construction projects and transit operations.

In this week’s episode of Between the Lines: A Metrolinx Podcast, Phil Verster weighs in on how this global issue is affecting Metrolinx’s business.

Listen here:

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Thank you to all of our thousands of listeners who have joined us so far. The Between The Lines team will be taking a short break over the summer, but we will be back. We want to hear from you! What topics should we focus on? What Metrolinx projects do you want to learn more about? What are you liking about the podcast? What would you improve? Send us your thoughts: podcast@metrolinx.com Have a great summer. Stay tuned… Host: Matt Llewellyn (@mattrolinx) Producer/Social: James Wattie (@jameswattie) Learn more at blog.metrolinx.com Credits: Gregory David / Shifting Out / courtesy of http://www.epidemicsound.com — Send in a voice message: https://anchor.fm/metrolinx/message
  1. Stay tuned – and thank you!
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  3. Episode 20 – #AMAwithAMA – Terrifying near miss video, what are sun kinks and Pride Month begins
  4. Episode 19 – Walking The Entire Eglinton Crosstown Line
  5. Episode 18 – #AMAwithAMA – GO & UP service changes, rail safety and your transit questions answered

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Story by James Wattie, producer/editor, Between the Lines: A Metrolinx Podcast

Full transcript for Between the Lines: Episode #13

Matt Llewellyn

Phil, Canada’s inflation rate hit around 5.7% in February, and it’s expected to go even higher by many analysts’ account. How closely is Metrolinx monitoring inflationary pressures here at home and around the globe, and which industries and sectors are you watching the closest?

Phil Verster

Yeah, Matt, that’s a great question. We are keeping a close eye on all the different market sectors that are affected. The ones that are very prevalent for us is everything that feeds into our construction, for example. We’ve seen commodity prices such as steel, lumber, you know, even concrete prices have increased dramatically.

And we’ve made adjustments to our current projects that are in market for bidding and brought in mechanisms that track inflation and sort of adjusts the price levels that our bidders are bidding. But also, look, on the operational side, we’re looking at fuel… that fuel hedges in place these days.

It’s pretty, pretty erratic to track fuel and put fuel hedging and to a degree of sensible control in place. But we’re looking at that primarily as well. You know, but Matt, you know, the one that really bothers me is skills and skills shortages, human capital. A very weird mix of factors that have affected skills competencies in the skills markets segment.

There’s the post-COVID great resign or they call it something to that effect whereby a lot of people just say, look, enough, I’m going to take it easy from this point onwards. We see constraints and bottlenecks in the supply side of the market and where they were in the past three, four or five players that would have bid stuff. There’s now two or perhaps three. These are the types of things that work its way through the economy and throughout our supply chain.

It’s very difficult to pinpoint it and to figure out where to provide a solution rather than to just, you know, what we do is we just listen and figure out what we can do in the realm of what we control to make it possible for the best possible prices to be bid to us in the best possible participation in our projects.

It’s a challenging environment, Matt. Challenging environment.

ML

I’m going to touch back on that skilled labour part in a little bit, but I want to go to where you were talking about in terms of building materials. I think it’s really relatable to people, especially.

PV

Yeah, commodities. Yeah.

ML

Yeah. If you’ve done like a home renovation project recently, you know exactly what you’re talking about in terms of steel and lumber.

You know, I’m sure there are buffers built in, but we’re talking about around $80 billion of critical infrastructure projects either in market or in various stages of procurement right now.

You know, as the person at the helm, which part of that, you know, of the commodities part are you most concerned about?

PV

Matt, I’m concerned about it all. You know, so different projects, we listen very closely to our partners.

Different projects have different tensions. Give you an example.

Just this week I did a detailed review with the CEO of one of the project co’s and the CEOs of the holding companies.

And we have particular challenges just around skilled resources, which is not a basic commodity, but which is a crucial ingredient to do these programs and projects.

You know, our projects are pretty multifaceted and have many parts to it.

To give you an example, availability of the right equipment to be able to execute the job is as much a challenge.

If there was a projection of buying three or four specialized pieces of equipment, those specialized pieces of equipment now take literally months longer to arrive and be delivered than what was the intention as little as 6 to 9 months ago.

Every aspect of project delivery is affected.

ML

Is it also the price though, like the bottom line being a major concern?

Certainly it’s not a well that’s, you know, unlimited that you can go to in these in these particular instances.

PV

Well, the well is not unlimited. When you look at the capital programs we run, the transit programs, the economic benefits of these programs are vast.

And that doesn’t mean there’s a never ending well for dealing with costs.

But for a moment, reflect on the fact that the benefits we get, for example on now GO Expansion program, which is a very exciting program which we’ve announced the preferred proponent for.

The benefits of this accumulates to us – in our business case, we calculate for the next 60 years – but accumulates to the infrastructure we built, 100 and 150 years.

This infrastructure will totally change how the whole region around Toronto can use transit to travel in and out of the different cities.

Bi-directional, two-way, all day train travel.

These projects, these transit projects, are, at its root, really economic projects rather than transit projects.

Transit is the mechanism, but economics is the outcome.

And wherever we are in an economic cycle with inflationary tendencies now or not, it doesn’t change the fact that these transit projects are irreplaceable.

We need to move people full stop.

We thought originally we thought that this inflationary phenomenon was temporary.

So did the Fed in the U.S.A, so did most people.

It looks as if it is not temporary, but more of an upwards ratcheting of prices with no downward ratchet evident.

And so it’s a time to think, to think deeply, take stock.

What we are thinking of is how do we phase expenditures in projects that can be phased, in projects where we can’t phase expenditure, we’re thinking very carefully on how to make sure that the supply chain is protected and able to deliver and just make difficult choices now.

ML

Metrolinx, I mean as you’ve talked about, we’ve experienced some of these cost pressures.

You know, one of the ones that was noted recently in the media was the Burloak Grade Separation.

I know that you’ve been a big driver of pushing Metrolinx away from fixed price contracting.

Exploring some more progressive models.

Do you think that through that type of procurement, the more progressive models, it has the ability to offset some of the financial pressure for these projects?

PV

Absolutely. I had yesterday morning, very early morning, did a safety walk with colleagues from Kiewit and on our USEP alliance project.

USEP standing for Union Station Enhancement Project where we are at Union Station, changing the platform configurations, building wider platforms, changing track layouts and solving the bottleneck we have on platforms.

And that’s an alliance project or a progressive formula for contracting, where we don’t take a fixed price when we select the bidder, but we take a bidder and a group consortium that shows the best ability to work with us through a design phase and to manage risks and to manage scope.

That’s a really exciting place for us all to be.

And, you know, on the project, on the safety walkthrough we had yesterday morning, it was fabulous.

There’s one sort of power control room which at the time of bidding, no one thought could be a power control room.

But through the development phase, our team, the city and the alliance partner working together found this control room, created a control room out of a space that was previously just underutilized.

Fabulous innovation. And we have saved roughly 20% of the contract price through innovations.

At the same time, the project team found items that wasn’t suitably specified in the reference concept design, which also added up to around 15, 18, 20%.

Point being, we have a de-risked project and all opportunities being delivered by all of the parties together.

So I definitely think the shift that we’ve made towards more progressive contracts over the last two years or so is now fortuitously exactly where we need to be.

And it does de-risk the program significantly.

ML

When we have these types of conversations, we often are talking about these larger scale mega projects, so to speak.

But I’m wondering if for smaller projects, for example, do you think they’re more susceptible to this type of market volatility, let’s say $10 million or less?

What about those projects and how is Metrolinx dealing with that?

PV

You know, the smaller projects may have less complexity, but they also typically involve smaller companies that are bidding.

So the whole cost risk equation is very different and it behooves us to be very focused on making those projects also deliverable.

I am very keen that we place contracts in that smaller scope project market with as many possible companies to deliver and to get as much of the work spread around.

And we’ll see how that works. I mean, we’ve now recently approved a project that will have station works at 34 of our stations.

Fabulous. It’s a very low complexity, technical scope, but fabulous opportunity for smaller companies to get involved in.

To your question, to what extent that risk would manifest itself in price cost risks?

It’s our view that it will, because the smaller companies often pick up the worst of the cost increases in commodities and inputs of supplies and have less sort of leverage to negotiate prices down.

But we’ll see when we go to market, we will be very, very cognizant of that and we will look very carefully at what the market says to us.

ML

Let’s look back to something that you talked about, and that’s about shortages in the skilled labor market.

Even before COVID, I know that it’s something that you had told me before, that it’s kept you up at night.

I want to know what you think needs to be done to help solve that problem.

And do you think that Metrolinx perhaps could play a role in helping solve it, like through initiatives such as community benefits agreements?

PV

You know, just today, I had a very interesting conversation with our chief legal officer about the demand for lawyers out there in the current market circumstance.

And probably back end of last week at a similar conversation with our chief I.T. officer on demand for I.T. resources.

And, not to be done short, our capital programs, chief of capital programs talk to me probably every week about the shortage of excellently skilled project managers and project directors we need.

So I can’t even tell you where the parameters are of the skills shortages and the skill demands out there.

It’s everywhere. It’s in all of the competencies that we have as an organization.

And so the real challenge for us is to figure out how to influence something which looks like a market wide phenomenon across multiple sectors of skills, you know, from lawyers through to I.T., through to construction.

And to the extent that we can influence it, I’ve come to the conclusion is very little.

What we are doing with our community benefits program is to do what we can.

And the community benefits program, the benefits and supports is what we call it.

It’s got four pillars to it. And I just love that program.

The four pillars are we use our projects to stimulate employment opportunities for apprentices and journey people and stuff like that.

There’s another pillar about supporting businesses and encouraging our project consortia to buy from local businesses where they’re building.

And then the last two about, you know, where you build a transit project. There’s cool stuff you can do along the route.

You know, give this example in Leslieville and Riverside, there’s five parks at least, where in each of the cases of those parks, Jimmie Simpson included, we will as part of the project, we’ve changed our construction methodology, changed our design so that we leave each of those parks after the construction bigger than what they are today.

Bigger. And that’s community benefits, isn’t it? That’s where the project is incurring more costs.

But we leave a benefit for the community. And those are sometimes unheralded, you know, not celebrated as much.

And maybe we should just be better talking about those.

And that’s that’s really important.

And then the fourth one, which like game changer stuff, is where communities identify very specific, huge set piece investments that could be made in those communities and can change those communities in the future.

And we’ve done that.

I mean, on our Finch West project, we donated a large piece of land for a community center to be built on.

We’re investing in Thorncliffe Park in the Islamic center, which would bring significant benefits to to that community where facilities for religious service facilities would be built, there would be basketball court, it’d be facilities for mortuary services and the like, stuff that wasn’t there in that community before.

And I think those types of things are also big, big benefits for just the betterment of our communities.

Now, this last category is really policy-based decisions, again, for the elected leadership of the province.

And it’s not for Metrolinx to just decide on that unilaterally, but we do that with communities and it’s government policy based.

So to your point, yes, for sure. Our Community Benefits and Supports program has a big impact on communities.

To what extent it’ll resolve the huge pressure we have on competencies and skills that we need throughout, it’ll make some impact.

But look, I don’t think it’s going to change the tenor of the conversation much.

The tenor of the conversation is the world is looking for skills these days.

ML

We’ve been talking a lot about the transformative nature of the capital project side and what role inflation will play there.

But obviously Metrolinx has an entire operations part of this business.

You touched on it a little bit in terms of fuel prices, but what other types of inflationary pressure is that side, the operation side of the business experiencing?

PV

Yeah, you know, you think about inflation as far as inflation is not something that happens out of the blue.

Inflation is something that’s a response to supply and demand.

And where demand vastly exceeds supply, you get an upwards movement in price levels.

And that’s the space we in. And it doesn’t help that we have a war in Europe going on at the same time, which has its own impact on foodstuffs, on many ranges of commodities and the like.

And on top of that, the effect of the pandemic has its constraining impact.

And the fact that we are less commodity-oriented on the general operations side means commodities don’t form so much of a conversation with regard to operations.

But for sure, the same issues, supply issues that we have on the operations side permeates the organization.

On operation side, a practical example is we have station repairs, we have track repairs, we have this whole market is undergoing the same pressures that we see on the capital program side.

Same resource challenges that our contractors have on the operations side of the business are the same that we have on the on the capital side of the business.

And so not much discrimination between those two or not much distinctness between the two, but both are challenging.

ML

And from a customer perspective, then do you think that in the way that other inflationary pressures are passed on to them, for example, fuel prices right now, will be passed on to them in terms of their day to day fare?

PV

We clearly not passed any costs on at this point in time.

Again, those types of decisions are really matters that we discuss in the longer term with policy makers.

What I can tell you is our strategy as Metrolinx, as a business, remain 100% rooted in the ethic of customer service excellence, running trains on time, running trains to the right capacity.

During the pandemic, at times we were down to 10 to 11 or 12% of ridership.

We ran services at frequencies way above the capacity required because we wanted to make sure essential workers can travel at the right times of day when they wanted to travel, and that we supported the broader community and the public service that we are here for.

That doesn’t change the fact that we run as a business. You know, we know our costs. We know our customer feedback. We know our supply chain.

We run as a business, but we make big decisions without hesitation to make sure customer satisfaction and the service ethic for what we are here are fully, fully delivered.

That’s really important.

ML

Overall, seems like lots of challenges to overcome. What an interesting time for you to be at the helm.

You know, lots to carefully consider or monitor. Was there anything else that you wanted to add?

PV

No, I don’t really… just to say this topic is is one which occupies us.

I think what has been transformational for Metrolinx as a business in the last four and a half years is we have pivoted two and a half, three years ago to a business model which is about operating as a business.

Even though we are a Crown Agency, our roots now line strong risk management, strong business planning, strong numerate KPI-oriented decision making, strong focus on continuous improvement.

And when we get curveballs like this, inflationary pressures in our supply chains or pandemics, we respond as a business and our ability to respond and our flexibility to respond and our, you know, just the ability of our whole organization to step up and to address it, is just fabulous.

You know, it’s just so different. And, you know, I’m indebted to the people of this organization for what they’ve done and how they pull things through and get things done.

And I’m sure we’re going to fix this one as well. You know, perhaps not fix it for the whole world, but we’re going to fix it for Metrolinx.

ML

Thanks so much for your time, Phil.

PV

Thanks. Thanks as always. Good to talk to you.