I chatted recently with David Baxter, an infrastructure specialist with significant experience in public-private partnerships. He shared some of his insights with me.
He gave me some meaningful comments regarding challenges facing governments in providing public infrastructure and how commercial interest can be created, risks shared and benefits for communities achieved.
So how would you characterise recent PPP activity in the Pacific?
Much of the activity seems to be focused on small island nations or be tied into China’s Belt and Road Initiative. Although there is great merit in building up these island nation trade capabilities through the improvement of port and airport facilities, the following questions need to be asked:
- Are these facilities being constructed in the interest of the host nations or are they being built for geopolitical leverage?
- Can these small island nations and even bigger nations afford these projects?
- Are adequate feasibility studies being done on the financial and commercial viability of the projects?
- Are full and competitive procurements being pursued?
- Is the long-term sustainability and resilience of PPP projects being considered?
Many countries have PPP policies in place and a PPP unit located in their Treasury or Finance departments. What are some of the biggest mistakes you have seen in implementing PPP policy?
The following are the most common that I see:
- In many instances, the PPP Units are the initiators of PPP projects when they are imposed upon unwilling line ministries which have not always been consulted on the viability or desirability of projects.
- Often the laws and best practices that are introduced, get ahead of institutional ability to implement the laws accordingly and so delays occur as everyone tries to meet requirements imposed by regulators.
- In some instances, the PPP Units try to be autonomous of the Treasury or the Finance Ministry (for political reasons) and this then leads to conflict between the institutions that is not healthy in the long run.
- Often the PPP Units do not have well define mandates and this leads to confusion on whether they should provide technical support to government institutions or whether they should be the initiator of PPPs. It is important that they realize that their activates should subject to national procurement laws and they are not a law unto themselves.
What characteristics do you think differentiate infrastructure PPPs from other types of PPPs?
Primarily the greater level of due diligence that needs to be completed on private sector partners due to the long-term commitments that are required and their ability to manage risk for 30 + years. Most typical contracts rely on the design-build element. PPPs require financing and O&M on top of this which requires that the public sector must monitor the performance of its long-term partner and the performance-based parameters.
What are the most significant conditions necessary to ensure an infrastructure PPPs is successful?
Appropriate allocation of risk during the feasibility, procurement, and contract award stages and monitoring and immediate mitigation of risk when it occurs.
PPPs are often seen as a panacea for difficult national budget circumstances. What are the risks around developing PPPs with this as the prime consideration?
In many instances, PPPs should not be implemented because they do not pass the litmus tests required such as Value for Money, commercial and financial feasibility, etc. They cannot be seen as an automatic panacea, it needs to be proven that proposed projects are viable and feasible as well as sustainable to be a panacea.
What governance arrangements are more effective for infrastructure PPPs?
Governments need to be fully engaged in the management of PPP contracts. They cannot step away and only engage the private sector partner when the close-out phase is reached. Many government employees do not understand the level of commitment required from their side and the need to have a technical understanding of PPPs to ensure that they are implemented correctly.
Is a rigorous public sector comparator really that important for an infrastructure PPP?
Most certainly in countries that are still developing or which are launching their first PPP projects. As PPP national markets mature, the private sector can become a more competent partner and this leads to a more trusting and professional collaboration.
PPPs often address a particular infrastructure service or need. How effective are they in addressing asset maintenance and preservation of benefit streams from existing infrastructure?
Brownfield PPP projects can be a minefield due to many unknowns. However, experience gleaned from existing projects and infrastructure can be beneficial – so it depends. However, I believe that every PPP project is unique and thus a certain amount of innovation is necessary to improve asset preservation and to do it better than it was done in the past. The goal should always be simple – do it better each time.
PPPs are inherently commercial in nature, as risk along with return is transferred to the private sector. How can social benefits and returns be properly incorporated in the development of PPPs?
I believe that this has to do with a mature and well-defined understanding of Value for Money: adherence to people first PPPs is an option as well as incorporating the SDGs into project goals and objectives. This can help project proponents determine the non-commercial elements of risk transfer in socially beneficial projects and the possible subsidies that might need to be introduced to offset non-commercial vitality pertaining to certain risks.
If every PPP had to contain one mandated element, what would that be?
By answering the following questions –
- Why are we doing this as a PPPs?
- Are we confident that this should be a PPP?
Good answers require completion of due diligence, gaining political support, full stakeholder engagement and full disclosure of all information to all private sector parties equally, so that they all understand the merits of the project.
If these answers cannot be motivated and supported fully – do not do it as a PPP.
David, thanks so much for making the time available to talk with us and share these insights.
BHP has announced it will be reducing the amount of time it takes to pay its suppliers to thirty (30) days:
This has a number of significant, positive impacts on its supply chain in the Mackay region. The effects will be felt across hundreds of firms in the region.
Earlier this year Lytton Advisory did analysis on the impacts of extended payment terms for the Resource Industry Network, which included some modelling of different effects. Details of the report are publicly available:
Last month I introduced day two of the 2018 PNG Investment Conference in Brisbane. This included an overview of some key PNG infrastructure sectors and an observation that the country needed to increase its infrastructure spending.
A great collaboration with the Department of Transport and Main Roads and Aurecon.
Lytton Advisory prepared cost benefit analysis modelling of this active transport infrastructure program for TMR, drawing on great research and analysis undertaken by the project team.
Queenslanders will continue to benefit from TMR’s engagement in developing further active transport infrastructure.
Many thanks to all who contributed to this.
Quality versus cost, speed of measurement versus accuracy of measurement, planning time versus build time, lightness versus strength. It is impossible to maximise the response to every factor in an economic analysis. Good economics is neither maximisation of every consideration nor even compromise among them; it is optmisation among options.
Accuracy is the absence of error; precision is the level of detail. Effective economic problem solving requires being accurate; but only being as precise as is helpful at any given stage of problem solving. In the pre-feasibility phase of a project, accurate but imprecise methods, rather than very exact methods will all consideration of all reasonable economic approaches. It will also minimise the tracking of needlessly detailed economic data.
Very pleased to see that my colleagues at Queensland Department of Transport and Main Roads and Aurecon will be presenting our analysis on the economic benefits of cycling infrastructure at the National Traffic and Transport Conference of AITPM in mid-August. The abstract is available here:
Image: Southbank, Brisbane. Source: Brisbane Tourism.
Clear thinking is a prerequisite for good economics. This leads to improved decision making, and that creates better outcomes.
The next time someone claims to be making an economic decision or proposes an economic course of action; dissect their claim or assertion. You do not need to be an economist to do that. There are five simple signs for good economic decision making:
- Decision to be made is articulated
- Available choices are considered
- Measurable objectives are described
- Input variables are identified
- Relationship between variables is determined
Without these famous five, the risk is the economic decision may be dead on arrival.
Installation of new infrastructure assets creates streams of services and improvements to existing services for users. Benefits accrue to these uses as well as a wider set of stakeholders. Maintaining the service potential is a critical element in ensuring that value for money is achieved from the initial capital investment.
However, many governments and asset managers are under significant pressure to trim maintenance budgets and scrimp on operating costs. In some contexts, this emerges as an extreme build-neglect-build scenario. Many Pacific Island nations experience this, as do a number of smaller Australian local government authorities. The full lifecycle cost of infrastructure assets is not factored into the budget planning processes of these organisations. Similarly, many private sector operators of infrastructure have commercial and financial incentives to focus on next quarter financial performance rather than long-term service provision from these assets.
The back end of infrastructure is seen as much less interesting, but it is where all the benefits are generated. So approaches to operating and maintaining these infrastructure assets is as equally critical as the planning and investment decisions to deliver them.
Two broad maintenance strategies are predictive maintenance and condition based maintenance. Predictive maintenance is like regular scheduled servicing based on the design performance of an infrastructure asset. It is less costly to implement but also less likely to match the actual performance of the asset. Condition based maintenance requires the collection of data and information about the actual performance of the asset and provision of a tailored asset maintenance response.
The approaches set up an economic challenge. Should an infrastructure manager simply maintain its assets according to schedule and only collect data and information on condition at the times of regularly scheduled servicing? Or should some initial data costs be incurred to change and adapt design-based, predictive maintenance? Decisions to underfund reasonable maintenance activities need to be made with good information and in an appropriate strategic context.
So it depends. In one sector, for example, the response is clear but not clear-cut. Analysis of wind turbine maintenance to address gearbox, generator and blade failure scenarios shows that for small wind turbines, predictive maintenance is more cost effective than condition based maintenance. Condition based strategies were based on an array of sensor data (optical, oil, vibration and temperature). However, for larger turbines, condition based maintenance where there is a high expected gearbox failure rate is a much better approach. In that instance, the cost of collecting additional data and information enables timelier and more appropriate servicing of the turbines.
For these reasons, infrastructure owners and managers need to ensure there are effective asset management and maintenance policies included in their strategic asset management frameworks. It is not enough to supply the assets, as only the services from them will be able to generate the full suite of expected benefits. This can only be achieved when the design potential of these assets is realised over time.