Major projects in Victoria: challenges, issues, and where to from here?

Major projects in Victoria: challenges, issues and where to from here?

Paul O’Connor

Sessional Lecturer & Doctoral CandidateSchool of Property, Construction and Project Management

Paul O'Connor 2RMIT University © 2013

Scope of this presentation

1. State of play for major projects in Victoria

2. Recent reviews and enquiries - how can major projects be better procured and implemented?

3. The alphabet soup of procurement options for major public sector infrastructure: traditional, alliance or PPP?

4. Addressing infrastructure project challenges and trends in times of fiscal austerity

5. PPPs: key drivers in Victoria and the story so far

6. Case studies - success stories and some areas for improvement…

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State of play for major projects in Victoria

Perceptions:

•Projects have been stalled through inaction

•Not enough focus on economic productivity

•Lack of holistic infrastructure vision

•Too much political focus on “debt” as BAD

• ‘Penny pinching’ at expense of future capacity

•Rising construction costs due to mining boom and resurgent union militancy

RMIT University © 2013

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Recent reviews and enquiries

Public Accounts and Estimates Committee inquiry into significant infrastructure projects (Dec 2012) found a number of key issues:

•Optimism bias (underestimating of costs and over estimating of benefits) was too prevalent

•Poor scoping & planning work = poor delivery

•Lack of suitable and available skillsets in PS

•Role confusion as ‘owner’, ‘investor’ & ‘deliverer’

•But more central scrutiny is positive development


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Context: infrastructure & development (1)

•Wide range of public infrastructure demand is forecast for many sectors:–Transport–Education–Health–Government accommodation/facilities–Utilities (water, sewerage, telecoms, power)

• Infrastructure ‘deficits’ are making larger calls upon scarce (shrinking?) government capital


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Context: infrastructure & development (2)

•Recurrent demands also increasing to fund essential citizen services

•Large and lumpy disbursements

•Debt/surplus funding raises fiscal issues:–Sovereign credit ratings linked to debt–‘Lazy’ balance sheets/inefficient allocations–Inter-generational equity of debt liabilities–Ongoing operations and maintenance liability plus depreciation and replacement funding


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Alphabet soup of procurement options

•Many options to procure infrastructure available:–Build to design (B)–Design and build (D and B)–Managing contractor (D and B)–Alliance (D and B)–JV (D, B and O) (and maybe F)–PPP/PFI (D,B, F, M) (and maybe O)

•Analysis of the profile of the infrastructure should drive the procurement strategy


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Funding projects in austere times

• Just as water always finds its course, a ‘good’ project will always find a sponsor and funding

•Austerity is a chance to get back to basics:–More work on cost-benefit analysis not just back of the envelope calculations and spin

–More scoping, planning and community engagement to de-risk and build buy-in

–More market engagement to find deliverer–More appropriate risk and cost sharing


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Benefits of a long term funding modelSmooth and predictable budget outlays

Promotes inter-generational equity

Embeds whole-of-life asset costing

Technology obsolescence better managed

Maintenance funding no longer discretionary

Operations can be kept contestable via regular market benchmarking or resets

Funding profile matches long-term institutional investors like pension or sovereign funds


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PPPs: Where did they come from?

• PPPs have been around for hundreds of years–Perrier Brothers had a drinking water concession in 1700s

• Modern PPPs started with the UK’s Private Financing Initiative launched in 1992:–Policy to extend Thatcher’s near-complete privatisation push–Kept and embraced by ‘New Labour’ when elected in 1997

• Seen as a way to smooth out demands upon the capital account for developed economies with high deficits

• Seen as one of Tony Blair’s “third way” vehicles to engage with the private sector and achieve public goals

• Seen as a way to speed up social and economic infrastructure renewal & promote delivery effectiveness


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What were the key drivers in Victoria?

•Two distinct periods–Pre-2000 – emerging PPP guidelines–Post-2000 – current PPP guidelines

•Pre-2000–Post recession period looking to kick start economy and

find “non-debt” capital methods

•Post-2000–Iconic and one-off complex projects–User pays (i.e. toll roads) and water treatment plants–Social infrastructure replacement and augmentation


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Why choose PPPs for infrastructure?

Value and size of the project

Technical complexity/novelty

Risk allocation profile (especially demand risk)

Scope for design/technical innovation

Maturity of the public sector project owner

Private sector interest/public sector need

Complementary projects to go with the PPP?


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Practical considerations for PPPs

For…

–Fixed capital payments over life of the asset

–Asset will return to public ownership

–Contract ‘locks in’ O and M funding

–Output specification drives service and asset quality

–Value for money

Against…

–Finding a good partner

–Funding availability (esp. due to GFC)

–Transparency of risk transfer premiums

–Up-front and high transaction costs

–Long term monitoring regime to maintain expected standards


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What has been achieved in a decade?

•UK has 500+ PFI projects with a capital value in excess of £28 billion

•Victoria has A$10.5 billion contracted in 21 projects (www.partnerships.vic.gov.au)

•Detailed policy and guidance suites have been developed in UK and Australia

•World Bank and ADB promoting PPPs

•PPPs being adopted in emerging economies


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SECTOR CASE STUDIES

Major PPP Projects:



PPPs in Action – Sector case studies

•Health

•Transport

•Education

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Health PPPs – some typical models

• DBFM – design, build, finance, maintain–Positive (refer to RWH

report and the RCH project summary)

–Negative (refer to PAC report on Paddington)

• DBFOM – design, build, finance, operate, maintain–(similar to privatisation?)



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RMIT University © 2013 19

Health PPPs – lessons & observations

•Transfer of design risk to private sector is only effective if State has clearly specified:–Present and future clinical models

–Present and future demand

–Expected functionality of the facility

–Non-negotiable building standards

•UK issues – quality of build in some facilities and fair profit share for refinancing gains

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Transport PPPs

RMIT University © 2013 Paul O'Connor 21

Road PPPs

Variety of models to consider

• ‘Toll road’ concession model–Successes: CityLink and EastLink in Melbourne –Failures: Sydney and Brisbane tunnels (over optimistic demand

forecasts and upfront payments to Government)

• HOT lane model–Augment existing corridor with express toll lane

• ‘Availability’ model–Used in UK with ‘shadow tolls’ –New PPP in Victoria – KPI not volume based

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Rail PPPs

• Infrastructure–London Underground

(refer to NAO reports)

•Rolling stock–(NSW)

•Facilities/interchange–Southern Cross Station

(refer to VAGO report)


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Transport PPPs - observations

•For roads –don’t be greedy and demand upfront payments, as this is

passed on via higher tolls to the public who may then boycott the route. (Refer to NSW AG report on tunnels)

•For rail–Understand the value drivers of the business and focus on

using private sector expertise to increase operational efficiency and reliability, as well as contain costs over the long-term. (Refer NAO reports on the underground)

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Education PPPs - Variety of models

• New build–Single site schools–Multiple site schools (refer PV

schools summary)

• Tertiary research precinct–LaTrobe University (refer

Biosciences summary)

• Refurbishment–UK building schools for the

future (refer NAO report)–Southbank TAFE (Brisbane)


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Education PPPs – some observations…

•Specify demand corridors and let private sector take site risk (PV schools)

•Multi-site deal is effective way to achieve quick build-out of many sites over a wide area

•Some risks of a “two class” system, due to poor asset maintenance in the State build sector

•Lock in of service payments reduces future flexibility (c.f. declining revenue base in Scotland)

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Other sectors?

• Prisons–Facilities only (DBFM)–Integrated correctional

services (DBFOM)

• Electricity–Independent power

producers

• Water–Town supply or desalination

plants


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PPPs: the future or a passing fad?• In Australia:

–Still only account for about 10% of total public sector asset investments (approx. $10.5 billion in Victoria across 10 years)

–Most are on balance sheet, no accounting advantage–User pays model (i.e. toll roads) becoming difficult due to problems with accuracy of traffic demand forecasting

–Some states pursuing Alliances more aggressively–Marginal cost of capital issue – cost and availability of private finance versus public sector debt raisings?

–Low hanging fruit exhausted? Iconic/innovative facilities likely to be overtaken by more ‘boring’ facilities (such as schools, water and sewerage)



Any questions?

• My contact details:

Paul O’Connor DipPer&OpsMgt, DipGovMgt, BA(AsianStudies), GradCertPPPs (Melb.), MPubInfra (Melb.)

School of Property, Construction and Project Management

RMIT University

E: <[email protected]>

M: +61 437 587 396

Date post:	28-Nov-2014
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Major projects in Victoria: challenges, issues, and where to from here?

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