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RMIT PPP Lecture Series When to choose PPP and when not to July 2013


Lindel James Director, Infrastructure Advisory E-mail:

lindel.james@au.ey.com

Lindel is a market leading infrastructure advisor and senior member of our team. She brings extensive Government and private sector experience in infrastructure procurement and financing from large scale projects both throughout Australia and in Canada. Lindel has advised on a wide range of iconic projects including in rail, roads, hospitals, justice, education, research and Defence such as the: •  $1 billion Victorian Comprehensive Cancer Centre •  $2 billion New Royal Adelaide hospital •  Urban rail developments including Melbourne Metro and Sydney Metro •  Large scale Defence services contracts in logistics and health service provision Lindel’s breadth and depth of experience also reflects her prior roles working in Government as well as in a boutique infrastructure investment house . Her project management and keen eye for detail coupled with a focus on big picture strategy creates exceptional value for her clients across a broad range of planning, procurement and delivery phases of infrastructure and government services projects Lindel holds a Bachelor of Commerce (Honours) and a Masters of Economics. Lindel lives in Melbourne and is a keen mountain bike rider who has learnt that she doesn’t bounce so well anymore © 2012 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation. 2

Lindel is a market leading infrastructure & government specialist who focuses on what counts for project success


Overview ► 

What is a PPP?

► 

To PPP or not to PPP? How do you choose the right procurement model?

► 

Case studies

► 

Exercise

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NS

What is a PPP?

and he y

► 

PPPs defined under National PPP Policy Framework as a project where: ►  ► 

the private sector provides public infrastructure and any related services; and there is private investing or financing

FT + ←

FT + →

► 

Two broad categories of PPPs: Asset Class

Key Features

Examples

Economic Infrastructure

Usually involves some transfer of patronage/ revenue risk to the Private Sector

Road, Rail, Ports

Social Infrastructure

Government is the user of the facility

Schools, Hospitals, Prisons, Social Housing, Water treatment plants, Convention Centres

► 

State Governments and Federal Government have PPP policies in place

► 

Global PPP market ►  ►  ► 

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UK – £4-6 billion of PPP deals per annum Other key markets – Western Europe, Canada, USA, India Emerging markets – SE Asia, South America

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Social Infrastructure PPP – The Concept Continuing Public Sector Spending Support Ø 

Concession contract (30 years+)

Ø 

Government responsible for: Ø  Ø  Ø 

Ø 

Land acquisition Approvals Service payments

Government §  Specify requirements §  Deliver Core Services (eg teaching)

Private sector responsible for: Ø 

Ø  Ø 

Supply and maintenance of social infrastructure asset (School, Hospital, Prison) Financing Remunerated based on Performancebased payments

Payments for Performance

Services

Private Sector D&C Skills

§  Build / Renew facilities §  Support Services

Finance

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FM Skills


Why are Governments turning to PPP ?

Government Funded (“Traditional Procurement”) $

Properly Structured PPP

Exposure to construction cost overruns

$

Exposure to construction time overruns Exposure to operating cost overruns

No payments until facilities available for use Service payments lockedin prior to commencement

Time Time

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Typical Project Finance Structure “Social Infrastructure” PPP Transaction Advisers •  Financial •  Legal • Technical (Design, QS etc)

State Government Project Finance Debt

Service Payments

Advisers •  Financial •  Legal • Technical (Design, QS etc)

PPP Company (Usually an SPV) FM Payments

Facilities Maintenance Provider(s)

Example Providers •  Spotless •  Honeywell •  DTZ/UGL •  Serco •  MTR Corp

Equity D&C Payments

Design & Construction Contractor(s)

Example Providers •  John Holland •  Leighton Group •  Lend Lease •  McConnell Dowell

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Example Sources •  Bank debt •  Capital markets (bond debt) •  Institutional (super funds)

Example Sources •  Contractor •  Super funds •  PPP investment funds •  International pension funds


Procurement options analysis methodology Version 1: IA National PPP Guidelines

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Example: Application of value drivers to potential models Fees based on fixed amount or percentage of cost

Flexibility to Change (Controls)

Time to Market

High

Risks Cost Plus % remain with the client. Very complex, highly Cost Reimbursed – Fixed Fee uncertain projects. Time is generally critical and costs Early Contractor Involvement secondary

Combines relationship based contracting with different degrees of fixed fees/ percentage fees/gain-pain sharing arrangements Complex, uncertain, high risk projects

Alliance

Early Contractor Involvement Construction Management Management Contractor Traditional contracting arrangements. With more defined scope and contract. Construction Only (Design separately procured) – Schedule of Rates / Bill of Quantities

Known technology, scope for innovation, defined specification

Design and Construct – Fixed Price

Low

PPP

Low

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Price Certainty Risk Transfer Innovation

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High


Role of the private sector (continued)

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Southern Cross Signalling Traditional 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 Signalling Key Decision Drivers Driver

Rating  

Rationale  

Flexibility HighDOI has identified a number of key risks which it is best placed to manage and to control   medium  therefore should be retained by the State. These risks include, inter alia, design acceptance, interface risk between contractors, access / occupation risk and stakeholder management risk. The workshop attendees therefore viewed that the significance of these risks would require the State to contract on the basis that it retains a relatively high level of flexibility to be able to control the Project   Time to Medium The Project has been identified as a priority since 1990 and should have been market   -low   commissioned in 1997. Therefore from 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 in the delivery of the Project between the various procurement models given that the design solution is highly specified and already in progress   However, factors favouring a medium rating include: (a) the requirement to spend the approved budgeted amount (i.e. representing part of the budgeted amount for the Project) in the current financial year; and (b) the 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  

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Southern Cross Signalling Key Decision Drivers   Rating   Rationale   Medium On balance the workshop participants rated this driver medium-low” -low   It 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 by the State. However, budget certainty is capable of being achieved if the State is able to retain control over the construction programme.   Risk Medium  A number of key risks have been identified as being retained by the State, although transfer   contractually certain elements of such risks could potentially be shared For example, liquidated damages could apply in instances where delays have arisen from inappropriate construction programming conflicting with access arrangements. On this basis, this driver was rated as medium   Contractor’s Medium  The tight specification of the State’s functional and operational requirements limits incentive   the contractor’s incentive to include innovation in relation to the CBI. However, design and construction of drainage works or the applied construction methodology were identified as areas for possible innovation   Driver Price certainty  

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Southern Cross Signalling Procurement Recommendation Fees based on fixed amount or percentage of cost

Time to Market

Flexibility to Change (Controls)

High

Risks Cost Plus % remain with the client. Very complex, highly Cost Reimbursed – Fixed Fee uncertain projects. Time is generally critical and costs Early Contractor Involvement secondary

Combines relationship based contracting with different degrees of fixed fees/ percentage fees/gain-pain sharing arrangements Complex, uncertain, high risk projects

Alliance

Early Contractor Involvement Construction Management Management Contractor Traditional contracting arrangements. With more defined scope and contract. Construction Only (Design separately procured) – Schedule of Rates / Bill of Quantities

Known technology, scope for innovation, defined specification

Design and Construct – Fixed Price

Low

PPP

Low

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Price Certainty Risk Transfer Innovation

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High


Victorian Comprehensive Cancer Centre Case Study

Authority: Department of Health

Construction start: November 2011

Budget: $1.0bn* (capital)

Construction finish: End 2015

Key issue: Green field on South side. Refurbishment and interface with Royal Melbourne on North side. Partnerships Victoria procurement model with a design and construct arrangement for the North Works at the RMH City Campus embedded ►  PPP transfers maintenance risk, site risk, asset capability risk and interface risk to the private sector ►  PPP delivery provides optimal whole-of-life costs ►  Sufficient market depth ►  Traditional on North Works to manage interface with Emergency Department ►  RMH provide FM services to North side

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Exercise – Melbourne Metro

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Melbourne Metro ► 

►  ► 

City-shaping project that will overhaul Melbourne's rail network, resulting in major improvements in capacity, reliability and travel times across the bulk of the metropolitan rail lines. 9 kilometre rail tunnel through inner Melbourne that will link the Sunbury and Pakenham/Cranbourne rail lines. 5 new underground stations to be located at Arden, Parkville, CBD North, CBD South and Domain.

Scope elements ►  Portals (tunnel entrances) ►  Tunnel ►  Stations ►  Rail systems ►  Track, power, signalling hardware ►  Signalling systems and software ►  Station maintenance and operations ►  Train operations and ticketing 17

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Exercise ► 

The Client (Public Transport Victoria) has asked you to identify 2 potential procurement options for the Melbourne Project. Based on the information 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 traditional delivery? Justify your answers against the value drivers

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Thank you


W1 rmit presentation july 2013