Richard Foster on Partnerships Victoria

PPPs from Government’s Perspective – The Partnerships Victoria Guidelines Richard Foster Director Foster Infrastructure Pty Ltd

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Agenda

• Scope & Application of the Partnerships Victoria Policy • Initiation of the PPP delivery process • Project Governance

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Agenda

• Scope & Application of the Partnerships Victoria Policy • Initiation of the PPP delivery process • Project Governance

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Development and Use of the PPP Model in Victoria • •

1980s/90s: PPP style projects in a number of sectors 1980s: Overriding concern was to achieve off balance sheet financing – Avoidance of limits for State borrowings.

– Little risk transferred.

– Financiers’ rate of return assured.

•

1990s: Belief that increased private sector involvement in infrastructure services could drive growth and efficiency – Economic and financial outcomes from these projects were largely positive.

– However, the quest for maximum risk transfer and private sector efficiencies led to some projects being unsustainable.

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

A new approach‌

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Development and Use of the PPP Model in Victoria June 2000: Partnerships Victoria policy introduced – Clear aim of achieving value for money in the public interest – No presumption that the private sector is more efficient in building and operating public assets – Focus on whole of life costing – Optimal, rather than maximum, risk transfer to the private sector

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Partnerships Victoria publications ยง Partnerships Victoria Policy

June 2000

ยง Overview ยง Practitionersโ Guide ยง Risk Allocation and Contractual Issues - a guide ยง Public Sector Comparator - a technical note

June 2001

ยง Contract Management Framework

June 2003

ยง Public Sector Comparator - supplementary technical note ยง Use of Discount Rates ยง Standard Commercial Principles ยง Infrastructure Australia Guidance ยง Other specific guidance - ongoing

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

July 2003 June 2005 (Updated 2008) November 2008

The current Policy and Guidance Framework Relevant Guidance for Victorian PPP Infrastructure Projects

National PPP Guidelines Overview and Volumes 1-7 Sum m ary of Jurisdictional Requirem ents ACT - AUS - NSW - NT - QLD - SA - TAS - VIC - WA

Partnerships Victoria Requirements Annexure Commercial Principles Annexure Further Guidance & Templates Annexure Contract Management

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Conduct of Commercial Engagements in Government

National PPP Policy Framework

Gateway Lifecycle Guidance

Investment Management Standard

Asset Management Framework

Partnerships Victoria Framework

The current Policy and Guidance Framework • The Partnerships Victoria Framework requires compliance with both: • •

the National PPP Policy and PPP Guidelines; and the Victorian specific requirements outlined in the Partnerships Victoria Requirements document and its annexures.

• The Baillieu government has not yet announced any refinements to this PPP Framework, but may do so in the future.

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

The scope of the Partnerships Victoria Policy • Delivery of infrastructure-based services by the private sector under a contract with government • Does not cover outsourcing or other service delivery arrangements where no capital investment is required • In most cases, but not all, the capital investment is funded by the private party and repaid out of service fees received over the life of the contract

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Traditional Procurement and PPPs compared Traditional Procurement Approach: •

PPP Approach: §

Government engages an architect who develops an

build and operate (or maintain) the facility to deliver

input based design for the facility •

•

Government engages a

Government engages one private sector party to design,

specified outputs / services.

contractor for construction

Payment is based on the services delivered and

Following construction, the

conditional on meeting the KPIs specified in the contract.

Government operates and maintains the facility

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

§

Traditional Procurement and PPPs compared Traditional Procurement Approach: •

PPP Approach: §

Government engages an architect which designs the

build and operate (or maintain) the facility to deliver

facility based on input requirements •

•

Government engages a

Government engages one private sector party to design,

specified outputs / services.

contractor for construction

Payment is based on the services delivered and

Following construction, the

conditional on meeting the KPIs specified in the contract.

Government operates and maintains the facility

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

§

PPPs are NOT: • • • •

Another bucket of money An alternative to the Cabinet funding process A financial device to get things off the balance sheet Simply about building things

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

PPPs – their role in meeting infrastructure needs • PPP delivery does not suit all needs • PPPs are one delivery option – others include design and construct, project alliances • Over the medium to long-term, PPPs account for around 10% of Victoria’s infrastructure needs • PPP delivery is applicable to more complex projects where outputs can be measured, and there is scope for innovation and whole-of-life efficiencies

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Characteristics of likely PPP candidates: • Scale: $50-100m + (some water/wastewater projects can be smaller) • Measurable service outputs • Non-core services • Risk transfer • Long term • Innovation • Market appetite

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Value for Money drivers • • • • •

Whole of life planning and costing Output specification and scope for innovation Efficient risk allocation Asset utilisation and third party revenues Rigorous process

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Agenda

• Scope & Application of the Partnerships Victoria Policy • Initiation of the PPP delivery process • Project Governance

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

PPP Project Development and Procurement in Victoria

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

PPP Project Development and Procurement in Victoria

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

A Project starts with a Service Need‌

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

The Service Need – Strategic Assessment • The strategic assessment identifies the: – – – –

requirement to meet the identified business needs anticipated benefits and timelines alignment with government policy directions fit with departmental or agency strategic priorities

• Enables government to decide whether it is worth proceeding either to options analysis or to develop a business case

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Next is Option Appraisal‌

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Options Analysis • Evaluation of a wide range of options, including: – Considering asset and non-asset solutions – Considering the timing, scale, location and delivery options

• Enables government to decide which (if any) options should be considered in a full business case for the proposed investment • May involve initial consideration of PPP delivery, particularly where there is a choice between government funding and user charging

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Next is Option Appraisal‌

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Business Case • The business case: – validates or amends the project assumptions – clarifies the quantitative and qualitative costs, risks and benefits from a whole-of-life perspective – provides a project plan that will steer the project’s implementation

• Enables government to decide whether the investment should be funded, taking into consideration: – The merits of the investment – The merits of other competing investment proposals – The available budget

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Business Case – Outcomes The Business Case enables government to answer three key questions: 1.Should the project be funded?

–

This is the Investment Decision

2.How should the project be delivered?

–

This is the Procurement Decision

3.What governance arrangements should be put in place?

–

This is the Governance Decision

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

The procurement strategy • Commenced as part of the business case • Finalised prior to commencement of tendering • Results in a decision as to the appropriate delivery model

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Selecting a delivery model

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Hypothetical waste treatment project – Should PPP be a short-listed delivery model?

• Is it large-scale and long-term?

ü ($100m plus, long-life asset) • Are there measurable outputs?

ü (Treatment of waste to comply with environmental regulations etc) • Are there opportunities for risk transfer?

ü (Design, construction, operation, incoming waste(?), energy cost(?))

• Is there scope for innovation?

ü (Significant scope in design, construction and operation) • Is there market capability and appetite?

ü (Market testing; Private sector delivery and operation of waste treatment plants has occurred elsewhere)

• Are there non-core services?

ü (Operation of the plant) Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Hypothetical waste treatment project – Selecting a delivery model from a shortlist

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

•

Delivery models are qualitatively assessed against project/procurement objectives

•

The objectives may be weighted

•

If the analysis has identified specific weaknesses of the preferred model, mitigants are considered

Separation of the funding and delivery decisions • Funding is approved on the basis of government delivery of the project • If a decision is made to deliver the project as a PPP, the approved funding represents the Public Sector Comparator •

The Public Sector Comparator is used as a price benchmark representing the cost if government was to deliver the projects – private sector bids are compared against this price

• Upon financial close occurring, the approved funding is “rephased” into the PPP cashflows

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Funding Approval – “User Pays” Projects • A project undertaken on a “user pays” basis must still be considered in the context of the State’s overall infrastructure programme • Interface issues must be considered – e.g. impact of a user pays toll road on the surrounding network • Government contributions (e.g. land), contingent liabilities (e.g. on contract termination) and potential benefits must be considered

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Project Development follows‌

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Agenda

• Scope & Application of the Partnerships Victoria Policy • Initiation of the PPP delivery process • Project Governance

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Portfolio Responsibility • Projects are a result of an asset requirement identified by a line agency/department •

This “Client Agency” may engage a separate team within the same agency, or in another Department (for example, Major Projects Victoria) to manage the project delivery process

• All Ministers have power to enter into PPP contracts • The Treasurer is responsible for PPP policy •

Therefore, a Partnerships Victoria Unit exists within the Department of Treasury and Finance, managing the implementation of this policy

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Portfolio Responsibility for Projects Sample PPP Projects

Responsible Department

New Hospital Projects

Department of Health

EastLink Toll Road

Department of Transport

Southern Cross Station Waste Water Treatment Projects

Department of Sustainability and Environment / Relevant Water Authority

Prisons, Court Buildings

Department of Justice

New Schools

Department of Education and Early Childhood Development

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Partnerships Victoria Unit – Key Roles Policy Role • Development of policy and guidance material:

Project Implementation

Advisory Role • Represented on Project Steering Committee and Working Group

• Process guidance

• Provide expert commercial advice

• Standard commercial principles

• Ensure policy issues identified / addressed

• Liaison with other jurisdictions

• Maintain integrity of Partnerships Victoria: • Policy positions • Process

• Monitor budgetary issues • Facilitate Treasurer’s approvals • Development of policy and guidance material

Contract Management

• Effective contract management

• Provide expert commercial advice • Ensure policy issues identified / addressed • Maintain integrity of Partnerships Victoria policy positions • Monitor budgetary issues

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

A Typical Project Governance Structure Steering Committee

Minister for Transport DOT Secretary (chair) Project Director DTF DPC Independent

Secretary Department of Transport

Probity Adviser

Commercial Manager

Commercial Financial

Project Director (Chair) Comm Manager DPC Tech Manager DTF

Project Director

In-House

Communication Manager

Legal

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

In-House

Technical Manager

Planning

Engineering

Working Group

Design

Summary • The PPP model in Victoria has been developed and refined over a number of years • The model is used where there are clear value for money drivers • The robust PPP delivery process helps us deliver value for money • The client agency, the delivery agency and the Department of Treasury and Finance each play a key role

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Questions?

Presentation to RMIT Advanced Construction Management Students | 9 March 2011

Contact Details Richard Foster Director Foster Infrastructure Pty Ltd E-mail: richard@fosterinfrastructure.com Web: www.fosterinfrastructure.com

Presentation to RMIT Advanced Construction Management Students | 9 March 2011