Despite the benefits available under traditional procurement, experience over many years has seen traditional methods resulting in cost increases, changes to the scope of a project, failure to deliver projects on time, and design faults. The Treasurer has acknowledged these problems, which he has attributed to the 'failure to identify and manage project risks at all stages of a project's life cycle'.85 In contrast, one of the major benefits of partnership arrangements has been the very sophisticated risk assessment and subsequent risk allocation to those parties best suited to managing the risk.
Within the public service, there is a need to improve expertise in project management, contract negotiation and financial evaluation and costing of projects. Acknowledging that while public service skills need to be supplemented by the use of external consultants, it is important that government has sufficient capacity to undertake extensive PPP work. The Committee acknowledges that the engagement of additional full-time staff in these areas is difficult for a number of reasons, including the government's inability to offer competitive packages to attract and retain staff with a high-level of expertise in project management.
The government has recognised these problems and sought to enhance project assessment within government by implementing the Gateway Initiative. This initiative is intended to bring greater rigour to project assessment and management across government, mainly for projects procured by traditional processes. The initiative is based on a similar program used in the United Kingdom. The Committee requested feedback from the Treasurer on the status of the Gateway Review Process as part of its review of the 2006-07 Budget Estimates. The Treasurer advised the Committee that:86
The Gateway initiative has been in place for only three years and yet the initiative is widely perceived to be promoting efficient asset planning and investment in Victoria. Overall, Gateway initiative users report that each of the four components is evolving as a useful tool for investment performance assessment and planning and delivery. Since the Initiative's introduction both the average project delay and the number of projects exceeding budget has decreased. Whether this is a result of the Gateway initiative is difficult to determine at this stage, due to variables relating to length of implementation time and external developments.
Generally, the users feel that:
• the initiative's first component, the Gateway Review Process, has helped to identify project issues at key decision points by independent review teams. More than 80 per cent of the government's High Risk Asset Investment projects have now undergone one or more Gateway Reviews. However, due to the long delivery time of high risk projects, no project has progressed through all six gates in the review process;
• the initiative's second component, the Multi-Year Strategy, has improved the alignment of asset projects with government strategic objectives and departmental plans;
• the initiative's third component is project lifecycle guidance material. Business case guidance was the first material to be developed. The Gateway Initiative Business Case Development Guidelines are now widely used by all departments and are seen as a useful decision-making tool for both departmental Secretaries and ERC [Expenditure Review Committee] in determining how asset procurement should best occur. Other guidance material is in preparation; and
• the initiative's fourth component, Asset Investment Reporting provides for quarterly reporting on all projects over $10 million and identified high risk projects. Presently Asset Investment Reporting indicates the health of current asset procurement projects. It is now being modified so that it also indicates the capacity of departments to implement planned projects.
There is a strong sense from Gateway users across government that the initiative has positively influenced the way their department and agencies plan and manage their asset projects. The majority of users agree that a greater proportion of government capital projects will be delivered on time, on budget and within scope as a result of the introduction of the Gateway initiative. Similarly, most users agree that the Gateway Initiative has given them a clearer understanding of project risks.
According to the Treasurer, considerable progress has occurred in ensuring that capital projects are delivered on time, on budget and within scope. Project risks are also becoming more readily identified.
The Committee welcomes the use of the Gateway initiative because it has the potential to enable better decision making about whether major projects can be managed by the public sector on a comparable basis with projects managed by the private sector under PPP arrangements. This should lead to better value for money in infrastructure development.
The challenge for the government now is that while project delivery is apparently improving, attention must be given to improving programmed maintenance over the lifetime of new infrastructure. The importance of maintaining assets over their lifetime has been recognised under the Partnerships Victoria policy. When ownership of assets reverts to the government at the end of the concession periods, invariably such arrangements also provide for maintenance over this period. The government must apply the same requirements to major assets delivered under traditional procurement methods as it demands from the private sector when undertaking partnerships projects.
The Committee recommends that:
Recommendation 1: | All major infrastructure projects including PPPs be subject to independent post project reviews at the completion of the construction phase and during the operational phase to measure the degree to which agreed outcomes are met. All results be periodically reported to Parliament. | |
Recommendation 2: | Before proceeding with any further build, own and operate projects, the government ensure that public benefits are maximised. | |
Recommendation 3: | Long term peppercorn leases extending beyond the concession period should not be given to a private consortium, unless it can be clearly demonstrated that there is a public benefit. | |
Recommendation 4: | All existing public private partnership projects involving operating leases be reviewed to determine whether they should be reclassified to finance leases under current accounting standards. | |
Recommendation 5: | Public private partnership contracts should include the total amount of payments outlining the total government commitment and the impact on state debt. This information should be published on the Partnerships Victoria website, with summary information included in the state budget papers. | |
Recommendation 6: | Further guidance material be developed to cover the situation where, during the course of the public private partnership contract, transferred risk reverts to the Victorian Government. | |
Recommendation 7: | The Victorian Government develop a policy on maximising the benefits to the state from commercial opportunities arising from public private partnership arrangements. | |
Recommendation 8: | Timeframes should be reduced, where possible, for the period of concession agreements so as to limit the impact of debt repayments for future governments. | |
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85 Hon. J Brumby, MP, Treasurer, address to the Australian Council for Infrastructure Development (AusCID), 3 July 2003
86 Hon. J Brumby, MP, Treasurer, response to the Committee's follow-up questions, Inquiry into the 2006-07 Budget Estimates, received 26 July 2006, p.6