Navigating Successful PPP In Infrastructure

Fair Allocation & Sharing of Project Ricks

It is imperative to develop and maintain a robust risk management process for any infrastructure project due to its high risk/high value nature.

In most PPP projects, a large portion of the project risks is usually transferred to the private sector as they are theoretically best placed to manage the proposed project.

However, this may not always be the case as some specific project risks, such as legislation and approvals required, are better controlled by the State (public sector).

Having processes in place where individual risk items are identified and allocated to the party best positioned to manage each risk, will ensure fair risk allocation between the public and private sector.

The incorporation of collaborative contracting principles (pain/gain share mechanisms) within the PPP framework is an innovative way to better mitigate risks such as unknown utilities, contamination &/or cultural / heritage finds.

Adequate risk management processes, augmented by the incorporation of the above mechanisms, increases the likelihood for a ‘win-win’ scenario – successful project completion for the State whilst maintaining profitability for the private sector.

Conducive Economic Conditions & Market Interest

Economic trends influence the demand for new infrastructure and in turn, infrastructure drives economic growth through trade, investment, and job opportunities.

The presence of favourable economic conditions is a key ingredient for successful PPP infrastructure projects. Such conditions entice funding from local and international investors as they increase the likelihood of healthy returns.

It is imperative that the State (public sector) carry out a market-sounding exercise during the early stages of any major infrastructure project. This is to determine if there is sufficient market interest and/or market capacity to ensure project success.

Key questions that the State should ask are:

1. Is there enough coverage and interest from the best suited private sector partners?

2. Does the proposed project have adequate scale/magnitude to attract the right private sector partners?

3. Are we capable of running a PPP project which is similar to running a major business corporation (PPP projects cannot be managed in the same way as a traditional D&C type contract procured project)?

Political Support

The politics of infrastructure is all about opinion and attitude. Yet Australia’s growing infrastructure sector is too valuable to be left to uncoordinated processes or whim.

Political support for any major PPP infrastructure project cannot be overlooked. The State (public sector) has the ability to pass enabling legislation &/ or modify existing legislation to support infrastructure projects, thus potentially reducing the likelihood of delays from obtaining approvals.

A prime example of how Political Support can make or break an infrastructure project is the East West Link Project (backed by the Liberal Government) vs. the West Gate Tunnel Project (backed by the Labour Government). After winning the State elections in 2014, the Labour Government proceeded to cancel the East West Link Project and implemented the West Gate Tunnel Project instead.

Both were arguably equally important projects required for Melbourne, where the rapid rate of population growth has rendered existing transport infrastructure obsolete/inadequate. These two infrastructure projects were designed to complement each other, and neither held more benefits than the other, as the ruling Government at the time would have liked the public to believe.

However, the penalty of cancelling such a project is high with compensation figures rumoured at over $1 billion. Moreover, this does not take into account the impact of such a cancellation on the State’s economy.

Experienced and Capable Bidding
Consortiums (Private Sector)

A consortium shares experience and expertise that would complement the function of the PPP project. It makes no sense to place under experienced representatives in a consortium when the bottom line affects the group.

Having experienced and capable Bidding Consortiums (Private Sector) is another key factor for successful PPP projects.

Any Bidding Consortium should be staffed and led by personnel with extensive experience in PPP infrastructure projects within the region.

This is crucial as it will enable a transfer of knowledge and experience within the respective consortiums (implement lessons learnt from past projects successes & shortfalls).

Within Bidding Consortiums, strong working relationships should be fostered in order to facilitate an honest assessment of each parties’ strengths and weaknesses.

This increases the level of synergistic collaboration for the consortium.

Clear & Transparent Decision Making Process

A clear process that is followed to communicate decisions and discussions will keep a transparent forward moving dialogue that aligns the team and stakeholders.

A clearly documented and transparent decision-making process, agreed by both the public and private sector, is critical as it ensures that effective policies are implemented and decisions made without delay.

This is particularly important for PPP infrastructure projects, given the numerous negotiations and agreements that are made.

Flexibility should be incorporated in these decision-making processes to allow for some leeway, allowing both parties (public & private)to adapt to unforeseen circumstances.

Another key success factor is the involvement of stakeholders, including the public, as well as a continual assessment and review process. Early-stage involvement of the public reduces the risks of opposition/public outcry at a later stage.

The introduction of incentivised target cost (ITC) mechanisms into the D&C JV component can add benefits of:

• Address cost overruns experienced on recent infrastructure projects;
• Aligning State’s interests with the Project Sponsor;
• Facilitate open communication between the parties and resolve issues early; and
• Risk and pain/gain sharing incentives.

The Benefits

By creating a competitive and transparent system that amplifies opportunities through the development of ideas drawn from experience and expertise, the community’s needs can be met with innovative solutions.

The Public Sector (State) recognises the importance of investing in infrastructure to enable its economy to grow. PPPs provide an alternative additional funding source to the public sector.

Moreover, the early implementation (preferably at the bid phase) of some of the previously mentioned factors, such as the fair allocation of risks and a clear decision-making process, will increase the likelihood of the following benefits being realised:

• Ensuring long-term value-for-money through fair allocation and sharing of risks;
• Delivery of large infrastructure projects on time and within budget by incentivising the private sector;
• Development of local private sector capabilities via a joint venture with large international firms and enhanced subcontracting opportunities for local firms;
• Enabling the introduction of private sector technology and innovation in providing improved public infrastructure through enhanced operational efficiency; and
• Supplementing limited public sector capacities to meet the growing demand

The integrated delivery of services under the PPP model motivates public and private sectors to deliver on-time and oncost infrastructure projects.

Conclusion

At the end of the day, there is no “one size fits all” approach that leads to a successful PPP. This is why the implementation method to any PPP should have a unique strategy that will provide the best assurance for an advantageous partnership.

The successful implementation of the PPP model is crucial for any major infrastructure development.

It is now commonplace for State Governments to turn to the private sector to develop sustainable infrastructure, enabling the public and private sectors to collaboratively work together for the benefit of the larger community.

In summary, there is no standardised solution that guarantees the success of a PPP. However, having these five factors in place can form the basis of a mutually successful partnership and provide benefits to both sectors (public and private), which outweigh any that could have been achieved individually.

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