When to choose PPP - Workshop 03 - 26 April

RMIT PPP Lecture Series When to choose PPP and when not to April 2012

Speaker Darrin Grimsey Partner, Infrastructure Advisory Tel: +61 3 9655 2519 Fax: +61 3 8650 7705 Email: darrin.grimsey@au.ey.com Darrin Grimsey is Partner with Ernst & Young’s Infrastructure Advisory Group in Melbourne and a leading adviser on infrastructure projects in Australia. He specialises in the delivery of infrastructure projects including commercial, strategic and financial advice, project structuring, risk identification and contract negotiations. He has extensive experience advising governments in Australia and elsewhere on infrastructure policy and guidelines well as delivering projects in health, education, corrections, justice and water.

He was lead financial and commercial adviser to the South Australian Government on its groundbreaking $2 billion New Royal Adelaide Hospital PPP project. Darrin worked with the Government on the outline business case in 2007 through to financial close earlier this year. Darrin also advised the Victorian Government on its $1 billion Victorian Comprehensive Cancer Centre that reached financial close in December 2012. Darrin has advised on several other health projects at business case and transaction stage in Australia and also the UK. Darrin has published several papers in leading peer reviewed academic journals and books dealing with various issues relating to infrastructure, including Public Private Partnerships: the revolution in infrastructure provision and project finance which won the 2006 Blake Dawson Waldron award for business literature in Australia. Recently he has written several published articles for the faircountmeddiagroup on financing infrastructure including a series for the Transforming the Nation’s Healthcare in Australia publication.

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Overview ►

Evolution of the PPP model in Australia

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How do you choose the right procurement model?

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Case studies

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Exercise

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PPP model Availability-based PPP (property models, output models and back to BOOT)

BOO / BOOT 2002

2008 2004 2003

1987

2009

2012

2007

2005

2013

2011

2006

2010 ?

BOOTs

NSW Schools I Risdon Prison Redevelopment

Toll Roads Sydney Harbour Tunnel

1st Generation Hospitals Casey Hospital Southern Cross Station

Establishment of PV in VIC DTF

Long Bay Prison & Forensic Hospital

Melbourne Convention Centre NSW Schools II

Perth CBD Courts

2nd Generation Hospitals

PV in Schools

Royal North Shore

Ararat Prison NRAH

SA Police Station and Courts Southbank TAFE Darwin Waterfront Melbourne Showgrounds

Royal Children’s

Victorian Desalination Plant

New PPP? NT Prisons

SA Schools SEQ Schools

Establishment of IA and PPP Guidelines

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Midlands Hospital

Geographic spread Closed Projects, 2000 - 2012

Commonwealth: 3 NT: 3

QLD: 5

NSW: 20 WA: 3 SA: 6 VIC: 23

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Geographic spread

Closed, procured and potential projects, 1988 - 2012 Projects: Closed, In Procurement and Potential by state

Projects closed by state by capital value ($m)

Projects in procurement by state by capital value ($m)

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Market model

1990s

2000

2012+

2008

2001

Single Corporate

2010

Sponsor & Contractor

Financier Led v

GFC AUD reaches a record low of 47.75 US cents (Apr.)

AUD and USD reach parity (Oct.) Establishment of IA and PPP Guidelines (Nov.)

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Procurement options analysis methodology Version 1: IA National PPP Guidelines

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Example: Application of value drivers to potential models Fees basedon fixed amount or percentage of cost

High

Risks remain with Cost Plus % the client. Very complex, highly Cost Reimbursed – Fixed Fee uncertain projects.

Time is generally critical and costs Early Contractor Involvement secondary

Combines relationship basedcontractingwith different degrees of fixed fees/ percentagefees/gain -pain sharing arrangements Complex,uncertain, high risk projects

Alliance Early Contractor Involvement ConstructionManagement Management Contractor Traditional contracting arrangements.With more definedscope and contract.

ConstructionOnly (Designseparately procured) Scheduleof Rates / Bill of Quantities

Known technology, scopefor innovation, defined specification

–

Design and Construct – Fixed Price Low

PPP Low

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Price Certainty Risk Transfer Innovation

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High

Role of the private sector (continued)

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Southern Cross Signalling Traditional Procurement Case Study ► ►

Design and install an automated signalling system at Southern Cross Station Developing a CBI system which includes: ► ► ► ► ►

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Establishing a connected Trackside Signalling System which includes: ► ► ►

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Completion of the signalling design Supply and installation of the CBI control equipment Factory acceptance testing Testing and commissioning Post commissioning support.

Supply and installation of signalling cabling and equipment Relocation of the ARTC S2 equipment Testing of trackside signalling prior to commissioning of the CBI

Track and Civil Work which includes: ► ► ► ►

Trackwork Drainage and ancillary civil works Extending Platform 2 Construction of the Motorail.

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Southern Cross Signalling Key Decision Drivers Driver

Flexibility to control

Time to market

Price certainty

Risk transfer

Contractor’s incentive

Rating

High-medium

Medium-low

Medium-low

Medium

Medium

Rationale DOI has identified a number of key risks which it is best placed to manage and therefore should be retained by the State These risks include, inter alia, design acceptance, interface risk between contractors, access / occupation risk and stakeholder management risk The workshop attendees therefore viewed that the significance of these risks would require the State to contract on the basis that it retains a relatively high level of flexibility to be able to control the Project The Project has been identified as a priority since 1990 and should have been commissioned in 1997. Therefore from an overall safety point of view, the Project is regarded as an urgent priority This driver was given a low rating as the workshop attendees viewed that there would be little difference in timing in the delivery of the Project between the various procurement models given that the design solution is highly specified and already in progress However, factors favouring a medium rating include: the requirement to spend the approved budgeted amount (i.e. representing part of the budgeted amount for the Project) in the current financial year; and the need to have civil and track work progressed in order for UGI to be able to commission the CBI. The design of the CBI is expected to be completed by March 2007 On the balance the workshop participants rated this driver medium-low It was acknowledged by the workshop attendees that although it would be attractive to have price certainty (by transferring the risk), it would be difficult to achieve this given the number of key risks proposed to be retained by the State However, budget certainty is capable of being achieved if the State is able to retain control over the construction programme.

A number of key risks have been identified as being retained by the State, although contractually certain elements of such risks could potentially be shared For example, liquidated damages could apply in instances where delays have arisen from inappropriate construction programming conflicting with access arrangements On this basis, this driver was rated as medium The tight specification of the State’s functional and operational requirements limits the contractor’s incentive to include innovation in relation to the CBI However, design and construction of drainage works or the applied construction methodology were identified as areas for possible innovation

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Southern Cross Signalling Procurement Recommendation Fees basedon fixed amount or percentage of cost

High

Risks remain with Cost Plus % the client. Very complex, highly Cost Reimbursed – Fixed Fee uncertain projects.

Time is generally critical and costs Early Contractor Involvement secondary

Combines relationship basedcontractingwith different degrees of fixed fees/ percentagefees/gain -pain sharing arrangements Complex,uncertain, high risk projects

Alliance Early Contractor Involvement ConstructionManagement Management Contractor Traditional contracting arrangements.With more definedscope and contract.

ConstructionOnly (Designseparately procured) Scheduleof Rates / Bill of Quantities

Known technology, scopefor innovation, defined specification

–

Design and Construct – Fixed Price Low

PPP Low

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Price Certainty Risk Transfer Innovation

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High

Victorian Comprehensive Cancer Centre Case Study

Authority: Department of Human Services

Construction start: November 2011

Budget: $1.0bn* (capital)

Construction finish: End 2015

Key issue: Green field on South side. Refurbishment and interface with Royal Melbourne on North side.

Partnerships Victoria procurement model with a design and construct arrangement for the North Works at the RMH City Campus embedded ► PPP transfers maintenance risk, site risk, asset capability risk and interface risk to the private sector ► PPP delivery provides optimal whole-of-life costs ► Sufficient market depth ► Traditional on North Works to manage interface ► RMH provide FM services to North side

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Victorian Comprehensive Cancer Centre Case Study

What about Box Hill and Bendigo?

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Exercise – North West Rail Link

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NWRL – Reference Scope Key components of the c$7.5 billion NWRL’s Reference Scope are: ► Total length 23 kilometres between Epping and Cudgegong Road, Rouse Hill; ► Electrified heavy rail, twin track, bi-directional; ► Connection into the existing rail network at Epping (underground); ► Eight new stations ► 15 kilometres of twin bored, lined tunnels, each approximately 7 metre internal diameter; ► Four stations are underground (to be constructed using cut and cover technique), one is in a cutting, two are elevated and one is at grade; ► 4,000 car parking spaces spread across five sites; ► Major bus interchange facilities at Rouse Hill and Castle Hill; ► 3.5 kilometre elevated ‘skytrain’ viaduct between Bella Vista and Rouse Hill – reduced cut and cover; ► Bus, pedestrian, car, cycling and easy access facilities at all stations; ► Stabling yard at Tallawong Road, Rouse Hill; and ► Ancillary infrastructure, rolling stock, systems and services.

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NWRL – Government’s Core Parameters The Government’s Core Parameters for the NWRL are: ►

A heavy rail line between Rouse Hill and Epping

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Provides Services to the CBD

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Commencement of substantial civil works (i.e. tunnel boring machines) in 2014

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NWRL – PPP Drivers PPP Drivers

Description

Improved risk management

Delivers a long term value for money funding that balances cost of funds with risk and affordability, as evidenced by more rigorous risk evaluation and transfer to the private sector of those risks it is best able to manage, including those associated with providing specified services, asset ownership and whole-of-life asset management.

Ownership and whole-oflife costing

Improved efficiency as design and construction become fully integrated up-front with operations and asset management.

Single point of contact

Ongoing service delivery, operational, maintenance and refurbishment costs become a single party’s responsibility for the length of the contract period.

Innovation

Asset Utilisation

Whole-of-Government outcomes

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Wider opportunities and incentives for innovative solutions to deliver service requirements. Opportunities may include: ► Bundled services, through a package deal for all non-core services; ► Upgrades of associated and complementary infrastructure; and ► Packaged Information Systems.

Reducing costs to Government, as a sole user, through more efficient design to meet performance (i.e. service delivery) specifications and by creating complementary opportunities to generate revenue from use of the asset by others.

Contained within the objectives and strategies of the Government’s Procurement Policy.

These include non-asset and non-price related value-adding outcomes of wider interest to the Government, such as socio-economic and environmental outcomes.

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NWRL – Key Issues Key Issue

Impact

Will customer outcomes be enhanced by operating the NWRL through to Chatswood/ St Leonards as a single line?

Packaging options involving a single private sector infrastructure operating company beyond NWRL are worth considering.

How will the performance of the existing rail network (e.g.

Epping onwards) impact NWRL specific service outcomes?

This would influence the level of performance risk transfer that could be allocated to potential NWRL private sector parties.

Will NWRL create an opportunity for O&M efficiencies along the broader rail network (e.g. Epping to Chatswood line), as well as VFM in NWRL project delivery?

Explore O&M bundling opportunities on existing parts of the network and design a performance regime that caters for flexibility of rail operation arrangements e.g. franchising.

How will NWRL interface with the existing road and rail network from an operational perspective, and do those interfaces impact procurement in areas such as risk allocation and contract packaging?

International experience shows that having a single organisation responsible for the management of the asset will reduce interface risk during operations.

Are there alignment and tunnelling options that change procurement strategy, risk profile and/or cost/affordability?

This would need to be considered in the financing strategy and could change the delivery strategy.

How should the project be split from a contract packaging perspective?

Aim of optimising VFM taking into account private finance capacity constraints.

What would be the most effectively procurement model for each of the contract packages?

Overall aim of achieving the project’s objectives while achieving efficient risk allocation and overall VFM.

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Exercise ►

The Client has asked you to identify 2 potential procurement options for the NWRL Project. Based on the information provided: ►

► ►

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1. Identify 2 potential options for delivery (eg single package of works? Multiple packages? If multiple, how are works split?).

Outline the key advantages and disadvantages of each option 2. Which package(s) may be strong candidates for PPP delivery?

Justify your answer against the PPP value drivers 3. Which package(s) may be strong candidate for traditional delivery? Justify your answers against the value drivers

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