Financial close was recently achieved on the North East Link Program’s (NELP) Central Package PPP which represents the largest investment in a road project in Victoria's history and delivers the much needed missing link in Victoria's transport network. The procurement of the NELP PPP has seen a move away from the traditional fixed cost procurement model with the introduction of collaborative contracting elements, including an incentivised target cost (ITC) regime, within the PPP framework.
A new and improved PPP model
The Central Package included implementing a cutting edge procurement framework to attract new participants to the Australian market as well as developing and executing a world first form of PPP framework that included innovative and collaborative mechanisms for the sharing of delivery risk. This innovative model was introduced by the NELP to recognise the challenges faced by the construction market in pricing key delivery risks in mega infrastructure projects. The Central Package is the first known PPP project to implement this innovative procurement model, which is designed to increase transparency of costs and foster a more collaborative relationship between the State and private sector whilst retaining the key characteristics of the PPP model. Clayton Utz's Major Projects team worked alongside the Victorian Government in the development and implementation of this cutting-edge procurement framework.
The ITC regime features innovative and collaborative mechanisms for the sharing of delivery cost risk, which aims to drive a better value for money outcome and incentivise "best for project" behaviours through a balanced and sustainable risk allocation. The key features of the NELP ITC regime include:
- an agreed Project TOC, comprising of a defined set of costs;
- a painshare / gainshare mechanism that governs the cost sharing regime; and
- a performance regime which incentivises Project Co to achieve delivery milestones.
The NELP Central Package ITC regime represents a critical change to how delivery costs are managed within a PPP framework. Unlike a traditional PPP, where cost risk is transferred to the private sector, the ITC regime recognises that an appropriate cost risk sharing regime may overcome the pricing challenges that are often presented on mega infrastructure projects – particularly where the delivery phase is long and there are a number of key delivery risks that are unquantifiable (for instance, unknown contamination and utilities risk).
Notwithstanding this fundamental change to the way in which delivery cost risk is managed, the key characteristics of the PPP model remain, including "hard" time commitments, transfer of long term asset risk, and the rigour and protections offered by private project financing.
Unique delivery strategy
The entire North East Link alignment is proposed to be delivered by a number of packages, which includes an early works package and four freeway packages. This delivery strategy was necessary to address the overall size and scale of the North East Link alignment as well as attracting second tier contractors to participate in the procurement and delivery of these critical parts of the North East Link.
However, as with any multi-package project, the delivery strategy presented a number of design, construction and operational interfaces. A number of unique regimes were developed to address these key interfaces, including a unique design interface regime which involved Project Co being responsible for the development of the preliminary design of a portion of the freeway packages to manage design interface issues.
New tolling structure
In another Victorian first, NELP also sees the inception of State Toll Co, a State-owned company, which will oversee the procurement, delivery, operation and maintenance of the tolling system, including the levying and collection of tolls. State Toll Co will also be responsible for the facilitation of payments to Project Co, the administration of the abatement regime and the management of the handover regime at the end of the term.
Paving the way forward for future mega infrastructure projects
NELP gave rise to a number of complex commercial and legal issues, but stands as a first-class project that will set new benchmarks in terms of major infrastructure procurement around the world. Reaching financial close is an enormous milestone for the Victorian Government's infrastructure agenda and will hopefully set a precedent in the future procurement of similar mega infrastructure projects.