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RMIT PPP Lecture SeriesWhen to choose PPP and when not to
April 2012
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Speaker
Darrin GrimseyPartner, Infrastructure AdvisoryTel: +61 3 9655 2519Fax: +61 3 8650 7705Email: [email protected]
Darrin Grimsey is Partner with Ernst & Young’s Infrastructure Advisory Group in Melbourne and a leadingadviser on infrastructure projects in Australia. He specialises in the delivery of infrastructure projectsincluding commercial, strategic and financial advice, project structuring, risk identification and contractnegotiations. He has extensive experience advising governments in Australia and elsewhere oninfrastructure 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 NewRoyal Adelaide Hospital PPP project. Darrin worked with the Government on the outline business case in 2007 through tofinancial close earlier this year. Darrin also advised the Victorian Government on its $1 billion Victorian ComprehensiveCancer Centre that reached financial close in December 2012. Darrin has advised on several other health projects atbusiness 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 issuesrelating to infrastructure, including Public Private Partnerships: the revolution in infrastructure provision and projectfinance which won the 2006 Blake Dawson Waldron award for business literature in Australia. Recently he has writtenseveral published articles for the faircountmeddiagroup on financing infrastructure including a series for the Transformingthe Nation’s Healthcare in Australia publication.
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© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Overview
► Evolution of the PPP model in Australia
► How do you choose the right procurement model?
► Case studies
► Exercise
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
PPP model
2011
NT Prisons
2013
?
Availability-based PPP (property models, output models and back to BOOT)
Casey Hospital
BOO / BOOT
2002
Establishment of PV in VIC DTF
Establishment of IAand PPP Guidelines
2008
Long Bay Prison& ForensicHospital 2nd Generation
Hospitals
New PPP?
BOOTs
1st GenerationHospitals
Toll Roads
2003
NSW Schools I
1987
Sydney HarbourTunnel
Royal NorthShore
2004
Perth CBDCourts
2005
SA Police Station andCourts
2006
MelbourneConvention Centre
2007
RoyalChildren’s
2009
VictorianDesalination Plant
2010
Ararat Prison
2012
MidlandsHospital
NRAH
Southern CrossStation
SA Schools
SEQ Schools
PV in Schools
NSWSchools II
Southbank TAFE
DarwinWaterfront
MelbourneShowgrounds
Risdon PrisonRedevelopment
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Geographic spreadClosed Projects, 2000 - 2012
VIC: 23
NSW: 20
QLD: 5
SA: 6
WA: 3
NT: 3Commonwealth: 3
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Geographic spreadClosed, procured and potential projects, 1988 - 2012
Projects closed by state bycapital value ($m)Projects: Closed, In Procurement and Potential by state
Projects in procurement bystate by capital value ($m)
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
v
Market model
SingleCorporate Financier Led
Sponsor &Contractor
1990s 2000 2008 2012+
Establishment of IA and PPP Guidelines (Nov.)
GFC
2010
AUD and USD reach parity (Oct.)
2001
AUD reaches a record low of 47.75 US cents (Apr.)
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Procurement options analysis methodologyVersion 1: IA National PPP Guidelines
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.9
Example: Application of value drivers topotential models
Risksremain withthe client. Verycomplex, highlyuncertain projects.Time is generally critical and costs secondary
Complex, uncertain, high risk projects
Known technology, scope for innovation, defined specification
Fees based on fixed amount or percentage of cost
Cost Plus %
Cost Reimbursed – Fixed Fee
Combines relationship based contracting with different degrees of fixed fees/ percentage fees/gain -pain sharing arrangements
Alliance
Construction Management
Management Contractor
Traditional contracting arrangements. With more defined scope and contract.
Construction Only (Design separately procured) –Schedule of Rates / Bill of Quantities
Design and Construct – Fixed Price
High
High
Low
Low
Price CertaintyRisk Transfer
Innovation
Early Contractor Involvement
Early Contractor Involvement
PPP
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.10
Role of the private sector (continued)
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Southern Cross SignallingTraditional Procurement Case Study► Design and install an automated signalling system at Southern Cross Station► Developing a CBI system which includes:
► Completion of the signalling design► Supply and installation of the CBI control equipment► Factory acceptance testing► Testing and commissioning► Post commissioning support.
► Establishing a connected Trackside Signalling System which includes:► 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.
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Southern Cross SignallingKey Decision Drivers
Driver Rating Rationale
Flexibility to controlHigh-medium
DOI has identified a number of key risks which it is best placed to manage and therefore should be retained by theState
These risks include, inter alia, design acceptance, interface risk between contractors, access / occupation risk andstakeholder management risk
The workshop attendees therefore viewed that the significance of these risks would require the State to contract onthe basis that it retains a relatively high level of flexibility to be able to control the Project
Time to marketMedium-low
The Project has been identified as a priority since 1990 and should have been commissioned in 1997. Thereforefrom 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 inthe delivery of the Project between the various procurement models given that the design solution is highlyspecified 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; andthe 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
Price certaintyMedium-low
On the balance the workshop participants rated this driver medium-lowIt 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 bythe State
However, budget certainty is capable of being achieved if the State is able to retain control over the constructionprogramme.
Risk transferMedium
A number of key risks have been identified as being retained by the State, although contractually certain elements ofsuch risks could potentially be shared
For example, liquidated damages could apply in instances where delays have arisen from inappropriate constructionprogramming conflicting with access arrangements
On this basis, this driver was rated as medium
Contractor’sincentive
MediumThe tight specification of the State’s functional and operational requirements limits the contractor’s incentive to
include innovation in relation to the CBIHowever, design and construction of drainage works or the applied construction methodology were identified as
areas for possible innovation
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Southern Cross SignallingProcurement Recommendation
Risksremain withthe client. Verycomplex, highlyuncertain projects.Time is generally critical and costs secondary
Complex, uncertain, high risk projects
Known technology, scope for innovation, defined specification
Fees based on fixed amount or percentage of cost
Cost Plus %
Cost Reimbursed – Fixed Fee
Combines relationship based contracting with different degrees of fixed fees/ percentage fees/gain -pain sharing arrangements
Alliance
Construction Management
Management Contractor
Traditional contracting arrangements. With more defined scope and contract.
Construction Only (Design separately procured) –Schedule of Rates / Bill of Quantities
Design and Construct – Fixed Price
High
High
Low
Low
Price CertaintyRisk Transfer
Innovation
Early Contractor Involvement
Early Contractor Involvement
PPP
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Victorian Comprehensive Cancer CentreCase Study
Partnerships Victoria procurement model with a design andconstruct arrangement for the North Works at the RMH CityCampus embedded
► PPP transfers maintenance risk, site risk, assetcapability risk and interface risk to the privatesector
► 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
Authority: Department of Human Services
Budget: $1.0bn* (capital)
Construction start: November 2011
Construction finish: End 2015
Key issue: Green field on South side. Refurbishment and interface with Royal Melbourne on North side.
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Victorian Comprehensive Cancer CentreCase Study
What about Box Hill and Bendigo?
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.16
Exercise – North West Rail Link
© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
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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© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
NWRL – Government’s Core Parameters
The Government’s Core Parameters for the NWRL are:
► A heavy rail line between Rouse Hill and Epping
► Provides Services to the CBD
► Commencement of substantial civil works (i.e. tunnelboring machines) in 2014
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© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
NWRL – PPP Drivers
PPP Drivers Description
Improved riskmanagement
Delivers a long term value for money funding that balances cost of funds with risk andaffordability, as evidenced by more rigorous risk evaluation and transfer to the privatesector of those risks it is best able to manage, including those associated withproviding specified services, asset ownership and whole-of-life asset management.
Ownership and whole-of-life costing
Improved efficiency as design and construction become fully integrated up-front withoperations and asset management.
Single point of contact Ongoing service delivery, operational, maintenance and refurbishment costs become asingle party’s responsibility for the length of the contract period.
Innovation Wider opportunities and incentives for innovative solutions to deliver servicerequirements. Opportunities may include:► Bundled services, through a package deal for all non-core services;► Upgrades of associated and complementary infrastructure; and► Packaged Information Systems.
Asset Utilisation Reducing costs to Government, as a sole user, through more efficient design to meetperformance (i.e. service delivery) specifications and by creating complementaryopportunities to generate revenue from use of the asset by others.
Whole-of-Governmentoutcomes
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 tothe Government, such as socio-economic and environmental outcomes.
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© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
NWRL – Key Issues
Key Issue ImpactWill customer outcomes be enhanced by operating theNWRL through to Chatswood/ St Leonards as a single line?
Packaging options involving a single private sectorinfrastructure operating company beyond NWRL areworth 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 risktransfer that could be allocated to potential NWRLprivate sector parties.
Will NWRL create an opportunity for O&M efficiencies alongthe broader rail network (e.g. Epping to Chatswood line), aswell as VFM in NWRL project delivery?
Explore O&M bundling opportunities on existing parts ofthe network and design a performance regime thatcaters for flexibility of rail operation arrangements e.g.franchising.
How will NWRL interface with the existing road and railnetwork from an operational perspective, and do thoseinterfaces impact procurement in areas such as riskallocation and contract packaging?
International experience shows that having a singleorganisation responsible for the management of theasset will reduce interface risk during operations.
Are there alignment and tunnelling options that changeprocurement strategy, risk profile and/or cost/affordability?
This would need to be considered in the financingstrategy and could change the delivery strategy.
How should the project be split from a contract packagingperspective?
Aim of optimising VFM taking into account privatefinance capacity constraints.
What would be the most effectively procurement model foreach of the contract packages?
Overall aim of achieving the project’s objectives whileachieving efficient risk allocation and overall VFM.
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© 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Exercise
► The Client has asked you to identify 2 potentialprocurement options for the NWRL Project. Based on theinformation provided:► 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 traditionaldelivery? Justify your answers against the value drivers
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