doing business in australia seminar (infrastructure & construction)

Doing Business in Australia (Infrastructure & Construction)

Joint presentation with VGBO Tokyo

Celeste Koravos, Finance & Projects, Melbourne

4 August 2016

Email: [email protected]

Phone: +61 3 9274 5860 (office), +61 409 934 200 (cell)

Agenda

1. Victorian infrastructure market

2. Key participants

3. Competitive landscape

4. Procurement (overview, framework, TPP, probity, access)

5. Project entities and delivery structures (overview, alliances, risk transfer)

6. Forms of contract

7. Statutory regulation

8. Insurance

9. Disputes

10. Key success factors

24 August 2016Doing Business in Australia (Infrastructure & Construction)

Victorian infrastructure market

First ever "Infrastructure Plan" (February 2016) sets out challenges, opportunities and solutions for infrastructure in Australia

Population will reach 30 million by 2031

Infrastructure services will be increasingly automated

Greater risks of extreme weather

"Inspirations" are

Productive cities, productive regions

Efficient infrastructure markets

Sustainable and equitable infrastructure

Better decisions and better delivery34 August 2016Doing Business in Australia (Infrastructure & Construction)


First ever "Infrastructure Priority List" (February 2016) based on "top-down" audit of our infrastructure gaps and requirements and "bottom-up" consultations with govs, industry and communities

Victorian high priority initiatives (not static):

Melbourne urban road network congestion

Access to Melbourne airport

Melbourne outer western suburbs access to CBD

Connectivity between M80 and Eastlink in outer NE Melbourne

Melbourne outer northern suburbs access to CBD

Freight rail connection Murray Basin to Ports of Geelong and Portland

Melbourne aviation capacity

Melbourne container terminal capacity



Our appointments include:

$5.5 billion Regional Rail Link

$5 billion Level Crossing Removal Project

Advising Melbourne Water on Vic Desalination Project take-offs

Advising Melbourne Water on $2.2 billion capital investment program 2013 -2017

Advising VicRoads on M1 and M80 Upgrade Projects

Advising VicRoads on West Gate Bridge Strengthening Project

Advising bidding consortium on Melbourne Metro Project

Advising Vic Gov water authorities on network operations and maintenance issues

*Further resources: DLAP "National Infrastructure Construction Schedule" (please see Victoria hand-out or request copies for other States)


Key participants in Victoria

Government

State (VicRoads / Public Transport Victoria → "Transport for Victoria", Port of Melbourne, Department of Health & Human Services, Department of Justice, DEDJTR)

Federal (for cross-jurisdictional e.g. National Broadband Network)

Infrastructure Australia, Infrastructure Victoria

Industry Bodies

Infrastructure Partnerships Australia

International Project Finance Association

Financiers

Equity

"Big 4" Banks (ANZ, CBA, NAB, Westpac)

Foreign lenders

Export credit agencies


Competitive landscape

Low degree of market share concentration

Many small-scale businesses in narrow markets

Top players command <10 % revenue

Largest firms are multidisciplinary

Globalisation is low (CIMIC, Bechtel), with room for more


Procurement - overview

Procurement of infrastructure usually on contestable tender basis

Like Japan, may be publicly advertised, from formal pre-qualified list or informally sought from private list

Government procurement is usually publicly advertised

Tender processes range from simple to complicated (e.g. IT, Defence)

No body of public procurement law like EU; mixture of policies (guides, codes of practice), statute, regulations and common law

Like Japan, no specialised procurement bodies, and each government procures its own projects

*Further resources: DLAP "Doing Business in Australia (Infrastructure & Construction)" (please see hand-out)


Procurement - Victorian framework

Ministerial Direction No 1 - Tendering Provisions for Public Construction

Specialised policies for particular procurements, e.g. health infrastructure and PPPs

Victorian Industry Participation Policy. Tenderers need to show commitment to using local goods and services for public procurements over:

Melbourne metropolitan or statewide > AUD 3 million

Regional > AUD 1 million

Major Projects Skills Guarantee (new). Tenderers need to maximise use (10%) of local apprentices, trainees or engineering cadets for public procurements > AUD 20 million


Procurement - Victorian framework

Australian Consumer Law prohibits certain conduct, e.g. bid rigging.

*Further resources: DLAP animation "Bid Rigging" https://www.dlapiper.com/en/australia/focus/competition-law-compliance-bid-rigging/

*Further resources: DLAP and ACCC seminar on "Australian cartel law for Japanese businesses" (please ask for copy)


Procurement - impact of TPP

Government Procurement provisions set out in Chapter 15

Ensures Australian government (State and Federal) does not discriminate against foreign suppliers when assessing tenders and awarding contracts

Achieved through increased transparency & certainty

Applies to Victorian procurements for:

AUD 692,946 (goods & services)

AUD 9,759,072 (construction services)

One key change: Like Japan's Government Procurement Review Board, complaints should be handled by an impartial administrative or judicial authority that is independent of the procurement entity

No big impact on Japanese bidders

*Further resources: DLAP "Navigating a new era of trade in the Pacific-Rim" (please see hand-out)


Procurement - probity

Probity = integrity, fairness & honesty

Government refers to probity in general sense to mean good process demonstrated by transparency of actions, equity, confidentiality and managing conflicts of interest

In procurement, probity relates to proper and ethical conduct, and propriety in dealings with market

Probity is integral to the goal of achieving value-for-money outcomes

Examples of how Vic Gov does this:

Manage conflicts of interest

Make decisions based on merit only

Provide same information to all suppliers

Ensure supplier IP remains confidential


Procurement – access to Victorian

opportunities

Ministerial Direction No. 1: Tendering Provisions for Public Construction requires three pre-qualified tenderers OR public advertisement for:

Building & construction works > AUD 200,000

Related consultancy services > AUD 150,000

February 2016 update requires mandatory OH&S and IR criteria

Current tenders: https://www.tenders.vic.gov.au/tenders/tender/search/tender-search.do?action=advanced-tender-search-open-tender

Awarded contracts: https://www.tenders.vic.gov.au/tenders/contract/list.do?action=contract-view

National Infrastructure and Construction Schedule: https://www.nics.gov.au/

*Further resources: see hand-out DLAP National Infrastructure and Construction Schedule (Vic), or ask us for same for other states


Project entities

Selection depends on type of project and business strategy

Most project delivery businesses are incorporated (private or public co.). PPPs delivered by special purpose vehicles

However project alliances often involve unincorporated JV

Foreign participants need to consider tax issues (transfer pricing hot topic in Japan now) including GST and stamp duty

*Further resources: DLAP "Key issues for entry of Japanese businesses into the Australian market" (please ask for copy)


Project delivery structures - overview


Structure Details

• Construct only • Usually procured on lump-sum basis• Other pricing mechanisms include bill of

quantities or schedule of rates

• Design & construct• Design & build • Document & construct

• Used where there may be preliminary design (and at times when designer must be novated to design and construct contractor)

• Contractor responsible for design and construction

• Engineer, procure,construct

• Engineer, design, construct, maintain

• Common in greenfield projects with large procurements (e.g. plant and equipment)

• Contractor delivers project for fixed price based on fixed scope / schedule of scope

• Construction management• Managing contractor

• Contractor paid fee for managing delivery of the works

• Trades and subcontractors progressively procured and engaged by either party

Project delivery structures - overview


Structure Details

• Operate and maintain • Used for facility management services• Outsourcing arrangement

Models incorporating a finance or operate component:• Build, own, operate• Build, own, operate, transfer• Design, build, operate, maintain• Design, build, operate transfer

• These models (excluding transfer) are essentially form used for PPPs but without obligation to return asset to state at end of term of operation

• Hybrids e.g. Alliances • May incorporate a relationship, collaborative or risk sharing element

• May incorporate forms of payment incentives e.g. shared savings, cost controls (Guaranteed Maximum Price)

Project delivery structures - alliances


Movement away from adversarial 'hard money' form of contracting and consequential disputes

Used in Australia for over 15-20 years, including by Japanese companies

Characteristics:

Collective responsibility

No dispute

Integrated team

Best for Project

Meaningful principles

Reward based on performance

Clear governance

Project delivery structures - alliances


May be appropriate where risks include:

Challenging delivery schedule or environment

Excessive external stakeholder demands and expectations (e.g. public profile)

Need for innovative solutions (e.g. brownfield environments with limited space)

Need to capture and explore emerging technology (e.g. toll, defence and transport integration)

Requirement for scope flexibility (e.g. owner has not finished cost/benefit analysis, political pressure to start)

Project delivery structures – risk transfer


Alliancing

Managing Contractor

PPP Availability Payment

PPP Transfer of Revenue Risk

Government Financing Private

Financing

Procurement Model

Liability remains on Government’s Balance Sheet

Off (Government) Balance Sheet

D & C

(DBFO)

(BOOT)

Forms of project contracts

Standard forms include:

Australian Standards (Standards Australia)

PC-1 1998 (Property Council of Australia)

Australian Building Industry Contract (Master Builders' Association and Royal Australian Institute of Architects)

FIDIC (International Federation of Consulting Engineers)

NEC3 (Institution of Civil Engineers)

Standard forms are heavily amended

Bespoke contracts used for alliances, PPPs and hybrid models


Statutory regulation of infrastructure

Level of regulation is "medium"

Regulated by federal, state and local governments

Includes:

Security of Payment

Occupational Health & Safety

Regulation of building contractors

Future will see growth of environmental regulation

*Further resources: DLAP "Changes to the resolution of domestic building disputes in Victoria" (please ask us for a copy)


Workers' comp #

Domestic building #

Third party motor

vehicle #

Contract works

Marine cargo

Profess/al indemnity

Property damage

Public liability

Insurance


# Required by statute

Project disputes

Disputes can be costly and time consuming

Lawyers are trained to avoid court proceedings

Infrastructure contracts contain dispute resolution clauses which must be followed before court proceedings, e.g:

Notice of dispute

Good faith negotiations between senior executives

Mediation or other informal dispute mechanism e.g. hearing by technical or legal expert

Expert determination (usually for technical matters)

Completion of steps prior to any court proceedings

Simple options available for building disputes under Security of Payment Act


Key success factors


Factor How?

Compete on tender • Secure contacts while maintaining adequate profitability & cash flow

Expand & curtail operations rapidly in line w market demand

• Quickly alter size of labour force to match short-term cycle

• Hire high-quality, productive workers, in times of low availability

Contacts in key markets • Form strategic alliances and relationships with building & construction companies

Business expertise (operators) • Excellent project management skills• Time, financial, labour and consortium

management skills

Good reputation • Be known to meet time, quality and cost specifications

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doing business in australia seminar (infrastructure & construction)

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