Long Term Capital Works

Programming to Achieve Better Project

OutcomesThursday 06 October 2011

Paul NortheyGeneral Manager Capital Projects

MELBOURNE 70 km

BARWON WATER

• Assets $1 billion

• Revenue $128 million

• Connected properties 133,000

• Growth 2% p.a.

• 20 treatment plants

• 10 reservoirs, 38 service basins

• 6 groundwater bores+7 under construction

• 6,000 km water and sewerage pipes

VICTORIAN GOVERNMENTMinister for Water

WATERCORPORATION

Department of Health

EssentialServices

Commission

EnvironmentProtectionAuthority

Drinking Water Quality

Environmental Compliance

Pricing,Customer Service StandardsBusiness Performance

Ultimate accountability

Statement of Obligations

CONTEXT: CLIMATE UNCERTAINTY

CONTEXT: MULTI – SITE DEVELOPMENT

Above Ground

Decommission

Rehabilitate / Replace

Operate & Maintain

Create Assets

Below Ground

CONTEXT: ASSET MANAGEMENT

Above Ground

Below Ground

Capital Works Process

- PARMS (Water)- SIMS (Sewer)

- FMMS

- FOCUS

- Spreadsheets

CONTEXTHistoric Capital Delivery Performance

Approach to Delivery

CAPITAL PROGRAM

• “Horses for courses” for major projects• Recurrent works by operations departments (term &

individual contracts)• Majority of works through a program alliance

BARWON WATER ALLIANCE

150 individual projects4 (+2) years~$450m80 EFT staffLocal subcontractors

Barwon Water Capital Works – Project Phases

Concept Planning Functional Design

HandoverConstructDetailed Design

Operation

Project Initiator / Asset Planning

Client DeptCapital Works Alliance

Milestone 1

Project included in BW Corporate Plan Budget

Milestone 3Functional design

developed. Procurement

strategy approved.

Milestone 4Detailed design

developed (>75%). Bus Case / TOC approved.

Milestone 5

Asset is operable.

Milestone 6Commissioning

and Testing complete. Handed

over to Client.

Milestone 2Planning Business

Case approved. Project handed over to Alliance

Milestone 7

Asset capitalised. Gain/Pain share

determined.

Project Initiation

Rel

evan

t P

oli

cy /

Pro

ced

ure

s

Project Prioritisation

Capital Works Management

Committee Charter

Risk Management

DTF Gateway

Procurement Policy

Project Program

Business Case

Statutory Engagement

Community Engagement

Project Reporting

Project Transfer

Risk Management

Contract Delivery Strategy

Design Management & Review

Community Engagement

Project ReportingBudget Variation

Budget Variation

Statutory Engagement

Procurement Policy

Envir Management

Safety Management

Statutory Engagement

Risk Management

Design Management &

Review

Community Engagement

Project Reporting

Budget Variation

Envir Management

Safety Management

Probity

Procurement Policy

Project Program Project Program

Risk Management

Envir Management

Safety Management

Probity

Community Engagement

Quality Plans

Statutory Engagement

Project Reporting

Budget Variation

Risk Management

Envir Management

Safety Management

Inspection & Test Plans

Quality Plans

Statutory Engagement

Project Reporting

Budget Variation

Commissioning Plan

Project Transfer

Final Cost Reporting

Project Review

Project Completion

Barwon Water

Barwon Water Alliance

CONSTRUCTIONUse of Subcontractors• Most construction delivered

by subcontractors• Limited ‘self-perform’ on

higher risk jobs with day-hire labour.

• Safety inducted over 1000 inductees in contractor induction program.

• SQE contractor forums – network forming between subcontractor.

• Lead to pre-qualification panel reduce site supervision over time.

Colac Pipeline

• Has delivered program to date• Equal number of employee’s from each

partner has led to strong culture• Development opportunity for client staff• Improve capability and capacity of regional

contractors• Bundle procurement of material delivering

cost savings• Manage workforce in areas to achieve

efficiencies

ALLIANCE

Positives

• High transaction cost $500k

• Early KPIs have required lot of monitoring and reporting streamlined down to 6

• TOCs are not like old project estimates on tendered prices – all cost identified – this lead to some tension on early TOC approvals.

• Can create differing standards within client organisation between Alliance and no – Alliance projects

ALLIANCE

Negatives

MELBOURNE TO GEELONG PIPELINE

• Competitive tenders received for construction contract

• Leaving pipe material option open led to competitive process for the pipe supply contract

• Managed risks with uncertainty on design of realigned section

• Pipe and fittings delivered to schedule or earlier

• Low transaction cost – use of AS2124

MGP PROCUREMENT MODELPositives

• Number of separable portions leads to complicated contract management

• Involved tender essessment process – difficultly in assessing

• Standard contract requires updating

MGP PROCUREMENT MODELNegatives

CORIO BAY

GEELONG

N

Proposed Northern Water Plant NORTHERN

WATERPLANT

Shell Refinery

10 km to Black Rock Water Reclamation Plant

and ocean outfall

NWP PROCUREMENT MODELGetting the Model Right

• Client involvement in design – managing whole of life risks

• Cost certaintity:– Single margin competitively big up front– Competitively tendered work packages– Fixed construction cost

• Contractor carries design into construction, provide working facility following proving period.

• Operational hand over and training for Barwon Water staff

• Transaction costs around $250K

NWP PROCUREMENT MODELPositives

• Stage 1 cost estimate process inefficient and difficult to

administrate due to:– contractor incentivised to influence work packages to

increase margin return

– Work packages tendering process not fully transparent

– considerable effort required through independent estimator

and extended negotiations to bring cost down

• Delay and variation claims for inefficient process

• Paying for risk twice?

NWP PROCUREMENT MODELNegatives

BIOSOLIDS DRYING FACILITY AT BLACK ROCK$76 million

21

TO PPP OR NOT?• Is project of sufficient value?

• Is there a history of in-house delivery and operation of this service?

– Is it ‘core’ business?• Characterise risks

– Are risks significant?– Which party is in the best position to manage risks (can

risks be transferred)?– How will the private sector cost the risks that will fall with

them?

• Will a PPP deliver economic value to the public sector?

• Will the project’s value bear the transaction costs (typ. $2-3 million)?

• Project costs and schedule have significantly extended but at no cost to Barwon Water.

• Proponent has had full responsibility for managing difficult IR issues.

BIOSOILDS - PPPPositives

• No Barwon Water control on how project was delivered or timeframes

• Agreements made by PPP proponent can influence other Barwon Water projects

• High transaction cost - $2-$3 million

BIOSOILDS - PPP Negatives

CONCLUSIONChoosing The Best Model

s t r u c t ,

F i n a n c e &

O p e r a t e )

MAX

MIN

LOW HIGH

E P C M

MIN

MIN

MAX

MAX

MAX

MIN

A

L I

N C

L

E

A

PPP

Project Procurement Options (adapted from PricewaterhouseCoopers, 2005,unpublished paper)

DBO

DBFO

D&C

EPCM

CFD

RISK TRANSFER (PRICE PREMIUM)

PRICE CERTAINTY

TRANSACTION COSTS

FLE

XIB

ILIT

Y T

O C

HA

NG

E

CO

NT

RO

L O

VE

R B

UIL

D Q

UA

LIT

Y

SUMMARY• Five year Water Plan requires assessment of

required capital spend and appropriate delivery strategy

• Bundling of projects enables cost savings in procurement of materials and construction

• Alliance has delivered increased capital works program

• Thorough business cases and demonstrated ability to deliver increases potential to obtain government funding

Thank you