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e-mail: g@zietlow.com

http://www.zietlow.com

http://www.performance-based-road-contracts.com

Dr. Gunter Zietlow

Road Asset Management and

Performance Based Contracts

Asian Development Bank (ADB)

Manila, July 29th 2015

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Overview of Presentation (1)

Introduction

What is Good Road Asset Management?

PBC concept Background

Characteristics

Brief History

Benefits

Performance standards

Risks

Performance monitoring

Payment and Incentive Systems

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Overview of Presentation (2)

Key external and internal factors associated with the implementation

of PBCs

Framework (Legal, Financial, Institutional)

Role and capacity of road agencies

Role and capacity of consulting and contracting industry

4

Overview of Presentation (4)

Implementation experiences in developed and developing countries

Lessons learned

Role of financing institutions

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Introduction

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Source: Unknown

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Road Conditions in the 1980s

In spite of their importance, roads in many developing countries are still

under-financed, poorly managed and

badly maintained.

Normally, only 20- 40% of the amounts required is being spent on routine and

periodic maintenance.

1/3 of the main road networks are in good

1/3 in regular and 1/3 in poor condition.

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Importance of Timely

Maintenance

When roads are in poor condition every $ saved in road conservation will cost:

$ 2 to road users in additional vehicle operating costs and

$ 2 to the road administration (or the tax payer) in reconstruction

and rehabilitation costs.

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What is Good Road Asset

Management?

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Road Asset Management (RAM)

Good Road Asset Management is a systematic process of maintaining,

upgrading, expanding and operating

road, bridge and road side assets, using

engineering principles with sound

business practice to effectively and

efficiently allocate and utilize resources

for the provision of well defined levels of

service to satisfy public expectations.

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In the long run

the best way of effectively and

efficiently manage road related assets

is through Performance Based

Contracting (PBC)

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PBC Concept

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Performance Based Road Contracts

Performance Contract (Western Australia)

Asset Management Contract (USA)

Performance-Specified Maintenance Contract (Australia, New Zealand)

Contract for Rehabilitation and Maintenance (Argentina, Brazil)

Area Maintenance Contract (Finland, Ontario/Canada)

Managing Agent Contract (UK)

Output and Performance Road Contract (World Bank)

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Type of Contracts

Method based contract Unit rates for work items

Payments are based on quantity of completed and measured work

Pure performance contract (PBC) Performance Standards or Service Quality

Levels

Fixed monthly payments if service quality levels are complied with

Hybrid contract (PBC) Mixture of method based contract and

performance contract

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Characteristics of PBC

Performance or Service Levels define the minimum conditions of road, bridge and traffic

assets as well as the management and operation

of the assets during the entire contract period,

leaving it mainly to the contractor as to how to

achieve them.

Lump sum payments are made periodically (mainly monthly) and might be adjusted in

accordance with the change of certain factors,

like inflation or unexpected increases of traffic

volume.

Major emergency, rehabilitation and improvement works might be paid based on unit prices for

works agreed case by case.

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Characteristics of PBC (2)

Deductions are being made for non-compliance with terms and conditions of contract, especially

with respect to the service levels.

Duration of contracts should at least include one periodic maintenance cycle (4-5 years for gravel

roads and 8-12 years for bituminous roads). Pure

routine maintenance contracts are normally

between 1-3 years. Pilot contracts may be of

shorter duration.

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Characteristics of PBC (3)

Complexity

Contract duration in years

2 4 6 12 10 8 14

Routine

maintenance

Routine and periodic

maintenance

Construction, periodic and

routine maintenance

Up to 30 years

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Characteristics of PBC (4)

Duration of contract

Relationship of required skills as a function

of the duration of PBC

Typical RAM skills Prediction of asset deterioration

Quality assurance management

Typical contractor skills

Skills

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Characteristics of PBC (5)

Road Network

Management and Operation

Routine

Maintenance

Periodic

Maintenance

Rehabilitation Improvements Emergencies

Potential Scope of Services and Works

Winter

Services

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Characteristics of PBC (6) Contractual Relationship Full PBC

Client/

Road Administration

Consultant/Contractor

Full Performance Contract

Audit

by Client

or External

Auditor

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Characteristics of PBC (7) Contractual Relationship with Hybrid Type PBC

Client/

Road Administration

Road Manager

Engineer

New Type

Contractor

Performance or

Conventional Contract Hybrid type PBC

Inspection of Compliance with Service Levels

Supervision for Admeasured Work

Audit

by Client

or External

Auditor

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Typical Implementation of PBC

Options

A. Paved roads (corridor or network)

1. Pure routine maintenance

a) Off-road maintenance (1-3 years)

b) All routine maintenance, except for risky items (1-5

years)

c) All routine maintenance (4-10 years)

2. Rehabilitation, backlog maintenance, routine

maintenance, winter services, periodic

maintenance, Emergencies

a) Only routine maintenance paid on lump-sum (5-

10years), rest on unit prices

b) Paid on lump-sum (10-30 years)

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Typical Implementation of PBC

B. Unpaved roads (corridor or network)

1. Pure routine maintenance

a) Off-road maintenance (1-3 years)

b) All routine maintenance (1-4) years)

2. Rehabilitation, backlog maintenance, routine

maintenance, winter services, periodic

maintenance, eEmergencies

a) Only routine maintenance paid on lump-sum (4-5

years)

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Brief History of PBC

1988 British Columbia, Canada

1990 Argentina

1994-98 Colombia, Uruguay, Chile, Brazil, Peru

1995 Sydney, Australia, Estonia

1996 Virginia, USA

1998 New Zealand, Finland

2001 Chad, Zambia, England, India, Spain

.............

Drivers: efficiency and effectiveness

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Source: World Bank, 2006

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Benefits of PBC (1)

Road Agency Reduces maintenance cost (based on

the same level of service!)

Avoids frequent claims and contract amendments to increase quantities of works by contractor

Avoids road rehabilitation

Improves quality of works

Improves control and enforcement of effective road quality service levels

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Benefits of PBC (2)

Road Users

Provides better and safer roads with consistent conditions

Reduces road user cost

Consultants and Contractors

Guarantees workload over longer period

Provides potential for increased margins

Opens excellent opportunities for business growth

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Reported Savings by Introducing

Performance Contracts

New Zealand: 15-22%

Australia: 10-35%

Brazil: 15%

USA: 10-18%

Finland: 18%

Alberta, Canada: 20%

Savings are reported against traditional unit price

contracts

In addition, quality improvements were reported

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Development of Road Maintenance

Cost in Sydney, Australia

0 10 20 30 40 50 60 70

Time (months from June 1991)

0

20

40

60

80

100% 1991 Rates

RTA

SOR Contract

Transfield ContractPerformance Specified Road Maintenance Contract

(Team of the Roads and Traffic Authority of New South Wales)

Private contractor

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Some Reasons for Reduction in Road

Maintenance Cost

Drivers of savings: Incentives / competition / long-term management

Modern management and work procedures

Increased labour productivity

Total life cycle costing

Just-in-time maintenance

Better use of latest technologies

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Performance / Service Levels

Objectives

To satisfy the road user accessibility

comfort

travel speed

safety

To minimize total system cost (cost to road users and agency life-cycle cost of assets)

To minimize environmental impacts

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Service Levels and Response Times

Fulfil objective

Clearly defined

Objectively measurable

Affordable

In compliance with the law (law of public roads, ordinance on maintenance and

protection of roads)

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Relationship between Objectives

and Service Levels

Improve road safety: Potholes not bigger than 15cm in diameter, ruts 0.4, etc.

Preserve road asset value: Cracks not wider than 3mm, potholes not bigger than 15cm, obstruction of drainage channels 50 km/hr

............

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Typical Service Levels and Response Times

for Paved Roads

Typical Traffic Volumes

(Vehicles/day)

Less

than 250

250 1000

1000 -

5000

5000 -

plus

Potholes (Max Dia of any single

pothole)

400mm 300mm 200mm 100mm

Repair of potholes (Response time) 28 days 28 days 14 days 7 days

Cleanliness of pavement surface

and shoulders response time for

safety related matters (Response

time)

8 hrs 4 hrs 2 hrs 1 hr

World Bank

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In-house

Mainte-

nance

Outsourcing

Specific

Maintenance

Works

Performance-Based

Road Management and

Maintenance Contracts

Long-term Road

Concessions (BFOT)

Short-

term

Medium-

term

Long-

term

Risk to contractor increases

Risk to road agency decreases

Distribution of Risk

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Performance Monitoring

Contractors self-control system with verification by client

Joint inspections by client and contractor at certain time intervals

Road user complaints

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Payment and Incentive Systems (1)

Fixed periodic payments for scope of works and services contracted under performance or service levels, mainly for routine maintenance works.

Payments based on unit prices and quantities of work performed typically for risky work items such as Emergency and Unforeseen Works and often for periodic maintenance and rehabilitation works as well.

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Payment and Incentive Systems (2)

Periodic fixed payments to be reduced if contractor does not comply with the performance service levels

Contract to be terminated prematurely for underperformance

Some contracts include bonus payments

Payment and incentive systems vary widely from one country to another

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Key External and Internal Factors

Associated with the Implementation of

PBCs

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Framework

Legal Multi-year contracting

Road maintenance regulations

Financial Sufficient funding

Multi-year financing

Dedicated funds

Institutional Separation of client and contractor

Privatization of road maintenance

Competition between contractors

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Role and Capacity of Road Agency

Role Manage a road asset management

Implementation and development of PBCs

Management and Supervision of PBCs

Capacity Understanding of PBC concept

Change of attitudes

Additional skills

Training and coaching

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Role and Capacity of Contractors

Role Long-term road asset management

Proactive

Services to the road user

Capacity Understanding of PBC concept

Change of attitudes

New skills (road asset management)

Lack of sufficiently qualified contractors

Training and coaching

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Role and Capacity of Consultants

Role Promoter

Designer

Supervisor / Manager

Trainer / coach

Capacity Understanding of PBC concept

Change of attitudes

New skills

Training and coaching

Lack of sufficiently qualified consultants

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Implementation Experiences

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Complexity of PBCs

Complexity

Contract duration in years

2 4 6 12 10 8 14

Estonia 1995

Estonia 2008

Serbia 2004

New Zealand 1998

Ukraine 2014

US 1997

MAC UK 2004

Finland1998

Croatia 2015

Finland 2008

Birmingham UK

27 years

Micro enterprieses

Latin America

China

Bangladesh

Argentina 1994 (RMC)

Punjab India 2012

Future Malaysia 2016

Malaysia 2000

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Estonia

1995 the Estonian Road Administration (ERA) launched two pilot performance contracts for

routine road maintenance for national roads

1995 to 2000 - ERA tested several one-year and two-year contracts, including winter

maintenance

Since 2000 several 5-year contracts have been awarded

Since 2006 ERA moved to 7-year contracts

As of 2008 100% of ERAs road network (16500 km, mainly gravel roads) is maintained under

hybrid type performance contracts

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Asian Countries (1)

India 2013, Tamil Nadu, WB, 5-year PBCs with a total

of 640 km

2009, Andhra Pradesh, WB, 3 OPRCs active , 34 OPRCs implemented or under preparation (10000 km)

2012, Punjab, WB, 10- year OPRC, 203 km

Nepal 2003, WB, 2-year PMBC, 114 km

2005, WB, four 5-year PMBC, about 50 km each

2007, ADB, 5-year PMBC, 77 km

Sri Lanka 2009 , eight 1-year routine maintenance PBCs

2010, two 2-year routine maintenance PBCs

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Asian Countries (2)

Malaysia 2000, 6 area PBCs for all national roads for 15

years each, in the process of prolongation

Performance based toll road concessions, 1800 km, program started in 1983

Vietnam

2009, WB, one 3-year PBC, 300 km of national highway

China

2009, ADB, 4-year simple PBCs on 1300 km of rural roads with local community groups

(Yunnan Province)

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Asian Countries (3)

Afghanistan 2006, EC, one 3-year PBC 140 km, routine + winter

maintenance paid on lump sum

2008, 5 PBCs on 1523 km of national and regional roads; 2011 two more PBCs on 250 km

Tajikistan Two 3-year PBCs with initial repairs (10km) each 75 km

long, lump sum for routine and winter maintenance

Indonesia 2010, two 3-year PBCs, 21 and 11 km, basically

rehabilitation contracts

Malaysia 2000, 6 area-wide 15-year PBCs covering all national

roads, only routine maintenance paid on lump sum

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Lessons Learned (1)

Highly positive in developed countries

Mainly positive in developing countries with few teething problems

Progress depends on the attitude of the road administration, the ability of consultants and

contractors to implement PBC as well as the

political backing of PBC

Substantial cost reductions have been realized with few exceptions

Road conditions have improved

PBC supports efforts to secure long-term financing of road maintenance

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Lessons Learned (2)

Pilot projects are the best way to implement performance contracts

Performance Contracts have to be tailored to each specific situation

Preferably roads should be in maintainable conditions

Qualification of contractors and supervisory staff of the client is key to

success. To be reflected is PBC design

Risks shall be assigned to the party that can best bear and manage the risk

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Lessons Learned (3)

Additional lessons learned in developing

countries

Project preparations requires consultants which have experiences in implementing

PBCs in similar environments Right mix of unit price items and performance items

Effective monitoring system

Effective penalty system

A gradual implementation of PBCs seems to be more sustainable

Local contractors should be favoured

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Lessons Learned (4)

History of road construction and maintenance, a detailed condition survey

and cost estimate needs to be made

available to tenderers

Training and coaching of client and contractors during the implementation

phase helps to adjust to the new

contracting system

Subcontractors need training as well

Overloading problems need to be taken care off

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Lessons Learned (5)

Payment reductions for non-compliance shall be applied strictly and shall be high

enough to make the contractor to comply

Escalation of payment reductions shall be foreseen for continued non-compliance

Once under PBC roads should remain under PBC

PBCs are not a silver bullet. Conditions need to be conducive!

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Role of Financing Institutions (1)

International Finance Institutions (ADB, WB, IDB, EBRD) have promoted and

financed performance based road

contracts for more than 15 years

Supporting the institutional and financial reform process

Supporting the Asset Management approach

Support a stepwise and sustainable implementation of PBCs

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Role of Financing Institutions (2)

Financing of consulting services: awareness seminars, training programs,

feasibility studies, contract design and

bidding process, training and coaching

during project implementation

Financing of works and services

Providing payment guarantees to PBC contractors

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Upcoming work

Reference note on Performance Based Road Maintenance Contracts

Analysis of RAM practices in CAREC countries

Compendium of good practices on RAM in CAREC countries

Hands-on project support in CAREC countries

For details contact Ko Sakamoto (CWTC) at

ksakamoto@adb.org