Public-Private Partnerships (PPPs) for civil engineering and construction projects

BOO, BOT, DBFO, Design Build, PPP, procurment, public private partnerships,

November 6, 2023

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Public-Private Partnerships (PPPs) are collaborative relationships between Australian Government agencies and private sector companies aimed at delivering infrastructure projects.

A public-private partnership (PPP) is a service contract between the public and private sectors where the Australian Government pays the private sector (typically a consortium) to deliver infrastructure and related services over the long term. The private provider will build the facility and operate or maintain it to specified standards over a long period. The private provider usually finances the project.

The government client is typically seeking the whole-of-life innovation and efficiencies that the private sector can deliver in the design, construction and operating phases of the project.

A Public-Private Partnership aims to create value for money, reduce costs, and increase efficiency in civil engineering and construction projects.

In a PPP, the private sector partner provides financing, design, construction, and operation of the infrastructure project. Whereas the Australian Government provides support through policies, regulations, and funding. Both partners work together to share rewards and risks to achieve better results.

Features of Public-Private Partnerships in Australia

Though each Public-Private Partnership has its own characteristics, all PPPs still share common principal features. This includes risk and reward sharing between public and private infrastructure companies, contributions by the Australian Government through land, capital works, or other mechanisms, and payments from the Australian Government to the private sector based on service delivery.

Moreover, PPPs involve utilising private sector expertise to provide service-enabling infrastructure on design, finance, construction, operations, and service delivery.

Policy and Guidelines – Australia

The creation of the National PPP Policy and Guidelines aims to establish a uniform framework that facilitates collaboration between the public and private sectors. This partnership is designed to enhance service delivery by involving the private sector in the provision of public infrastructure and associated services.

All Australian, state and territory government agencies now apply the National PPP Policy and Guidelines to all public private partnership projects released to the market.

Public Private Partnership Models

Models for Public-Private Partnerships provide a structured framework for collaboration between government agencies and private sector companies to deliver infrastructure projects. These models outline the roles, responsibilities, and obligations of each party involved in the partnership and help allocate risks, share benefits and collaboration.

Below are a few models that Public-Private Partnerships use for civil engineering and construction projects.

Build-Operate-Transfer (BOT) Model

Build Operate Transfer (BOT) is a type of public-private partnership (PPP) where a private entity finances, builds, and operates a facility or infrastructure project for a specified period before transferring ownership and operations to the public sector. The BOT model is commonly used for large-scale engineering and construction projects such as roads, bridges, airports, and power plants.

The private engineering company constructs the infrastructure project, typically including the design, procurement, and installation of systems necessary for its operation. Once the project is complete, they maintain the infrastructure for several years and charge fees for using the facility. This includes tolls, fares, or usage charges. The ownership of the infrastructure is then transferred back to the public sector at the end of the operating period.

Melbourne’s East Link is a major highway project in Melbourne that was delivered through a BOT arrangement between the Victorian Government and a consortium of private companies led by Connect East. The consortium financed, built, and operated the highway, collecting user tolls until the concession agreement expired.

The BOT model for funding engineering and construction projects allows the public sector to leverage the private sector’s expertise and resources to deliver complex projects. Additionally, the BOT model transfers the project’s financial risk to the private sector, which can reduce the burden on the public sector’s budget. However, there is a concern that the private sector may prioritise maximising profits over the public interest, leading to higher user fees or reduced service quality.

Design-Build Model

Commonly referred to as the Build-Transfer model, the Design-Build model is a project arrangement where the Australian Government engages a private engineering company to undertake the design and construction. The successful bidder develops and constructs the structure while collaborating closely with the government agency to ensure requirements are all met. Once construction is complete, the completed infrastructure project is handed back to the government agency.

The design-build model in public-private partnerships enhances efficiency in project delivery by combining the design and construction phases. This approach ensures that the construction stage is completed more quickly as it reduces the project timeline. Moreover, it minimises potential disputes between multiple parties as the Australian Government entity provides the responsibilities.

There are a few disadvantages associated with the Design-Build model. Awarding a single contract for both the design and construction leads to decreased competition. This could lead to higher costs and reduced quality if the project is not properly managed. Additionally, the model may pose challenges in accommodating design changes once construction begins, as the design and construction teams are closely integrated.

Careful consideration and management are required to ensure the success of the design-build PPP projects.

Design-Build-Finance-Operate (DBFO) Model

The Design-Build-Finance-Operate (DBFO) model is a project delivery method in which a private sector consortium designs, builds, finances, and operates a public infrastructure project. The consortium is responsible for the entire project lifecycle, from planning and design to construction, financing, and operation. This approach allows for a more streamlined process, as the team that designs and builds the project is also responsible for its operation and maintenance.

The company handles everything from designing and building the project to raising the funds and running it for several years. During this time, they collect user fees or receive payments from the government agency or owner. The government agency then takes over the operation and maintenance at the end of the period.

The Melbourne Metro Rail Project is a $11 billion project that involves the design, construction, financing, and operation of a new railway line in Melbourne, Victoria. The project was delivered through a DBFO contract between the Victorian Government and a consortium of private companies led by Lendlease.

The DBFO Model allows more efficient use of resources, as the team that designed and built the project deeply understands its operations and can optimize its performance. Additionally, this model can attract private-sector funding due to the long-term involvement opportunity in projects. This ultimately eases the public sector on the costs funded by Government agencies.

However, using the DBFO model can be expensive for the private sector partners as they must cover the costs of designing, building, financing, and operating the project. Also, there is a risk that the private sector partner may need help to fulfil their obligations. The DBFO model can create a lack of competition, as the private sector partner may need more incentive to innovate or reduce costs once the contract has been awarded.

Build-Own-Operate (BOO) Model

The build-Own-Operate (BOO) model is a type of project finance structure where a private company is responsible for the design, construction, and operation of an infrastructure project. The company funds the project through a combination of equity and debt financing. Then, it operates the facility to generate revenue, which is used to repay the investors and provide a return on their investment. Once the project’s concession period ends, ownership of the facility reverts to the Government agency.

Sydney Metro Northwest is being delivered through a Build-Own-Operate contract between the New South Wales Government and a consortium of private companies led by ACCIONA. It involves designing, constructing, financing and operating a new metro rail line in Sydney’s northwest.

Brisbane Cross River Rail is also being delivered through a BOO contract between the Queensland Government and a private company consortium led by Pulse. The Pulse Consortium comprises CIMIC Group companies, Pacific Partnerships, CPB Contractors, and UGL with international partners DIF, BAM, and Ghella Investments & Partnerships.

The Build-Own-Operate model offers several benefits for funding engineering and construction projects, including access to private sector financing, faster delivery, and transfer of risks to the private sector. Private companies can raise capital through various sources such as stock markets, pension funds, and commercial banks, which can help to supplement public sector funding. Additionally, the BOO model creates efficiency and cost savings since the private operator has an incentive to minimise costs and maximise revenues.

On the other hand, there is a significant concern that the private operator may prioritise profits over the project’s quality of service for this model. Henceforth, the project’s size, complexity, and social implications must be considered when using the BOO model.

Concession Agreement Model

The Concession agreement model is when a private engineering company is granted a concession to finance, build, and operate an infrastructure project for a specified period. It provides a stable source of revenue for the private engineering company through user fees or availability payments and encourages private sector investment in developing new infrastructure.

Westlink M7 is a completed project connecting Sydney’s orbital motorway network to the M4, M5 and M2 in North New South Wales. It was built under a concession agreement between the NSW Government and the Westlink M7 Consortium. The Westlink M7 project was not only completed within its budget but also exceeded expectations by being delivered ahead of schedule.

The Concession agreement model can attract private sector funding for infrastructure projects and allow the Australian or State Government to focus on its core responsibilities. The model can promote innovation and efficiency in project delivery and operations, as private partners can optimise the project’s performance to maximise the returns.

However, the concession agreement model may not provide adequate returns for the private sector partner during the early stages of the project and can lead to disputes between the sectors regarding the terms of the agreement. Before this agreement is used, the suitability of this model for an infrastructure project is always carefully evaluated to ensure that the terms of the agreement are fair.

Joint Venture Model

The Joint Venture model is when government agencies and private engineering companies collaborate to develop and operate an infrastructure project. It shares risks and rewards between the two sectors and encourages private sector investment in developing new infrastructure. Moreover, the venture terminates when a civil project is completed or if one agency withdraws from the public-private partnership.

The advantages of using a joint venture model for funding engineering and construction projects include access to resources and expertise and the ability to tackle complex projects together. Joint ventures can also foster innovation and creativity by combining different perspectives and approaches from private engineering companies.

However, it requires a high level of trust and cooperation in the partnership, and it may take a lot of work to establish a joint venture agreement that is mutually beneficial. Moreover, it may lead to conflict between the public and private sectors regarding the distribution of profits and decision-making authority. Despite these challenges, the joint venture model remains viable for financing large-scale engineering and construction projects when properly structured and managed.

An example of a project that uses the joint venture model for funding is Sydney’s biggest public transport project, the Sydney Metro. The joint venture is between the New South Wales Government and a consortium of private companies, including John Holland, CPB Contractors, and Acciona.

The choice of model will depend on the specific needs of the civil engineering and construction project and the preferences of the public and private companies involved. Additionally, the success of a PPP will depend on factors beyond the chosen model, such as the parties’ negotiation skills and the contractual agreement’s effectiveness.

Ultimately, Public Private Partnerships have emerged as a popular procurement method in Australia’s engineering and construction industry. They are a valuable tool for Governments seeking to deliver civil engineering and construction projects. By balancing the strengths of both the public and private sectors, PPPs can help create sustainable, efficient, and effective solutions that benefit everyone involved.

Advantages and Disadvantages of Public Private Partnerships

Infrastructure Partnerships Australia (IPA) engaged the Allen Consulting Group, in conjunction with The University of Melbourne, to undertake a study of the efficiency of Public Private Partnerships (PPPs) relative to Traditional procurement approaches in the provision of public infrastructure in Australia.

Key findings include:

PPPs demonstrated significantly better cost efficiency compared to Traditional procurement, with potential savings ranging from 11.4% to 30.8%.
In absolute terms, the cost advantage of PPPs was economically and statistically significant, resulting in minimal cost overruns.
Over the next decade, approximately $400 billion is expected to be invested in Australian infrastructure. Based on the study, PPPs could generate around $6 billion in potential community benefits.
In terms of project completion time, PPPs were found to outperform Traditional projects, with PPPs finishing ahead of schedule on average, while Traditional projects often experienced delays.
Project size had a significant impact on time overruns in Traditional projects but did not negatively affect PPPs, showing that PPPs were more resilient to project size and complexity.
The study revealed that PPP projects were more transparent than Traditional projects in terms of publicly available data.
The actual benefits of PPPs to society may be greater than what the study measured, including the value of completing projects on time and providing earlier access to infrastructure facilities.

Source: Infrastructure Partnerships Australia

While Public Private Partnerships have successfully delivered major infrastructure projects across Australia, PPPs are not without disadvantages.

Some disadvantages of using a PPP model for major infrastructure projects include:

Higher Financing Costs: Private financing often comes at a higher cost than government borrowing. This can lead to increased project expenses and higher long-term financial obligations.
Profit Motive: Private sector partners in PPPs aim to generate profits. This can sometimes result in prioritizing financial returns over public interest, potentially leading to conflicts of interest.
Complexity: PPP agreements are typically complex and require extensive legal and financial expertise to negotiate and manage. This complexity can lead to delays and increased transaction costs.
Risk Transfer: While risk transfer is a key feature of PPPs, it can also lead to the transfer of risks to the public sector, especially when unforeseen circumstances arise. This can result in additional costs for the government.
Contractual Disputes: Complex contracts can lead to disputes between public and private sector partners, potentially resulting in legal battles, project delays, and increased costs.
Lack of Competition: In some cases, limited competition among private bidders can reduce the cost-saving benefits associated with competitive markets.
Longer Decision-Making Processes: The procurement and approval processes for PPP projects can be time-consuming, delaying project commencement.
Private Sector Monopoly: In cases where a PPP project grants exclusive rights to a private partner, it can result in a de facto monopoly, limiting competition and potentially leading to higher costs for consumers.
Loss of Public Control: The government may cede a degree of control over infrastructure and public services to private partners, which can raise concerns about accountability and public interest protection.
Social Equity Concerns: PPPs may not always address social equity concerns, such as providing access to infrastructure for disadvantaged communities. Profit-driven private partners may prioritize projects that maximize revenue.
Regulatory Challenges: Balancing the need for regulation with private sector involvement can be challenging, as overregulation can stifle innovation, while inadequate regulation can lead to negative consequences.

Despite these challenges, PPPs remain viable for delivering infrastructure projects across Australia.

Source: Commonwealth of Australia

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