Public Private Partnerships Presentation to Construction ...

Public Private PartnershipsPresentation to Construction Specifications

Canada

Alternative Approaches to ProcurementMay 18th, 2006

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Agenda

Plenary Group Overview

View of Traditional Design-Bid-Build Public Infrastructure Projects

General Overview of the P3 Delivery Model

The P3 RFQ and RFP process

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Introduction to Plenary Group

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Plenary Group Overview

Plenary Group is an independent, specialist public private partnership business. Australian Head Office, Canadian operations are based in Vancouver and Toronto and focus entirely on P3 deals across Canada

Plenary Group’s business model represents a unique service offering in the Canadian P3 market. True to our name, the company brings a comprehensive and complete, or ‘plenary’ approach to all projects we undertake

Plenary Group will take an active role in all aspects of infrastructure projects including development, financing, construction and operations

Importantly, Plenary Group is seeking both the development and the long term ownership of P3 assets

Plenary Group is owned by its staff and by Deutsche Bank with specific project financing’s underwritten by Deutsche Bank

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Relevant Experience

Plenary Group’s senior management team in Canada and Australia have been working in the P3 market for more than a decade and have had key roles in financing projects under numerous P3 models and across all asset classes

The management team has had a combined involvement in structuring and financing more than 40 P3 projects

In Canada, the local management team had a role in the development of the P3 industry. While working within an infrastructure business for a major international bank these individuals led the bidding, structuring and financing of:

– $110m VGH Academic Ambulatory Care Centre, British Columbia

– $450m Abbotsford Regional Hospital and Cancer Centre, British Columbia

– $380m Anthony Henday SE Ring Road, Alberta

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Design-Bid-Build-Tender vs. P3 Procurement Process

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Traditional Design-Bid-Build

Process:

Identified need for renovation or new space

Functional Programmer is hired to work with the identified user group

The Public Sector Agency (PSA) hires an architect who then hires remainder of design team and specialists, working with user group representatives over a number of months to develop a design that conforms to the functional program

Typically, to conform to the traditional public sector model, a Quantity Surveyor will be brought on board at key intervals in the design process to confirm budget

100% design to building permit stage, project is tendered to open marketplace, on larger projects, pre-qualification of generals is usually preferred approach

Traditional models worked with some success in a stable construction market under normal labour and material supply conditions

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Traditional Design-Bid-Build

Shortcomings:

Lack of constructability input into the design at critical early stages

Lack of control over user group expectations and demands

Less ability to fast-track and phase construction due to uncertainty of overall costing until late in the project

Lack of control over choice of contractors with access to labour and critical sub-trades

Lack of incentive for innovations or for performance-based outcomes

Cost issues do not become apparent until very late in the process when design changes and construction changes are very expensive

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P3 Delivery Model

Widely used in UK, Australia and more increasingly in Canada

Provides a structured process to tender for design, build, finance and maintain new assets, typically through RFQ’s and RFP’s.

In BC, this process has been run on behalf of Provincial departments by Partnerships BC. Partnerships BC has now successfully run and closed 8 projects in the past three years

Process for a project can take 6-12 months to select a preferred proponent and to enter into final documentation. This can be a time and cost intensive exercise and given the significant upfront costs to be incurred by bidders, may require the payment of an honorarium to unsuccessful bidders

While front end intensive, once the financial close is reached, construction can start next day.

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P3 Delivery Model

Key Benefits of the P3 Process:

Model works, if structured appropriately, to transfer key risks from the public to the private sector that this sector is more able to manage effectively:

– Innovative design in context of competition

– Innovative use of different construction delivery methods and approaches

– Fixed time, fixed price construction delivery

– Fixed payments for the government (sometimes linked to CPI increases)

– Committed future investment in asset through life cycle program

– Fixed price operating costs

– Guarantees for condition of asset at handback to government

One of the key benefits of the P3 model is that it drives innovation and cost competition, without sacrificing quality

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P3 Delivery Model

In Canada design of public institutional facilities has largely been completed by architects who have sole sourced projects through a mandate and they typically respond to their client’s wishes through an extended user group process. The P3 model incorporates the benefit of architectural innovation with the budget discipline that the private sector can deliver

For example, the Abbotsford Regional Hospital project by leveraging the “at-risk” discipline of the development and construction incorporated the most current thinking on innovative healthcare design and infection control with all user groups having signed off on the final design of all aspects without the issuance of a single change order

The project is currently on schedule and on budget

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Basic P3 Project Structure

Equity Developer

Project Co.Lenders

Design/Construction

Maintenance & Capital ReplacementLease Payment

Sub-contracts

Equity

Debt

Site License

OWNER (GOVERNMENT)

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Design Development

Multi-stage sign-off process, P3 sponsor typically co-leads with Architect

Important process for private and public sectors

– Ensures pursuit dollars are being spent appropriately

– Allows competitive final bids to be submitted that meet Public Sector’s expectations

Interactive workshops

Project steering committee is convened with representation from Architect, User Group, PSA, contractor and P3 sponsor. The steering committee is empowered to make decisions on behalf of the project

– Focus and mandate of the committee has to be on what does or does not meet technical and performance requirements

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Construction

Typically, fixed-price, fixed time stipulated sum bid has been developed at RFP stage with allowances remaining to be detailed (typically higher level of allowances than normal due to timing of proposal and higher levels of unknowns but risk allocations are fixed between the team members)

Project steering committee formed at Design Stage continues it’s role and is now empowered to make construction-related decisions on behalf of the project

Reporting requirements are fairly rigorous and are intended to highlight and catch any issues at an early date to allow intervention by the Steering committee

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Operations and Maintenance

P3 sponsors take responsibility for the maintenance of the buildings, with experienced sub-contractors actually performing work on a fixed priced basis

Performance standards would be agreed in advance with the PSA and would be incorporated in the Project Agreement

P3 sponsors are responsible for managing the maintenance services and ultimately for meeting performance standards. Failure to do so will give rights to the PSA to set-off against its rental payments

Additional facility management services such as cleaning, cafeteria, etc. can be included in the services to be provided under the agreement

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Capital Replacement

As they are often called upon to take risk and provide operational performance guarantees, P3 sponsors have developed expertise in dealing with life cycle issues

– This typically involves engaging sub-contractors early in the process to consider all life cycle issues in designing projects and in determining upfront cost

– The major assemblies and systems are run through a life cycle analysis program which outputs the capital reserve funding required to repair and replace all major building components over the term of the concession granted by the PSA. This funding reserve is built into the financial modeling to assure that funds are available to maintain and protect the asset upon its handover to the PSA at the end of the term

P3 models are flexible with respect to how the PSA wishes to deal with this issue:

– P3 sponsors could take the risk and responsibility and factor charges into the lease payments

– P3 sponsors could share risk with the PSA by managing a fund with both parties taking upside/downside risk

– PSA could manage all life cycle replacement obligations themselves

Performance-based payments and hand back tests are then used to ensure private sector delivers on its obligations.

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Complementary Developments

For certain transactions the private sector can add value by introducing associated developments that provide subsidies to cost to public sector of key asset

These can range from basic ancillary retail within the development (i.e. coffee/gift shop in a hospital) or parking garages to complimentary site developments such as commercial office space or residential

Key determining factor is the underlying business case which must support the additional capital costs independent of the base asset case

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P3 RFQ Process

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P3 RFQ Process

Timing

– Process is typically longer than required, 6 to 8 weeks

– Standard list of requirements of corporate experience and resumes of team members

– Early warning of projects through the “grapevine” allows teams to form and prepare

– 3-4 weeks is all the time typically needed to assemble and structure a team to respond

Typical Pre-qualification requirements­ Developer/sponsor capability and role of each team member­ Design & Construction experience in type of project proposed­ Facility Management services and experience­ Financing Capability­ Typically a minimum of 3 teams are selected to go to the RFP stage

dependent on the caliber of responses received.

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P3 RFP Process

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P3 RFP Process

Single Stage RFP works best, A two stage process does not achieve desired result as proponents may view the first stage as being “not at risk” and may manipulate the process and prolong the selection, which in a rising construction market represents real risk to increase the costs or scheduled delivery of the asset

2 Types of RFP

- BFO (Build-Finance-Operate)

- DBFO (Design-Build-Finance-Operate)

Typical response timeframe of 60-90 days for BFO and 90-120 days for DBFO – depending on the level of detail required these timelines are very aggressive and require a highly intensive integrated team approach

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P3 RFP Process

BFO

Typically the project is fully designed to the building permit level, full sets of tender-ready drawings and specifications are provided to each team

Very few changes permitted to exterior and internal layout as user groups have signed off

Very little value to be added by P3 on the design aspect, innovation is limited to operations and performance-based value engineering

Submission includes hard-bids on capital, rents payable and operating costs with very little risk sharing or transfer

Due to its limitations on synergies and innovation between initial design and life cycle costing, the process takes little advantage of the benefits of the P3 model

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P3 RFP Process

DBFO

Typically a functional program, adjacency diagrams or tables and a list of technical, sustainability and performance specifications are provided

Requirements usually include Schematic level drawings, detailed architectural outline specifications, mechanical and electrical design briefs, code analysis, detailed facility management plan

Like BFO model, submission includes firm costs on capital, design soft costs, rent and operating costs but typically has additional built-in contingencies for design risk allocation between the team members

The more ability given by the PSA to control and shape the design and the less prescriptive the specifications are, the less risk contingencies that will be carried by the P3 partner

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Cost of Submission

Cost of assembling and submitting a DBFO RFP is of natural concern to private sector with the majority of bid costs relating to design, legals and other advisors

Given that bid costs are “at risk” to P3 Bidders, there is an expectation that advisors and the design team will also share in this risk through success-based team structures

Submission requirements should only include what is deemed necessary for evaluation

RFP’s typically have required too much information on technical side at a very early stage in the design which is typically not necessary to provide the required price certainty

– Fire suppression system plans

– Security/IT system plans

– Foundations/civil engineering design

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Samples of P3 successes

South Australian Police and Courts

Casey Community Hospital, Victoria,

Australia

VGH Academic Ambulatory Care

Centre

Abbotsford Hospital and Cancer Centre