Due to the nature of complex large scale economic infrastructure projects there is often a significant amount of upfront work involving multi-discipline teams. Once a potential project has been identified then there is organising the investors, commercial/ economic reviews, completing pre-feasibility then feasibility studies, community engagement, design/ engineering, project structuring, financing, value engineering, and approvals prior to the Final Investment Decision. As stressed in the interview with Nicole Lockwood, the role of community and stakeholder engagement is becoming increasingly important, as is whether or not a project has sufficient commercial basis. Too often in the past, projects using public sector money have been developed based on meagre or incomplete business plans.
There is a growing realisation that a full lifecycle approach is required that considers the project not only during the construction but also throughout the operational phase. What are the project objectives and does the proposed project best achieve these goals? Have the spectrum of ideas from within government and the private sector been explored and evaluated?
A project should start with answering the following questions:
Who really benefits from the project?
Will the party that benefits pay for the upfront project work?
Who is the credit-worthy counterparty that will eventually pay for the project?
Based on the answers to these questions a party/ parties are identified that will pay for the upfront project costs. Without this step, the project needs to be killed as quickly as possible to ensure money and time aren’t wasted. There is no need to create detailed engineering or cost studies if the underlying commercial aspects don’t work. So rather than redoing engineering pre-feasibility and feasibility studies, redirect the funds towards and making projects commercially viable or de-risking it and then perhaps get the private sector to pay for the studies and planning.
Risk is another area that is often overlooked. A detailed risk analysis process needs to be completed to ensure the parties best able to mitigate the relevant project risks are responsible for those risks. For instance, the risks of construction cost overruns and delays, financing, engaging operators and asset maintenance are considered to ensure the project is investable with a suitable risk-return ratio.
Many projects also benefit from an assessment to determine whether or not a Public Private Partnership (PPP) model is appropriate. Value for money analysis, comparisons of public and private sector project budgets, optimal risk transfer and allocation, level of private and public sector investment and stakeholder engagement are some of the main areas to cover.
This also means that the traditional repeatable skills-based analysis is becoming less relevant. More and more, multi-disciplinary approaches with a broad range of skills and expertise are more suitable to the development of new projects. People can be trained in engineering, science, banking, accounting or economics but then diversify into different fields so that there are diverse skills and expertise across economic, technical, environmental, social and financial aspects. It is virtually impossible to secure top level specialists in all these disciplines from one firm and therefore skillsets have to be sourced from specialist consulting firms, subject-matter experts, legal firms, universities and research institutions to prepare projects effectively. This also increases costs, although infrastructure origination and project preparation costs in Australia are usually within the range of 3-5% of total project costs, which is consistent with our experience in WA as well.
One issue that we have noticed is that governments around the world often do not accurately track infrastructure project preparation costs, as they are usually lumped in with other initial costs before the project is approved. To improve this, government budgets should clearly detail in a transparent manner the costs incurred in project preparation which also improves budget allocations and future infrastructure spending. What we currently see is that the information is being recorded however, reporting could be more detailed to improve cost management and the allocation of scarce resources.