Sharing the Weight
Some use P3s to transfer risk—what if the risk was shared by all key players?
If a project is successful, then the owner saves money and the contractor and the designer each get a bonus. Sound good? It’s an alliance, a delivery model that’s been gaining some momentum in Australia.
Colin James, manager for Canada with Australian design firm GHD, says alliances are a non-combative way of reaching a goal.
It starts off with an alliance team—the owner, contractor and designer. Unlike a P3, where the incentive is getting risk off your plate and onto someone else’s, in an alliance, everyone shares in the risk. You get paid the minimum for your time. If you do achieve the goals, you receive your profit margin. If you exceed the goals of the team, you make more.
The better alliance contracts include a non-sue clause. The mantra is “we all win or all lose.” Under this approach, everyone focuses on solving problems if they arise rather than blaming each other. “The only people who lose in this scheme are the lawyers, because nobody sues anybody,” says James.
Merie-Anne Beavis at Ogilvy Renault LLP says, “I had the same thought. The model does require a lot of cooperation—the intention is not to engage lawyers who will pour through contracts.”
First of all, let’s be clear, this is not a public-private partnership (P3)—there’s not necessarily any private money involved. But why not do these projects as P3s and transfer the risk?
Michael Bernstien, whose company, Macquarie, has had some experience with alliances, says, “Alliances perform best when the project scope is hard to define.” A straightforward project that’s easy to cost may not warrant this approach, but if there’s uncertainty around, for example, an area’s geology or underground infrastructure and conditions, this is a solid approach. James explains: “Typically, with projects that have a lot of uncertainty, the contractor and the zoner will hit up the owner for costs associated with design changes or delays. But with this framework if one team member encounters a problem, the entire team has a problem.”
The financials involve an open-book approach where the non-owner participants place at risk their corporate overheads and profit in delivering their project. They are guaranteed their base costs. The amount of the profit and corporate overheads they are able to gain from the project depends on how successful they have been in meeting the agreed-upon key performance indicators (KPIs).The KPIs can include cost, time, environmental, safety, and community criteria. These are agreed upon before the project starts.
James says, “Everyone shares in the risk, that’s true, but we’ve done a whole bunch across the world now and the end result has been better.”
So far, alliances haven’t been used in Canada. “It’s going to be a challenge for the first government in Canada to step up and do it because it’s generally perceived that a competitive procurement process is the way to go. It’s transparent; politically, that’s certainly the less sensitive way to go.”
The reason the alliance model took off in Australia was that the country was in dire straits. Drought conditions were severely limiting water supply—dam levels in Brisbane were down to 14 per cent. The country had to have water supply. The government in Queens legislated a completion date for a water project. “This was born out of complete necessity,” says James. “When your back’s to the wall, you do it. This type of scheme probably won’t happen in Canada until that happens—or you get some brave politician.”
Beavis says, “I think [this model] is intriguing. It turns the traditional model on its head and I think some of the principles it espouses are worth considering and could help get some large-scale projects back on track.” Particularly, she says, large-scale projects where the government sponsor doesn’t really know what it needs.
One such project, says Beavis, is Infrastructure Ontario’s (IO’s) nuclear procurement—a potentially extremely large-scale facility where the government’s mandate required the private sector to be involved in the very early stages of the design process—over 10 or 15 years before construction even started. The project has been starting and stalling for some time—the latest hiccup is the RFP’s suspension because of “concern about pricing and uncertainty” regarding preferred proponent Atomic Energy of Canada Limited’s future. “Engaging someone who has the right expertise from the beginning and then following these principles—no blame, risk-sharing—may work for a large-scale project like this, as opposed to one with more traditional specs like a hospital,” says Beavis.
“We’ve hit our stride with hospitals,” says Beavis. At least in Ontario, that’s true. IO currently has 14 hospital P3s on our Top 100 Projects list.
The provincial body is actually toying with at least one alliance principle in some of its smaller projects, such as hospitals. Once a project is up and running, IO conducts energy modelling to determine what amount of power should be used and then, to encourage the managing company to be energy-efficient, it incorporates an element of gain share/pain share.
For Canada, James sees the water sector as potentially the equivalent of what the health care sector has been for AFPs in Ontario. But he also thinks it can happen with some of the larger light-rail transit projects coming down the pipeline. A prime example: the link from Toronto’s downtown to Pearson Airport. Now that the city has won the bid to host the Pan Am Games in 2015, that link will have to be built in a hurry.
“There’s nothing like a deadline,” says James. “There’s going to be uncertainties around building that link. Instead of arguing and worrying about who gets paid, an alliance team comes together and finds a solution.”
Beavis says the principles alliances bring to the industry are well worth considering. “If it actually works and you can get the buy-in, I think this model does have the potential to get people thinking about the entire process of infrastructure renewal and P3s and perhaps revisit and rethink how it’s being done.” She says it would be a hard adjustment because industry key players are not used to an open and transparent process.
“Somehow,” says Beavis, “I think there would still be work for the lawyers.”