Long Term Capital Works Programming to Achieve Better Project Outcomes

1. Long Term Capital Works Programming to Achieve Better Project Outcomes Thursday 06 October 2011 Paul Northey General Manager Capital Projects

2. BARWON WATER • Assets $1 billion • Revenue $128 million • Connected properties 133,000 • Growth 2% p.a. • 20 treatment plants • 10 reservoirs, 38 service basins • 6 groundwater bores+7 under construction • 6,000 km water and sewerage pipes MELBOURNE 70 km

4. CONTEXT: CLIMATE UNCERTAINTY

5. CONTEXT: MULTI – SITE DEVELOPMENT

6. CONTEXT: ASSET MANAGEMENT Create Assets Capital Works Process Operate & Maintain Above Ground - FMMS Below Ground - FOCUS Rehabilitate / Replace Above Ground - Spreadsheets Below Ground - PARMS (Water) - SIMS (Sewer) Decommission

7. CONTEXT Historic Capital Delivery Performance

8. CAPITAL PROGRAM • “Horses for courses” for major projects • Recurrent works by operations departments (term & individual contracts) • Majority of works through a program alliance Approach to Delivery

9. BARWON WATER ALLIANCE • 150 individual projects • 4 (+2) years • ~$450m • 80 EFT staff • Local subcontractors

10. Barwon Water Capital Works – Project Phases Barwon Water Alliance Barwon Water Project Initiator / Asset Planning Capital Works Alliance Client Dept Functional Design Detailed Design Concept  Planning    Construct  Handover  Operation  Project Initiation DTF Gateway Risk Management Risk Management Risk Management Risk Management Final Cost Reporting Project Prioritisation Risk Management Envir Management Envir Management Envir Management Envir Management Project Review Capital Works Management Committee Charter Procurement Policy Safety Management Safety Management Safety Management Safety Management Project Completion Project Program Contract Delivery Strategy Probity Probity Inspection & Test Plans Community Engagement Procurement Policy Procurement Policy Design Management & Review Commissioning Plan Project Program Project Program Statutory Engagement Quality Plans Community Engagement Design Management & Review Community Engagement Relevant Policy / Procedures Statutory Engagement Business Case Statutory Engagement Quality Plans Project Reporting Project Reporting Community Engagement Statutory Engagement Budget Variation Project Reporting Budget Variation Statutory Engagement Project Transfer Budget Variation Project Reporting Project Transfer Project Reporting Budget Variation Budget Variation Milestone 1 Project included in BW Corporate Plan Budget Milestone 2 Planning Business Case approved. Project handed over to Alliance Milestone 3 Functional design developed. Procurement strategy approved. Milestone 4 Detailed design developed (>75%). Bus Case / TOC approved. Milestone 5 Asset is operable. Milestone 6 Commissioning and Testing complete. Handed over to Client. Milestone 7 Asset capitalised. Gain/Pain share determined.

11. CONSTRUCTIONUse of Subcontractors • Most construction delivered by subcontractors • Limited ‘self-perform’ on higher risk jobs with day-hire labour. • Safety inducted over 1000 inductees in contractor induction program. Colac Pipeline • SQE contractor forums – network forming between subcontractor. • Lead to pre-qualification panel  reduce site supervision over time.

12. ALLIANCEPositives • Has delivered program to date • Equal number of employee’s from each partner has led to strong culture • Development opportunity for client staff • Improve capability and capacity of regional contractors • Bundle procurement of material delivering cost savings • Manage workforce in areas to achieve efficiencies

13. ALLIANCENegatives • High transaction cost  $500k • Early KPIs have required lot of monitoring and reporting  streamlined down to 6 • TOCs are not like old project estimates on tendered prices – all cost identified – this lead to some tension on early TOC approvals. • Can create differing standards within client organisation between Alliance and no – Alliance projects

14. MELBOURNE TO GEELONG PIPELINE

15. MGP PROCUREMENT MODELPositives • Competitive tenders received for construction contract • Leaving pipe material option open led to competitive process for the pipe supply contract • Managed risks with uncertainty on design of realigned section • Pipe and fittings delivered to schedule or earlier • Low transaction cost – use of AS2124

16. MGP PROCUREMENT MODELNegatives • Number of separable portions leads to complicated contract management • Involved tender essessment process – difficultly in assessing • Standard contract requires updating

17. Shell Refinery NORTHERN WATERPLANT Proposed Northern Water Plant CORIO BAY N GEELONG 10 km to Black Rock Water Reclamation Plant and ocean outfall

18. NWP PROCUREMENT MODEL Getting the Model Right

19. NWP PROCUREMENT MODEL Positives • Client involvement in design – managing whole of life risks • Cost certaintity: • Single margin competitively big up front • Competitively tendered work packages • Fixed construction cost • Contractor carries design into construction, provide working facility following proving period. • Operational hand over and training for Barwon Water staff • Transaction costs around $250K

20. NWP PROCUREMENT MODEL Negatives • Stage 1 cost estimate process inefficient and difficult to administrate due to: • contractor incentivised to influence work packages to increase margin return • Work packages tendering process not fully transparent • considerable effort required through independent estimator and extended negotiations to bring cost down • Delay and variation claims for inefficient process • Paying for risk twice?

21. BIOSOLIDS DRYING FACILITY AT BLACK ROCK$76 million

22. TO PPP OR NOT? • Is project of sufficient value? • Is there a history of in-house delivery and operation of this service? • Is it ‘core’ business? • Characterise risks • Are risks significant? • Which party is in the best position to manage risks (can risks be transferred)? • How will the private sector cost the risks that will fall with them? • Will a PPP deliver economic value to the public sector? • Will the project’s value bear the transaction costs (typ. $2-3 million)?

23. BIOSOILDS - PPPPositives • Project costs and schedule have significantly extended but at no cost to Barwon Water. • Proponent has had full responsibility for managing difficult IR issues.

24. BIOSOILDS - PPP Negatives • No Barwon Water control on how project was delivered or timeframes • Agreements made by PPP proponent can influence other Barwon Water projects • High transaction cost - $2-$3 million

25. CONCLUSIONChoosing The Best Model Project Procurement Options (adapted from PricewaterhouseCoopers, 2005,unpublished paper) CFD MAX MAX A L L I A N C E EPCM E P C M D&C FLEXIBILITY TO CHANGE CONTROL OVER BUILD QUALITY DBO PPP DBFO F i n a n c e & s t r O u p c e t , r a t e ) MIN MIN RISK TRANSFER (PRICE PREMIUM) MIN MAX PRICE CERTAINTY MIN MAX TRANSACTION COSTS LOW HIGH

26. SUMMARY • Five year Water Plan requires assessment of required capital spend and appropriate delivery strategy • Bundling of projects enables cost savings in procurement of materials and construction • Alliance has delivered increased capital works program • Thorough business cases and demonstrated ability to deliver increases potential to obtain government funding

27. Thank you