Michael Regan

Public infrastructure procurement: A comparative analysis of adversarial and non-adversarial contracting arrangments

Michael Regan — Tue, 24 Jul 2012 21:59:12 PDT

Most public infrastructure is provided by traditional procurement methods generally based on quantitative selection techniques and adversarial contracting principles. International evidence suggests that this method of contracting is inefficient, is often delivered late, and is often over-budget. Further, the adversarial nature of these contracts means that disputes over variations, changes to specification or renegotiation may lead to lengthy and costly ex post negotiations or civil action. The introduction of alternative procurement methods (APM) in the early 1990s introduced a less adversarial contracting approach in which ownership (of decision-making) and responsibility for design and operation of the service-producing asset passed to the contractor with the state adopting a regulatory role. The contract is non-adversarial to the extent that the relationship between the contractor and the state is one of long-term relationship management. Evidence suggests that APM is achieving better time and cost performance than adversarial methods and contributing to improved service delivery and lower lifecycle costs.

This paper reviews the theoretical literature with a view to understanding the relationship of the parties in a non-adversarial project procurement contract. It finds that the principal and agent view of traditional procurement may not be the best way to understand collaborative contracts where the relationship can be characterised as purely transactional – the principal is a buyer of services and the contractor is the producer. The paper also reviews the empirical evidence and finds that the characteristics of non-adversarial contract models such as the output specification, qualitative selection criteria, the alignment of responsibility for service outcomes and residual control rights, incentives, life cycle costing and risk-weighted value for money measurements, are improving project delivery performance and service outcomes.

Public private partnership units

Michael Regan — Wed, 13 Jun 2012 22:22:13 PDT

Public private partnerships (PPPs) are an alternative method for government procurement of infrastructure and are employed widely throughout the world to delivery better procurement performance and improved delivery of public goods and services. As a specialised form of procurement for delivering large, complex and highly networked infrastructure assets, PPPs require enabling policy frameworks, expertise in the selection, analysis, negotiation and delivery of projects and a good understanding of long-term contract management. In developed and developing countries, PPP policy is managed by PPP units formed within a central policy-making agency of government. PPP units require experience and technical skills across a number of disciplines, personnel must possess a good understanding of commercial issues and capital markets, and the unit must work collaboratively with line agencies to achieve PPP policy objectives.

This paper surveys international best practice for PPP units and finds that the effectiveness of PPP programs is improved with a well-designed PPP unit located in Treasury or a major agency of government and which is equipped with a wide charter, highly-skilled procurement specialists with strong transactional experience. The major challenges for the PPP unit include building capacity within government, cultivating a competitive bid market, developing a project pipeline, provide oversight and assistance to agencies and serve a technical support role within government. Countries that can design their PPP agencies to meet these objectives are more likely to have an effective PPP program than those countries that do not.

Evaluating the environment for public-private partnerships in Asia-Pacific: The 2011 infrascope

Manisha Mirchandani et al. — Wed, 15 Feb 2012 21:17:56 PST

Preface

This document comprises a summary and analysis of a benchmark index and learning tool that assesses the capacity of countries in the Asia-Pacific region to carry out sustainable publicprivate infrastructure partnerships, as of June 2011. The methodology is based on a similar study of Latin America and the Caribbean published in 2009 and 2010. The index was built by the Economist Intelligence Unit and commissioned by the Asian Development Bank (ADB).

The views and opinions expressed in this publication are those of the Economist Intelligence Unit and do not necessarily reflect the official position of the ADB.

An Economist Intelligence Unit research team, led by Manisha Mirchandani, Vanesa Sanchez and Manoj Vohra conducted the study. Michael Regan, professor of Infrastructure at Bond University, Queensland, was research consultant and project adviser.

September 2011

Impact of the capital market collapse on public-private partnership infrastructure projects

Michael Regan et al. — Wed, 15 Feb 2012 19:04:26 PST

The collapse of capital markets is having an impact of the funding arrangements for economic and social infrastructure projects in Australia. Bearing this in mind, this paper seeks to examine whether the current volatility and uncertainty in capital markets in Australia affects the feasibility of privately financed infrastructure and specifically the public-private partnership PPP method of procurement. This paper examines the role and dependency that capital markets play in funding PPPs, current market conditions, and how they will affect PPP viability. In addition, alternative funding and procurement mechanisms that can be used for short- and medium-term infrastructure deliveries are presented.

Comparative procurement methodology analysis in Australia: A new approach

Peter Love et al. — Wed, 15 Feb 2012 18:29:49 PST

A comparative review of procurement methods was undertaken for the purpose of objectively determining the relative strengths and weaknesses of the principal methods for the state procurement of economic and social infrastructures. The study concerned procurement alternatives commonly used
with large or complex projects and available to government, including:

o In-house provision using a state agency or works department
o Traditional procurement
o Outsourcing
o Build own operate and related forms of asset procurement
o Alliance contracting
o Public private partnerships.

Around 90% of state procurement in the late 1980s was traditional which employs a comprehensive input specification, a lowest price tender selection process, separation of the design and construction components of the project and an adversarial approach to contractual relationships. The main
measurement methods were delivery on time and within budget.

As traditional procurement is mainly concerned only with the delivery of assets, most performance measures concern the timeliness and cost of delivery and these are mainly applied at commissioning. Tender evaluation criteria may take into account the qualitative aspects of bids such as the bidder's credit strength, expertise and track record. However, these values are generally subordinated to price and few traditionally procured projects are evaluated again during their service life.

The development of a comparative procurement methodology involved a comparison of quantitative and qualitative outcomes. The evidence was sourced from the procurement outcomes of 124 economic and social infrastructure projects commissioned by governments or state agencies in
Australia, Canada, New Zealand and the United Kingdom.

The findings of this work show that PPP and outsourcing models are clearly the most effective methods of large or complex project procurement although it needs to be remembered that this method of procurement has limited in application and not appropriate for the majority of projects. PPPs are a better procurement option when the state is delivering services that can benefit from risk transfer, the certainty of lifestyle costing, and the integration of design and construct services, an output specification (innovation, new technology) and efficient management. The comparison also highlights the benefits of the shift from traditional adversarial contracting principles to a more collaborative approach that aligns agency and contractor incentives, an important driver of value for money procurement outcomes.

Integrating regional and infrastructure planning: Lessons from South East Queensland, Australia

Michael Regan et al. — Wed, 15 Feb 2012 18:29:47 PST

Economic and social infrastructure provision presents a conundrum for urban planners, especially in high growth regional economies experiencing strong population growth, increasing demand for infrastructure services and limits to their capacity to sustain long-term investment strategies. This chapter considers the South East Queensland (SEQ) regional economy and the policy decisions taken in recent years to embed and integrate both regional planning and regional infrastructure investment strategies through the statutory SEQ Regional Plan and SEQ Infrastructure Plans and Programs. This case study examines the benefits from this integrated approach as well as the challenges facing the region. Some of the benefits of the integrated approach include land use transport integration, a strategic approach to infrastructure provision, alignment of infrastructure planning with budgetary processes, and greater certainty for investments in the regional economy. The challenges for integrated planning are also numerous, and include ensuring close co-operation between three levels of government and the private sector, reconciling long term infrastructure planning with short term political imperatives, managing future uncertainty, and financing future investments in land use and infrastructure.

Infrastructure procurement: Learning from private - public partnership experiences 'down under'

Michael Regan et al. — Wed, 15 Feb 2012 18:29:44 PST

The public - private partnership (PPP) market in Australia is considered to be sophisticated and mature. Yet there have been several major failures that have occurred with economic infrastruc ture projects. Building on the experiences of Australia, we examine the underlying concepts of PPPs and the pertinent issues that have arisen during the procurement of infrastructure projects. Lessons learnt from implementing PPPs with respect to risk allocation, certainty, incentives, intergenerational equity and fiscal sustainability, and the cost of capital are identified and discussed. We conclude by suggesting that future research should focus on examining how PPP delivery can be improved rather than on determining their usage within the marketplace.

Procurement method selection in practice: A journey to discover the optimal

Peter Love et al. — Wed, 15 Feb 2012 18:29:42 PST

Determining the optimal procurement approach for capital works is a challenging task considering the array of procurement methods available and criteria that must be assessed. To assist a public sector client with this complicated decision making process, a procurement method selection process was developed. A focus group compromising of key stakeholders involved with an educational capital works project used the developed approach to determine an appropriate solution for their needs. Overwhelmingly, participants supported the outcome albeit, a small minority who had limited wider exposure to alternative methods initially perceived their bastion (i.e. a default Traditional Lump Sum (TLS), to be a credible option. Indeed, those participants with limited knowledge procured almost 95% of capital works projects using a TLS and did not adopt a formal approach to procurement method selection. As a clear indicator of demonstrable impact, it can be reported that the approach presented in this paper is now being used by the public sector agency responsible for capital works. The pragmatic approach developed enabled decision-makers to constantly re-evaluate outcomes during each stage of the process in the form of recommendations that were grounded in practice, reflection and detailed evaluation.

Editorial

Michael Regan — Tue, 04 Jan 2011 21:10:57 PST

Extract:

Welcome to Edition 7 of the Public Infrastructure Bulletin. The two articles we feature in this edition are both refereed and deal with matters central to the future of public private partnerships (PPPs) in Australia – state participation in the debt finance facilities used to finance the transaction and the likely impact of volatility in capital markets on public private partnerships (PPPs) in this country.

What impact will current capital market conditions have on public private partnerships? The South East Queensland regional economy

Michael Regan — Tue, 04 Jan 2011 21:10:56 PST

Extract:

Infrastructure is one of Australia’s largest asset classes and plays an important role in the economy’s productive capacity, output and microeconomic performance. Governments at all levels provide around 70% of economic and 64% of social infrastructure.

Public private partnerships: Improving the science of public procurement

Michael Regan — Tue, 04 Jan 2011 21:10:56 PST

Extract:

In 2005, the Australian Centre for Public Infrastructure published a report that reviewed the operation and performance of public private partnerships (PPPs) in developed economies worldwide. The report was updated in 2006 and will be reviewed and updated again in 2008. The report identifies a number of important characteristics of PPPs that are often missed in the public debate and these will be the focus of further research endeavour in the coming 12 months.

Australia's hybrid approach to project finance

Pierre Tapper et al. — Tue, 04 Jan 2011 21:10:55 PST

Extract:

Project finance generally refers to long-term, limited recourse debt structured to meet the specific requirements of capital-intensive resource and infrastructure projects. Project finance is designed to the strength of future cash flow and there is less reliance on more traditional credit benchmarks such as the credit standing of the borrower and the security value of the asset being financed.

Reviving regional economies

Michael Regan — Tue, 04 Jan 2011 21:10:54 PST

In recent years, the state of Australia’s regions has attracted unprecedented interest as governments, business and communities grapple with the social, economic and political changes that are reshaping remote and regional areas.

Measuring up: Dimensions of the Australian infrastructure sector

Michael Regan — Tue, 04 Jan 2011 21:10:53 PST

Infrastructure is widely regarded as a major asset class in Australia. Yet it is not recognised as a distinct group of assets in national financial accounts. What is the country’s actual infrastructure investment and why is this important? Michael Regan looks at the meaning of the term ‘infrastructure’ and provides an estimate of the size and relative importance of these assets in national economic terms.

What impact will current capital market conditions have on public private partnerships?

Michael Regan — Mon, 06 Dec 2010 22:09:02 PST

Extract:
This research report is prepared for the Infrastructure Association of Queensland and is a joint undertaking of the Association and the Mirvac School of Sustainable Development at Bond University. He purpose of this study is to examine the present and future use of public private partnerships (PPPs) in Queensland given recent events in international and domestic credit markets and prevailing capital market conditions. The essential research question to be answered here is whether current volatility and uncertainty in capital markets in Australia affects the feasibility of privately financed infrastructure and specifically, the PPP method of procurement.

Infrastructure for economic growth and development: The financing gap

Michael Regan — Mon, 30 Aug 2010 23:18:09 PDT

Extract:
Infrastructure is one of the most important tools for accelerating economic development in developing and transition economies. However, the benefits are not always uniform across nations; the results vary significantly between industries, and improved social returns from additional investment have more to do with the procurement method and operational efficiencies than the amount of money that is employed. This article provides a review of the role that infrastructure plays in strengthening economic development and poverty reduction and reducing trade costs to support improved regional cooperation and integration in Commonwealth countries.

Public private partnerships: What does the future hold?

Michael Regan et al. — Mon, 30 Aug 2010 23:18:08 PDT

Internationally, Public and Private Partnerships (PPPs) are being used across a wide variety of economic and social infrastructure projects in more than 85 countries. PPPs are a procurement methodology that brings a rigorous risk-weighted approach to major projects using a competitive bid process and private sector expertise and innovation. PPPs are achieving a number of significant improvements in major project procurement and improved public service delivery.

This paper considers the prospects of PPPs from the perspective of government clients and their promoters of PPPs and whether current volatility and uncertainty in the capital markets in Australia will affect the feasibility of privately financed infrastructure, and specifically, the PPP method of procurement. A survey of financial advisers and lenders indicates that present market conditions will be placing PPPs under pressure. Future PPPs will be subject to new disciplines – lower leverage, higher reserves, stronger underlying credit credentials, higher debt service coverage criteria and higher cost debt. This will affect both bid depth and state/government risk allocation with lenders expected to take a tougher approach to the support of delivery and operational risks. This suggests some impact on the value for money outcomes for the PPP model in the short-term.

The characteristics of PPPs will be reviewed in this paper using national and international sources in order to identify those features that will be essential in this new economic climate. From the literature and views of experts gained form its survey, the authors suggest that present market conditions do not close the door on PPPs, but do provide an opportunity for both government and industry to develop a more refined model that is more appropriate for the new environment. This may require a more scientifically costed approach to risk allocation, state guarantee support, improved underlying credit credentials and a rethinking of patronage risk. It is a shared responsibility. It is also likely to be a further step in the continuing evolution of alternative major project procurement mechanisms.

Critical foundations: Providing Australia’s 21st century infrastructure

Michael Regan — Wed, 26 Aug 2009 18:45:40 PDT

Extract:

Infrastructure is undoubtedly the least understood of the major asset classes in Australia. A tradition of public ownership and operation, its status as a public good and a lack of information about its investment characteristics in both public and private hands has contributed to limited recognition of its role in national and regional economies. However, this situation is changing. A coincidence of political, economic and financial events in the lead up to the worldwide economic recession of the late 1980s and Australia's microeconomic reforms of the 1990s b[r]ought into sharper focus the central role that infrastructure plays in both developed and developing economies. Evidence indicates that infrastructure contributes to an economy's performance, productivity and rate of growth. This suggests that establishing an optimal level of investment, improving coordination and planning by governments and greater private sector provision in supply and operation of infrastructure has important implications for Australia's future economic development and standard of living.