Big projects: upping value

By Michael Sutherland | April 25, 2017

P3s have been shown to save as much as five or ten percent compared with traditional delivery methods. On a project worth a billion dollars, that’s a lot!  Notably, it is at the front end of projects, earlier in the design cycle, where even bigger opportunities for value are to be found.

Canada has become a world leader in the use of public-private partnerships (P3s) to deliver infrastructure. In the process, we've learned a few lessons. Like there are significant opportunities—and gains to be had—by enabling the competitive tension, the marketplace of ideas, and the due diligence practices perfected within P3 projects to be moved up a little earlier in the development cycle to the planning and design phases of projects.

Whether greenfield or brownfield, a government body or agency is typically the initiator in a traditional P3. Usually it's tasked with advancing a project such as transit, a park, a hospital, or a school with some simple objectives: make people’s lives better and deliver the project on time and on budget.

There are two main reasons that governments around the world are adopting the P3 model to deliver infrastructure projects: schedule certainty and an acknowledgement of the private sector’s ability to manage key risks. By effectively transferring delivery risk to the private sector, opportunities are created for innovation and delivering defined projects as efficiently as possible. Value-for-money assessments show the savings delivered by the P3 model over traditional delivery methods are often in the order of five or ten percent. While this is incremental, on projects costing upwards of a billion dollars or more, five percent is still a lot!

Notably, it is at the front end of projects, earlier in the design cycle, where big opportunities for value are to be found. Cleverly refining or redesigning a project can boost returns on spending by a hundred percent or more. In fact, a one-hundred-percent return is not unrealistic for a large infrastructure project that’s been shrewdly designed compared to the initial project concepts. At a minimum, a fifty percent gain from design improvements should be expected. Far too often, these design improvement opportunities—and the significant benefits possible—are not realized.

How are public infrastructure projects started? Usually, a government entity such as a municipality has a master plan or similar document that identifies projects or programs needed to support a vision. Consultants are hired to refine and add detail to plans within tightly controlled, predefined scopes of work. (The government must show that it isn’t wasting a penny of taxpayer resources.) With luck, a project scope gains political momentum as various milestones are set out by legislative requirements, such as environmental assessments. If it gets funded, the project will enter implementation phases where P3 models can be used to ensure on-budget and on-time delivery.

Generally, big ideas to reset projects or consider value opportunities—very different from value-engineering—do not occur, or not to the degree that they could or should. The explanation is that it's hard enough to get a project started; few want to introduce a challenge process to further complicate matters. Often, projects that have significant opportunities for improvement still manage to get implemented.

Still, there is a way to find and realize the significant value that's missing from many projects.

The profit-oriented aspirations of the private sector and the public-benefit-oriented government can work together. They can create innovative processes and projects that will ultimately benefit end-consumers.

Canary Wharf is a fitting example of how public and private sector collaboration (and associated challenge and competitive tension) has realized excellent outcomes for all. For background, Canary Wharf was a former docklands area that was converted into a bustling financial district in London, UK. This transformation needed efficient transportation. The Canary Wharf Group was known for playing a proactive role in improving transport links, through the design and advocacy of generations of rail improvements including Docklands Light Railway (DLR) improvements, the Jubilee Line extension, and soon to open in 2018, the Elizabeth Line (formerly known as Crossrail), Europe’s largest civil engineering project.

The involvement of the private sector in the conceptualization of this area was innovative, and the city broadly benefited by having highly transit-oriented development. In Canary Wharf’s case, the private sector wasn’t engaged to simply deliver the infrastructure as it would have been with a traditional P3. Instead, Canary Wharf worked with the public sector to conceptualize and design the infrastructure from the very beginning. In effect, a marketplace of ideas was catalyzed and some good ideas were implemented. It is generally accepted that without Canary Wharf, a significant amount of successful infrastructure simply wouldn’t have been created.

The Canary Wharf example illustrates the importance of involving the private sector much earlier in the planning process to realize good innovation—even as early as the conceptualization of the project. There needs to be a high degree of collaboration among many parties: government agencies, private interests, and communities. Significant innovation will come out of processes where the private sector and government work together.

The private sector brings energy and activity that can complement the process of innovation and idea generation. Governments benefit from the participation of the private sector, but need to be reasonable and productive commercial partners in their focus to extract maximum value from this association. The benefits of competitive tension and collaboration can’t happen if there is only one partner.

Naysayers might suggest that collaborative planning involving the private sector or multiple government entities is duplicative and wasteful: Why have several parties participate in planning when just one entity could do it all? But consider this question another way. Front-end planning work comprises no more than one-to-two percent of a total project’s cost. If collaboration leads to better ideas, and the payoff is a fifty percent increase in the productivity and benefits of a capital project, isn't it worth it to invest that one or two percent at the beginning?

Hatch and a niche of other practitioners have been able to bridge the gap between the private sector and government efficiently and effectively. With technical expertise that understands what the private sector wants and deep knowledge of how government works, we can deliver solutions that help find answers that are better for everyone. The government’s ability to make foundational investments becomes more valuable when more parties become part of the planning process early, even when that includes accepting unsolicited proposals from the private sector to government.

Hatch is helping to advance this kind of work, bringing various parties with different skills, ideas, and goals to the table so they can realize the benefit of working together in new ways.