Imagine a future where federal and state governments improved productivity and ensured continued economic growth through delivering new infrastructure. Investing in and delivering new infrastructure plays a key role in delivering on these economic and developmental goals – so why would we want to deliver it more effectively and economically?
A QUT and Griffith University research project known as “Reforming the Procurement of Construction and Financing of Australian Infrastructure: Advancing Capacity, Competition and Investment” aimed set out to find more effective and efficient ways of procuring and delivering Australia’s social and economic infrastructure.
Within the report’s introduction, its authors stated the following key objectives as underpinning the project’s aims:
“The project, as formulated in 2008, aimed to deliver new procurement and financial modelling, and to explore the relationship between construction capacity/competition and finance availability/affordability as the basis for procurement reform to address these infrastructure delivery constraints.”
Over a period of four years, the research investigated constraints relating to construction, capacity, competition and finance in new public sector procurement. Research findings were tested on selected health and road projects to see if different procurement directions would have been taken.
So can this research tell us anything new? Well, it depends on what lenses you put on when you read this research.
To do this, we need to focus on what it is that impacts the funding and delivery of public infrastructure projects. As an independent body, the Productivity Commission offers a good insight into the marketplace and the challenges for a typical funding model.
“It is essential to reform governance and institutional arrangements for public infrastructure to promote better decision-making in project selection, funding, financing and the delivery of services from new and existing infrastructure.”
Source: Productivity Commission: Public Infrastructure, Inquiry Report, Vol.1 (71) May 2014
Anyone who has used “value for money” guidelines to evaluate major infrastructure projects, including Public Private Partnerships (PPPs), knows the strengths and limitations of this method of evaluation.
In particular, that fact that when it comes to assessing what is value for money depends heavily on the accurate identification and measurement of risk. This aspect of the assessment often requires practitioners (government departments, financial advisors, institutional investors, design consultancies, construction businesses, etc.) to make many assumptions before the event.
Typically, these assumptions are about a project, its procurement, implementation, and projected benefits, especially return on investment from an investor perspective.
In Australia, we do have robust value for money guidelines as part of project assurance frameworks (mainly for PPPs) which have been developed largely from the experience of state governments, which are based on project experience and sound corporate finance principles.
The latter point is important, as understanding risk and how to price its impact on the cost of finance is critical to any project involving the private sector. More importantly, though, pricing risk comes after individuals and firms work out their appetite for risk – after all, each of us reacts differently to how much risk we will accept and pay for.
The current value for money guidelines were developed largely pre-global financial crisis. This was a time when both debt and equity were easy to source, and there was a different risk-appetite across government, markets in general and the global financial sector.
We now operate in a very different market, with different risk appetites for major players. So, is now the time to have another look at how we are assessing value for money?
The existing value for money guidelines are based largely on corporate finance principles – they have to be, because PPPs involve private lending. Further, government is approaching value for money from the purchaser’s perspective. This lens differs from equity, which tends to look for the upside potential (and risk involved), and debt which mainly views a project from a loss-protection perspective.
The exciting part of the QUT and Griffith University research is a decision model that can potentially allow us to better recognise institutional reaction/barriers to getting involved in major projects.
At present, for major infrastructure procurement, we try to understand institutional reaction through market soundings and then do this formally, once a transaction has commenced. To date, there has been little attempt to internalise these institutional factors as part of a decision-making framework.
However, what this latest research does, is lift us up one level from the corporate finance approach. It allows us to look more closely at how project participants and markets might behave and the risks they will take. This lens, using “new institutional economics” glass, gives some new and interesting perspectives on competition, project size, bundling of projects, and potentially reducing the time and cost of procuring major infrastructure projects.
The next step is making this new research work in practice. While one strength of this research is to capture behaviours (and risks) that are largely not monetised, the private sector needs to work with a framework that allows for reasonable measurement of the risk/reward trade-off.
Once the private and public sector see the practical results of this new research, we may have a second set of spectacles and see things much clearer.
The Major Infrastructure Procurement research project findings present world-first modelling of procurement decision-making and multinational contracting (procurement theme), along with new insights into debt and equity risk and return characteristics of Australian PPPs and long-term US infrastructure returns and portfolio selection (finance theme).
These advances in knowledge also allow a new perspective on the relationship between procurement and finance and an improved foresight in the direction of future research.
Reforming the procurement of construction and financing of Australian infrastructure: advancing capacity, competition and investment
The Queensland University of Technology and Griffith University Major Infrastructure Procurement project sought to find more effective and efficient ways of procuring and delivering the nation’s social and economic infrastructure by investigating constraints relating to construction capacity, competition, and finance in new public sector major infrastructure.