Major projects in Victoria: challenges, issues, and where to from here?

Major projects in Victoria:
challenges, issues and
where to from here?
Paul O‟Connor
Sessional Lecturer & Doctoral Candidate
School of Property, Construction and Project Management

RMIT University © 2013 Paul O'Connor 2
Scope of this presentation
1. State of play for major projects in Victoria
2. Recent reviews and enquiries - how can major projects
be better procured and implemented?
3. The alphabet soup of procurement options for major
public sector infrastructure: traditional, alliance or PPP?
4. Addressing infrastructure project challenges and trends
in times of fiscal austerity
5. PPPs: key drivers in Victoria and the story so far
6. Case studies - success stories and some areas for
improvement…

State of play for major projects in Victoria
Perceptions:
• Projects have been stalled through inaction
• Not enough focus on economic productivity
• Lack of holistic infrastructure vision
• Too much political focus on “debt” as BAD
• „Penny pinching‟ at expense of future capacity
• Rising construction costs due to mining boom and
resurgent union militancy

Recent reviews and enquiries
Public Accounts and Estimates Committee inquiry
into significant infrastructure projects (Dec 2012)
found a number of key issues:
• Optimism bias (underestimating of costs and over
estimating of benefits) was too prevalent
• Poor scoping & planning work = poor delivery
• Lack of suitable and available skillsets in PS
• Role confusion as „owner‟, „investor‟ & „deliverer‟
• But more central scrutiny is positive development

Context: infrastructure & development (1)
• Wide range of public infrastructure demand is
forecast for many sectors:
–Transport
–Education
–Health
–Government accommodation/facilities
–Utilities (water, sewerage, telecoms, power)
• Infrastructure „deficits‟ are making larger calls
upon scarce (shrinking?) government capital

Context: infrastructure & development (2)
• Recurrent demands also increasing to fund
essential citizen services
• Large and lumpy disbursements
• Debt/surplus funding raises fiscal issues:
–Sovereign credit ratings linked to debt
–„Lazy‟ balance sheets/inefficient allocations
–Inter-generational equity of debt liabilities
–Ongoing operations and maintenance liability
plus depreciation and replacement funding

Alphabet soup of procurement options
• Many options to procure infrastructure available:
–Build to design (B)
–Design and build (D and B)
–Managing contractor (D and B)
–Alliance (D and B)
–JV (D, B and O) (and maybe F)
–PPP/PFI (D,B, F, M) (and maybe O)
• Analysis of the profile of the infrastructure should
drive the procurement strategy

Funding projects in austere times
• Just as water always finds its course, a „good‟
project will always find a sponsor and funding
• Austerity is a chance to get back to basics:
–More work on cost-benefit analysis not just
back of the envelope calculations and spin
–More scoping, planning and community
engagement to de-risk and build buy-in
–More market engagement to find deliverer
–More appropriate risk and cost sharing

Benefits of a long term funding model
Smooth and predictable budget outlays
Promotes inter-generational equity
Embeds whole-of-life asset costing
Technology obsolescence better managed
Maintenance funding no longer discretionary
Operations can be kept contestable via regular
market benchmarking or resets
Funding profile matches long-term institutional
investors like pension or sovereign funds

PPPs: Where did they come from?
• PPPs have been around for hundreds of years
–Perrier Brothers had a drinking water concession in 1700s
• Modern PPPs started with the UK‟s Private Financing
Initiative launched in 1992:
–Policy to extend Thatcher‟s near-complete privatisation push
–Kept and embraced by „New Labour‟ when elected in 1997
• Seen as a way to smooth out demands upon the capital
account for developed economies with high deficits
• Seen as one of Tony Blair‟s “third way” vehicles to
engage with the private sector and achieve public goals
• Seen as a way to speed up social and economic
infrastructure renewal & promote delivery effectiveness

What were the key drivers in Victoria?
• Two distinct periods
–Pre-2000 – emerging PPP guidelines
–Post-2000 – current PPP guidelines
• Pre-2000
–Post recession period looking to kick start economy and
find “non-debt” capital methods
• Post-2000
–Iconic and one-off complex projects
–User pays (i.e. toll roads) and water treatment plants
–Social infrastructure replacement and augmentation

Why choose PPPs for infrastructure?
Value and size of the project
Technical complexity/novelty
Risk allocation profile (especially demand risk)
Scope for design/technical innovation
Maturity of the public sector project owner
Private sector interest/public sector need
Complementary projects to go with the PPP?

Practical considerations for PPPs
For…
–Fixed capital payments
over life of the asset
–Asset will return to public
ownership
–Contract „locks in‟
O and M funding
–Output specification
drives service and asset
quality
–Value for money
Against…
–Finding a good partner
–Funding availability (esp.
due to GFC)
–Transparency of risk
transfer premiums
–Up-front and high
transaction costs
–Long term monitoring
regime to maintain
expected standards

What has been achieved in a decade?
• UK has 500+ PFI projects with a capital value in
excess of £28 billion
• Victoria has A$10.5 billion contracted in 21
projects (www.partnerships.vic.gov.au)
• Detailed policy and guidance suites have been
developed in UK and Australia
• World Bank and ADB promoting PPPs
• PPPs being adopted in emerging economies

SECTOR CASE STUDIES
Major PPP Projects:

RMIT University © 2013 16
PPPs in Action – Sector case studies
•Health
•Transport
•Education
Paul O'Connor

17
Health PPPs – some typical models
• DBFM – design, build,
finance, maintain
–Positive (refer to RWH
report and the RCH project
summary)
–Negative (refer to PAC
report on Paddington)
• DBFOM – design, build,
finance, operate, maintain
–(similar to privatisation?)
RMIT University © 2013 Paul O'Connor

Health PPPs – lessons & observations
• Transfer of design risk to private sector is only
effective if State has clearly specified:
–Present and future clinical models
–Present and future demand
–Expected functionality of the facility
–Non-negotiable building standards
• UK issues – quality of build in some facilities and
fair profit share for refinancing gains
Paul O'Connor

Transport PPPs
Paul O'Connor

Road PPPs
Variety of models to consider
• „Toll road‟ concession model
–Successes: CityLink and EastLink in Melbourne
–Failures: Sydney and Brisbane tunnels (over optimistic demand
forecasts and upfront payments to Government)
• HOT lane model
–Augment existing corridor with express toll lane
• „Availability‟ model
–Used in UK with „shadow tolls‟
–New PPP in Victoria – KPI not volume based

Rail PPPs
• Infrastructure
–London Underground
(refer to NAO reports)
• Rolling stock
–(NSW)
• Facilities/interchange
–Southern Cross Station
(refer to VAGO report)

RMIT University © 2013
Transport PPPs - observations
• For roads
–don‟t be greedy and demand upfront payments, as this is
passed on via higher tolls to the public who may then
boycott the route. (Refer to NSW AG report on tunnels)
• For rail
–Understand the value drivers of the business and focus on
using private sector expertise to increase operational
efficiency and reliability, as well as contain costs over the
long-term. (Refer NAO reports on the underground)
Paul O'Connor 23

Education PPPs - Variety of models
• New build
–Single site schools
–Multiple site schools (refer PV
schools summary)
• Tertiary research precinct
–LaTrobe University (refer
Biosciences summary)
• Refurbishment
–UK building schools for the
future (refer NAO report)
–Southbank TAFE (Brisbane)

Education PPPs – some observations…
• Specify demand corridors and let private sector
take site risk (PV schools)
• Multi-site deal is effective way to achieve quick
build-out of many sites over a wide area
• Some risks of a “two class” system, due to poor
asset maintenance in the State build sector
• Lock in of service payments reduces future
flexibility (c.f. declining revenue base in Scotland)
Paul O'Connor

26
Other sectors?
• Prisons
–Facilities only (DBFM)
–Integrated correctional
services (DBFOM)
• Electricity
–Independent power
producers
• Water
–Town supply or desalination
plants
RMIT University © 2013 Paul O'Connor

PPPs: the future or a passing fad?
• In Australia:
–Still only account for about 10% of total public sector
asset investments (approx. $10.5 billion in Victoria
across 10 years)
–Most are on balance sheet, no accounting advantage
–User pays model (i.e. toll roads) becoming difficult due
to problems with accuracy of traffic demand forecasting
–Some states pursuing Alliances more aggressively
–Marginal cost of capital issue – cost and availability of
private finance versus public sector debt raisings?
–Low hanging fruit exhausted? Iconic/innovative facilities
likely to be overtaken by more „boring‟ facilities (such as
schools, water and sewerage)

Any questions?
• My contact details:
Paul O‟Connor
DipPer&OpsMgt, DipGovMgt, BA(AsianStudies), GradCertPPPs (Melb.), MPubInfra (Melb.)
School of Property, Construction and Project Management
RMIT University
E: <paul.oconnor@rmit.edu.au>
M: +61 437 587 396

Major projects in Victoria: challenges, issues, and where to from here?

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Major projects in Victoria: challenges, issues, and where to from here?