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AN OVERVIEW OFDELIVERYSTRUCTURESUSED IN MAJOR ANDCOMPLEXINFRASTRUCTURE,PROCESS PLANT, MININGAND PUBLIC-PRIVATEPARTNERSHIP (PPP)PROJECTSAndrew ChewSenior Associate

INTRODUCTIONThis paper provides an overview ofsome of the delivery structuresused in majorand complexinfrastructure, process plant,mining projects, public-privatepartnership [PPP) projects andprovides a comparison of theadvantages and disadvantages ofthese delivery structures.

The delivery structures discussed inthis paper are:

[a} Engineering ProcurementConstruction ['EPC');

[b) Engineering ProcurementConstruction Management('EPCM');

[c} Managing Contractor;

[d) Alliancing; and

[e} Public-Private Partnership(,PPP'l.

CHOICE OF DELIVERYSTRUCTUREChoosing an appropriate deliverystructure is far from an exactscience-there is no formula intowhich each project's peculiaritiesand owner's requirements can be'plugged in' toproduce the mostsuitable delivery structure.Ultimately, the choice of deliverystructure is a risk managementexercise in itself, involving abalance of various factors,including:

[a) the degree of complexity of theengineering process in the projectand how much control the principalwants over design developmentand construction andcommissioning process;

[b} time constraints on the projectdelivery-for example, whether itshould be executed over a normal,sequential schedule or a fast-trackschedule;

[c} the experience and capability ofthe designers and constructioncontractors to be engaged todeliver the project optimally fromthe three key perspectives of cost,time and quality;

Choosing an appropriatedelivery structure is far froman exact science-there is noformula into which eachproject's peculiarities andowner's requirements can be4plugged in' to produce themost suitable deliverystructure. Ultimately, thechoice of delivery structureis a risk managementexercise in itself, involving abalance of various factors.

6 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #96 MAY/JUNE 2004

[d) the capabilities of the principal,including the degree of knowledgethe principal has about the intendedprocess, design, construction andthe extent and nature of theprincipal's resources [including theskills and expertise of theprincipal's team] etc;

EPC Contract

Subontracts

Design Consultants

[e) the size of the project [in termsof dollar value and complexity); and

[f) the requirements of thefinanciers to the project.

EPC DELIVERY STRUCTUREUnder an EPC delivery structure, acontractor is engaged to carry out

Principal

EPC Contractor

Construction Contractors

all aspects of the design,construction and commissioning ofthe project (at the end of whichprocess, it is said, all the principalneeds to do is 'turn the key' to startthe plant, hence the term 'turnkey'].

Suppliers

recovery of compensation ifsomething goes wrong with theproject. There are very feworganisations that will be able toprovide adequate financialguarantees to ensure that there issubstance behind the contractingparty in the event of a claim for thetotal failure of the project [whichcould be a big risk consideration fora project of the size of the Stanwellmagnesium plant].

HybridsThere have also been hybrids of theEPC structure used. Forexample,under a novated EPC approach, theprincipal engages designconsultants (under contractsobliging them to agree to beingnovated at the principal's directionto a construction contractor] tocarry out the design to anappropriate stage (generallyspeaking, a stage that is sufficientlyadvanced for the principal to feelcomfortable that it will receive thetype and standard of facility it isseeking, but not so advanced thatthe benefits of an experiencedconstruction contractor'sbuildability and other time-saving

AdvantagesThe perceived advantages of theEPC delivery structure for aprincipal include:

(a) single point responsibility-thecontractor is responsible whetherthe fault is due to a design orconstruction defect;

(b) costs-this form of deliverystructure can be more economicalas the design can take into accountconstructability issues (such asaccess, construction problems andparticular methods of workingemployed by the contractod whichcan result in substantial savings;

(cl time-it allows fast trackconstruction due to phasedconstruction;

(d) there is but one overall contractforthe principal to manage, withdesign (including often processknow-how) and constructionprovided by a single contractingorganisation; and

[e] the principal obtains thesignificant extra legal promise (notusually obtainable in either of thealternative delivery structu res] of awarranty of fitness for purpose fromthe contractor:

DisadvantagesThe perceived disadvantages of theEPC delivery structure include:

(a] the checks and balances thatare usually present when designand construction are separate donot usually exist, as the design andconstruction are being performedthrough one entity;

(bl under-design-this is notfrequently detectable by theprincipal's team, and may result inrecurrent operational ormaintenance problems and costs inthe completed facility;

(c) the difficulty of making anygenuine assessment or comparisonof prices submitted bytendererswhere designs differ ('comparingapples and oranges');

(d] if the principal finds that it mustdirect significant variations (usuallywhere it has not fu lly or properlyexpressed its needs up front in theuser brief/design brief), the EPCcontractor will usually be able toextract a significant price forcarrying them out; and

(e] a principal must generally relysolely on one organisation for

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #96 MAY/JUNE 2004 7

practical input will be lost). andthen the principal engages aconstruction contractor who agreesto accept the novation of, andresponsibility for, the work of thedesign consultants who enter intonew (novated) contractualarrangements with the contractor.

The perceived advantages for theprincipal include:

(a) the close relationship betweenthe principal and the designconsultants at the early stages ofthe project retains for the principalthe opportunity to monitor andprovide direct input into the designprocess;

(b) a closer relationship betweenthe contractor and the designconsu ltants in the later stages ofthe design process [than is usuallyachieved underthe EPCM ormanaging contractor deliverystructures) so that the design cantake account of constructabilityissues and methods of working ofthe contractor; and

(c) the principal still enjoys thebenefits of an EPC deliverystructure (including obtaining awarrantyforfitness for purpose

from and single point ofresponsibility in the contractor, anda higher degree of certainty in thedesign process compared to thestandard EPC structure).

The novated EPC deliverystructure's principally perceiveddisadvantage is that it can be moreexpensive delivery structure, asthere will usually be a degree of'double charging', as the contractorwill usually need to review thedesigner's design in order to becomfortable with taking overresponsibility for it.

In ourexperience, EPC deliverystructures are most commonlyused in the delivery of powergeneration facilities (including cogeneration facilities), water andwastewater treatment facilities, gasprocessing facilities, andtransportation projects [includingroad and rail) where the processtechnology is either lesssophisticated or is fairly mature[and thus principals require lesscontrol over the detailed design),the construction market has a largepool of contractors who areexperienced and capable ofsuccessfully delivering projects

using this mode of deliverystructure (and are willing to give awarranty for fitness for purpose tothe principal).

EPCM DELIVERYSTRUCTUREUnder an EPCM delivery structure,the principal engages an EPCMcontractor to carry out theengineering design, and to managethe procurement and constructionof the project. The principal willenter into direct contracts with thesuppliers and constructioncontractors for the project.

EPCM delivery structures areusually used in the delivery of largeprocess plants involving moresophisticated process technology,and where the principal is keen totake a 'hands on' approachthroughout the project, often withan expectation that getting thingsright will take constant 'fine tuning'variations to the design. Someexamples include the Lihir goldprocessing facilities in Papua NewGuinea, the Boyne IslandAluminium Smelter project inGladstone, Queensland and BHP'sHBI plant in Port Hedland, WesternAustralia.

Construction Contracts

Construction Contractors

PrincipalEPCM Contract

Supply Contracts

Suppliers

EPCM Contractor

Design Subcontracts

Design Consultants


AdvantagesThe perceived advantages of theEPCM delivery structure include:

(a] time-it allows fast trackconstruction due to phasedconstruction and project deliverycan be com petitive in overalldesign-construction time ascompared with an EPC approach;and

(b) the principal has better controlover the design development (thanin an EPC approach) especiallywhere the process technology ismore complex while at the sametime, the design can take intoaccount constructability issues(such as access, constructionproblems and particular methodsof working employed by thecontractor] by using theconstruction management skills ofthe EPCM contractor.

DisadvantagesThe perceived disadvantages of theEPCM delivery structure include:

(a) there is usually no firm projectcost established until constructionis well underway;

Principal

(b) neither the EPCM contractor northe construction contractorswarrant that the project whencompleted, will achieve all of theoperational requirements of theproject (that is, no warranty offitness for purpose);

(c) there is the risk that the overallquality and performance of theproject may be subordinated to theEPCM contractor's desire tomaximise the cost and timeperformance-based elements of itsremuneration. Forexample,because of the inability to projectcosts, various techniques are oftenadopted such as awarding a largerportion of the project early in theproject or setting targets for eachportion of the project work and thentrying to maintain the targets. Thetechniques used to minimise costoverruns can sometimescompromise the quality of theproject. In addition, the opportunityforthe EPCM contractor to cover upits own design deficiencies by theway it construction manages isgreater; and

Managing Contract

(d) the successful integration ofdesign and construction functionsand avoidance of changes/modifications to the design arelargely left to the EPCM contractor,and the principal may not be awareof potential conflicts of interest orweaknesses in the EPCMcontractor structu re that mayinterfere with economical andtimely project completion.

MANAGING CONTRACTORAPPROACHThe managing contractor approachis more akin to a projectmanagement approach. Under thatdelivery structure, the principalengages a managing contractor(who is usually a large andexperienced contractor) to assist itin only the management aspects ofthe project delivery process. Theprincipal enters into direct contracts(supervised on its behalf by themanaging contractor) with thedesign contractors, the constructioncontractors and the suppliers.

Managing Contractor

Engineering Contracts Construction Contracts

Design Consultants Construction Contractors

Supply Contracts

Suppliers

AdvantagesThe perceived advantages of themanaging contract deliverystructure for a principal include:

(a] the construction managementskills of the managing contractorcan be utilised without the inherentconflict of interest of it also being

the designer. The managingcontractor can play an active role inevaluating design tendered bydesign contractors, so as to effectvalue engineering to reduce costsand to make suggestions as to howto improve the performanceoutcome of the design;

(b) individual project componentsare performed by the most expertspecialists in those fields, so thateach risk is spread to those bestequipped to take it and thushopefully minimised, without·putting all eggs in one basket';


(c) there can be independentevaluation of costs, schedules andconstruction performance(including evaluation for changes/modifications in design);

(d) full time, objective co-ordinationbetween the design andconstruction contractors (bothhorizontally, between differentdesigners or between differentconstruction contractors, andvertically, between designers andconstruction contractors) isavailable; and

(e) if the management function iswell executed, project delivery canbe competitive in overall designconstruction time as compared withthe EPC approach and the EPCMapproach.

oisadvantagesThe perceived disadvantages fromthe principal's perspective include:

(a) in using a phased constructionapproach, the principal begins theproject before the total project priceis established. An issue is whetherearly completion is a sufficienttrade off for this cost risk;

(b) the principal has certainresponsibilities and obligationsunder the construction contractsthat must be met in a timelymanner-for example, delays in thedesign development or supply ofprincipal-supplied materials andequipment can have serious timeand cost consequences fortheprincipal;

(c) similar to an EPCM deliverystructure, it would be difficult toprocure a warrantyforfitness of theplant from the managingcontractor, the design contractorsor the construction contractors asthe managing contractor is notperforming either design orconstruction and neither theengineering contractors northeconstruction contractors are solelyresponsible for both the design andconstruction of the project;

(d) the success of projectimplementation to a great extent

stands or falls on the planning,estimating and projectmanagement skills and resourcesof the managing contractor; and

(e) the managing contractor doesnot usually give a guarantee eitherin terms of overall price or thequality of the work (this contraststhat of the EPC contractor).

ALLIANCING

What is an Alliance?Alliances are not new. They range insize from handshake agreementsbetween two companies to megadeals involving many participants.

An alliance is a businessrelationship between organisationsin which they share risks, poolstrengths, or integrate businessfunctions for mutual benefit.

Each participant in an allianceremains a distinct entity. The benefitof an alliance is not the length ofthe alliance relationship but ratherthe value of each allianceparticipant underthat alliancerelationship.

Alliance Projects inAustraliaAlliancing was first used inAustralia in the 1980s on theWandoo and East Spar offshore gasprojects. The operator of theWandoo oilfield constructed andinstalled the Wandoo B platformusing an alliance with fourconstruction and design companies.In the East Spar project, there wasan alliance between the operatorand engineering/constructioncontractors forthe design andconstruction of two subsea wells, asubsea gathering system andmultiphase pipelines. Since thoseoffshore projects, alliancing hasbeen used on other infrastructureand service areas including processplants, roads, dams, railways, waterand sewerage treatment plants,and outsourcing of servicesincluding facilities management,steel plants, railway infrastructuremaintenance, process plantfacilities, etc.

AdvantagesSome of the reasons given asperceived advantages of thealliance approach on those projectswere:

(a) flexibility to vary developmentconcept while maintaining scheduleand cost;

(b) joint owner/contractor approachto safety and environmentalobjectives;

(c) non-adversarial approach withcommon, ratherthan conflicting,project objectives;

(d) reduced project managementcosts due to fewer contracts andinterfaces and an integrated team;

(e) reducing bidding time and costs;and

(f) flexible access to contractor'sresources, thereby avoiding theneed for the client to develop alarge in-house engineering group.

Types of AliancesBroadly speaking, alliancing can becategorised into the following:

(a) .pure' or' project' alliances,which include projects such asSydney Water's Northside StorageTunnel Project and Priority SewageProject, the Queensland CleanFuels Project, the NationalMuseum of Australia Project,Western Australian WaterCorporation's Woodman PointProject and a number of roadprojects by the QueenslandDepartment of Main Roads,including the Georgina River Bridgeand the Port of Brisbane Motorway.These types of alliances are alsoincreasingly being used in NewZealand, including the FreeflowAlliance road project in Aucklandand the Project Aqua hydro-electricproject. They are also used by theDefence Materiel Organisation inthe ANZAC Ship and ProjectDjimindi, the anti-submarinewarfare lightweight torpedoprojects; and

10 AUSTRALIAN CONSTRUCTION LAW NEWSLETIER #96 MAY/JUNE 2004

[b) 'impure' or 'strategic' alliances,which include outsourcing of majorrail infrastructure capital andmaintenance works by the thenNSW Rail InfrastructureCorporation, State Rail Authority ofNSWand BHP Steel, offacilitiesmanagement by NSW Police,Alcoa, Incitec, and of EPC andmaintenance services by Santos,and the TVR telecommunicationsproject in New Zealand.

Pure AllianceA 'pure' or 'project' alliancetypically includes the following keyfeatures: 1

[a) the parties are collectivelyresponsible for performing thework and generally assumecollective ownership of all risksassociated with delivery of theproject;

[b) the project owner pays the nonowner project participants fortheirservices on a 100 per cent openbook compensation model whichcovers the project costs and projectspecific overheads, a fee to covercorporate overheads and 'normal'profit, and an equitable share of the'pain' or 'gain' depending on theproject outcomes compared withthe parties' joint targets. Thedownside to the non-owner projectparticipants is usually limited to theloss of the corporate overheads andnormal profit;

Higher

Project /' Pure' type alliances

No legal remedy except for 'wilfuldefault'

[c) the project is governed by a jointbody [typically called the ProjectAlliance Board or AllianceLeadership Team) comprisingsenior representatives of theproject owner and non-ownerproject participants, of which alldecisions are unanimous;

[d) day-to-day management of theproject is by a senior managementteam [typically called the AllianceManagement Team) and seamlessintegrated project teams where allproject members are chosen andallocated tasks on a 'best forproject' basis; and

[e) the parties agree to resolveissues or disputes within thealliance with no recourse tolitigation except in the case of 'wilfuldefault' .

Impure or Strategic Alliance'Impure' or 'strategic' alliances aresimilarto the 'pure' alliances interms of management structure(such as use of alliance boards,alliance management teams andintegrated project teams].remuneration structure [such asperformance based paymentstructure based on use of keyperformance indicators [KPls)) andobligations of the parties to workco-operatively and in good faith.

However, in 'impure' alliances, thenon-owner alliance participants

Project scope, cost and timing certaintiesI I

Legal remedy

[rather than all allianceparticipants) typically retaindiscrete liability for breach of theirobligations under the alliancecontract. and are specificallyobliged to discharge theirobligations under the alliancecontract. In these and otherrespects, these types of alliancesretain more of the features oftraditional contracting. than is thecasewith 'pure alliances' relying onthe management and remunerationstructures adopted to drivealliance-style behaviours, but witha less radical approach to riskassumption and liability.

This type of alliance is generallyused more for projects or situationswhere the parties are better able toidentify, assess and quantify therisks assumed. They are moregenerally used for conventionalconstruction projects [as comparedto the more 'risky' projects such asoffshore platforms orwhere theproject alliance participants areworking under severe time anddelivery constraints) and foroutsourcing of services [such asplant maintenance, facilitiesmanagement, and railinfrastructu re maintenance).

Risk SpectrumThe diagram below shows the riskspectrum for the different forms ofalliancing.

Lower

Strategic / 'Impure' type alliances

More traditional contractualremedy


Setting up a SuccessfulAlliance StructureThe parties to a new alliancerelationship should notunderestimate the cultural changeslikely to be required by them toachieve the necessarily more openrelationship and the transition forparties who are used to working in aprincipal/contractor relationship towork as 'blended teams'.

For a successful alliancerelationship, the parties must havea clear set of objectives, carefulselection processes and anexcellent working relationshipbetween the alliance participants.

It is important that all of thealliance participants have seniorexecutives in charge of theirinvolvement. However, that goesbeyond simply anointing an alliance'godfather'. The strategic allianceparticipants ideally need to developa class of alliance executive to buildcapability not only in existing butalso in future alliances.

In setting a successful alliancestructure, there are various aspectswhich are notable:

(a] benchmarking;

[b] senior managementinvolvement and commitment;

[c] evolution of the alliance;

(d] aligning the alliance with thecontractor's strategy-topmanagement must articulate aclear link between where it expectsthe contractor's future profit poolswill be, how to capture them andwhere such an alliance fits in thatplan;

(e] building systems andprocesses-alliance input needs tocome from the middle and bottom,not just the top, of organisationswhile the alliance parties may havedraft alliance mission statements orproject charters, there needs to bea fuller infrastructure which mayinclude tools such as corporatepolicies, best practice guidelinesand practice notes; and

(f] staff appropriately-to workeffectively, teams must be balancedand personally compatible.

PUBLIC-PRIVATEPARTNERSHIP rppp')

BackgroundOver the last 10 years, there hasbeen a marked increase inAustralia in co-operation betweengovernments and private sectorforthe development, financing andoperation of an array ofinfrastructure ranging fromtollroads, water and seweragetreatment plants, sewerage outfalltunnels, power stations, hospitals,schools, prisons to defence-relatedequipment. These Public-PrivatePartnership [PPP] projects wereprimarily driven by governmentstrying to implement projects withoutrecourse to public funding and alsoby governments to improve thequality and efficiency of deliveringthese infrastructure projects andongoing services to the public.

In Australia, PPP projects to datehave been generally based on theBuild-Operate-Transfer (BOT]model and have been essentiallyproject financed by the privatesector. They are more commonlyknown as private financinginitiatives or PFls or PFI PPPs.

Some recent projects that havebeen delivered or have beenproposed to be delivered inAustralia using a PFI PPP approachinclude:

(a] Roads (NSW-Cross City Tunnel,Western Sydney Orbital, Lane CoveTunnel, M4 East; Victoria-MitchamFrankston Freeway; QueenslandGateway];

(b] Rail Facilities [Victoria-SpencerStreet Redevelopment; NT/SAAlice Springs to Darwin RailProject];

[c] Prisons (Victoria-Sale RuralMen's Prison, Men's High SecurityPrison, Correctional FacilitiesProject);

[d] Educational Facilities [NSWSchools project-nine schools forthe Department of Education;Queensland-Southbank TAFEl;

(e] Hospitals [Victoria-MilduraHospital, Berwick Hospital, andRoyal Woman's Hospital (Melbl;NSW-Mater Hospital [Newcastle]and the Long Bay ForensicHospital); and

(f] Water and sewerage services(NSW-Prospect Water FiltrationPlant, Wyuna Water, Gerringong/Gerroa Wastewater; SouthAustralia-Riverland waterprojects).

PPP PoliciesThe Commonwealth and eachState and Territory governmenthave established their own set ofguidance and policy materials onthe delivery of PPP projects:

(a] CommonwealthCommonwealth Policy Principlesforthe Use of Private Financing2002;

[b] ACT-Government PurchasingPolicy and Principles Guidelines2000;

[c] Victoria-Partnerships Victoria2000;

[d] Queensland-Public PrivatePartnership Guidance Materials2002;

[e] New South Wales-Workingwith Government: Guidelines forPrivately Financed Projects 2001 ;

[f] Western AustraliaPartnerships for Growth 2002;

[g] South Australia-PartnershipsSA: Private Sector Participation inthe Provision of Public Services2002;

[h] Tasmania-Private SectorParticipation in Public SectorInfrastructure Provision-PolicyStatement and Guiding Principles2000; and

[i] Northern Territory-TerritoryPartnerships Policy Framework2003.


STRUCTURE OF A BOT PROJECT

Host Government Investment bankers,Legal counsel,

Technical advisors

Project Agreement

Government Agency Specia lAg reem ents Construction Contract Contractors

Project Company

Operation & MaintenanceContract

Operator

SuppliersSupply ContractsLoan Agreements

Insu rance Policies

Lenders

Insurers

Shareholders' Agreements

Sponsors

Source: UNIDO BOT Guidelines


Key PrinciplesThe structure of a PFI PPP dealgenerally comprise of:

(a) a concession agreementbetween the government and theprivate sponsor;

[b) the private sponsor entering intoa design and construct contract forthe project and a long termoperation and maintenanceagreement; and

[c) the funding arrangementscomprising various financing andequity documents.

The essential element of anyproject financing is that the projectfinancier's recourse is to theproject's assets and revenuestream. This is often described aslimited recourse financing.

There are three overridingconsiderations when designing therisk allocation structure for aproject-financed deal for deliveryof projects: 2

[a) the cost of the project in itsentirety-whilst the governmentwants to transfer most of the risksto the private sector and the privatesectorwants to reduce its riskexposure, the main consideration isthe efficiency gains and costs forthe project in its entirety;

[b) all substantial project risks haveto be identified, allocated andmanaged, and the project riskshave to be managed by acombination of financial resourcesand firm contractual commitments;and

[c) the risk allocation structure hasto be sufficiently sound [or sensible)to cope with a combination ofworse-case scenarios for theproject.

It is difficult to generalise about therisks applicable to any specificproject. The nature and extent of aproject and the circumstances andrisk appetite of individual sponsorsand their project financiers willaffect how each project risk will bemanaged and priced. Theviews of


the project financiers will determinethe mix of debt and equity to beused, and the creditworthiness andthe bankability of the project willdepend on the set of consistent andinter-related agreements betweenthe project parties.

Traditionally, in major projects orprojects involving project financing,the most common approach is forproject owners to enter into fixedtime/fixed price 'turnkey' contractsfor the delivery of the project sothat the risk of cost overruns, delayrisks and technology risks[depending on the technology usedin the project) are passed to thecontractor. The owner wouldnormally effect insurance for thoserisks which the parties are unwillingto assume.

Influences on RiskAllocationIn a recent survey carried out by theVictorian government,3 respondentsranked the following three factorsas being the most important on theactual [final) risk allocation for PFIPPP projects. Theywere:

(a) commercial requirements;

[b) bargaining power; and

[c) the financiers' requirements.

Rational risk allocation and thegovernment's preferred risk regimewere ranked fourth and fifthrespect ively.

As that report stated, theimportance of commercialrequirements indicates thatsponsors do expect a risk premiumin return for risk bearing.Respondents also indicated thatbargaining power was seen as thenext most important factor as thebargaining power largely restedwith the government (at least untilthe selection of the preferredproponent). Whilst it is consideredthat it is essential for governmentsto retain competitive tension in thebidding process to gain the bestoutcomes, it is also argued thatgovernments need to ensure that

they do not use this bargainingpower to transfer risks to theprivate sectorwhich cannot bereasonably managed by them. Thiswill result in higher risk premiumsor' projects may fail if these risksarise and cannot be well managed'.

As discussed in the previoussection, financiers' requirementsare a major influence on final riskallocation. This is the case for mostcurrent PFI PPP projects. Thefinanciers must be comfortable withthe risk to which their funds areexposed.

Value for MoneyFor governments, in choosing theappropriate form of deliverystructure (whether for a PFI PPP ornon-PFI PPP project). an importantquestion is whetherthe parties willdeliver 'value for money' and if so,how to optimise that value. Valuefor money is an expression of theeconomy, efficiency and theeffectiveness in which the publicsector bodies operate.

Generally, the major factorsconsidered when assessing valuefor money in PPP programs are:

• risk transfer-relieving thegovernment of the substantial, butoften undervalued, cost of assetbased risks;

• whole of life costing-fullyintegrating up-front design andconstruction costs with ongoingservice delivery, and operational,maintenance and refurbishmentcosts;

• innovation-providing wideropportunity and incentive forinnovative solutions as to howservice requirements can bedelivered;

• asset utilisation-greateropportunities to generate revenuefrom use of the asset by thirdparties (which may reduce the costthat government would otherwisehave to pay as sole user);

• output based specificationservices are specified as outputs

and payment is linked to the qualityand timing of their delivery;

• performance measurement andincentives-these act as a means ofsecuring the delivery of theservices;

• private sector managementskills-ability of the private sectorto deliver management andoperational efficiencies;

• competition-the value for moneyof a project ,is easier to demonstratewhere there has been an effectiveprice-led competition.4

REFERENCES1. Ross, J, 'Introduction to ProjectAlliancing' paper presented at thePCI Alliancing ContractingConference, Sydney, April 2003.

2. UNIDO BOT Guidelines, Chapter8, Risk Identification andManagement.

3. Department of Treasury andFinance, Private Provision of PublicInfrastructure, Risk Identificationand Allocation Project, SurveyReport, 1999.

4. In 'Partnerships Victoria' projects,bids are assessed againstbenchmarks to ensure value formoney, as compared with the costto government to deliverthe projectitself. The Public SectorComparator benchmark can beused calculate the full, riskinclusive cost of providing theservice over the life of the project.Other factors such as nonquantitative risks in the proposedservice levels and capabilities aretaken into consideration in theoverall assessment.

Andrew Chew's article waspreviously presented at theUniversity of New South WalesFaculty of Law CLE seminar'Building and Construction Disputes'on 11 March 2004. Reprinted withpermission.


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