Over the last two decades, the balance of project risk allocation between public and private parties has generally shifted in favour of the public sector. Whilst PPPs are still regarded as offering greater whole of life risk transfer benefits for Government, we suggest there has been a gradual convergence across all hard dollar models to a relatively onerous risk imbalance in key areas of the delivery phase. There are a number of reasons for this trend, with key drivers being a relatively limited pipeline in Australia and the competitive dynamics of the bidding process. This trend has, in some instances, been in tension with the principle that risks should be allocated to the parties best able to manage them.

There is now a perceptible shift in market sentiment. In some cases, large contractors have opted not to bid for government infrastructure projects and some international contractors are going further with open discussions about exit from the Australian market.

The need for a correction has not gone unnoticed by Government. In 2018, the New South Wales Government's Construction Leadership Group released an Action Plan, which included a commitment to procure and manage projects in a more collaborative way. The plan commits to moving away from a reliance on fixed price, lump sum procurement methods, being more open to collaborative contracting models like alliancing and adopting expedited engagement processes like ECI where the project risk profile and value for money justifies this. Incentivised Target Cost contracts are also gaining traction in the right circumstances.

Despite this, the D&C and PPP models are not broken. When properly utilised on the right project, they can deliver positive outcomes and value for money. Recent research conducted by Infrastructure Partnerships Australia on social infrastructure PPPs in Australia and New Zealand painted a positive picture of the PPP model, with the vast majority of the analysed PPPs delivering on the service promised to Government and also producing long-term value for money outcomes.

Accordingly, rather than throwing out the PPP model, we suggest that the disruption of the COVID-19 pandemic is a good opportunity to pause and rethink aspects of the traditional risk profile and simplify some of the unnecessary contractual complexities that have evolved.

Different approach to known uncertainties

Key risks that frequently affect large infrastructure projects include interface risks (such as interactions with existing infrastructure, utility providers, and adjoining owners) and geotechnical and latent conditions. Notable recent examples where these risks have given rise to significant issues between the contracting parties include Sydney CBD Light Rail and West Gate Tunnel in Melbourne. The challenge going forward is to balance the right allocation of these risks given growing market wariness and the limited information generally available during the bid process to enable contractors to assess and price contingency combined with the standard lack of reliance on offer from the client.

The NSW Government's Action Plan recognises that "not all risks are capable of being fully assessed, priced, managed or absorbed by the private sector" and suggests that the types of risks mentioned above instead be managed collaboratively. In recognition of this, the Action Plan indicates that the NSW Government intends to seek the market's views about the extent of due diligence which would be needed to reduce "in-ground" and other risks which are difficult to forecast, including Government warranties for the factual accuracy of investigative reports.

Various solutions proposed by industry participants in addressing these key risks and providing more certainty of outcome for principals include:

• Early contractor involvement or interactive tender processes to promote a more informed understanding of project risks and potential mitigation measures to enable improved risk allocation and provisioning;
• Early works or enabling works packages to "de-risk" the project; and
• In relation to issues relating to ground conditions, inviting pricing based on a 'geotechnical baseline', and tailoring latent condition clauses to reflect that baseline.

Our suggestion is that these risks should be considered and managed on a 'bottom up' and 'project by project' basis. That is, rather than have standard wording that shifts any particular risk to the contractors (or reserves any risk to Government) (in either case based on template drafting or simply adopting the approach of the last project), time should be taken at the start of a project with the technical teams to understand the specific risks inherent in the particular project context. Then, with that background and understanding, look at how that risk or those risks can be mitigated through additional due diligence and disclosure or addressed in the contractual documentation.

Rebalancing and better managing these risks will be a critical factor in the long term sustainability of the infrastructure industry in Australia.

Increasingly complex contractual process

As Australian experience with major projects has increased over the years, so too has the complexity of the contractual processes and volume of documentation. The page count for modern day PPP project deeds is often more than three times that of some of the earliest Australian projects, with the page count growing from 100 pages to 300 or even 500 pages in the last 20 years.

Undoubtedly, deals have become more complex over time. Nonetheless, some of the contractual processes now accepted as 'standard' could be simplified, including to reduce administration and costs. The Infrastructure Partnerships Australia report on social infrastructure has raised concerns about the time and energy it took for FM operators to address variation issues due to the administrative burden of the contract details and processes, noting that in some cases the contractual 'process' is used as an excuse to delay or avoid action. In Victoria, the Department of Treasury and Finance has consulted with industry and developed a rationalised, standard PPP Project Deed for Social Infrastructure. This is a welcome step, but there is always more that can be done.

The design review process is a case in point. This ordinarily involves each stage of documentation having to pass through the hands of a number of parties before approval. The process of design document creation, review and ultimately approval can often see a particular design being checked and approved by up to five different parties – twice by the consultant design team (as a draft and then as a peer review), by the D&C Contractor, by Project Co and then again by the State. The process is further extended when one of the reviewing parties provides comments which require the initial design document to be amended, in which case re-design and re-submission are added to the process. Any given set of design documentation will also need to be produced at multiple design stages, including as a minimum, at preliminary and then advanced design stages before the 'for construction' version of the design documents are finalised. 

Understandably, clients want to have input into designs before they are too developed to make adjustments. While the design review process in principle is an important quality assurance mechanism, each stage of review increases time and cost for the project. In some cases, there comes a point when further review of a design document only serves to delay progress and add costs without producing an equivalent increase in value by way of improvement to or quality assurance of the design.

With this in mind, one suggestion is that Government and industry work together to develop a 'best practice model' for design review, with a view to simplifying the process without reducing overall quality. This may involve an agreement by the State and the private parties to appoint a peer reviewer or 'verifier' to review design compliance at key stages in order to streamline or reduce the design review stages.

Longer and more involved Government procurements

The cost of tendering for major projects in Australia has increased exponentially. The factors driving the increase include the tendency to involve a number of bidders for a sometimes prolonged procurement period and the requirement for bidders to provide detailed deliverables as part of the tender submission, including highly advanced designs.

Requiring this greater detail in bid submissions is intended to enable the client to be able to make a more informed decision in awarding the final contract. However, excessive bid costs are often in the millions of dollars and serve to deter potential bidders from entering the process, or even the Australian market. Over the medium to long term, there is a risk that this will discourage bids and ultimately diminish the pool of regular bidders for large infrastructure projects in Australia.

The NSW Government's Action Plan sets out an approach which seeks to address this issue, including by minimising the design documents and project-specific plans that are required to be submitted before selecting the preferred tenderer, reducing the time that unsuccessful bidders are kept on "standby" pending resolution with the successful bidder and avoiding changes to evaluation criteria after tender documents have been issued. The Action Plan also indicates a willingness to partially reimburse bid costs for unsuccessful tenderers where required to promote market competition.

Going forward

As the world is forced to reconsider all manner of established practices during the COVID-19 pandemic, this represents an opportune moment to do the same with the way we approach major projects. This is the time for Australia to be brave and innovative.

Our infrastructure team is available to support you with any queries.