Case Study Royal Children s Hospital

Philippine-Australia PPP Policy Dialogue

Case Study – Royal Children’s Hospital

Tony Lubofsky

RCH Project Scope

Construction Phase

Stage 1 - $900m (2008 – 2011)

 New hospital facilities

 Expanded MCRI and University of Melbourne facilities

 1,300 space underground carpark

Stage 2 - $160m (2012 – 2014)

 Demolition of existing hospital

 Construction of additional 800 space underground carpark

 Additional commercial facilities (hotel, gym, retail)

 Refurbish FEB and ‘cloak’ RPB facade

 Park reinstatement (not part of the PPP project)

PPP Operating Phase – 25 years

 Hard FM - maintenance / refurbishment (incl. retained buildings)

 Security

 Help Desk

 Carparking operations (RCH to retain revenues)

 Grounds Maintenance

 Waste management

 Cleaning

Typical PPP Commercial Structure

State / DOH

Consortium

Equity

Providers

Debt

Providers

Builder

Facilities

Manager

Typical PPP Commercial Structure – Construction

Phase

State / DHS

Consortium

Equity

Debt

Builder

Facilities

Manager

Typical PPP Commercial Structure

– Operating Phase (25 years)

Facilties Management Agreement

State / DHS

Consortium

Equity

Providers

Debt

Providers

Facilities

Manager

Typical PPP Commercial Structure – Operating

Phase (25 years)

State / DHS

Consortium

Equity

Providers

Debt

Providers

Facilities

Manager

Net Present Cost compared to the Public Sector Comparator

Key success factors

• Clarity of vision

• Realistic budget / program • Effective governance

• Experienced project director / project team

• High quality design / functional / technical briefs (incl. balance between inputs and outputs)

• Stress testing of KPIs

• Efficient rather than maximum risk transfer • Clear documentation requirements

• Interactive tender process • Active contract management

• Clear definition of what constitutes a modification and pricing mechanism (incl. pre-agreed margins)

Clarity of Vision

• Does Government have a clear vision?

• Need to be able to clearly articulate the vision • “Fit for purpose” of limited benefit

• Use of exemplars or budget / Public Sector Comparator • Very challenging when dealing with quality / aesthetics.

Scope / Budget

• Scope to fit budget, or budget to fit scope

• Delay announcement re scope, budget, program

• Don’t set unrealistic timelines.

• Beware of optimism bias. Projects generally cost more and

take longer than original estimates.

• Detailed analysis and modelling of project risks

• Use of scope ladder (identify scope items that can be added

or removed if bids are below / above the Public Sector

Comparator)

Effective governance

Project Team Interagency Working Groups Decide

Responsible Accountable

Includes representatives of:

· Relevant Dept (Chair)

· Dept of Treasury & Finance

· Dept of Premier & Cabinet

Experienced project director / team

• Experience on comparable projects

• Project Director – needs to be capable of understanding commercial and technical challenges

• Quality more important than quantity

• Project team to comprise mix of project management, commercial, technical (design, engineering, ICT, ESD etc), communications skills

• Recognise that consultants can get it wrong (eg. too much gold plating)

Quality Brief

• Design, functional, technical, engineering, ICT briefs • Critical importance, but extremely challenging

• Poor quality brief = poor quality outcome

• Balance between input and output specifications • Too input based – no innovation

• Too output based – increased chance bidders will get it wrong

• Language needs to be capable of contractual enforcement

• Recognise areas that are difficult to brief (quality / aesthetics) and address via tender response requirements

Key Performance Indicators

• KPIs / Service Specifications define the service standards expected during the operating phase of the PPP (eg. building maintenance, cleaning, security, catering, materials management, grounds

maintenance etc)

• Tied to the payment mechanism

• Need to be capable of objective measurement

• Stress test to ensure they work in practice, and are affordable

Risk Transfer

• PPPs are generally very effective at transferring risk from

Government to the private sector (although depends on the

quality of the contract documentation)

• Aim for efficient rather than maximum risk transfer

• Risks should be allocated to the party based able to manage

the risk

• Any risk can be transferred to the private sector. However it

may not equate to value for money.

Clear documentation

• Alignment of

–

the contract

–

the project brief

–

tender documents

• Unambiguous language in the brief / bid documents.

• Addressing conflicts between the brief / bid. What takes

precedence?

• Careful consideration of tender response requirements to

address areas of ambiguity in the brief

Interactive tender process

• Multiple workshops with bidders during the RFP response

period

• Aims to ensure bidders do not misinterpret the brief

• The greater interaction, the less risk of bidders ‘getting it

wrong’

Avoiding modifications / variations

• Clear definition of what constitutes a modification (building

and equipment)

• The quality of the brief and tender documents directly

impacts the likelihood of modification

• Design development –v- Modification

• Clear understanding of how modifications are to be priced,

including margins