Toronto Transit Commission - Procurement of

Replacement Subway Cars

 The Strategic Policies and Priorities Committee recommends the adoption of the recommendations in the following transmittal letter (May 27, 1998) from the Budget Committee:

 Recommendations:

 The Budget Committee on May 26, 1998, recommended to the Strategic Policies and Priorities Committee, and Council, the adoption of the recommendations embodied in the communication (May 21, 1998) addressed to the City Clerk from the Toronto Transit Commission and the report (May 25, 1998) from the Chief Financial Officer and Treasurer, subject to financing the 1998 requirement from the Toronto Transit Commission's Capital Project Reserve Fund.

 The Budget Committee reports having requested the Toronto Transit Commission to report to the Budget Committee on the automated door system (platform edge doors) as originally proposed for the Sheppard Subway line and the cost factor involved.

 Background:

 The Budget Committee on May 26, 1998, had before it the following:

 (i)communication (May 21, 1998) addressed to the City Clerk from the Toronto Transit Commission; and

 (ii)report (May 25, 1998) from the Chief Financial Officer and Treasurer.

 Mr. Gary Webster, Manager of Operations, Toronto Transit Commission, appeared before the Budget Committee in connection with the foregoing matter.

 (Letter dated May 21, 1998, addressed to the

City Clerk from the

Toronto Transit Commission)

 At its meeting on Wednesday, May 20, 1998, the Commission considered the attached report entitled, AProcurement Of Replacement Subway Cars.@

 The Commission also received deputations from Mr. S. Munro and Mr. P. Lambert concerning this matter.

 After hearing the deputations, the Commission approved the Recommendation contained in the above report as listed below:

 AIt is recommended that the Commission approve recommendations (1) through (5) noting that:

 (a)The H2 and H4 subway cars purchased between 1971 - 1975 are reaching the end of their useful life and must either be replaced, or rebuilt to extend their life to 45 years;

 (b)Approximately $300 million is available in the 1998-2002 Capital Program for use to accelerate the replacement of H2 and H4 subway cars;

 (c)An opportunity currently exists to replace H2 and H4 cars with T1's at a savings of approximately $500,000.00 per car over the current contract price, allowing Bombardier and its major component suppliers to continue uninterrupted production of T1's;

 (d)Purchasing H2/H4 replacement cars now at the lower negotiated price will result in a savings of $99 million relative to the estimated final cost for replacement in 2002-2005 as reflected in the current 1998-2002 Capital Program. This analysis is based on net present value comparison including the interest costs associated with advancing the expenditures to purchase the cars now;

 (e)The deferral of bus purchases, due to operational concerns with low floor buses as well as design and quality considerations, will make sufficient funds available in the 1998-2002 Capital Program. It will limit the impact of purchasing subway cars now to an accelerated cash flow and not require an expansion to the 1998-2002 Capital Program;

 (f)Accelerating cash flow requirements in the Capital Program will assist in addressing the cash flow peaks immediately beyond the year 2000;

 (g)If the Commission approves the purchase of replacement subway cars, the H4 cars can be used to meet the additional short term service requirements expected if the City of Toronto is successful with its bid for the 2008 Olympics;

 (h)If the Commission does not approve the purchase of H2/H4 replacement cars now it will face two options: either replace the cars in 2002-2005 at a significantly higher price; or undertake a risky and expensive major rebuild program on 30 year old cars to extend their life to 45 years, noting that staff have no previous experience in rebuilding cars since most rebuild programs occur at the mid point of a vehicle=s life. Therefore it is unknown how long the car=s life will actually be extended.

 (1)Amend the 1998-2002 Capital Program as follows, subject to City of Toronto Council approval:

 (a)Advance the procurement of 156 replacement subway cars for the H2 and H4 fleets to coincide with completion of the current T1 subway car contract; and

 (b)Defer the purchase of 391 buses in the 1998-2002 New Bus Acquisition Program, eliminate the H2 Life Extension Project and allocate these funds to the purchase of 156 T1 subway cars for delivery in 1999 through 2001.

 (2)Subject to approval of recommendation (1):

 (a)Amend the current contract with Bombardier Inc. to purchase 156 T1 subway cars in the amount of $307,948,204.00 to replace 76 H2 and 80 H4 cars; and

 (b)Authorize funds in the amount of $3,060,000.00 for material, inspection, engineering and other in-house staff costs required for the purchase as summarized in Appendix 2.

 (3)Dispose of 76 H2 cars in the best interest of the Commission as they become surplus to the Commission=s needs;

 (4)Store the 80 surplus H4 cars for potential use should the City of Toronto be successful in its bid for the 2008 Olympics, noting that some work on the trucks, propulsion systems and control equipment would be required for the cars to be used in 2008; and

 (5)Forward this report to the City of Toronto Council requesting approval of this budget

amendment noting there is no net impact on 1998-2002 envelope requirements. Further, it is recommended that City Council authorize additional project approval in the amount of $300,296,251.00 gross and that financing in this amount be debentured if necessary for a term of up to 20 years.@

 The Commission also referred a brief submitted by Mr. Munro to staff for review and report back in due course on the possible implementation of the suggestions contained therein.

 Due to timing limitations associated with the contractual options available to extend the current T1 Subway Car Contract, it is essential that a decision on this request is made by City Council at its meeting on Wednesday, June 3, 1998. To facilitate this decision, it would be appreciated if this matter could be included on the respective agendas for consideration by the City Budget Committee on Tuesday, May 26, 1998, the City Strategic and Policies Priorities Committee on Friday, May 29, 1998 and City Council at its meeting on Wednesday, June 3, 1998.

 Your cooperation with respect to the foregoing is greatly appreciated.

 Toronto Transit Commission

Report No. 1

 Meeting Date: May 20, 1998

 Subject: Procurement Of Replacement Subway Cars

 Recommendations:

 It is recommended that the Commission approve recommendations (1) through (5) noting that:

 (a)The H2 and H4 subway cars purchased between 1971 - 1975 are reaching the end of their useful life and must either be replaced, or rebuilt to extend their life to 45 years;

 (b)Approximately $300 million is available in the 1998-2002 Capital Program for use to accelerate the replacement of H2 and H4 subway cars;

 (c)An opportunity currently exists to replace H2 and H4 cars with T1's at a savings of approximately $500,000.00 per car over the current contract price, allowing Bombardier and its major component suppliers to continue uninterrupted production of T1's;

 (d)Purchasing H2/H4 replacement cars now at the lower negotiated price will result in a savings of $99 million relative to the estimated final cost for replacement in 2002-2005 as reflected in the current 1998-2002 Capital Program. This analysis is based on net present value comparison including the interest costs associated with advancing the expenditures to purchase the cars now;

 (e)The deferral of bus purchases, due to operational concerns with low floor buses as well as design and quality considerations, will make sufficient funds available in the 1998-2002 Capital Program. It will limit the impact of purchasing subway cars now to an accelerated cash flow and not require an expansion to the 1998-2002 Capital Program;

 (f)Accelerating cash flow requirements in the Capital Program will assist in addressing the cash flow peaks immediately beyond the year 2000;

 (g)If the Commission approves the purchase of replacement subway cars, the H4 cars can be used to meet the additional short term service requirements expected if the City of Toronto is successful with its bid for the 2008 Olympics;

 (h)If the Commission does not approve the purchase of H2/H4 replacement cars now it will face two options: either replace the cars in 2002-2005 at a significantly higher price; or undertake a risky and expensive major rebuild program on 30 year old cars to extend their life to 45 years, noting that staff have no previous experience in rebuilding cars since most rebuild programs occur at the mid point of a vehicle's life. Therefore it is unknown how long the car's life will actually be extended.

 (1)amend the 1998-2002 Capital Program as follows, subject to City of Toronto Council approval:

 (a)advance the procurement of 156 replacement subway cars for the H2 and H4 fleets to coincide with completion of the current T1 subway car contract; and

 (b)defer the purchase of 391 buses in the 1998-2002 New Bus Acquisition Program, eliminate the H2 Life Extension Project and allocate these funds to the purchase of 156 T1 subway cars for delivery in 1999 through 2001.

 (2)subject to approval of recommendation (1):

 (a)amend the current contract with Bombardier Inc. to purchase 156 T1 subway cars in the amount of $307,948,204.00 to replace 76 H2 and 80 H4 cars; and

(b)authorize funds in the amount of $3,060,000.00 for material, inspection, engineering and other in-house staff costs required for the purchase as summarized in Appendix 2.

 (3)dispose of 76 H2 cars in the best interest of the Commission as they become surplus to the Commission's needs;

 (4)store the 80 surplus H4 cars for potential use should the City of Toronto be successful in its bid for the 2008 Olympics, noting that some work on the trucks, propulsion systems and control equipment would be required for the cars to be used in 2008; and

 (5)forward this report to the City of Toronto Council requesting approval of this budget amendment noting there is no net impact on 1998-2002 envelope requirements. Further, it is recommended that City Council authorize additional project approval in the amount of $300,296,251.00 gross and that financing in this amount be debentured if necessary for a term of up to 20 years.

 Funding:

 The impact to the 1998-2002 Capital Program is limited to a change in the timing of expenditures. Sufficient funds totalling $300.3 million are available for the purchase of 156 replacement subway cars in the 1998-2002 Capital Program as indicated in the following table, based on deferring the purchase of 391 buses, eliminating the H2 minor life extension (2-3 years) and applying existing funds in the 1998-2002 Program for H2 and H4 replacement:

 Table 1 - Funds Available in 1998-2002 Capital Program ($ millions)

 While more funds will be required in the years 1998/1999 than are currently budgeted, purchasing these cars now will permit the City of Toronto to save $99 million (net present value) relative to the estimated final cost for replacement in 2002-2005 as reflected in the 1998-2002 Capital Program. Further, utilization of a portion of the $828 million provided by the Province to discharge their responsibilities under the 5 year Provincial/Municipal/TTC Capital Subsidy Agreement would help to mitigate the 1998/1999 budget impact.

 Under this proposal, the overall funding requirements for revenue vehicles over the next 10 years will be reduced by $240 million (Table2).

Table 2 - Net Cashflow Impact ($ millions)

 The following table presents the current and proposed bus and subway car replacement plans.

Table 3 - Revenue Vehicle Replacement Plans (number of vehicles)

  Background:

 Revenue vehicles wear out in a predictable fashion. Subway cars are expected to have a 30 year life providing they receive proper maintenance and a mid life overhaul. Bus life at the TTC has historically been assumed to be 18 years. The current 1998-2002 Capital Program assumes replacement of rail cars at 30 years and buses at 18 years. In fact, given the different types of buses currently in our fleet assuming a single life expectancy is unrealistic.

 Bus Program:

 The TTC has in its fleet, monocoque buses consisting of GM New Looks and MCI classics and tubular frame buses built by two manufacturers; New Flyer and Orion using either "C" channel steel or closed boxed tube steel. Life expectancy of the GM and MCI buses with proper maintenance and overhaul can exceed 24 years. Life expectancy of the tubular framed buses ranges from 10 years to 18 years with proper maintenance and overhaul.

 Recent experience with new bus procurements has been disappointing. At its meeting of January 27, 1998, the Commission received a report titled 1998-2002 Capital Program Amendment - Bus Purchases which outlined a proposed change in the Bus Acquisition Plan, plus an alternative use of the funds. This report noted that we would obtain 50 Orion VI low floor buses in early 1998 and 50 New Flyer low floor buses in mid-1999 and that it is essential to gain a minimum of one year of operating experience to fully assess quality issues and the impact of the use of low floor buses before purchasing additional buses. This is due to the expected lower passenger capacity and anticipated higher maintenance costs associated with this new technology. As a result, this report recommended the budget be revised to reflect reality by:

 (1)reducing the New Bus Acquisition Program by 391 buses; and

 (2)re-assigning the estimated $181.2 million in capital funds for New Bus Acquisition to be held in a revenue vehicle replacement fund for use either to:

 (a)advance H2/H4 subway car procurement to coincide with the end of the current T1 contract; or

 (b)overhaul the current H2/H4 fleet to extend their life to 45 years (15 year increase).

 Staff's recommendation to defer bus purchases will permit the necessary experience to be gained regarding the impact of low floor buses, however the deferred buses will still be required in the future beyond the 1998-2002 Capital Program. The system will survive by taking steps to ensure a 24-year life for all GM and MCI buses, thereby delaying their scrapping and the need for their replacements.

 It is clear that the TTC will be unable to acquire new acceptable buses as planned in the approved 1998-2002 Capital Program which frees up funds for the acquisition of subway cars. However, this will result in extraordinarily high bus procurements in the 2003-2008 timeframe (see Table 3 previous page) with a resultant increase in cash flow requirements during those years.

 Subway Car Program:

 The Commission currently operates a total fleet of 622 subway cars with a 30-year design life. Continual replacement of vehicles, is therefore, necessary to maintain a reliable fleet to meet service requirements. The long leadtime required for the purchase of a new order of subway cars (approximately 30 months to the start of delivery), necessitates long term planning to ensure funds will be budgeted to permit the purchase of cars for delivery when required.

 At its meeting of March 25, 1998, the Commission received a presentation from staff which summarized the status of the subway car fleet. The following table shows the size, age and replacement dates for the fleet prior to the receipt of T1 cars.

Table 4 - SUBWAY CAR REPLACEMENT PROGRAM

 * H2/H4 cars to be replaced in advance of their normal replacement age of 30 years. H4 cars to be stored in serviceable condition for occasional use as trippers pending a decision on the City of Toronto's bid for the 2008 Olympics.

 The current T1 order of 216 cars will replace the M1 and H1 cars plus add 20 cars to the fleet for the Sheppard line. The T1 deliveries are as follows:

 The next subway cars due for replacement are the 76 H2 cars and the 88 H4 cars. The following two projects are included in the approved 1998-2002 Capital Program:

 (1)An H2 Life Extension project ($4.1 million) for minor work to extend the life of H2 cars by 2 to 3 years to permit their replacement in a single, larger order with the H4 cars; and subsequently.

 (2)An H2 and H4 replacement project for 164 cars between 2003 and 2005 at a total cost of $560 million based on an all inclusive price of approximately $3.3 to 3.4 million per car. This is budgeted as a new contract since any options to purchase additional cars through the existing T1 contract with Bombardier will expire soon.

 The current T1 contract with Bombardier was approved in December, 1992 by the Commission and Metro Council and awarded at $493 million with provision for adjustment due to escalation. The contract included options which expire soon, to purchase additional cars to extend the T1 contract .

Discussion:

 Over the last two to three months, staff have reviewed the feasibility of and estimated a realistic cost for a major overhaul of the H2 and H4 fleets to extend their life to 45 years. In addition, staff have been negotiating with Bombardier for an extension to the existing T1 contract to replace the H2 and H4 cars at a significantly lower price. As a result, the Commission is faced with the following three options (as summarized in Table 5 below) regarding subway car requirements, although the third option of overhauling subway cars to extend their life to 45 years is very risky and not considered practical:

 (1)Purchase T1 cars now at a significantly reduced price over current contract price; or

 (2)Replace the H2 and H4 cars between 2002 - 2005 as currently shown in the 1998-2002 Capital Program; or

 (3)Overhaul the H2 and H4 cars to achieve up to a 45 year life.

Table 5 - SUMMARY OF AVAILABLE OPTIONS

 In making a decision on which option to select, there are two comparisons required. First, a comparison of buying now versus buying later (Option 1 vs. Option 2) and then depending on the outcome of that analysis, a comparison of the preferred buy option versus a major overhaul of the H2/H4 fleets (Option 1 or 2 vs. Option 3).

 Option 1 vs. Option 2: Purchase Cars Now or in 2002/2005:

 Option 1 is the preferred and recommended option based on a comparison between the cost to purchase 156 T1 cars now at a significantly lower price per car including consideration of the interest costs associated with advancing the expenditure of funds (Option 1), versus the cost to purchase replacement cars in 2002-2005 at an estimated higher cost (Option 2).

 The cost of 156 cars is $307 million (156 cars at $1.97 million, not including GST rebate), under Option 1 and $515 million (156 cars at $3.3 million) under Option 2. Based on a net present value comparison, the discounted costs for Option 1 and 2 are $270 million and $369 million respectively, which represents a net saving of $99 million for Option 1.

 In addition, extending the T1 contract now to replace the H2 and H4 cars would provide a more uniform fleet with a larger number of T1 cars with the same configuration. This would reduce inventory requirements and provide more cars with improved operational, maintenance and passenger access/comfort features.

 Also, if the H2 and H4 replacements are purchased now, the 80 H4 cars to be replaced will be stored pending a decision on the City of Toronto's bid for the 2008 Olympics. If the City is successful, these cars could be refurbished with minimal investment for use to handle the additional short term load on the transit system expected during the Olympic games. Prior to use in the Olympics, these cars would occasionally be used as "trippers" to ensure they remain operational. When no longer required, the vehicles will be sold in the normal fashion in the best interests of the Commission.

 The estimated cost per car of $3.3 million for Option 2 is consistent with the numbers used in the 1998-2002 Capital Program, which was based on the current contract price for a T1 subway car ($2.5 million) adjusted for inflation based on delivery. The price also assumes a new contract with either the current or a new supplier with all the normal costs associated with a new order including engineering, development, proto-typing, tooling and production start-up costs. However, these costs would be amortized over a smaller 164 car order as compared to the existing T1 contract for 216 cars plus the proposed 156 car option (which has helped to reduce the price for extending the T1 contract now). In any event, in order for the two options to be equal, the purchase price of the new cars in 2003-2005 would need to be $2.5 million per car and this is not considered a reasonable or practical expectation.

 Option 1 vs Option 3: Replace Cars Now or Overhaul H2/H4:

 Option 1 is the preferred and recommended option based on a comparison of the average cost per year of service between purchasing 156 new cars with a 30 year life at $1.97 million/car, versus Option 3 involving a major overhaul of 30 year old cars at a cost of $1.2 to $1.4 million/car to extend their life to 45 years (a 15 years increase at 60 percent to 70 percent of the price of a new car) while enjoying none of the benefits of the new car technology in the areas of operational efficiency, maintenance and passenger access/comfort features.

 A comparison reveals the much higher cost associated with overhauling 30 year old cars as the average cost per year of service for Option 1 (purchase new) is $10.2 million (156 cars at $1.97 million/car over a 30 years of life) versus Option 3 (overhaul) which is $14.6 million (156 cars at $1.2-1.4 million/car over a 15 year life). Since the expenditures will occur in approximately the same time period, interest cost differences are negligible.

 Additionally, undertaking a rebuild program for cars at the end of their useful life to further extend their life to 45 years is considered very risky. Staff have no experience in rebuilding subway cars and while staff are rebuilding buses of a particular design with structures conducive to a rebuild, a subway car rebuild is a much more complicated and expensive venture. While staff are hopeful that a subway car rebuild will allow the cars to last 45 years, there is concern that this may be overly optimistic as it has never been done before.

 Negotiations with Bombardier:

 The negotiations with Bombardier Inc. to purchase 156 replacement subway cars are based on an option to extend the current T1 contract, however this opportunity is only available for a limited period of time. Thereafter, the options that Bombardier has with its major component suppliers based on the original T1 signed in 1992 contract will expire.

 The negotiated agreement also includes contract security (performance bond or letter of credit) for 25 percent of the value of the contract extension, the costs for which would be shared equally by Bombardier and the Commission.

 The significantly reduced price negotiated with Bombardier relative to the current contract price is a result of a unique, but temporary situation. First, Bombardier will complete the current T1 contract in late 1999 and there are currently no new orders to occupy their Thunder Bay facility and Bombardier may have to reduce its operation if this situation does not change. Second, under the original contract Bombardier had negotiated prices for components from its suppliers which are still in effect (but only for a limited time) and which are very attractive relative to current market prices. Third, based on the quantity of cars being considered, staff have negotiated a significant quantity discount based on adding 156 additional cars to the existing 216 car order based on economies of scale, and continuity of production, resulting in greater productivity and lower labour costs to assemble the cars at Thunder Bay. Fourth, staff have also negotiated special terms for this extension relating to payment/cashflow and contract security issues and improvements to provisions in warranty/reliability, delivery and liquidated damages included in the original T1 contract. Staff have taken advantage of a unique situation to establish a significantly reduced price with improved terms, however this situation is temporary and Bombardier can only offer it for a limited period of time.

 Justification:

 The H2 and H4 subway cars are reaching the end of their useful life and will need to be replaced in the near future. The purchase of 156 T1 cars now to replace H2/H4 cars represents the best option available to the Commission.

 The purchase of H2/H4 replacement cars now at the negotiated lower price will result in significant saving in the amount of $99 million (net present value) compared to purchasing replacement cars in 2002-2005 as planned in the current 1998-2002 Capital Program.

 The purchase of replacement cars now also represents a significantly lower average cost per year of service than overhauling 30 year old cars to extend their life to 45 years.

 Funds are currently available in the 1998-2002 Capital Program for the purchase of 156 cars within the existing funding envelope based on advancing the expenditure of funds.

 The purchase of 156 T1's to replace the H2/H4 subway cars will result in a more uniform fleet and offer operational, maintenance and passenger access/comfort features. The 80 H4's to be replaced can be stored for possible use to address additional service requirements expected during the 2008 Olympics pending a decision on the outcome of the City of Toronto's bid.

 Appendix 1

 Procurement Of Replacement Subway Cars

 Summary Of Total Estimated Project Costs

 Note:The estimated cost for escalation and foreign exchange for the 156 car purchase is $8.1 million, however sufficient funds are expected to be available in the existing T1 Contract due to current under expenditures to cover this expense.

 (A copy of Staff Summary Sheet appended to the report dated May 21, 1998, from Mr. Vincent Rodo, General Secretary, Toronto Transit Commission, has been forwarded to all Members of Council with the agenda of the Strategic Policies and Priorities Committee for its meeting on May 29, 1998, and a copy thereof is also on file in the office of the City Clerk.)

 (Report dated May 25, 1998, addressed to the

Budget Committee from the

Chief Financial Officer and Treasurer)

 Purpose:

 To modify the 1998 Capital Works Program of the TTC to include the purchase of 156 subway cars to replace the existing H2 and H4 subway cars (project #422), and to seek authority for specific gross financing for the project.

 Financial Implications:

 The recommendations contained in this report would result in an increase in financing requirements in 1998 of $69 million. However, the total funding requirements for capital projects for 1998-2002 will not change significantly from the current projections as a result of the combination of the bus purchase deferrals and the advanced purchase of subway cars (although additional operating funds may be required to fund the expansion of the bus rebuild program implicit in the bus purchase deferral). Concurrently, as result of the lower price of subway cars resulting from the recommended extension of the current contract, the long term expenditure in subway car procurement will be reduced in a net present value amount of approximately $99 million from the current projections.

Recommendations:

 It is recommended that:

 (1)an increase to the 1998 gross capital budget of the TTC for project #422 - 156 subway cars (H2 & H4 Replacements) be approved in the amount of $69 million;

 (2)new gross financing authority to project #422 - 156 subway cars (H2 & H4 Replacements) be approved in the amount of $300.3 million; and

 (3)appropriate staff be authorized to undertake any necessary actions to implement these initiatives.

 Council Reference / Background:

 At its meeting on April 29 and 30, 1998, Council adopted the 1998 Capital Budget for the Toronto Transit Commission which did not included the purchase of subway cars to replace the existing H2 and H4 cars. The related project was anticipated by the TTC to start in the year 2001, involving the purchase of 164 cars at a total estimated cost of $560 million.

At its meeting on May 20, 1998, the Commission adopted a report from the Chief General Manager of the TTC which recommended: (i) to advance the procurement of 156 replacement subway cars for the H2 and H4 fleets to coincide with completion of the current T1 subway car contract at a total cost of $300.3 million and (ii) to defer the purchase of 391 buses in the 1998-2002 bus acquisition program, eliminate the H2 life extension project and allocate these funds to the purchase of 156 T1 subway cars for delivery in 1999 through 2001.

 Discussion:

 The H2 and H4 subway cars were purchased between 1971 and 1975. Based on a service life of 30 years the cars are scheduled for replacement starting in 2001. Accordingly, the TTC capital expenditure projections associated to the approved 1998 capital budget included the H2/H4 replacement through years 2002 to 2005.

 The TTC report indicates that an opportunity currently exists to replace the H2 and H4 cars with T1's at a savings of approximately $500 thousand per car over the current contract price allowing the current suppliers to continue uninterrupted production of T1's.

 Based on the TTC estimates, the advanced purchase of cars will result in a total lower expenditure of $232 million in relation to the purchase of the same number of cars at the estimated price included in the current TTC capital projections, and the resulting net present value of the savings is approximately $100 million. The TTC calculations are based on reasonable assumptions and Finance concurs with the conclusions of the analysis.

 The Commission at the same time approved the deferral of the bus procurement plan of the TTC as a result of: (i) an extension of the life of monocoque buses to 24 years (a 6-year extension) through the overhaul program currently being funded from the operating budget; and (ii) the need to gain a minimum of one year of operating experience to fully assess quality issues and the impact of the use of low floor buses before purchasing additional buses.

 The combination of both measures (T1 advanced purchase and bus procurement deferral) will result in a smoothing of the capital expenditures of the TTC in the future years, in addition to the already noted savings related to the acquisition of the subway cars under the currently recommended alternative. However, the 1998 gross capital expenditures will increase by $69 million as a result of the H2/H4 subway car replacement project and a further $80 million will be required in 1999, as compared to the TTC 1998-2002 capital budget.

 The revised projections include the assumption of the continuation of the bus rebuild program initiated in 1997. The 1998 operating budget included funds for the rebuild of 50 buses to extend their service life from 18 to 24 years. The deferral of the bus purchases is based on rebuild program comprising: 110 buses in 1998, 150 buses in 1999 and 2000, and 90 buses in 2001, which will increase the fleet in a manner that will provide for growth at 2 per cent per year.

 The table below indicates the impact of the T1 advanced purchase and bus procurement deferral on the current projections of capital expenditures.

 Vehicle Procurement ($ Million)

 19981999200020012002Total

Original Projections

 #422 - 164 Subway Cars

(H2/H4 Replacement)0.00.00.184.030.9115.0*

H2 Life Extension (included in Project

#460 Subway Car Overhaul)0.00.02.02.10.04.1

Bus Purchase Projects21.780.645.662.362.3272.5

 Total Original Projections 21.780.647.7148.493.2391.6

 *Post-2002 expenditures of $445.0 million and total project cost of $560.0 million.

 Revised Projections

 #422 - 156 Subway Cars

(H2/H4 Replacement)69.0138.352.240.80.0300.3

H2 Life Extension (included in Project

#460 Subway Car Overhaul)0.00.00.00.00.00.0

Bus Purchase Projects21.222.70.047.60.091.5

 Total Revised Projections90.2161.052.288.40.0391.8

  19981999200020012002Total

 Difference (Revised - Original)

 #422 - H2/H4 Replacement69.0138.352.1(43.2)(30.9)185.3*

H2 Life Extension (included in Project

#460 Subway Car Overhaul)0.00.0(2.0)(2.1)0.0(4.1)

Bus Purchase Projects(0.5)(57.9)(45.6)(14.7)(62.3)(181.0)

 Total68.580.44.5(60.0)(93.2)0.2

 *If post-2002 expenditures are included and the original project is adjusted to reflect the revised number of subway cars (156 instead of the original 164), the difference is as follows:

 Original Project (adjusted) = $532.7 million

Less Revised Project = $300.3 million

Difference = $232.4 million

 Conclusions:

 The advanced purchase of cars recommended by the TTC, based on savings of approximately $500 thousand per car over the current contract price, will result in a total lower expenditure of $232 million in relation to the purchase of the same number of cars at the estimated price included in the current TTC capital projections, and a resulting net present value of the savings of approximately $100 million. Concurrently, the bus purchase deferral already adopted by the TTC will reduce the increase in capital financing resulting from the advanced expenditure. It is therefore recommended that the purchase of 156 subway cars to replace the existing H2 and H4 subway cars be approved

 Contact Names:

 Rob Hatton, 392-9149

Andres Hachard, 392-5377.