As a long-term participant in the Infrastructure industry in Australia and a supporter of public transport as an enabler of urban regeneration, I’m really pleased to see the Sydney Light Rail CBD Extension up and running.
As a complex greenfield / brownfield project procured under a Public Private Partnership (PPP) model, the overall success of the project won’t be apparent until substantial completion of the multi-year Operations & Maintenance phase. (Consider for instance: how flexible will the service agreement need to be to cater for potential longer term impacts on demand due to COVID-19?)
It is hard to assert though that the build phase, culminating in a public dispute between constructor and the NSW State Government, was a rousing success.
It’s reasonable – in my view at least – to say that the complexity and inflexibility of the private finance-based contract model was a key contributor, if not at the heart of the dispute.
And it appears that similar issues are in play for example with Sydney’s NorthConnex project as well as the Westgate Tunnel in Melbourne.
So why does it seem so hard for project proponents to align on the right contract model and key terms for the right circumstances?
Where have we been?
The Infrastructure industry has seen a revolution since the early 1990s, with Public Sector intentions shifting from procuring public assets to ensuring public access to essential assets.
My own experience, particularly from the late 1990s to the early 2010s with Serco (a British services company), GHD and then Transfield Services (now Ventia) in 2018 – 2012 included extensive exposure to Australia’s move from traditional procurement of engineering and construction services, to construction and private sector financing and then to the integration of asset provision with service delivery.
Hard lessons were learnt by many regarding packaging and delivery on complex projects such as Melbourne Trains & Trams Franchising, Brisbane Light Rail Project, Epping – Chatswood Rail Link, Waratah Trains PPP and the NSW Country Regional Network.
As an experienced industry, we should by now be much better able to align the contract model with the project risk profile.
SO where are we at?
The Australian Constructors Association (ACA) has recently released a response to Infrastructure Australia’s 2019 Infrastructure Report.
Required reading for the industry!
In the report under “Better Risk Allocation” are the following statements:
“….industry noted that the single biggest threat to sustainable infrastructure delivery was inefficient risk allocation on projects” and
“Increasingly, clients are transferring greater risk to industry based on its bargaining position rather than the principle of who is best able to manage (or pay for) that risk.”
What specifically is going wrong?
The available evidence suggests that the issue is not one of stated intention by the project proponents.
For instance, the NSW Government way back in November 2001 published “Working with Government” Guidelines for Privately Financed Projects, following industry consultation via a Green Paper. Specifically, Section 5: Risk Management leads with the following:
“Government’s aim is to optimise risk allocation so that value for money is maximised in each project on a whole-of-life basis; the aim is not to maximise risk transfer from government to the private sector”.
More recently, Point #2 of the NSW Government’s June 2018 10-Point “Commitment to the Construction Sector” states: “Adopt partnership-based approaches to risk allocation”.
Nor does the issue appear to stem from a fundamental misuse of private finance-based contract models. Since the late 1990s when PPP projects were commonly “off Government balance sheet” items, there is now widespread recognition that private financing does not represent a “magic pudding” by which to procure additional public works.
However, when we step back and consider what success fundamentally looks like for all parties to a complex infrastructure project, the key issue does become apparent:
Ineffective Risk Management!
Indeed, as the ACA argues:
“The increased complexity and risk embedded in modern infrastructure projects, combined with potential constraints on the capability and expertise of the client to evaluate and manage these risks, requires clients to adopt a more agnostic approach to their choice of procurement model.”
SO what does Effective Risk Management look like?
An appropriate contract model and key terms is at the heart of effective risk management for complex projects. Well-designed and documented contracts properly address the following key elements:
Value for Money Drivers: At the top of the list of Value for Money drivers is appropriate risk allocation, ahead of elements such as output-based specifications, appropriate length of contract, performance measurement and incentives and opportunities for innovation.
Alignment of Incentives: A Quality outcome should be a matter of contract specification and incentivisation, rather than a “stick” based approach to identifying and rectifying issues. Well-designed bundling of O&M services with construction should provide effective incentive against cost-shifting and create an environment for optimising up-front investment. Service providers prepared to invest in better-quality assets up-front should be able to benefit from reduced costs down-stream.
Trust between the Parties: Referring again to the ACA:
“Trust between the client and the bidder is required at the beginning of the tender process. Just as bidders must be able to rely on the information received as complete and sufficient to develop an accurate costing, clients should also be able to rely on the tenders received in that the method and costing are accurate and not over-engineered.”
How do we get there?
Game Theory offers the “Prisoners’ Dilemma” – a paradox in which two rational parties acting in their own self-interests do not produce the optimal outcome. The typical prisoner’s dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant. As a result, both participants find themselves in a worse state than if they had cooperated with each other in the decision-making process.
Unfortunately, this is exactly the situation in which our industry finds itself each time a new “mega-project” appears.
The ACA has proposed the next move with the follow-up release of a “Commitment to our Clients and the Construction Industry”.
It’s now over to each of us to play our part in achieving greater industry alignment…..