The pressure to build Australia’s critical infrastructure is reaching crisis point.

Yet deep uncertainty and division remains over how to reform the process of procuring the architecture, engineering, and related professional services needed to build the slated projects.

There are billions of dollars at stake. Just before Christmas, the New South Wales government updated its $20 billion infrastructure plan to go “further and faster.

Leading Australian CEOs, desperate to improve the nation’s stalled productivity, are anxious to get on with desperately needed projects. When top CEOs were asked by the Australian Financial Review (paid link) about priorities for 2015, they all named infrastructure.

Last year’s Productivity Commission report on Public Infrastructure highlighted the problems in our procurement costs and processes.

Although the word “procurement” appeared 357 times in the entire report only two recommendations related to the procurement system with another 10 addressing the related issue of tendering.


More work needed

Megan Motto, the CEO of the professional services industry association, Consult Australia, says relatively small number of recommendations to reform procurement is, “by and large, the problem. Procurement is such a complex area, defining problems is easy, but coming up with robust quantifiable solutions is much more difficult,” Motto says.

While welcoming the Commission’s report and recommendations, Motto believes many procurement problems remain unanswered.

The solution?

Motto says Consult Australia has commissioned a major research report from Deloitte Access Economics, specifically addressing the procurement puzzle.

It is scheduled for release next month.

Consult Australia will release the report, which contains seven recommendations. Motto hopes the government will adopt them all. “The report contains a detailed look at the cost of core procurement,” Motto says. “It is very robust.”

Do we need an Australian Infrastructure Market?

Also arguing for a complete overhaul of the procurement system is Garry Bowditch, CEO of the Smart Infrastructure Facility at the University of Wollongong. Established in 2011 with Federal government funds, SIF argues the need for an Australian Infrastructure Market (AIM) that would bring buyers and sellers together in a transparent process.

“Australia spends more on infrastructure today than ever, but deep structural problems persist,” Bowditch says. “Despite huge dollars being directed to it, this spending is not really making a substantial impact. There is congestion on our roads, bottlenecks at our airports and sea ports, and we are seeing issues with energy and water availability.”

And there are bigger problems, says Bowditch. “Our concerns go deeper. We believe there is a systemic misallocation of money, with projects adopted that are not going through proper government processes of prioritisation, and selection.”

Lack of transparency is the issue holding back design innovation and increasing costs, Bowditch says.

AIM must include every part of the infrastructure system, SIF insists, including markets, land use, planning, approvals, project prioritisation, funding, financing, delivery and operation.”

It seems like a recipe for delays and “analysis paralysis”.

Bowditch disagrees. Full disclosure of the project pipeline and the reasoning behind each choice will foster a vibrant market, and innovations to improve efficiency and new techniques, he says.

No more Cross River Rail debacles

Some infrastructure problems can be solved without any construction at all, says Bowditch. “The tyranny of infrastructure is that we all want to use it at the same time.” For example, if governments removed stamp duty on buying homes, it might encourage people to move home when a new job involves greater travel.

The Cross River Rail project in Brisbane, a 5.4km underground tunnel proposal that would have cost about $8 billion, is another example of limited thinking. “This was to fix a 40-minute peak hour problem, and was gold-plated and over engineered,” says Bowditch. “The [now former] government didn’t ask how we can improve existing infrastructure before we embark on audacious new project. The new government came up with bus and train tunnel for $5 billion, less than half, tested the principle and fixed the problem.”

The first step is for governments to commit to transparency in project selection. Doing so will start to restore community confidence which has been eroded by high-profile inefficient projects, and collapses in public private partnership that have cost taxpayers money.

Bowditch says: “The role of governments is to build the confidence of the community.”

What the Productivity Commission recommends

The Productivity Commission’s recommendations go to the heart of some of the professional services sector’s main pain points, which include:

  • Onerous requirements for details in bid, especially in design. Some argue that these design requirements limit innovation.
  • Lack of clarity in tender documents. Some argued that better-developed design specifications at the bid stage provides for more accurate project costing, reducing rework risks and therefore costs (this being at odds with the first position.)
  • Administrative inefficiencies, such as providing geotechnical reports, but insisting all bidders submit (and pay for) their own report.
  • Distorted incentives in the procurement process that favouring bank finance against equity and bond financiers, again deterring some bidders and reducing competition.
  • Requiring bids to be fully financed.
  • Bid costs of many millions, between 1% and 5% of the total project cost, that reduce competition and increase the overall cost of construction as companies try to reduce the costs of failed bids.

The Commission’s responses address many of the details raised by industry.

Their recommendations to State and Federal Governments include:

  • Trialling a bid process that does not require full financing.
  • Increasing use of Building Information Modelling (BIM) for concept bids to lower costs.
  • Contributing to the design costs of bids.
  • Taking explicit and detailed account of available alternatives when selecting projects, including the enhanced use of existing infrastructure, pricing solutions and cheaper build options.
  • Investing more time and resources in the initial concept Design specifications, but allowing tenderers to contest the design specifications with more innovative solutions.
  • For preferred tenderers, requiring only non-design management plans.
  • Testing the costs and benefits of applying past contract performance by tenderers as a means of constructor selection
  • Removing requirements for local content plans, such as the Australian Industry Participation plans.
  • Breaking large and complex projects into smaller components, after pre-testing the market to gain insights into possible savings, thereby reducing the level of risk borne by any one contractor, and promoting competition from smaller construction companies.
  • Investing more time and money in understanding site risks and updating the information provided to tenderers.

What remains to be seen is whether the Commission’s views and recommendations will impact and shape government procurement processes, and provides the industry with the opportunity to cut costs and deliver innovation.

 

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