Major projects in Victoria:challenges, issues andwhere to from here?Paul O‟ConnorSessional Lecturer & Doctoral CandidateSc...
RMIT University © 2013 Paul OConnor 2Scope of this presentation1. State of play for major projects in Victoria2. Recent re...
State of play for major projects in VictoriaPerceptions:• Projects have been stalled through inaction• Not enough focus on...
Recent reviews and enquiriesPublic Accounts and Estimates Committee inquiryinto significant infrastructure projects (Dec 2...
Context: infrastructure & development (1)• Wide range of public infrastructure demand isforecast for many sectors:–Transpo...
Context: infrastructure & development (2)• Recurrent demands also increasing to fundessential citizen services• Large and ...
Alphabet soup of procurement options• Many options to procure infrastructure available:–Build to design (B)–Design and bui...
Funding projects in austere times• Just as water always finds its course, a „good‟project will always find a sponsor and f...
Benefits of a long term funding modelSmooth and predictable budget outlaysPromotes inter-generational equityEmbeds whol...
PPPs: Where did they come from?• PPPs have been around for hundreds of years–Perrier Brothers had a drinking water concess...
What were the key drivers in Victoria?• Two distinct periods–Pre-2000 – emerging PPP guidelines–Post-2000 – current PPP gu...
Why choose PPPs for infrastructure?Value and size of the projectTechnical complexity/noveltyRisk allocation profile (es...
Practical considerations for PPPsFor…–Fixed capital paymentsover life of the asset–Asset will return to publicownership–Co...
What has been achieved in a decade?• UK has 500+ PFI projects with a capital value inexcess of £28 billion• Victoria has A...
SECTOR CASE STUDIESMajor PPP Projects:RMIT University © 2013 Paul OConnor 15
RMIT University © 2013 16PPPs in Action – Sector case studies•Health•Transport•EducationPaul OConnor
17Health PPPs – some typical models• DBFM – design, build,finance, maintain–Positive (refer to RWHreport and the RCH proje...
RMIT University © 2013 18Paul OConnor
RMIT University © 2013 19Health PPPs – lessons & observations• Transfer of design risk to private sector is onlyeffective ...
RMIT University © 2013 20Transport PPPsPaul OConnor
RMIT University © 2013 Paul OConnor 21Road PPPsVariety of models to consider• „Toll road‟ concession model–Successes: City...
Rail PPPs• Infrastructure–London Underground(refer to NAO reports)• Rolling stock–(NSW)• Facilities/interchange–Southern C...
RMIT University © 2013Transport PPPs - observations• For roads–don‟t be greedy and demand upfront payments, as this ispass...
Education PPPs - Variety of models• New build–Single site schools–Multiple site schools (refer PVschools summary)• Tertiar...
RMIT University © 2013 25Education PPPs – some observations…• Specify demand corridors and let private sectortake site ris...
26Other sectors?• Prisons–Facilities only (DBFM)–Integrated correctionalservices (DBFOM)• Electricity–Independent powerpro...
PPPs: the future or a passing fad?• In Australia:–Still only account for about 10% of total public sectorasset investments...
RMIT University © 2013 Paul OConnor 28Any questions?• My contact details:Paul O‟ConnorDipPer&OpsMgt, DipGovMgt, BA(AsianSt...
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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?

  1. 1. Major projects in Victoria:challenges, issues andwhere to from here?Paul O‟ConnorSessional Lecturer & Doctoral CandidateSchool of Property, Construction and Project Management
  2. 2. RMIT University © 2013 Paul OConnor 2Scope of this presentation1. State of play for major projects in Victoria2. Recent reviews and enquiries - how can major projectsbe better procured and implemented?3. The alphabet soup of procurement options for majorpublic sector infrastructure: traditional, alliance or PPP?4. Addressing infrastructure project challenges and trendsin times of fiscal austerity5. PPPs: key drivers in Victoria and the story so far6. Case studies - success stories and some areas forimprovement…
  3. 3. State of play for major projects in VictoriaPerceptions:• 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 andresurgent union militancyRMIT University © 2013 Paul OConnor 3
  4. 4. Recent reviews and enquiriesPublic Accounts and Estimates Committee inquiryinto significant infrastructure projects (Dec 2012)found a number of key issues:• Optimism bias (underestimating of costs and overestimating 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 developmentRMIT University © 2013 Paul OConnor 4
  5. 5. Context: infrastructure & development (1)• Wide range of public infrastructure demand isforecast for many sectors:–Transport–Education–Health–Government accommodation/facilities–Utilities (water, sewerage, telecoms, power)• Infrastructure „deficits‟ are making larger callsupon scarce (shrinking?) government capitalRMIT University © 2013 Paul OConnor 5
  6. 6. Context: infrastructure & development (2)• Recurrent demands also increasing to fundessential 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 liabilityplus depreciation and replacement fundingRMIT University © 2013 Paul OConnor 6
  7. 7. 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 shoulddrive the procurement strategyRMIT University © 2013 Paul OConnor 7
  8. 8. 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 justback of the envelope calculations and spin–More scoping, planning and communityengagement to de-risk and build buy-in–More market engagement to find deliverer–More appropriate risk and cost sharingRMIT University © 2013 Paul OConnor 8
  9. 9. 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 regularmarket benchmarking or resetsFunding profile matches long-term institutionalinvestors like pension or sovereign fundsRMIT University © 2013 Paul OConnor 9
  10. 10. 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 FinancingInitiative 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 capitalaccount for developed economies with high deficits• Seen as one of Tony Blair‟s “third way” vehicles toengage with the private sector and achieve public goals• Seen as a way to speed up social and economicinfrastructure renewal & promote delivery effectivenessRMIT University © 2013 Paul OConnor 10
  11. 11. 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 andfind “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 augmentationRMIT University © 2013 Paul OConnor 11
  12. 12. 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?RMIT University © 2013 Paul OConnor 12
  13. 13. Practical considerations for PPPsFor…–Fixed capital paymentsover life of the asset–Asset will return to publicownership–Contract „locks in‟O and M funding–Output specificationdrives service and assetquality–Value for moneyAgainst…–Finding a good partner–Funding availability (esp.due to GFC)–Transparency of risktransfer premiums–Up-front and hightransaction costs–Long term monitoringregime to maintainexpected standardsRMIT University © 2013 Paul OConnor 13
  14. 14. What has been achieved in a decade?• UK has 500+ PFI projects with a capital value inexcess of £28 billion• Victoria has A$10.5 billion contracted in 21projects (www.partnerships.vic.gov.au)• Detailed policy and guidance suites have beendeveloped in UK and Australia• World Bank and ADB promoting PPPs• PPPs being adopted in emerging economiesRMIT University © 2013 Paul OConnor 14
  15. 15. SECTOR CASE STUDIESMajor PPP Projects:RMIT University © 2013 Paul OConnor 15
  16. 16. RMIT University © 2013 16PPPs in Action – Sector case studies•Health•Transport•EducationPaul OConnor
  17. 17. 17Health PPPs – some typical models• DBFM – design, build,finance, maintain–Positive (refer to RWHreport and the RCH projectsummary)–Negative (refer to PACreport on Paddington)• DBFOM – design, build,finance, operate, maintain–(similar to privatisation?)RMIT University © 2013 Paul OConnor
  18. 18. RMIT University © 2013 18Paul OConnor
  19. 19. RMIT University © 2013 19Health PPPs – lessons & observations• Transfer of design risk to private sector is onlyeffective 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 andfair profit share for refinancing gainsPaul OConnor
  20. 20. RMIT University © 2013 20Transport PPPsPaul OConnor
  21. 21. RMIT University © 2013 Paul OConnor 21Road PPPsVariety of models to consider• „Toll road‟ concession model–Successes: CityLink and EastLink in Melbourne–Failures: Sydney and Brisbane tunnels (over optimistic demandforecasts 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
  22. 22. Rail PPPs• Infrastructure–London Underground(refer to NAO reports)• Rolling stock–(NSW)• Facilities/interchange–Southern Cross Station(refer to VAGO report)RMIT University © 2013 Paul OConnor 22
  23. 23. RMIT University © 2013Transport PPPs - observations• For roads–don‟t be greedy and demand upfront payments, as this ispassed on via higher tolls to the public who may thenboycott the route. (Refer to NSW AG report on tunnels)• For rail–Understand the value drivers of the business and focus onusing private sector expertise to increase operationalefficiency and reliability, as well as contain costs over thelong-term. (Refer NAO reports on the underground)Paul OConnor 23
  24. 24. Education PPPs - Variety of models• New build–Single site schools–Multiple site schools (refer PVschools summary)• Tertiary research precinct–LaTrobe University (referBiosciences summary)• Refurbishment–UK building schools for thefuture (refer NAO report)–Southbank TAFE (Brisbane)RMIT University © 2013 Paul OConnor 24
  25. 25. RMIT University © 2013 25Education PPPs – some observations…• Specify demand corridors and let private sectortake site risk (PV schools)• Multi-site deal is effective way to achieve quickbuild-out of many sites over a wide area• Some risks of a “two class” system, due to poorasset maintenance in the State build sector• Lock in of service payments reduces futureflexibility (c.f. declining revenue base in Scotland)Paul OConnor
  26. 26. 26Other sectors?• Prisons–Facilities only (DBFM)–Integrated correctionalservices (DBFOM)• Electricity–Independent powerproducers• Water–Town supply or desalinationplantsRMIT University © 2013 Paul OConnor
  27. 27. PPPs: the future or a passing fad?• In Australia:–Still only account for about 10% of total public sectorasset investments (approx. $10.5 billion in Victoriaacross 10 years)–Most are on balance sheet, no accounting advantage–User pays model (i.e. toll roads) becoming difficult dueto problems with accuracy of traffic demand forecasting–Some states pursuing Alliances more aggressively–Marginal cost of capital issue – cost and availability ofprivate finance versus public sector debt raisings?–Low hanging fruit exhausted? Iconic/innovative facilitieslikely to be overtaken by more „boring‟ facilities (such asschools, water and sewerage)RMIT University © 2013 Paul OConnor 27
  28. 28. RMIT University © 2013 Paul OConnor 28Any questions?• My contact details:Paul O‟ConnorDipPer&OpsMgt, DipGovMgt, BA(AsianStudies), GradCertPPPs (Melb.), MPubInfra (Melb.)School of Property, Construction and Project ManagementRMIT UniversityE: <paul.oconnor@rmit.edu.au>M: +61 437 587 396

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