when to choose ppp - workshop 03 - 26 april

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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Overview

► Evolution of the PPP model in Australia

► How do you choose the right procurement model?

► Case studies

► Exercise


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


Geographic spreadClosed Projects, 2000 - 2012

VIC: 23

NSW: 20

QLD: 5

SA: 6

WA: 3

NT: 3Commonwealth: 3


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)


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.)


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


PPP


Role of the private sector (continued)


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.


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


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



PPP


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.


Victorian Comprehensive Cancer CentreCase Study

What about Box Hill and Bendigo?


Exercise – North West Rail Link


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

► Provides Services to the CBD

► Commencement of substantial civil works (i.e. tunnelboring machines) in 2014

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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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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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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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when to choose ppp - workshop 03 - 26 april

Documents

ernst young australia

australia publication

ppp model

generationhospitalsnew

infrastructure advisorytel

financing infrastructure

infrastructure provision

rmit ppp lecture serieswhen