State-initiated changes are a fact of life in social infrastructure, driven by legislative and social policy imperatives of incumbent governments. Service delivery models and facility solutions for education, health care, aged care and other social services are being adapted to meet such changes, driven by the quest for efficiency and effectiveness, alterations to funding models, government funding priorities and community expectations and needs.

With the increasing application of Public Private Partnerships (PPPs) in social infrastructure, it is critical for the success of such PPP arrangements that the facility and service delivery propositions are developed to effectively respond to the shifting needs of the government and users.

Some typical impacts on social infrastructure facilities include building capacity increases, technology upgrades and service priority modifications.

PPPs are characterised by long-term concession periods, often at least 20 years. The challenge in social infrastructure delivery is for both public and private sector parties involved to identify potential changes and create arrangements and contingencies so they can respond flexibly, positively and cost effectively throughout the life of the PPP. This will ensure the facility remains relevant and useful, and above all, provides ‘value for money’.

The rise of Social Infrastructure PPPs

In Australia, the PPP market is coming of age.

Early PPPs focused on transport infrastructure, which, in contrast to social infrastructure, is subject to minimal ongoing change. Subsequently, ‘lessons learnt’ that were applied to the social infrastructure PPPs that followed did not necessarily embed provisions to allow for flexible responses to change.

Today, with a significant number of social infrastructure PPPs now well into their operating phase, future PPPs can benefit from new perspectives for achieving successful, mutually-beneficial arrangements.

Evidence of strong track records for PPPs in project delivery and ensuing operational performance will lead to increased market confidence and stakeholder acceptance. Acceptance will be further enhanced as users realise the benefits across the whole-of-life servicing of a facility compared with facilities delivered under traditional procurement, where historically, buildings suffer inevitable deterioration due to Government tendencies to under-resource maintenance regimes and overly ‘sweat’ assets.

State -initiated change in social infrastructure

Most social infrastructure, irrespective of how it is procured, has been or will be, subjected to alterations over its life by capacity increases, service upgrades or changes to the service mix.

Without flexibility for change embedded in a PPP arrangement, these alterations can result in poor responses to change and unnecessary distraction of contractual repercussions.

In a typical social infrastructure arrangement, a private sector consortium – a construction company, a maintenance company and a bank lender – form a ‘special purpose vehicle’ (SPV). The SPV is responsible for financing, building and maintaining the asset. Increasingly, the core services in social infrastructure like a hospital or prison will be delivered by the public sector.

This arrangement has inherent complexity when the operating environment changes because the social infrastructure is provided and maintained by one party (Contractor) to the other (State operator) in a customised facility that has been developed, often to stringent State operational requirements.

Common approaches for flexibility

To address the challenge of providing an effective operating environment suitable for the delivery of social services and programs over a long concession period - whilst absorbing and responding to changing policies – some common approaches have evolved:

Refurbishment and Refresh Provisions

Regardless of any potential changes, robust refurbishment and refresh specifications are critical to defining the Contractor’s facility management obligations. When changes occur, they clearly distinguish what is a change-driven activity that requires additional financial contribution from the State from what is (or can be) covered within the existing refurbishment regime.

Effective refurbishment specifications may include:

• Clear specifications for each year or phase of the concession period and standards of performance;
• Fixture, fit-out and equipment replacements aligned with respective warranties;
• Fixture repairs and replacements that reflect a realistic upkeep that is consistent with the Contractor’s maintenance obligations;
• A monetary float, where refurbishment to agreed areas in a particular year can be rolled over; and
• Flexibility in the regime so it can be altered by agreement, once the facility commences operations and with the benefit of operational experience.

Service Contracts Re-Tender Option

To easily adapt emerging requirements, the State may elect to re-tender options for ancillary service sectors – such as information technology, building security, maintenance, landscaping – and re-visit the specifications to keep them relevant. A common arrangement is for these non-core services to be delivered on an initial five-year contract, with the option to continue or re-tender the services at suitable timeframes thereafter for the concession period.

By re-tendering, the State can also be satisfied that it is achieving value for money in delivery of these ancillary services throughout the concession period.

Start-Up Augmentations

Despite rigorous scoping, in many social infrastructure projects, a State operator may identify unforseen requirements or seek several revisions to the facilities, usually within the first year of operation when they present themselves.

Such post-delivery risks can be anticipated and managed by incorporating an ‘augmentation’ capacity (to fixed capital amount) which can be applied to pay for State operator requests for ‘refining’ facility changes in the initial operating period.

Future-Proofing

Most new PPP social infrastructure is provided to meet community demand for accommodation to house social programs, such as extra prison beds, classrooms, consulting rooms, additional hospital wards, etc.

By nature, social infrastructure sees this community demand increase rather than contract over time. Under any procurement approach, the challenge is to anticipate changes in scope, services mix or the extent of demand well in advance over the working life of an asset.

Rather than structuring contractual agreements around a single view of what future composition and demand for services might be – which invariably tends to be conservative and creates unnecessary complexity when demand-driven changes arise – PPPs are increasingly adopting up-front ‘future-proofing’ specifications into facility design and construction. This is the result of both public and private sector parties agreeing to invest now to realise financial savings and less contractual complexity in the future.

Future-proofing can take many forms – creating building space that is initially vacant (and fitted out at a future date) or under-utilised; designing engineering foundations and building services with capacity for vertical extension or setting aside areas on a site for horizontal expansion.

Conclusion

As the current generation of social infrastructure PPPs are successfully delivered and services provided with effectiveness and value for money, an increasing environment of certainty and confidence is emerging amongst participating parties and the general public. The result is more social infrastructure PPPs responsible for the future delivery of government services and programs.

Key to this ongoing success and acceptance is acknowledgement of the inherent nature of change in social infrastructure delivery and operation over the whole concession period, and the adoption of effective mechanisms to manage that change in a mutually beneficial way.

© Sinclair Knight Merz
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