Melbourne Metro Business Case

APPENDIX 12PACKAGING AND PROCUREMENT

OPTIONS ANALYSIS

Appendix 12 - Packaging and Procurement Options Analysis

1. Overview and Methodology

Overview

1.1.1. Introduction

The Melbourne Metro Program is one of the largest transport infrastructure projects ever undertaken in Australia. It will transform Melbourne’s rail network into an international-style metro system, improving access to and connectivity with the CBD and increasing the capacity, reliability and efficiency of train lines serving Melbourne’s growth areas in the north, west and south-east.

The Melbourne Metro Program comprises:

Two nine-kilometre rail tunnels from South Kensington to South Yarra as part of a new Sunshine – Dandenong Line, new underground stations at Arden, Parkville, CBD North, CBD South and Domain, and tunnel entrances in the vicinity of South Kensington and South Yarra; and

Wider Network Enhancements which are required across the wider existing above ground rail network (outside of the tunnel and beyond the tunnel portals), including track modifications and signalling system upgrades on lines other than the Sunshine – Dandenong Line.

The State’s Project 10,000 policy identifies major new initiatives to drive growth, investment and jobs for the long-term benefit of Victorians as a key economic pillar for the future. As a key element of the Government’s commitment to the project, the State has a desire to develop options for engaging with the private sector with the aim of attracting private investment to the project.

1.1.2. Purpose of this Appendix

Consistent with State’s broader project and policy objectives, the purpose of this Appendix is to detail the development of packaging and procurement options and risk allocation structures through which all elements of the Melbourne Metro Program’s scope could ultimately be delivered, and that appropriately considers options to work with the private sector in an efficient and cost effective manner.

A high level summary of the key conclusions of the extensive packaging and procurement options assessment undertaken is provided in Chapter 14 of the Business Case.

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Methodology

1.2.1. Procurement objectives

The procurement strategy must drive the delivery of the State’s objectives for the Melbourne Metro Program. The overarching objectives are outlined in Chapter 2 of the Business Case.

In addition to, and to help realise, the overarching project objectives, a number of procurement objectives were also developed. The procurement objectives are a reflection of the project objectives, but with a focus on commercial and delivery related outcomes. They are to deliver value for money through:

Optimal risk transfer: Ensure the procurement strategy allocates risks to the party best placed to manage them

Timing: Ensure the procurement strategy is able to deliver the project within State’s time requirements

Budget certainty: Ensure the procurement strategy provides certainty regarding capital and recurrent costs and performance

Innovation and incentive: Ensure the procurement strategy incentivises contractor innovation

Market capacity and interest: Ensure the procurement strategy addresses the market’s capacity and interest to deliver the project.

These objectives have been used to guide the overall development of the packaging and procurement strategy for the project.

1.2.2. Evaluation methodology

The evaluation methodology for the procurement options is consistent with relevant guidance from the Department of Treasury and Finance (DTF) (with specific reference to the High Value High Risk guidelines), as well as Infrastructure Australia’s National PPP Guidelines (with specific reference to Volume 1: Procurement Options Analysis), summarised in Figure 1.

Figure 1 - Process for developing packaging and procurement recommendation

Step 1: Key data about the Melbourne Metro Program that is relevant to procurement was gathered, including objectives, scope elements, costs, risks and base assumptions. Procurement analyses undertaken as part of previous business cases and studies relevant to the Melbourne Metro Program were also revisited

Step 2: The key scope elements were assessed against identified value drivers to test whether there are components that would be optimally delivered individually or bundled together

Step 3: The proposed packages (developed in Step 2) were assessed against the shortlisted procurement models.

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Step 4: The shortlisted procurement strategies (developed in Steps 2 and 3) were tested and validated with the market through a market sounding process

Step 5: The recommended procurement strategy has been determined based on the assessment undertaken in Steps 1 to 4.

The above considerations cannot be assessed in isolation and therefore the process has been iterative in nature (particularly Steps 2, 3 and 4).

In addition to the above, experiences and lessons learned from procurement precedents in significant rail tunnelling and transport projects from Australia and internationally have been drawn on to inform and benchmark the analysis.

1.2.3. Previous procurement strategy assessments

The Department of Economic Development, Jobs, Transport and Resources (Department) and Public Transport Victoria (PTV) have undertaken a number of previous investigations into options for increasing Melbourne’s rail capacity and improving reliability. These previous investigations have also included considerable work on the deliverability and procurement of the project in various forms. This included:

Melbourne Metro 1 – Procurement Strategy Development, November 2010 (prepared by Ernst & Young) (2010 Procurement Study)

Melbourne Metro – Market Sounding Update 2012

Melbourne Metro – Procurement Strategy Update - Interim Report, August 2012 (prepared by PTV)

Melbourne Metro – Procurement Strategy Update Expert Peer Review, September 2012 (2012 Peer Review)

Melbourne Metro – Procurement Strategy Update - Delivery Models Options Assessment, January 2013 (prepared by PTV) (2013 Procurement Strategy Update).

The Department validated the methodology and key conclusions reached in the most recent procurement investigations (the 2013 Procurement Strategy Update including the associated 2012 Peer Review), and satisfied itself that much of the analysis and key conclusions remain relevant. In developing this Business Case, efforts have therefore focussed on assessing the most likely packaging and procurement options and refining the procurement strategy to address further developments in the project’s design and latest input from recent market sounding sessions.

1.2.4. Procurement strategy workshops

A series of procurement workshops were held with technical teams and other relevant transport projects to inform the development of the recommended procurement strategy for the Business Case. A broad spectrum of stakeholder representatives attended the workshops (as relevant) including from, inter alia, the Department, project advisors, DTF, Department of Premier and Cabinet and PTV. This Appendix reflects the inputs received from and recommendations made by these stakeholders.

2. Step 1: Data gathering

2013 Procurement Strategy Update

As noted above, the procurement assessment in the Business Case has included consideration of the findings of the 2013 Procurement Strategy Update, but recognises refinements in the

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project’s scope and changes in the private sector market and the impact these have upon the preferred packaging and procurement strategy.

2.1.1. Summary of 2013 Procurement Strategy Update findings

The table below summarises the proposed packages and recommended delivery models identified in the 2013 Procurement Strategy Update, following the 2012 Peer Review. It should be noted that the key findings summarised below are materially consistent with the equivalent findings from the 2010 Procurement Strategy.

Table 1 - Summary of 2013 Procurement Strategy Update

Package Description Packing rationale and delivery model

Early works The early works comprised:

Tram diversions Utility relocation and protection Construction power Demolitions and relocations.

Managing contractor.

Key drivers of this model were:

These works need to be delivered before the core bundle and therefore should be procured as a separate package (or packages) Given the size and complexity of the project and limitations on the level of resourcing able to be mobilised by the delivery body, this work package is suitable for managing contractor The managing contractor model can be established in a relatively short timeframe, allowing the managing contractor to be engaged quickly and early in the process The managing contractor can then provide input into the scope definition, design documentation and construction of the works, ensuring the works are delivered in time for the core bundle to begin Enables subcontract packages to be procured on a fixed time and cost basis (on a competitive basis) and ensure value for money.

Core bundle The core bundle comprised:

Construction of rail tunnels Five underground stations Station fit out and finishes (including mechanical systems, ventilation, station substations, electrical and fire systems and tunnel base slab) Western portal Station operations, maintenance and refurbishment.

PPP using an availability model.

Key drivers of this model were:

Delivering these works as a single, integrated package minimises the State’s exposure to interface risk Allows greater transfer of design and construction risk.

Eastern portal The eastern portal comprised:

Cut and cover decline structure Open to air decline structure Local reconfiguration and realignment of existing lines Surface tie-in to the existing lines Mechanical, electrical and fire services.

Relationship based model.

Key drivers of this model were:

Separated out as an individual package from the core bundle, as the interface with the existing rail network in the area is complex and it will allow de-risking of the core bundle Allows management of significant construction interface with core bundle as all parties working within the vicinity can work collaboratively to achieve the best outcomes for the State.

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Package Description Packing rationale and delivery model

Rail systems The rail systems comprised:

HCS (infrastructure and systems installation from Sunbury to South Yarra) Installation of tunnel systems (power, lighting and rail installation) Traction power Communications Tunnel substations at stations Platform screen doors.

Early contractor involvement leading to either a D&C or alliance component.

Key drivers of this model were:

Packaged separately to core bundle due to different technical nature and risk profile Requires the cooperation of a number stakeholders and involvement in the design development of the core bundle package A relationship based model may therefore be suitable to facilitate this cooperation effectively.

Wider rail network works

The wider rail network works comprised:

Track modifications Station and system upgrades.

Alliance or Franchisee delivery.

Key drivers of this model were:

Packaged separately to core bundle due to different technical nature and risk profile Significant interface with the existing network and the Franchisee, as works are on the existing network and there will be requirement for service interruptions Alliancing including the Franchisee has the ability to manage complex stakeholders and has a shared risk/gain approach and is performance based.

Source: 2013 Procurement Strategy Update

With respect to the recommendation to deliver the tunnels and stations as a PPP, the 2013 Procurement Strategy Update noted that options for geographically splitting the core bundle into two or three packages should be left open, subject to more detailed market sounding closer to procurement (noting also that contractors who participated in the 2012 market sounding process expressed varying views on this issue with some preferring a single package approach while others preferred it to be broken up into smaller packages). This issue has been considered as part of the packaging and procurement assessment undertaken for the Business Case.

Project scope

The Melbourne Metro Program scope is outlined in detail in Chapter 7 and Chapter 8 of the Business Case. This scope is the assumed project scope for the purposes of the packaging and procurement assessment documented in this Appendix.

Key assumptions

The procurement analysis documented in this Appendix is predicated on a number of key assumptions, as outlined in the following sub-sections.

2.3.1. Rolling stock

Procurement of rolling stock for the operation of the new Sunshine to Cranbourne-Pakenham Line will be undertaken separately to the project on a network wide basis. It is currently envisaged that the operation of the new line on opening will require the acquisition of 62 High Capacity Metro Trains (HCMT). PTV is currently procuring the first 37 HCMT, via a PPP model, that will be delivered and operational prior to the project’s operational commencement given capacity improvements on the existing Cranbourne- Pakenham Line are required in the short-term. In addition, stabling, wider network power and overhead upgrades will all be delivered

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separately, as the HCMT will be deployed to the network in advance of the project. It is assumed that the additional 25 trains will be procured as a modification under the rolling stock PPP contract.

2.3.2. Rail services operation

An assessment of the key commercial considerations regarding the introduction of a second rail services operator for the Sunshine – Dandenong Line, through the infrastructure delivered by the project, was undertaken as part of the procurement assessment for this Business Case. Whilst there are some potential benefits associated with including operations within the project (including greater operator input into design to deliver a better whole-of-life outcome), introducing a second rail services provider for operation of the new Sunshine – Dandenong Line is considered to be a sub-optimal approach vis-à-vis including the project’s operations and service delivery within the existing single network-wide franchise arrangements. This is on the basis of the following:

There are already franchise arrangements in place for the metropolitan train network. The impact on the wider network and the complexity, and additional cost, of a second rail services operator may exceed the whole-of-life and integration benefits of having a dedicated operator for the new Sunshine – Dandenong Line.

Previous experience of two operators on Melbourne’s metropolitan rail network resulted in a number of issues, including difficulty in collective decision-making (e.g. over timetable interfaces); duplication of management resources and functions; contrived and unwieldy arrangements for (necessarily) shared assets (e.g. Metrol); loss of system capacity; loss of potential system flexibility and redundancy in the event of significant system incidents (even where lines are operationally independent of each other); and confusion for passengers as to who is responsible for train operations and service delivery. A single operator simplifies management of the rail network, improves co-ordination between services, secures economies of scale and reduces confusion and uncertainty for passengers.

Even though the new Sunshine – Dandenong Line will operate as a stand-alone line with dedicated rolling stock, there will continue to be interfaces, including between the metropolitan rail franchisee, V/Line services, freight trains and the new Sunshine – Dandenong Line. This could include interfaces in relation to infrastructure resilience if there is an issue in the new tunnels, at shared or interchange stations such as CBD interchanges and Sunshine, and / or between shared systems and the requirement to develop future network plans (e.g. there could be a need to move or share rolling stock between lines and / or to share stabling or maintenance facilities in the future). The practical and contractual ability to separate one line would also need to be confirmed.

The Victorian rail sector has been through three iterations of rail franchising (1999, 2004 and 2009). The current arrangements reflect this and strike a delicate balance in terms of fixed and variable (cap and collar style) pricing. Within this context, for example, if a PPP was pursued for the project that included a fully fixed price operational contract, such a structure may not offer optimal value to the State, and may also more broadly impact the pricing of the wider network franchise arrangements.

Given the capital cost of the project is expected to outweigh the operating cost, if the capital works and operations were procured together the selection of the winning consortium would likely be driven by the best construction outcome and not by who is the best operator. This is in direct contrast to Government’s previous policy of selecting a franchisee based on the best operator and operating outcomes.

Inclusion of train operations would increase the complexity of an already highly complex project procurement process and would increase the level of risk.

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Key project risks

A key consideration in the selection of a packaging and procurement strategy is its ability to promote efficient and effective management of project risks. Risks should be allocated to the party (i.e. either the State or private sector) most capable of managing and/or pricing the risk, potentially lowering the overall cost of the project. The key project risks identified through the risk assessment process at a whole-of-project level were outlined in Chapter 9 and the supporting appendix, together with the identification of potential risk mitigation strategies for these risks.

In addition to these whole-of-project risks, there are range of key risks1 specific to each works package recommended in this Appendix. An outline of these package specific risks and how the proposed delivery model for each works package will mitigate these risks is provided in the analysis below.

Impact of other Australian projects on the market capacity for the project

An important consideration in assessing packaging and procurement strategies is the impact of other Australian projects on market capacity. There are a number of current and future projects that could compete for market capacity in terms of both construction and finance, including WestConnex (NSW), Capital Metro (ACT), Forrestfield-Airport Link (WA), the Western Distributor (VIC), Level Crossing Removal Program (VIC), Stage 2 of Sydney Metro (NSW) and Inland Rail (Cwth). Notwithstanding the magnitude of Australia’s infrastructure pipeline, activity in the infrastructure market indicates:

With respect to the depth of the construction market:

New entrants to the Australian market with strong balance sheets (for example, Bouygues, Acciona and Salini) are enhancing competition in the market

Availability of skilled labour is strong as the resource led infrastructure boom tapers

Packages should be structured to match contractor and investor expectations and ensure sufficient competitive tension

A key risk has been identified in relation to potential capacity constraints of suitably qualified railway signalling technicians and engineers with in-depth knowledge of Melbourne’s metropolitan rail network.

The financing and equity market for greenfield projects is deepening:

The Queensland Motorways sale process attracted a broad range of new investors to the Australian transport market

Strong appetite exists for the infrastructure pipeline from equity sponsors and financiers, notwithstanding the number of projects currently in the market.

Although there are a number of issues that will need to be monitored leading into taking the project to market, including around competing projects and the availability of select specialist resources, the market sounding process indicted strong interest in, and capacity for, the project. As such, market capacity considerations have not been a key constraint in the packaging and procurement analysis presented in this Appendix.

1 Key risks specific to each works package were identified based on the value of the real risk adjustment attributable to the relevant risk, as documented in the Project Risk Register attached to Appendix 8.

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Redacted - commercial-in-confidence

3. Step 2: Packaging options assessment

Packaging assessment approach

To establish the most appropriate procurement strategy for Melbourne Metro, it is necessary to determine if works should be delivered as a single, integrated package or split into a number of smaller packages.

After consideration of the project’s characteristics, inputs from technical advisers and analysis of approaches adopted or proposed to be adopted on comparable projects, the packaging drivers presented in the table below were developed to support the assessment and comparison of packaging options. These drivers were used to help identify and inform the key differentiating factors between potential packaging options, and were not intended to act as fixed evaluation criteria.

Table 1: Packaging value drivers

Packaging value driver Description

Technical requirements Are the technical requirements/skills/capabilities required to deliver the elements of the package similar?

Interfaces and risk profile Are there synergies from bundling components?

Does the package involve interaction with the existing network and are there any dependencies? Does the separation of the package create a natural and manageable point of interface with other packages, or does it create undesirable interface risks? Does the proposed packaging solution support appropriate risk transfer, such that value for money can be achieved by the State?

Innovation Does the packaging approach create or reduce opportunities for innovation in design, construction and/or a whole of life focus?

Market appetite and capacity

Is there sufficient market interest in delivering the project package? Does packaging impact on market appetite? Is there market capacity to deliver the package such that a competitive outcome is likely to be achieved?

Source: Department analysis

The approach used to develop and evaluate packaging options comprised three key steps:

Consideration of an extensive list of potential packaging options based on factors such as geography and technical discipline.

Identification of a shortlist of potential packaging options by undertaking a qualitative analysis to determine the most realistic, practical options. Factors considered during the shortlisting process included the potential benefits of delivering elements with specific characteristics separately, the ability of the packaging option to assist in achieving project objectives and reduced interface risks.

Consideration of shortlisted packaging options against the packaging value drivers to determine the most suitable option.

The recommended packaging approach is outlined in the following sub-sections, including the rationale for the proposed approach.

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Packaging assessment

3.2.1. Early works

Early works comprise works that are needed to enable efficient and on-time delivery of the tunnel and station works and to minimise disruption. This includes relocating and protecting utilities, tram diversions, construction power and works to prepare construction sites.

Site preparatory works are expected to include demolitions, removal or relocation of trees, removal or relocation of monuments, minor road / transport network changes and any other activities required in order to facilitate early commencement of the main works, including for example, temporary works and other works that provide access for surface and underground construction.

Delivery of early works separately to the tunnel and station works is considered the optimal packaging approach for these works. This is consistent with the approach recommended in the 2013 Procurement Strategy. The key reasons for undertaking early works in advance of the tunnel and station works include:

Preventing delays in the overarching construction program for the tunnel and stations works as scope definition and planning approval of certain early works are on the critical path. It is desirable to commence these activities as soon as possible and complete the works before the State contracts for the tunnel and stations works.

Enabling delivery of the tunnel and stations to occur in a construction environment where the constraints of existing utilities and transport infrastructure that conflicts with the project alignment are reduced, thereby reducing risk premiums (and by extension, costs) expected to be bid for the tunnel and stations works. This approach will also reduce the interface risks for the tunnel and station works because delivery of these works will not involve direct interface with multiple Utilities Service Providers (USPs) and other third party asset owners/operators.

Easing the difficulty of packaging such works in the tunnel and stations works as specific parties (e.g. Yarra Trams and utilities providers) need to undertake and oversee certain early works. For example, certain utility relocations can only be undertaken by the asset owners and their pre-qualified sub-contractors.

Providing an opportunity to more effectively manage and mitigate any necessary disruption to the community, including commuters and businesses. For example, early commencement of the early works will reduce the intensity of disruption by enabling works to be staged (e.g. to avoid multiple road closures at the same time) and will reduce the need for these works to be performed in parallel with the heavy civil construction activities to be undertaken as part of the tunnel and station works.

Enabling relevant USPs to manage their internal resources more effectively and ensure that resources are available when required (for example, because works can be staged, rather than all undertaken all at once), thereby mitigating any program risks potentially arising from USP resource capacity constraints.

Providing an opportunity to reduce delivery costs. For example, the shorter construction program should result in reduced cost escalation and savings in project overheads. Similarly, de-risking the tunnel and station works should reduce the risk premium associated with these works.

The commencement of early works in advance of main works is a typical approach that is used on infrastructure projects that have in-ground civil works, particularly linear projects in urban environments such as railway lines. For example, the Regional Rail Link Authority engaged a demolition contractor as well as the metropolitan rail franchisee and interstate rail franchisee (ARTC) to perform early works and the NWRL and Sydney Light Rail projects used a managing

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contractor to deliver early works including service relocations, demolitions and construction power.

The table below summarises the recommended approach to packaging of the early works.

Table 3 - Early works packages

Early works package Key packaging drivers

Utilities relocations / protection and site preparation – Relocation / protection of utility services in conflict with the project alignment, plus other site preparatory works (for example, potentially including building demolitions and/or works that provide access for surface and underground construction)

Packaging these works together allows the contractor to generate efficiencies through design integration and streamlining of construction activities, potentially leading to reduced costs. This also allows a single contractor to effectively manage:

– Asset owners in an integrated and efficient manner given these organisations can often be resourced constrained

– Staging and timing of works, reducing the risk of delays and mitigating disruptions.

Packaging all utilities relocations / protection and site preparation together should drive a more effective risk transfer as one party is responsible for total early works delivery meaning there is less scope for gaps in risk allocation, cost shifting and disputes given the reduced level of interfaces.

Tram works – Tram diversion works

The tram works have very different technical and risk characteristics to other early works and are to be undertaken in a live light rail and road environment which also leads to significant network interface and stakeholder management issues. Therefore, it is optimal to quarantine these technical requirements and risks from the other early works, and package the tram works separately. This approach will facilitate a greater role for Yarra Trams in delivery given it is best placed to mitigate and manage service disruptions during construction and to ensure the works achieve the operational outcomes required.

Construction power – Provision of power for construction activities

Separate procurement of these works may accelerate the program because MMRA can progress the arrangements with the USPs to ensure power is available for the tunnel boring machines (TBMs) as early as possible. These works are geographically and technically separable (e.g. compliance with relevant industry acts, etc.) to other early works and therefore do not require any integrated coordination with these other works. Given the scale and importance of these works it may be desirable for MMRA to have a direct relationship with the USPs in order to oversee delivery of the works.

Source: Department analysis

3.2.2. Tunnels and stations

The tunnel and station works comprise 9km twin tunnels, five stations (including fit-out), mechanical and electrical systems, and, subject to the procurement model(s) adopted for these works, may include structure maintenance, stations operations and maintenance, and commercial opportunities at the new underground stations.

The 2013 Procurement Strategy Update assessed a broad spectrum of 13 alternative packaging options for these works based on three alternative approaches:

1. Core bundle approach with one large package of works.

2. Geographic packaging approach with works split at logical construction staging points.

3. Technical discipline packaging approach with works split based on technical discipline.

The 2013 Procurement Strategy Update ultimately recommended a single package approach, but noted that a geographical split option should be further tested, largely on the basis that

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there was some uncertainty at the time in relation to the market’s capacity to deliver the works as a single package.

On this basis, for the purposes of the current packaging assessment, the following two options were considered:

Option 1: Single package – The tunnel and station works are delivered as one integrated works package.

Option 2: Geographic Split at CBD North2 – This option includes two works packages:

Package 1: Twin tunnels from the western portal to CBD North, Arden and Parkville stations (including station fit-out), major TBM launch site at Arden and potentially mechanical and electrical systems for this section of tunnels.

Package 2: CBD North station and fit-out, tunnels along Swanston Street, CBD South station and fit-out, twin tunnels from CBD South to the eastern portal, Domain station and fit-out, major TBM launch site at either Fawkner Park or Domain and potentially mechanical and electrical systems for this section of tunnels.

Having regard to the packaging value drivers with respect to each of the two packaging options above, a single package approach (Tunnel and Stations package) has been re-confirmed as the preferred packaging solution for the tunnel and stations works. The key reasons for a single package approach include:

Facilitating a single end-to-end solution that could lead to better service and customer experience outcomes by better integrating works (for example, consistency of station design).

Avoiding the creation of additional interface risk for design, construction (particularly at the point at which the two packages would meet), program (for example, splitting packages is likely to result in an extended program to allow additional time to provide for an iterative design process and the more complex integration and commissioning processes) and commissioning (for example, to ensure that the tunnel ventilation and rail systems are integrated and commissioned across both packages).

Enabling more effective ground condition (geological and hydrogeological) risk transfer to the contractor as all high risk locations (such as Arden and the Yarra River crossing) are included in one package allowing risk to be mitigated. In addition, the design and construction interface risk between tunnels and stations is transferred to the same contractor (which is particularly important given Melbourne’s geological conditions make splitting these scope elements more technically challenging than certain other locations – for example, because the station box structures must be completed before the TBMs arrive at the stations).

Providing more scope for innovation as the contractor has greater flexibility to adjust the design, develop alternative staging or program solutions or adopt different construction approaches, including approaches that would reduce disruption. For example, a single package provides increased flexibility for the contractor to develop alternative tunnelling solutions and construction methodologies.

Having one party responsible for managing site access, safety, industrial relations and disruption (for example, with a single party being responsible for all construction activities in the CBD), thereby further reducing interface risks between works and providing additional opportunities for economies of scale (for example, procurement of TBMs). In addition, key challenges for the delivery of the tunnel and station works include construction site access, lack of lay down areas and the requirement use tunnels for delivery to site of key

2 Based on the technical analysis undertaken during this Business Case process this geographic split packaging option was selected as the most likely option for the purposes of this assessment.

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equipment. A single package approach facilitates better management of these risks given one party will have responsibility for managing construction and site access.

Having one party responsible for designing and delivering an end-to-end mechanical and electrical system and fire life safety solution. This is important because these systems are integral to the tunnels and stations being fit for purpose and being able to facilitate the required operational outcomes (for example, because the spacing of ventilation shafts and the effectiveness of the ventilation systems solution can restrict the number of trains per hour and because integrated systems will be necessary to achieve final commissioning).

Having a single contractor responsible for facilitating the accreditation requirements and managing this metropolitan rail franchisee interface.

Although the interface between two geographically separated packages could be managed, there were no material benefits identified with pursuing a geographic split option for the tunnel and stations.

The mechanical and electrical systems are proposed to be included as part of the Tunnel and Stations works due to the significant design, access and construction interface and because the mechanical and electrical systems are integral to the tunnels and stations being fit for purpose (for example, ventilation systems are essential for the tunnels to be operational).

As far as reasonably practicable, the scope of the Tunnel and Stations package will be defined to exclude works in the existing live rail environment, which involve additional brownfield risks and complexity.

3.2.3. Rail infrastructure

Certain works will be required at the eastern and western portals which involve significant interface with the existing rail network, including cut-and-cover tunnelling works, decline structures and local reconfiguration and realignment of the existing Sunbury, Frankston and Cranbourne-Pakenham Lines (including modifying existing signalling, traction power and communications rail infrastructure).

Delivering the brownfield rail infrastructure works separately to the tunnel and stations works is the optimal packaging approach for these works. This is consistent with the approach recommended in the 2013 Procurement Strategy with respect to the eastern portal works but differs with respect to the western portal works which were previously included in the Tunnel and Stations package. The key rationale for this difference is to exclude from the tunnel and stations package works in the existing live rail environment. The reasons for this conclusion include:

Extensive works need to be undertaken in close proximity to the live rail network and in a complex, constrained operating environment (noting that, for example, the Sandringham, Frankston and Cranbourne-Pakenham Lines converge in the area where the eastern portal will be built and the Sunbury and Werribee Lines operate where the western portal will be built). This will require multiple service disruptions and associated bus replacement services. Delivery of these works will involve complex, multi-staged construction processes (particularly at the eastern portal) requiring multiple weekend and other occupations over a significant time period. Given the technical nature and risk profile of undertaking these works in the live rail environment, it is imperative that these works are undertaken with significant involvement of rail franchisees and separate to the tunnel and stations works.

These works will affect the local road network (for example, with substantial works required to the William Street bridge structure at the eastern portal) and the local community. Procuring these works separately to the tunnel and stations package should ensure that the rail infrastructure contractor focuses on managing local disruption and stakeholder issues in these areas.

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A single package approach for the rail infrastructure works is considered optimal. Although separate eastern and western portal packages could be managed, a single package is preferable on the basis that:

The works are of a materially similar nature.

Track occupations can be coordinated more effectively and disruption can be minimised.

Separating the rail infrastructure works into two packages would create additional contractual interface, requiring the Tunnel and Stations contractor to engage with two contractors in relation to design, construction and commissioning.

Separate packages would require an additional procurement process and an additional contract, requiring additional resources from the Department, the market and the rail franchisee.

Feedback from the most recent market soundings suggested that a single package will be attractive from the market’s perspective.

This package will also include the western and eastern turnbacks. These works are similar in nature to the track works at the portals and packaging these works together should enable occupations to be coordinated and disruption minimised.

3.2.4. Rail systems

Rail systems includes conventional signalling, HCS, train and power control systems, ICT and rail system integration. This will involve not only the provision of new rail systems within the tunnels and stations but also the delivery of new rail systems and systems upgrades on the existing Sunbury and Cranbourne-Pakenham Lines. The solution will need to be designed on a system-wide basis and integrated and commissioned across the newly created Sunshine – Dandenong Line.

Delivery of rail systems separately to the Tunnel and Stations is considered the optimal packaging approach for these works. This is consistent with the approach recommended in the 2013 Procurement Strategy. The key drivers of separate delivery are as follows:

Rail systems are highly complex and will have significant interfaces with the new HCMT rolling stock, existing signalling infrastructure, rail operations and the broader network. Quarantining these works from the tunnel and stations works enable these works to be managed more effectively and allow the main works to be ‘de-risked’ and delivered at a lower cost.

Introducing HCS potentially compounds these issues given the specialist nature of HCS and noting that HCS has not yet been implemented anywhere on the Victorian rail network. This degree of technical specialism and uncertainty means that including a fixed scope for rail systems in the tunnel and stations works could lead to large risk premiums for the rail systems elements of the package.

Procuring the rail systems separately from the tunnel and stations enables the preferred rail systems provider to be selected on a stand-alone, value for money basis.

For completeness, it is noted that certain rail systems installation works within the tunnels and stations will be included in the Tunnel and Stations package. The key driver for this is to minimise program, access and delivery interface risks between the packages (noting that the proposed program to meet the required timelines involves installation of rail systems throughout the tunnels and stations at the same time as mechanical and electrical systems installation, station fitout and other activities which form part of the Tunnel and Stations works).

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3.2.5. Wider Network Enhancements

Wider Network Enhancements involve works across the wider existing above ground rail network (outside of the tunnel and beyond the tunnel portals) including track modifications and signalling system upgrades.

The Wider Network Enhancements are being considered separately to the other packages, consistent with the approach recommended in the 2013 Procurement Strategy. The key reasons for considering the wider network works as a separate package (or series of packages) are as follows:

The scope and location of these works means that they can potentially be undertaken independently of other scope elements.

They have very different technical characteristics to the tunnel and stations works, are geographically separate, are of a brownfield nature and will be undertaken in a live operating environment with significant interface and stakeholder management issues.

The required timeframe for procurement and delivery of these works differs to the rest of the project. These works need to be completed to coincide with completion of the tunnel and stations works, but have a much shorter construction duration.

Wider Network Enhancements will be packaged with other works where there are clearly demonstrable benefits such as procurement and/or delivery synergies. As noted above, the eastern turnback will form part of the Rail Infrastructure package and the signalling upgrades on the Sunshine – Dandenong Line will form part of the Rail Systems package. Other Wider Network Enhancements may ultimately form part of these packages and, where appropriate, works will be incorporated with the Level Crossing Removal Project to reduce costs and minimise disruption. Further detailed assessment of any such opportunities will occur as part of the detailed pre-procurement planning activities.

3.2.6. Commercial opportunities and station airspace rights

Commercial opportunities associated with the Melbourne Metro Program include general amenity retail offerings within stations, station airspace rights (over site development) and broader precinct development opportunities. The preliminary packaging outcomes in relation to these opportunities are as follows:

Commercial opportunities within stations – It is desirable to package these with the Tunnel and Stations so that stations can be designed to best accommodate retail and other potential opportunities. The value of these opportunities is not expected to be material in the context of the Melbourne Metro Program’s total capital, operating and maintenance costs.

Station airspace rights – Over site development opportunities exist at CBD North and CBD South stations. Given the significant interface between design and construction of the station boxes and any over site developments, it is desirable to package these development opportunities with the Tunnel and Stations package to manage interface risks and maximise value capture (for example, through integrated design).

Commercial development on surplus land at Arden – The Arden – Macaulay Precinct presents a significant urban renewal opportunity. It has been determined that the redevelopment opportunities at Arden should be delivered separately from the Tunnel and Stations package because there is limited direct interface between the station works and the broader precinct redevelopment, significant additional work will be required by numerous Government agencies to coordinate and deliver the desired urban renewal outcomes and the timing of any precinct-wide development activities will occur naturally over a significantly longer period than the tunnel and stations works.

14

Although integrated packaging for within and above station commercial opportunities is considered desirable from a packaging perspective, it is noted that the final packaging solution for commercial opportunities will be largely driven by the procurement approach (for example, because commercial development opportunities are commonly included within PPPs but not within traditional procurement models such as D&C).

3.2.7. Operations and maintenance of new infrastructure and systems

As noted above, the operation of rail services on the Sunshine – Dandenong Line will be provided by the metropolitan rail franchisee. Any reference in this procurement analysis to ‘operations and maintenance’ therefore does not include the operation of rail services; the analysis contemplates which party is best placed to operate the five new stations and maintain the new tunnel and stations infrastructure.

As the current metropolitan rail operator, the metropolitan rail franchisee is the ‘default’ operations and maintenance service provider for the Melbourne Metro Program. Notwithstanding this, opportunities to package the operation and maintenance of relevant aspects of the new infrastructure (including stations) and systems with delivery of the capital works has been considered as part of this Business Case in order to identify any opportunities to deliver better customer experience at the new stations, derive whole of life benefits and improve value for money.

However, the approach to packaging of stations operations and maintenance of infrastructure and systems is largely driven by the procurement model(s) adopted for the Tunnel and Stations package (e.g. if a PPP model is adopted, some operations and maintenance activities would be included within the scope of the PPP whereas if a D&C is adopted, all operations and maintenance activities would be packaged independently to design and construction).

Subject to the above, there are a number of different packaging options for including operations and maintenance activities within the Tunnel and Stations package to deliver whole-of-life benefits and minimise interface risks between project components, including:

At one end of the spectrum, extensive operations and maintenance services could be included in the Tunnel and Stations package (for example, with the scope of services within the stations being similar to the arrangements at Southern Cross Station). This approach may deliver improved customer outcomes, better risk transfer and whole-of-life benefits under a PPP model.

At the other end of the spectrum, the metropolitan rail franchisee could be responsible for these services. This is consistent with the approach adopted for the remainder of the metropolitan network with the exception of Southern Cross Station.

Various options exist between these two ‘bookends’. For example, the scope of the Tunnel and Stations package could include ‘hard’ maintenance of the tunnel and stations structures and mechanical and electrical systems, with the remainder of services (stations operations including ‘soft’ facilities management services) provided by the metropolitan rail franchisee.

The approach to packaging of operations and maintenance is discussed in more detail in Step 3: Procurement options assessment.

Recommended packaging solution

Using the packaging value drivers, the assessment of packaging options focused on bundling project components to better manage risk, minimise interfaces between project components and the network, provide opportunities for innovation and increase attractiveness and acceptance by the market.

A summary of the recommended packaging strategy is presented in the table below.

15

Table 4 - Summary of recommended packaging solution

Works package Description Estimated cost (P90, Nominal)

Early Works

Tram works Tram diversion works

$ m

Utilities relocations / protection and site preparation

Relocation / protection of utility services in conflict with the project alignment, plus other site preparatory works

Construction power

Provision of power for construction activities

Tunnel and Stations Main tunnelling works, construction of five underground stations, station fit-out and mechanical and electrical systems1

$ bn

Rail Infrastructure Works at the eastern and western portals including cut and cover tunnelling, decline structures and local reconfiguration and realignment of existing lines2

$ m

Rail Systems Rail systems design (including conventional signalling, HCS, train and power control systems and ICT), installation works, rail systems integration and commissioning3

$ m

Wider Network Enhancements Works which are required across the wider existing above ground rail network (outside of the tunnel and beyond the tunnel portals), including track modifications and signalling system upgrades

$ m

1 Estimated cost includes installation of rail systems in the tunnel. 2 Estimated cost includes the western and eastern turnbacks. 3 Estimated cost includes signalling upgrades on the Sunshine – Dandenong Line.

A procurement options assessment for each package is undertaken in Step 3: Procurement options assessment in Section 4.

4. Step 3: Procurement options assessment

Evaluation methodology

The evaluation methodology used by the Department for the procurement options assessment is consistent with relevant guidance from the DTF (with specific reference to the High Value High Risk guidelines), as well as the National PPP Guidelines (with specific reference to Volume 1: Procurement Options Analysis).

4.1.1. Evaluation criteria

Having regard to the factors outlined in Step 1 (refer to Section 2), and approaches adopted or proposed to be adopted on comparable projects, the following evaluation criteria were developed to support the value for money assessment of delivery models for the identified works packages.

Table 5 - Procurement options assessment evaluation criteria

Evaluation criterion Description Relative priority

Risk management The extent to which the delivery model allocates risk to the party best placed to manage it.

High

16

*

*

*

*

*

* Redacted - commercial-in-confidence

Evaluation criterion Description Relative priority

Time The extent to which the delivery model is able to deliver the project within the State’s time constraints and provides time certainty.

High

Price and budget certainty

The extent to which the delivery model supports cost certainty and competitive pricing for capital and whole of life costs.

High

Innovation and incentive

The extent to which the delivery model incentivises the contractor to innovate to meet the required performance outputs and other requirements.

Medium

Flexibility and control The extent to which the delivery model enables the State to retain flexibility to change specifications and operations over time.

Medium

Market interest and appetite

The extent to which the delivery model assists in maximising market interest amongst the appropriate market participants with the relevant skills, expertise and capacity.

Medium

Source: Department analysis

Following DTF guidance, these criteria have not been numerically weighted. However, some provide inherently greater differentiation between alternative procurement models than others and therefore an indicative ‘priority’ has been attached to each criterion as set out above.

4.1.2. Evaluation framework

The following ratings were used to assess the suitability and value for money proposition of each shortlisted procurement models against the evaluation criteria.

17

Table 6 - Procurement options assessment evaluation framework

Scoring Description

Procurement option is extremely effective in satisfying the requirements of the criterion

Procurement option is effective in satisfying the requirements of the criterion

Procurement option satisfies or partially satisfies the requirements of the criterion

Procurement option is ineffective in satisfying the requirements of the criterion

n/a Not applicable

Source: Department analysis

4.1.3. Overview of procurement models considered

The following table summarises the procurement models considered in the procurement options assessment, in line with the description provided by the National PPP Guidelines (Volume 1: Procurement Options Analysis).

The following overview is provided as general guidance only to assist in determining the most appropriate delivery model for each project package and, to this end, the nature of the commercial arrangements under each of the delivery models can be developed to reflect specific project requirements.

Table 7 - Procurement models considered

Model Description

Competitive alliance

Competitive alliancing is a form of relationship contracting in which the State collaborates with one or more non-owner parties (e.g. design, constructor, Accredited Rail Transport Operators (ARTOs), etc.) to share risks and responsibilities in delivering the construction phase of a project. Consistent with Victorian and national guidelines and policies, it is assumed that any alliance package would be structured as a competitive target outturn cost (TOC) alliance whereby a TOC is developed by more than one alliance in an environment of competitive tension.

Managing contractor

This form of contracting involves the State appointing a head contractor (the managing contractor) who engages subcontractors to deliver the works. The managing contractor is responsible for administering these subcontracts and accepts some delivery risks. Payment arrangements typically include reimbursement of costs plus allowances for management fees, margins and overheads. The contract may also include an incentive regime in relation to key performance indicators such as cost and schedule targets (with some contracts including a ‘guaranteed maximum price’, usually subject to defined exclusions). The managing contractor is engaged early in the process to manage the scope definition, design documentation and construction of the works. The managing contractor sometimes performs elements of the design and/or construction and is paid based on an agreed fixed price or schedule of rates. Subcontracted works are tendered on a competitive and transparent basis, where possible on a fixed price, fixed time basis.

Franchisee delivery

The State has entered into Projects Agreements with the metropolitan rail franchisee (Metro Trains Melbourne) and trams franchisee (Yarra Trams), respectively, which provide for these franchisees to deliver infrastructure works on behalf of the State. These arrangements are similar to a managing contractor arrangement, the difference being that it is with the incumbent rail/tram service providers. Consequently, the franchisees could be used to deliver infrastructure under an existing contracting framework, which provides for a cost plus approach with a fixed margin.

D&C A fixed price, fixed time contract for design and construction of the works in accordance with a design brief prepared by the principal which outlines the functional and key user requirements.

DCM As for D&C, except that the DCM contractor must also maintain the facility for a specified period – usually between 10 and 30 years.

DBOM In a DBOM arrangement, the private sector party is responsible for designing, building, operating and maintaining the infrastructure.

18

Model Description

PPP A PPP is typically a long-term service contract between the public and private sectors where the State pays the private sector (typically a consortium constituted as a Special Purpose Vehicle (SPV)) an availability service fee to deliver infrastructure and related services over an agreed project term (typically 15-30 years). The SPV typically designs, builds and finances the facilities and operates and/or maintains them to specified standards. The SPV is financed by equity and non-recourse or limited recourse debt and is financially responsible for the asset’s condition and performance throughout the concession.

There is a large range of procurement models available to the State for the identified works packages. The approach to identifying the most likely procurement models for each works package was to consider the factors outlined in Step 1 (refer to Section 2) and Step 2 (refer to Section 3) in the context of the suitability of procurement models to particular works packages, the outcomes of which were consistent with the 2013 Procurement Strategy Update, where many models were deemed not suitable for certain packages. Therefore only the most likely procurement models have been assessed for each of the works packages. For example, models such as construct only and construction management were not considered appropriate for any project packages and alliancing and managing contractor were discounted for the Tunnel and Stations package due to the high importance placed on construction innovation, risk transfer and the desire for a fixed price contract.

Procurement assessment – Early Works

4.2.1. Procurement assessment summary

As noted above, early works comprise above/below ground utility relocations, tram diversions, provision of construction power to the TBM launch sites, and other site preparatory works including demolition works.

The recommended approach to procurement of early works packages is summarised Table 8.

Table 8 - Early works procurement approach

Early works package

Procurement assessment

Utilities relocations / protection and site preparation

Delivery of the majority of the utilities relocation and protection works is recommended to be via a Managing Contractor approach. This should ensure that the works are delivered quickly, that the State has sufficient flexibility to adjust scope if required as the project’s design is further developed and that the benefits of coordinating and managing a diverse range of works and utility owner/operator interfaces are realised.

It is recommended that any other early works to prepare construction sites, including works that provide access for surface and underground construction, are delivered as part of the Managing Contractor arrangement. However, the State will consider opportunities for including some elements of these works in the Tunnel and Stations package where there are clearly demonstrable benefits (for example, the State may wish to retain the ability to offer buildings provisionally nominated for demolition to the tunnel and stations contractor for use as a construction management base).

Tram works The recommended option is franchisee delivery under the Projects Agreement between the State and Yarra Trams as Yarra Trams is best placed to manage the significant interfaces with the existing tram network and to ensure that the works achieve the operational outcomes required.

Construction power

Provision of additional construction power at selected worksites is recommended to be delivered via a direct agreement with relevant power providers because delivery of these works does not have significant interfaces with other early works, this provides the State with more direct control over these works and because including these works within the scope of the Managing Contractor arrangement might result in additional costs (due to the Managing Contractor’s margin, overheads, etc.) for potentially limited benefit. However, opportunities to include these works within the scope of the Managing Contractor arrangements will be considered if this can be achieved on a value for money basis.

Source: Department analysis

19

In addition to the above, a number of contractor participants in the 2015 packaging and procurement market sounding process expressed an interest in participating in the delivery of the project’s early works, including under a Managing Contractor or similar delivery model.

For completeness, it is noted that the Managing Contractor will not be precluded from tendering for future project work packages or prejudiced during future selection processes, subject to complying with the probity requirements to be specified as part of the Managing Contractor procurement process.

4.2.2. Mitigation of key work package specific risks

The key risks3 specific to the early works and how the recommended delivery model for each of the major early works package will mitigate these risks is summarised below.

Table 9 - Mitigation of key early works risks

Key risks Mitigation under delivery model

Utilities relocations and site preparation (Managing Contractor)

Risk of delay in approvals under the telecommunications and/or pipeline Acts resulting in delayed commencement of the Tunnel and Stations works. Enabling/early works not adequately scoped and scheduled resulting in additional works being added to the Tunnel and Stations works causing delay. Enabling/early works not completed as required within the specified timeframe causing delay.

Key factors relevant to the proposed delivery model that mitigate these risks include:

The Managing Contractor will be responsible for the procurement of applicable approvals / consents / authorisations required for the performance of the works. The Managing Contractor will also be responsible for verifying and completing all designs provided by, or on behalf, of the State. With respect to overarching timely completion, the Managing Contractor Agreement will include a target program setting out key milestone completion dates and an overall completion date. The target program will form the basis for measurement of the Managing Contractor’s achievement of the time related KPIs.

Tram infrastructure works (Yarra Trams delivery under the Projects Agreement)

Interface issues arise with Yarra Trams resulting in scope changes and/or delay e.g. acceptance of infrastructure into service. Works are not completed as required within the specified timeframe causing delay to Domain Station construction commencement.

Key factors relevant to the proposed delivery model that mitigate these risks include:

The State has entered into the Projects Agreement with Yarra Trams to facilitate the collaborative delivery of tram works on behalf of the State. The existing contractual framework provides an effective mechanism in which to manage interface issues, particularly given the nature, scale and cost of these works is consistent with the type of works typically managed by Yarra Trams under the Projects Agreement. These works are required to be completed by early 2018 in order to facilitate construction of the Tunnel and Stations package. Given that Yarra Trams operates the existing tram infrastructure, Yarra Trams is arguably best placed to ensure the timely delivery of these works. In addition, the existing performance incentives in the Projects Agreement would be reviewed to ensure appropriate incentives are offered for timely completion.

3 Key risks specific to each works package were identified based on the value of the real risk adjustment attributable to the relevant risk, as documented in the Project Risk Register attached to Appendix 8.

20

Key risks Mitigation under delivery model

Provision of construction power (Direct agreements with USPs)

Risk that HV power to TBM construction sites is inadequate resulting in significant upgrades to local or remote substations. Power utilities cannot meet anticipated future power consumption demand, leading to inability to achieve expected level of service. Provision of construction power not completed as required within the specified timeframe causing delay.

Key factors relevant to the proposed delivery model that mitigate these risks include:

Given the scale and importance of these works it is desirable for MMRA to have a direct relationship with the USPs in order to oversee delivery of the works and ensure the HV power is adequate to enable effective TBM operation. Direct agreements with USPs for delivery these works should accelerate the program because MMRA can progress the arrangements with the USPs prior to appointment of the Managing Contractor ensuring power is available of all TBM’s as early as possible.

Source: Department analysis

Procurement assessment – Tunnel and Stations

The Tunnel and Stations package capital works include the main tunnelling works, construction of five underground stations, station fit-out and mechanical and electrical systems.

As noted above, there is a large range of procurement models available to the State for the Tunnel and Stations package, however, based on analysis undertaken in developing the current procurement strategy, the D&C, DCM and PPP models have been identified as the most likely procurement models for the Tunnel and Stations package.

4.3.1. Qualitative comparison of traditional and PPP procurement models

Performance comparison of traditionally procured projects and PPPs

The most authoritative study of the relative performance of PPPs and traditional procurement (i.e. construct only, D&C, etc.) in Australia is that released by the University of Melbourne in December 2008.4 This study assessed the cost and time performance of 25 PPP projects and 42 traditionally procured projects throughout Australia since 2000. The study found that:

From the time the relevant contract is signed:

The PPPs experienced average construction cost over-runs of 4.3 per cent, compared with 18 per cent for the traditionally procured projects. PPP projects provide far greater cost certainty than traditional contracts and there is little variation in cost of a PPP project after the contract is signed

The average construction phase delay for the PPPs was 1.4 per cent, compared with 25.9 per cent for the traditionally procured projects.

Only 43.3 per cent of traditionally procured projects were completed within 5 per cent of the expected cost.

This study therefore found that the State remains exposed to a higher degree of cost/time uncertainty under the contractual arrangements for traditionally procured projects vis-à-vis PPPs beyond the date of contractual commitment.

4 Colin Duffield, Peter Raisbeck and Ming Xu, National PPP Forum – Benchmarking Study, Phase II – Report on the performance of PPP projects in Australia when compared with a representative sample of traditionally procured infrastructure projects, University of Melbourne, 2008.

21

In addition to the University of Melbourne study, a number of older studies have also sought to test the performance of PPPs relative to traditionally procured projects:

Mott MacDonald (2002) – The study found that capital expenditure resulted in a 1 per cent cost overrun on average for PFI/PPP projects relative to an average of 47 per cent for traditional procurement projects.

National Audit Office, UK (2003) – The study found that 76 per cent of PFI projects were delivered on time and 78 per cent on budget, compared to 30 per cent on time and 27 per cent on budget for traditional procurement.

Standard & Poors (2007) – Of 161 survey responses, 61 per cent believed PPPs have a better track record of delivery than traditional procurement, 30 per cent said ‘it depends’ and 9 per cent disagreed.

Allen Consulting Group (2007) – Cost overruns experienced by traditional projects were 35.3 per cent and in the case of PPPs, it was 11.6 per cent. The weighted time overrun was 25.6 per cent for traditional procurement and 13.2 per cent for PPPs.

Other benchmarking studies relevant to rail projects

The studies below have not explicitly sought to compare the performance of traditionally procured projects and PPPs. They do, however, provide highly relevant context in considering the level of cost risk and uncertainty historically encountered on major rail projects:

Procedures for Dealing with Optimism Bias in Transport Planning (Department of Transport, UK) – This guidance was produced by the British Department of Transport to assist with costing transport projects. The guidance indicated that rail projects typically required an uplift in project budgets of 40 per cent, compared to similar scope road projects which required an uplift of only 15 per cent. Although this data relates to business case costings (rather than contract pricing) and is therefore of limited relevance, it does highlight the inherent complexity and risk associated with rail projects which can give rise to an additional level of cost uncertainty when compared to other sectors.

Underestimating Costs in Public Works Projects (Journal of the American Planning Association) – This study of 258 transportation projects found that rail projects incur the highest difference between actual and estimated costs, and that the average difference between actual and estimated costs for rail projects is substantially higher than that for other types of infrastructure.

4.3.2. Analysis against evaluation criteria

The table below presents a summary of the analysis against each evaluation criterion, focusing on the key points of differentiation between the various delivery models.

22

Tab

le 1

0 -

Tu

nn

el a

nd

Sta

tio

ns

pro

cure

men

t as

sess

men

t

Eva

luat

ion

cr

iter

ion

D

&C

D

CM

P

PP

Ris

k m

anag

emen

t P

rovi

des

a pr

ima

faci

e co

mpa

rabl

e le

vel o

f de

sign

an

d co

nstr

uctio

n ris

k tr

ansf

er a

s th

e D

CM

and

PP

P m

odel

s, b

ut d

oes

not a

llow

for

the

tra

nsfe

r of

any

po

st c

onst

ruct

ion

mai

nten

ance

ris

k to

the

priv

ate

sect

or.

With

res

pect

to

the

cons

truc

tion

perio

d, t

radi

tiona

l pr

ocur

emen

t mod

els

(incl

udin

g D

&C

) hav

e hi

stor

ical

ly p

rovi

ded

a lo

wer

leve

l of

prot

ectio

n ag

ains

t ris

k fo

r th

e S

tate

sin

ce t

he p

roje

ct is

Sta

te

fund

ed, l

eavi

ng t

he S

tate

with

litt

le o

ptio

n bu

t to

co

ntin

ue t

o su

ppor

t pr

ojec

ts a

nd a

bsor

b th

e co

nseq

uenc

es o

f ris

ks e

vent

uatin

g.

With

res

pect

to

post

con

stru

ctio

n de

fect

s, t

he

cont

ract

or w

ould

be

cont

ract

ually

bou

nd t

o re

turn

to

the

site

and

mak

e go

od d

efec

ts u

ntil

the

expi

ry o

f th

e de

fect

s lia

bilit

y pe

riod.

5 B

eyon

d th

e ex

piry

of

the

defe

cts

liabi

lity

perio

d, t

he S

tate

wou

ld n

eed

to b

ring

a cl

aim

aga

inst

the

con

trac

tor

for b

reac

h of

con

trac

t or

tor

t fo

r an

y m

ajor

def

ects

in t

he c

onst

ruct

ion

wor

k. A

fter

the

exp

iry o

f th

e de

fect

s lia

bilit

y pe

riod

(typ

ical

ly 1

2-24

mon

ths)

the

Sta

te w

ould

nee

d to

pr

ove

desi

gn o

r con

stru

ctio

n “f

ault”

(it

is n

ot li

ke a

w

arra

nty)

whi

ch g

ets

hard

er t

o es

tabl

ish

as t

ime

mov

es o

n. T

o th

e ex

tent

tha

t pa

rt o

f th

e w

orks

are

‘b

uild

ing

wor

ks’ f

or t

he p

urpo

ses

of t

he B

uild

ing

Act

19

93 (V

ic),

any

such

cla

im is

sub

ject

to

a 10

yea

r lim

itatio

n pe

riod.

The

risk

tran

sfer

ass

ocia

ted

with

the

DC

M m

odel

sh

ould

be

prim

a fa

cie

grea

ter

rela

tive

to a

D&

C g

iven

th

e de

liver

y of

mai

nten

ance

on

a fix

ed p

rice

basi

s sh

ould

ince

ntiv

ise

a gr

eate

r le

vel o

f w

hole

of l

ife

focu

s.

How

ever

, as

the

D&

C c

ost i

s pa

id in

ful

l dur

ing

the

deliv

ery

phas

e, t

he e

xten

t of

the

fin

anci

al in

cent

ives

fo

r th

e co

ntra

ctor

to

ensu

re t

he t

unne

l and

sta

tions

co

ntin

ue t

o pe

rfor

m a

s ex

pect

ed in

the

med

ium

to

long

ter

m is

lim

ited

to t

he v

alue

of a

ny p

erfo

rman

ce

secu

rity

and

the

mai

nten

ance

pay

men

ts a

t ris

k (w

hich

is e

xpec

ted

to b

e im

mat

eria

l rel

ativ

e to

the

ca

pita

l cos

t of

the

con

stru

ctio

n w

orks

).

The

maj

ority

of

desi

gn, c

onst

ruct

ion,

mai

nten

ance

an

d re

leva

nt fa

cilit

ies

man

agem

ent

(FM

) ser

vice

s ris

ks o

n a

who

le-o

f- li

fe b

asis

are

abl

e to

be

tran

sfer

red

to t

he p

rivat

e se

ctor

. Th

e in

trod

uctio

n of

priv

ate

finan

ce o

ffer

s m

ater

ial

leve

l of p

rote

ctio

n fr

om r

isk

for

the

Sta

te (e

.g. t

he

Sta

te t

ypic

ally

doe

s no

t pa

y un

der a

PP

P u

ntil

wor

ks

are

com

plet

ed6

and

does

not

hav

e di

rect

con

trac

t m

anag

emen

t of

the

D&

C c

ontr

acto

r). I

n ad

ditio

n, it

pr

ovid

es a

dditi

onal

dis

cipl

ine

and

scru

tiny

of r

isk

com

pare

d to

tra

ditio

nal p

rocu

rem

ent

(i.e.

fin

anci

er

due

dilig

ence

and

ove

rsig

ht).

Com

petit

ion

betw

een

bidd

ers

is b

ased

on

min

imis

ing

who

le-o

f-lif

e co

sts

and

the

priv

ate

sect

or is

at r

isk

for

inte

grat

ing

desi

gn, c

onst

ruct

ion,

mai

nten

ance

and

re

leva

nt F

M s

ervi

ces

to a

chie

ve a

n op

timal

who

le o

f lif

e ou

tcom

e. F

or e

xam

ple,

alth

ough

the

con

trac

tor

wou

ld b

e at

ris

k fo

r any

def

icie

ncie

s in

the

ass

ets

until

the

exp

iry o

f the

def

ects

liab

ility

per

iod

unde

r th

e D

&C

/ D

CM

mod

els,

the

Sta

te w

ould

hav

e lim

ited

reco

urse

aga

inst

the

con

stru

ctor

for

any

m

ater

ial i

ssue

s th

at w

ere

to a

rise

post

the

exp

iry o

f th

is p

erio

d (w

hich

wou

ld b

e lim

ited

by b

oth

the

build

er’s

liab

ility

cap

and

, to

the

exte

nt t

he w

orks

are

‘b

uild

ing

wor

ks’ f

or p

urpo

ses

of t

he B

uild

ing

Act

19

93 (V

ic),

the

10 y

ear s

tatu

tory

tim

e lim

itatio

n on

br

ingi

ng c

laim

s). I

n co

mpa

rison

, und

er a

PP

P t

he

finan

cier

s’ c

apita

l wou

ld s

till b

e at

risk

and

sub

ject

to

abat

emen

t fo

r th

e fu

ll co

nces

sion

term

.

Sco

ring

(Prio

rity:

Hig

h)

Tim

e Fi

nanc

ial i

ncen

tives

can

be

built

into

D&

C c

ontr

acts

to

enc

oura

ge t

imel

y co

mpl

etio

n. F

or e

xam

ple,

the

pa

ymen

t arr

ange

men

ts c

ould

be

stru

ctur

ed o

n a

mile

ston

e co

mpl

etio

n ba

sis

and/

or a

por

tion

of a

ny

mile

ston

e/pr

ogre

ss p

aym

ents

cou

ld b

e re

tain

ed u

ntil

final

com

plet

ion.

In a

dditi

on, D

&C

con

trac

ts ty

pica

lly

incl

ude

liqui

date

d da

mag

es t

o co

ver

the

owne

r’s

genu

ine

pre-

estim

ated

loss

aris

ing

from

any

del

ay t

o

The

timin

g in

cent

ives

and

issu

es a

ssoc

iate

d w

ith a

D

CM

mod

el a

re li

kely

to

be m

ater

ially

sim

ilar

to t

he

D&

C m

odel

.

The

use

of p

rivat

e fin

ance

res

ults

in v

ery

sign

ifica

nt

ince

ntiv

es f

or o

n tim

e co

mpl

etio

n w

hen

com

pare

d to

pu

rely

pub

licly

fin

ance

d pr

ocur

emen

t m

etho

ds d

ue

to t

he a

dded

fin

anci

al in

cent

ive

to a

chie

ve

com

mer

cial

acc

epta

nce

(i.e.

the

ope

ratin

g te

rm w

ill

be t

runc

ated

if t

here

is a

del

ay f

or w

hich

rel

ief

is n

ot

prov

ided

, res

ultin

g in

lost

ser

vice

pay

men

ts, a

nd t

he

build

er w

ill b

e re

quire

d to

pro

vide

mat

eria

l liq

uida

ted

5 The

def

ects

liab

ility

per

iod

is ty

pica

lly 1

2-24

mon

ths f

rom

Pra

ctica

l Com

plet

ion

(alth

ough

not

ing

this

can

be a

gree

d an

d de

fined

diff

eren

tly u

nder

the

rele

vant

cont

ract

). 6 O

r, w

here

cont

ribut

ions

are

mad

e du

ring

the

desig

n an

d co

nstr

uctio

n ph

ase,

thes

e ar

e st

ruct

ured

to e

nsur

e th

ere

is no

ero

sion

of th

e ‘ty

pica

l’ PP

P ris

k tr

ansf

er.

23

Eva

luat

ion

cr

iter

ion

D

&C

D

CM

P

PP

com

plet

ion.

7 H

owev

er, t

his

will

typ

ical

ly b

e ca

pped

–

for

exam

ple

to 1

0 pe

r cen

t of

the

con

trac

t pric

e.

How

ever

, as

note

d ab

ove,

res

earc

h su

gges

ts t

hat

‘tra

ditio

nally

’ del

iver

ed g

over

nmen

t pr

ojec

ts h

ave

ofte

n ex

perie

nced

del

ay.8

Gro

unds

for

ext

ensi

on o

f tim

e ar

e ty

pica

lly b

road

er

than

a P

PP a

nd D

&C

con

trac

tor ‘

min

dset

’ is

typi

cally

th

at E

OTs

will

be

soug

ht a

nd a

re e

xpec

ted

to a

ce

rtai

n ex

tent

.

dam

ages

to

cove

r the

priv

ate

sect

or c

ost o

f fin

ance

). Fu

rthe

rmor

e, w

ith t

he in

tere

sts

of t

hird

par

ties

such

as

fin

anci

ers

bein

g al

igne

d w

ith t

he S

tate

’s

obje

ctiv

es in

thi

s re

spec

t (an

d ac

tivel

y m

onito

red

thro

ugh

deliv

ery)

, the

PP

P op

tion

typi

cally

giv

es t

he

high

est

degr

ee o

f cer

tain

ty o

ver o

n tim

e de

liver

y (a

s ev

iden

ced

by t

he in

depe

nden

t st

udie

s re

ferr

ed t

o ab

ove)

.

Sco

ring

(Prio

rity:

Hig

h)

Pric

e an

d bu

dget

ce

rtai

nty

A

D&

C p

rovi

des

the

Sta

te w

ith a

fix

ed p

rice

for

the

cons

truc

tion

phas

e on

ly.

Whi

lst r

isks

are

oft

en ‘t

rans

ferr

ed’ u

nder

fix

ed t

ime,

fix

ed p

rice

cont

ract

s, e

xper

ienc

e su

gges

ts t

hat

gove

rnm

ents

typ

ical

ly r

etai

n or

do

not

effe

ctiv

ely

pass

on

cert

ain

risks

und

er D

&C

con

trac

ts a

nd t

he

Sta

te’s

dire

ct in

volv

emen

t in

pro

ject

fun

ding

mea

ns

the

Sta

te h

as a

gre

ater

exp

osur

e to

cla

ims

durin

g co

nstr

uctio

n.

D&

C C

ontr

acto

r ‘m

inds

et’ i

s ty

pica

lly t

hat v

aria

tions

w

ill b

e so

ught

and

add

ition

al p

aym

ents

are

exp

ecte

d to

an

exte

nt.

D&

C m

odel

s do

not

nat

ural

ly in

cent

ivis

e th

e co

ntra

ctor

to

focu

s up

on t

he d

eliv

ery

of t

he lo

wes

t w

hole

of

life

cost

(i.e

. the

re is

lim

ited

ince

ntiv

e fo

r de

sign

and

con

stru

ctio

n to

min

imis

e m

aint

enan

ce

cost

s an

d/or

to

deliv

er o

pera

tiona

l eff

icie

ncie

s th

roug

hout

the

ass

et’s

life

).

The

DC

M m

odel

sho

uld

prom

ote

a hi

gher

deg

ree

of

cost

cer

tain

ty t

han

a D

&C

and

with

the

incl

usio

n of

m

aint

enan

ce s

ervi

ces.

In

add

ition

, the

DC

M m

odel

cou

ld g

ener

ate

som

e w

hole

-of-

life

bene

fits

thro

ugh

the

com

bina

tion

of

desi

gn a

nd c

onst

ruct

ion

with

mai

nten

ance

. H

owev

er, D

CM

con

trac

tor

‘min

dset

’ is

likel

y to

be

mor

e cl

osel

y al

igne

d to

a D

&C

on

the

basi

s th

at t

he

min

dset

is t

hat o

f a c

ontr

acto

r and

not

the

‘ow

ner’

of

the

asse

t (as

per

a P

PP).

A P

PP

mod

el p

oten

tially

ena

bles

mor

e ef

fect

ive

allo

catio

n of

ris

k to

the

priv

ate

sect

or, p

rovi

ding

a

sign

ifica

nt d

egre

e of

cos

t cer

tain

ty in

rel

atio

n to

the

de

sign

and

con

stru

ctio

n of

the

Tun

nel a

nd S

tatio

ns

pack

age

(as

evid

ence

d by

the

inde

pend

ent

stud

ies

refe

rred

to

abov

e).

Whi

lst P

PP

proj

ects

are

not

imm

une

to d

elay

s or

co

st o

verr

uns,

the

re a

re s

tron

g fin

anci

al in

cent

ives

to

com

plet

e on

tim

e an

d on

bud

get s

o th

at t

he S

PV

ob

tain

s th

e be

nefit

of s

ervi

ce p

aym

ents

whe

n its

de

bt f

inan

cing

cos

ts b

ecom

e pa

yabl

e.

Mai

nten

ance

and

rel

evan

t FM

ser

vice

s co

sts

are

also

kn

own

and

agre

ed u

pfro

nt, t

here

by p

rovi

ding

the

S

tate

a h

igh

degr

ee o

f bu

dget

cer

tain

ty w

ith r

espe

ct

to t

hese

cos

ts f

or t

he f

ull c

once

ssio

n pe

riod.

Thi

s is

su

ppor

ted

by t

he r

esea

rch

cite

d ab

ove.

Th

e in

clus

ion

of p

rivat

e fin

ance

will

res

ult i

n hi

gher

fin

anci

ng c

osts

for

a P

PP

com

pare

d to

bot

h D

&C

and

D

CM

. How

ever

, in

typi

cal a

vaila

bilit

y-ba

sed

PP

P ar

rang

emen

ts, t

he a

dditi

onal

priv

ate

sect

or c

ost

of

finan

ce is

dee

med

to

prov

ide

valu

e fo

r m

oney

on

the

basi

s th

at it

is m

ore

than

off

set

by t

he im

prov

ed

who

le-o

f-lif

e co

st o

utco

mes

, add

ition

al c

omm

erci

al

rigou

r an

d/or

mor

e co

mpr

ehen

sive

ris

k tr

ansf

er t

hat

can

be a

chie

ved

unde

r a P

PP

whe

n co

mpa

red

to

trad

ition

al p

rocu

rem

ent m

etho

ds.

7 It i

s not

ed th

at a

ny su

ch p

aym

ent m

echa

nism

(e.g

. suc

h as

a d

elay

in th

e pr

ovisi

on o

f mile

ston

e pa

ymen

ts) w

ould

nee

d to

be

cons

ider

ed in

ligh

t of t

he co

ntra

ctor

’s ab

ility

to ra

ise sh

ort t

erm

fina

nce

/ pro

vide

its o

wn

wor

king

capi

tal,

and

in co

nsid

erat

ion

of th

e as

socia

ted

finan

cing

cost

s tha

t wou

ld li

kely

be

pass

ed-th

roug

h to

the

Stat

e. In

add

ition

, the

leve

l of l

iqui

date

d da

mag

es u

nder

a D

&C

mus

t be

form

ulat

ed b

ased

on

a ge

nuin

e pr

e-es

timat

ion

of lo

ss a

nd th

eref

ore

cann

ot b

e a

‘pen

alty

’.

8 Col

in D

uffie

ld, P

eter

Rai

sbec

k an

d M

ing

Xu, N

atio

nal P

PP F

orum

– B

ench

mar

king

Stu

dy, P

hase

II –

Rep

ort o

n th

e pe

rform

ance

of P

PP p

roje

cts i

n Au

stra

lia w

hen

com

pare

d w

ith a

repr

esen

tativ

e sa

mpl

e of

trad

ition

ally

pro

cure

d in

frast

ruct

ure

proj

ects

, Uni

vers

ity o

f Mel

bour

ne, 2

008.

24

Eva

luat

ion

cr

iter

ion

D

&C

D

CM

P

PP

In a

dditi

on, c

onsi

sten

t with

man

y re

cent

Aus

tral

ian

PP

Ps,

it is

ass

umed

at a

PP

P m

odel

for

thi

s pr

ojec

t w

ould

incl

ude

capi

tal c

ontr

ibut

ions

(in

som

e fo

rm)

from

gov

ernm

ent

durin

g th

e de

sign

and

con

stru

ctio

n ph

ase

and/

or f

ollo

win

g co

mpl

etio

n of

the

ass

et t

o re

duce

the

cos

ts a

ssoc

iate

d w

ith p

rivat

e fin

ance

w

hile

stil

l mai

ntai

ning

the

ris

k tr

ansf

er a

nd o

ther

be

nefit

s ty

pica

lly a

ssoc

iate

d w

ith P

PP

s.

Sco

ring

(Prio

rity:

Hig

h)

Inno

vatio

n an

d in

cent

ive

Th

e m

ost m

ater

ial o

ppor

tuni

ties

for

inno

vatio

n fo

r th

e Tu

nnel

and

Sta

tions

pac

kage

rel

ate

to d

esig

n an

d co

nstr

uctio

n m

etho

dolo

gies

for

the

con

stru

ctio

n w

orks

. As

such

, a D

&C

con

trac

t sh

ould

pro

vide

si

gnifi

cant

opp

ortu

nitie

s an

d in

cent

ives

for

in

nova

tion.

H

owev

er, t

he a

bsen

ce o

f any

pos

t con

stru

ctio

n se

rvic

es m

ay li

mit

the

oppo

rtun

ity fo

r th

e S

tate

to

driv

e in

nova

tion

that

del

iver

s w

hole

of

life

cost

ef

ficie

ncie

s (a

lthou

gh n

otin

g th

at c

onst

ruct

ion

inno

vatio

n is

like

ly t

o be

the

mos

t crit

ical

fac

tor

in

rela

tion

to t

he T

unne

l and

Sta

tions

pac

kage

giv

en it

s va

lue

rela

tive

to t

he v

alue

of

who

le o

f lif

e se

rvic

es).

The

DC

M m

odel

pro

vide

s im

prov

ed s

cope

for

des

ign

and

cons

truc

tion

inno

vatio

n co

mpa

red

to t

he D

&C

m

odel

as

a re

sult

of a

gre

ater

em

phas

is o

n ac

hiev

ing

low

er w

hole

of

life

cost

ing.

H

owev

er, t

he c

onse

quen

ces

of fa

iling

to

min

imis

e lo

ng t

erm

ope

ratio

n an

d m

aint

enan

ce c

osts

(and

th

eref

ore

the

ince

ntiv

e to

gen

uine

ly o

ptim

ise

who

le

of li

fe c

osts

) is

limite

d to

the

val

ue o

f th

e on

goin

g m

aint

enan

ce p

aym

ents

and

any

per

form

ance

se

curit

y. W

ith r

espe

ct t

o th

e Tu

nnel

and

Sta

tions

pa

ckag

e, t

he v

alue

of t

he r

ecur

ring

mai

nten

ance

and

lif

ecyc

le c

osts

rel

ativ

e to

the

cap

ital v

alue

of

the

wor

ks w

ill b

e ve

ry lo

w a

nd, t

here

fore

, the

abi

lity

of

the

DC

M m

odel

to

driv

e a

mat

eria

lly b

ette

r w

hole

of

life

focu

s vi

s-à-

vis

a D

&C

may

not

be

sign

ifica

nt in

th

is in

stan

ce.

The

long

-ter

m n

atur

e of

PP

P c

ontr

acts

and

the

ir m

ore

outp

ut-f

ocus

sed

stru

ctur

e pr

ovid

es p

rima

faci

e gr

eate

r sc

ope

for

the

priv

ate

sect

or t

o bi

d in

nova

tive

solu

tions

whi

ch c

an d

eliv

er t

he r

equi

red

infr

astr

uctu

re a

nd s

ervi

ces

at a

low

er w

hole

of

life

cost

. Thi

s is

bas

ed o

n a

num

ber

of f

acto

rs in

clud

ing:

–In

tegr

atio

n of

des

ign,

con

stru

ctio

n, m

aint

enan

ce

and

cert

ain

serv

ice

deliv

ery

into

the

one

str

uctu

re

can

driv

e be

tter

inno

vatio

n bo

th d

urin

g th

e de

sign

an

d co

nstr

uctio

n an

d in

ser

vice

del

iver

y ph

ases

(w

hich

is s

uppo

rted

by

serv

ice

prov

ider

and

m

aint

enan

ce c

ontr

acto

r in

put i

nto

the

desi

gn

proc

ess)

.

–Th

e pr

esen

ce o

f lo

ng t

erm

priv

ate

finan

ce a

nd t

he

linka

ge o

f ser

vice

pay

men

ts t

o pe

rfor

man

ce

outc

omes

res

ults

in v

ery

sign

ifica

nt in

cent

ives

to

driv

e va

lue

thro

ugh

an in

tegr

ated

, who

le o

f lif

e ap

proa

ch t

o de

sign

and

cos

ting.

H

owev

er, i

n th

e co

ntex

t of

the

pro

ject

it m

ust

be

reco

gnis

ed t

hat

this

is p

oten

tially

som

ewha

t red

uced

du

e to

:

–La

ck o

f fle

xibi

lity

in r

elat

ion

to t

he a

lignm

ent

beca

use

the

appr

oval

pro

cess

and

sta

keho

lder

in

terf

aces

will

mea

n th

ere

is n

ot s

igni

fican

t sco

pe

for

the

priv

ate

sect

or t

o m

ater

ially

alte

r th

e al

ignm

ent.

–R

ail O

pera

tions

are

not

incl

uded

in s

cope

. P

PP

s pr

ovid

e an

opp

ortu

nity

for

the

priv

ate

sect

or t

o pr

ovid

e in

nova

tive

solu

tions

in r

elat

ion

to c

omm

erci

al

oppo

rtun

ities

, pot

entia

lly p

rovi

ding

sig

nific

ant

com

mun

ity b

enef

its a

nd e

nhan

cing

val

ue f

or m

oney

(f

or e

xam

ple,

by

part

ially

off

sett

ing

the

cost

of

the

proj

ect)

. Thi

s co

uld

pote

ntia

lly b

e a

sign

ifica

nt is

sue

25

Eva

luat

ion

cr

iter

ion

D

&C

D

CM

P

PP

for

this

pro

ject

bec

ause

inte

grat

ing

in-s

tatio

n co

mm

erci

al o

ppor

tuni

ties

(suc

h as

ret

ail o

utle

ts) a

nd

over

site

dev

elop

men

ts w

ith t

he s

tatio

ns d

esig

n co

uld

prov

ide

an o

ppor

tuni

ty t

o m

ater

ially

enh

ance

th

e va

lue

of a

ny s

uch

com

mer

cial

opp

ortu

nitie

s an

d al

so m

inim

ise

disr

uptio

n (f

or e

xam

ple,

bec

ause

an

inte

grat

ed a

ppro

ach

coul

d en

able

the

com

mer

cial

op

port

uniti

es t

o be

dev

elop

ed a

t the

sam

e tim

e as

th

e Tu

nnel

and

Sta

tions

pac

kage

, rat

her

than

aft

er

the

Tunn

el a

nd S

tatio

ns w

orks

hav

e be

en

com

plet

ed).

Sco

ring

(Prio

rity:

Med

ium

)

Flex

ibili

ty a

nd

cont

rol

Giv

en t

hat t

he S

tate

wou

ld b

e re

spon

sibl

e fo

r di

rect

ly

cont

ract

ing

with

the

con

trac

tor a

nd f

or f

undi

ng t

he

cons

truc

tion

cost

s, a

D&

C m

odel

can

pro

vide

a

grea

ter

degr

ee o

f fle

xibi

lity

in r

elat

ion

to t

he

agre

emen

t of

sco

pe v

aria

tions

dur

ing

the

desi

gn a

nd

cons

truc

tion

phas

e (a

lthou

gh t

he f

ixed

pric

e na

ture

of

the

cont

ract

stil

l lim

its f

lexi

bilit

y to

som

e de

gree

). Th

is is

impo

rtan

t as

the

pro

ject

will

ope

rate

as

part

of

a br

oade

r rai

l net

wor

k, a

nd n

ot a

s a

stan

dalo

ne a

sset

. H

owev

er, a

mat

eria

l var

iatio

n ca

n ex

pose

the

Sta

te

to a

sig

nific

ant

clai

m (f

or e

xam

ple,

as

was

the

cas

e on

the

Reg

iona

l Fas

t Rai

l Pro

ject

).

The

Sta

te h

as v

ery

limite

d ex

perie

nce

of m

anag

ing

and

cont

rolli

ng t

he d

eliv

ery

of s

imila

rly s

ized

and

te

chni

cally

com

plex

D&

C c

onst

ruct

ion

proj

ects

. A

lthou

gh t

he S

tate

suc

cess

fully

del

iver

ed R

egio

nal

Rai

l Lin

k on

tim

e an

d on

bud

get

utili

sing

tra

ditio

nal

proc

urem

ent m

odel

s, it

is n

oted

that

rec

ent m

ajor

tu

nnel

ling

proj

ects

del

iver

ed in

Mel

bour

ne (e

.g.

City

Link

, Eas

tLin

k an

d E

ast W

est L

ink

(not

ing

this

pr

ojec

t ul

timat

ely

did

not

proc

eed)

) wer

e de

liver

ed

usin

g a

PP

P m

odel

.

The

flexi

bilit

y an

d co

ntro

l out

com

es a

ssoc

iate

d w

ith

a D

CM

mod

el d

urin

g th

e de

sign

and

con

stru

ctio

n ph

ase

are

likel

y to

be

mat

eria

lly s

imila

r to

the

D&

C

mod

el.

With

res

pect

to

the

oper

atio

ns a

nd m

aint

enan

ce

phas

e, it

is p

ossi

ble

to s

truc

ture

the

mai

nten

ance

co

ntra

ct t

o pr

ovid

e fo

r th

e fle

xibi

lity

to m

odify

the

se

rvic

es s

peci

ficat

ions

. In

add

ition

, the

Sta

te w

ould

hav

e th

e fle

xibi

lity

to

term

inat

e th

e m

aint

enan

ce c

ontr

act

early

(pot

entia

lly

subj

ect t

o a

rela

tivel

y sm

all t

erm

inat

ion

paym

ent)

or

to e

xten

d th

e m

aint

enan

ce t

erm

thr

ough

exe

rcis

ing

optio

ns.

PP

P c

ontr

acts

are

typ

ical

ly le

ss f

lexi

ble

than

D&

C /

DC

M m

odel

s du

e to

the

long

-ter

m n

atur

e of

the

co

ntra

cts

and

the

cons

trai

nts

whi

ch a

rise

from

the

in

clus

ion

of p

rivat

e se

ctor

fin

ance

(not

ing

this

may

al

so p

oten

tially

be

a po

sitiv

e gi

ven

the

Sta

te m

ay b

e le

ss li

kely

to

chan

ge s

cope

unl

ess

criti

cal).

Alth

ough

a

typi

cal P

PP c

ontr

act w

ould

incl

ude

mec

hani

sms

to

enab

le m

odifi

catio

ns, t

his

proc

ess

is o

ften

mor

e co

mpl

icat

ed t

han

the

varia

tions

reg

imes

und

er

trad

ition

al p

rocu

rem

ent m

odel

s, f

or e

xam

ple

due

to

the

very

fix

ed p

rice

natu

re o

f (an

d lo

ng t

erm

fin

anci

ng s

truc

ture

), an

d ad

ditio

nal p

artie

s in

volv

ed in

(e

.g. b

anks

), PP

P c

ontr

acts

. The

agr

eem

ent

of

mod

ifica

tions

and

the

pric

ing

ther

eof

can

also

be

mor

e co

mpl

ex w

here

any

suc

h ch

ange

s re

quire

ad

ditio

nal p

rivat

e se

ctor

fin

ance

and

/or

whe

re t

he

chan

ges

mig

ht im

pact

the

ris

k pr

ofile

of

the

proj

ect

or p

rivat

e se

ctor

ret

urns

.

Sco

ring

(Prio

rity:

Med

ium

)

Mar

ket i

nter

est a

nd

appe

tite

9 C

ontr

acto

rs in

the

201

5 m

arke

t sou

ndin

gs g

ener

ally

in

dica

ted

that

the

y w

ere

open

to

a va

riety

of

proc

urem

ent m

etho

ds a

nd w

ould

bid

for

the

Tun

nel

and

Sta

tions

pac

kage

irre

spec

tive

of w

heth

er it

was

Alth

ough

the

re m

ight

be

slig

htly

less

mar

ket a

ppet

ite

for

this

mod

el c

ompa

red

to a

D&

C m

odel

(for

ex

ampl

e, b

ecau

se s

ome

cons

truc

tion

firm

s do

not

pr

ovid

e m

aint

enan

ce s

ervi

ces

and

as s

uch

wou

ld

As

note

d fo

r th

e D

&C

mod

el, c

ontr

acto

r mar

ket

appe

tite

is e

xpec

ted

to b

e st

rong

und

er a

ny

proc

urem

ent m

odel

.

9 Ref

er to

Sec

tion

2 fo

r a d

etai

led

sum

mar

y of

the

key

them

es fr

om th

e pa

ckag

ing

and

proc

urem

ent m

arke

t sou

ndin

g pr

oces

ses h

eld

in Ju

ne 2

015

and

Dece

mbe

r 201

5, re

spec

tivel

y.

26

Eva

luat

ion

cr

iter

ion

D

&C

D

CM

P

PP

deliv

ered

und

er a

PP

P m

odel

or

a tr

aditi

onal

del

iver

y m

odel

(e.g

. a D

&C

). A

sel

ect n

umbe

r of

con

trac

tors

indi

cate

d a

pref

eren

ce f

or t

he T

unne

l and

Sta

tions

pac

kage

to

be

proc

ured

via

a t

radi

tiona

l del

iver

y m

odel

– a

lthou

gh

none

indi

cate

d th

at t

heir

inte

rest

was

con

tinge

nt o

n tr

aditi

onal

pro

cure

men

t.

need

to

part

ner

with

ano

ther

org

anis

atio

n), t

here

sh

ould

stil

l be

suff

icie

nt m

arke

t app

etite

and

ca

pabi

lity

for

the

proj

ect

to b

e de

liver

ed v

ia a

DC

M.

Equ

ity s

pons

or a

nd f

inan

cier

app

etite

for

the

Tun

nel

and

Sta

tions

pac

kage

is a

lso

expe

cted

to

be s

tron

g.

Mar

ket s

ound

ing

part

icip

ants

indi

cate

d th

e m

arke

t cu

rren

tly h

as a

gro

win

g ca

paci

ty fo

r la

rger

ass

ets,

w

ith a

larg

e vo

lum

e of

com

petit

ive

debt

and

equ

ity

avai

labl

e.

Sco

ring

(Prio

rity:

Med

ium

)

Sou

rce:

Dep

artm

ent a

naly

sis

27

4.3.3. Summary of assessment

Based on the comparative analysis summarised above, the delivery models have been assessed and rated as per the table below.

Table 11 - Summary of assessment

Evaluation criterion Priority D&C DCM PPP

Risk transfer High

Time High

Price and budget certainty High

Innovation and incentive Medium

Flexibility and control Medium

Market interest and appetite Medium

Overall ranking 3 2 1

Source: Department analysis

The analysis undertaken for this Business Case, including qualitative VFM assessment, recommends delivery under an availability based PPP model as the optimal procurement approach as this drives the strongest value for money proposition. This is consistent with the findings of the previous procurement studies and the 2012 Peer Review. The key drivers for this recommendation for each of the procurement assessment evaluation criteria are as follows:

Risk management – PPPs achieve a significant and effective transfer of risk, with the majority of design, construction, maintenance and relevant facilities management (FM) services risks transferred to the private sector on a whole-of-life basis. This is a significant issue given the complexity and high risk nature of the tunnelling and civil works within the Tunnel and Stations package. Although a similar contractual risk allocation could contractually be achieved under other models, the risk transfer is enhanced under a PPP because private sector capital is at risk for the duration of the concession (typically 15-30 years). The introduction of private finance also provides additional discipline and scrutiny of risk (for example, including financier due diligence and oversight). As noted below, the robustness of this risk transfer has been demonstrated on previous PPP projects.

Time – The use of private finance results in very significant incentives for on time completion when compared to ‘traditional’ procurement methods due to the additional financial incentive to achieve final completion (for example, noting that service payments will be lost). This is supported by independent research which found that the average construction phase delay for a sample of PPP projects was 1.4 per cent compared to 25.9 per cent for traditionally procured projects.10

Price and budget certainty – The extensive and robust risk transfer achieved under PPP contracts provides the State with a high degree of budget certainty for the duration of the concession. This is supported by the research cited above which found that PPPs

10 Colin Duffield, Peter Raisbeck and Ming Xu, National PPP Forum – Benchmarking Study, Phase II – Report on the performance of PPP projects in Australia when compared with a representative sample of traditionally procured infrastructure projects, University of Melbourne, 2008.

28

experienced average construction cost overruns of 4.3 per cent compared to 18% for traditionally procured projects (only 43 per cent of which were completed within 5 per cent of the expected cost). Although PPPs involve additional costs associated with private finance, this is considered to provide value for money on the basis that it is more than offset by the improved whole-of-life focus, additional commercial rigour and robust risk transfer. It is also noted that, consistent with many recent Australian PPPs, it is assumed that the Tunnel and Stations PPP will include capital contributions from the State during delivery and/or following completion to reduce the costs associated with private finance while still achieving the risk transfer and other benefits associated with PPPs (see Chapter 14 of the Business Case for further details). The additional cost and budget certainty is considered to be a material issue for the Tunnel and Stations package given its risk profile, the complexity of the works and the value of this package (for example, a 20 per cent cost overrun could equate to approximately $1bn of additional costs). Victorian experience on other complex PPPs which have encountered issues during the design and construction phase (for example, Southern Cross Station, CitiLink, Victorian Desalination Plant, Biosciences Research Centre (AgriBio) and Hopkins Correctional Centre) has shown the risk transfer to be robust, with the private sector bearing significant additional costs in order to deliver these assets.

Innovation and incentive – Although a PPP model may not result in additional innovation compared to other delivery models in relation to tunnel design or construction methodologies (because these innovations will be driven by the contractor and could be incentivised under other procurement models), it should provide additional incentive to focus on whole-of-life design innovation (for example, in relation to the stations, mechanical and electrical systems, tunnel ventilation, etc.), FM services (for example, within the stations) and commercial opportunities (such as retail outlets and other customer amenities within stations and over site development). If the PPP is responsible for designing, building and operating the stations this could lead to additional innovation in design and service delivery which enhances the customer experience (a key priority and area of focus for PTV).

Flexibility and control – Although PPP contracts are typically less flexible than D&C / DCM models, PPP contracts do include mechanisms to enable modifications. Importantly, it is also noted that rail operational flexibility and control will be retained to a large extent because rail services will continue to be delivered as part of the metropolitan franchise arrangements, with franchisee involvement in the design of rail systems and with rail systems within the tunnels (e.g. signalling and train power) being operated and maintained by the metropolitan rail franchisee (see below).

Market appetite and interest – Market sounding participants stated that they would be interested in a PPP for the Tunnel and Stations package and market appetite is expected to be strong under this procurement approach. The market soundings also indicated that there should be strong appetite from equity investors and financiers.

As well as delivery of the main tunnelling works, construction of five underground stations, station fit-out and mechanical and electrical systems, the scope of the Tunnel and Stations PPP will also include:

Delivery of certain rail systems works (e.g. installation of rail systems within the tunnels).

Maintenance of relevant tunnels and stations infrastructure (including mechanical and electrical systems) and provision of facilities management services within the stations in order to incentivise a focus on whole of life benefits and improve value for money

Commercial opportunities within the stations and above the station structures (over site developments at CBD South and CBD North) to improve value for money and ensure an integrated approach. For completeness, it is noted that delivery of over site development will not be included in the Tunnel and Stations PPP Project Agreement; it will be subject to

29

separate contractual arrangements (e.g. a Development Agreement) procured as part of a single, integrated procurement process.

Under the terms of the availability based PPP, the private sector will be responsible for ensuring that the infrastructure is available by a specified completion date and for the duration of the contract term in accordance with the defined specifications and requirements. Service payments will be lost if the infrastructure is delivered late and the payments will be abated during the operating term if the infrastructure is unavailable or if services are not delivered to the required standards.

Certain works are recommended to be delivered by the PPP as ‘returned assets’ to be operated and maintained by the metropolitan rail franchisee. This is desirable to reduce operational interface risks and to provide improved operational outcomes.

4.3.4. Mitigation of key work package specific risks

The key risks specific to the Tunnel and Stations package and how the recommended availability PPP model will mitigate these risks is summarised below.

Table 12 - Mitigation of key Tunnel and Stations risks

Key risks Mitigation under delivery model

Risk of delay in delivering the detailed design of the project adversely impacting the overarching project timeline. Construction program is too aggressive leading to delay and additional costs. Ground conditions encountered during tunnelling activities are significantly worse than anticipated. TBMs do not perform as specified leading to a slower production rate, project delay, changes to construction methodology and/or redesign. Material defects in either the design or construction of the tunnels and stations become apparent during commissioning or operations phases. Inadequate consideration of O&M during detailed design results in additional costs during operations. Failure to design and construct in compliance with key operations standards.

Key factors relevant to the proposed delivery model that mitigate these risks include:

PPP Co would bear the impact of delayed delivery of the tunnel and stations because the service payments would not commence until the works reach completion (except for very limited risks borne by the State). PPP Co would bear the risk of latent ground conditions (with very limited exceptions). PPP Co would remain responsible for availability of the assets over the life of the service contract. This would drive a whole of life focus in relation to design and construction of the works. Maintenance and relevant facilities management services costs are known and agreed upfront, thereby giving the State a high degree of budget certainty with respect to these costs. PPP Co would continue to be responsible for defect rectification after expiry of the defects liability period and would bear the risk of defects for the full term of the contract.

Source: Department analysis

Procurement assessment – Rail Infrastructure

As noted above, the Rail Infrastructure package involves extensive works that would need to be undertaken in close proximity to the live rail network (including the Sandringham, Frankston, Cranbourne-Pakenham Lines at the eastern portal and the Sunbury and Werribee Lines at the western portal) and involves interfacing with rail franchisees and freight services. These works require significant occupations and associated bus replacement services, as well as interfacing with the tunnel and stations works.

The competitive alliance and Franchisee delivery relationship based models have been considered for the purposes of the current analysis (noting that the assumed structure of the alliance is a competitive TOC alliance which would include the State, the metropolitan rail franchisee and the Rail Infrastructure package contractor(s) (including designers) as participants). In addition, for completeness, a D&C model has also been assessed.

30

4.4.1. Analysis against evaluation criteria

The table below presents a summary of the analysis against each evaluation criterion, focusing on the key points of differentiation between the various delivery models.

31

Tab

le 1

3 -

Rai

l In

fras

tru

ctu

re p

rocu

rem

ent

asse

ssm

ent

Eva

luat

ion

cr

iter

ion

A

llian

ce

Fran

chis

ee D

eliv

ery

D&

C

Ris

k m

anag

emen

t E

arly

invo

lvem

ent

of t

he c

ontr

acto

r w

ith t

he P

roje

ct

Team

and

the

AR

TOs

durin

g th

e de

sign

pha

se

incr

ease

s th

e op

port

unity

to

unde

rsta

nd t

he R

ail

Infr

astr

uctu

re t

echn

ical

com

plex

ities

and

to

bett

er

iden

tify,

miti

gate

and

man

age

risks

. An

allia

nce

mod

el is

exp

ecte

d to

pro

vide

the

opt

imal

for

um

thro

ugh

whi

ch t

hese

ris

ks c

an b

e m

anag

ed, w

ith t

he

Sta

te, t

he c

ontr

acto

r(s) a

nd t

he A

RTO

s al

l wor

king

to

geth

er o

n a

‘bes

t fo

r pr

ojec

t’ b

asis

. G

iven

the

leve

l of

cons

truc

tion

com

plex

ity a

ssoc

iate

d w

ith t

he R

ail I

nfra

stru

ctur

e pa

ckag

e, t

he a

llian

ce

stru

ctur

e pr

ovid

es t

he o

ppor

tuni

ty f

or t

he S

tate

, A

RTO

s an

d co

ntra

ctor

s to

wor

k co

llabo

rativ

ely

to

ensu

re r

isks

are

iden

tifie

d an

d m

anag

ed c

olle

ctiv

ely.

Th

is p

rovi

des

cont

inue

d ab

ility

of

the

Sta

te a

nd

cont

ract

ors

to d

eal w

ith t

he c

ompl

exiti

es a

nd

deve

lop

appr

oach

es t

o m

anag

e ris

ks a

s th

ey a

rise,

be

the

y co

nstr

ucta

bilit

y is

sues

, sco

pe c

hang

e ris

ks o

r ris

ks in

rel

atio

n to

AR

TO a

cces

s an

d oc

cupa

tions

.

The

Fran

chis

ee m

odel

may

hav

e so

me

prim

a fa

cie

adva

ntag

es o

ver a

n al

lianc

e in

ter

ms

of b

ette

r m

anag

emen

t of

ris

ks r

elat

ing

to n

etw

ork

inte

grat

ion

and

appr

oval

s an

d ac

cred

itatio

n. T

his

is o

n th

e ba

sis

that

ele

men

ts o

f th

e R

ail I

nfra

stru

ctur

e w

orks

in

terf

ace

dire

ctly

with

live

rail

infr

astr

uctu

re, t

he

met

ropo

litan

rail

fran

chis

ee is

bes

t pla

ced

to m

anag

e th

e oc

cupa

tions

reg

ime

for m

etro

polit

an s

ervi

ces.

N

otw

ithst

andi

ng t

he a

bove

, the

fol

low

ing

fact

ors

are

rele

vant

:

–O

ne o

f th

e ke

y dr

iver

s of

an

allia

nce

is t

o ca

ptur

e th

ese

bene

fits

by in

clud

ing

the

met

ropo

litan

rai

l fr

anch

isee

in t

he a

llian

ce a

nd in

corp

orat

ing

appr

opria

te in

cent

ives

.

–Th

e na

ture

and

sca

le o

f Rai

l Inf

rast

ruct

ure

wor

ks is

m

uch

larg

er t

han

the

type

of w

orks

typi

cally

m

anag

ed a

nd d

eliv

ered

by

the

met

ropo

litan

rai

l fr

anch

isee

. Thi

s m

ay in

trod

uce

anot

her

leve

l of

deliv

ery

risks

whe

n co

mpa

red

to a

n al

lianc

e. F

or

exam

ple,

the

met

ropo

litan

rail

fran

chis

ee w

ould

ne

ed t

o su

bcon

trac

t the

se w

orks

mea

ning

tha

t th

e S

tate

wou

ld h

ave

no d

irect

con

trac

tual

rel

atio

nshi

p w

ith (o

r abi

lity

to c

ontr

ol) t

he p

arty

del

iver

ing

thes

e co

mpl

ex w

orks

. It a

lso

plac

es m

ore

stra

in o

n m

etro

polit

an ra

il fr

anch

isee

res

ourc

es t

o m

anag

e th

e pr

ojec

t com

pare

d to

the

com

petit

ive

allia

nce

mod

el.

–Th

e w

orks

are

not

con

stra

ined

to

the

met

ropo

litan

ra

il ne

twor

k an

d w

ill a

ffec

t V/

Line

and

fre

ight

se

rvic

es a

s w

ell a

s th

e lo

cal r

oad

netw

ork.

The

sc

ope

and

the

asso

ciat

ed r

isks

the

refo

re e

xten

d be

yond

the

nat

ure

of w

orks

typ

ical

ly u

nder

take

n un

der

the

Pro

ject

s A

gree

men

t (in

add

ition

to

bein

g of

a m

uch

high

er v

alue

).

–A

s di

scus

sed

in t

he D

&C

col

umn

to t

he r

ight

, the

de

sign

and

con

stru

ctio

n co

mpl

exity

of

the

Rai

l In

fras

truc

ture

pac

kage

is s

uch

that

it m

ay b

e di

ffic

ult

to e

ffec

tivel

y tr

ansf

er t

hese

ris

ks u

nder

a

fixed

tim

e, f

ixed

cos

t con

trac

t on

a v

alue

for

mon

ey

basi

s. It

is t

here

fore

diff

icul

t to

und

erst

and

how

the

m

etro

polit

an f

ranc

hise

e co

uld

proc

ure

thes

e w

orks

The

desi

gn a

nd c

onst

ruct

ion

com

plex

ity o

f th

e R

ail

Infr

astr

uctu

re p

acka

ge is

suc

h th

at it

may

be

diff

icul

t to

eff

ectiv

ely

tran

sfer

the

se r

isks

und

er a

fix

ed t

ime,

fix

ed c

ost c

ontr

act

on a

val

ue f

or m

oney

bas

is (i

.e.

with

out

a si

gnifi

cant

ris

k pr

emiu

m).

For

exam

ple,

it

will

be

diff

icul

t to

pre

-agr

ee a

fix

ed o

ccup

atio

ns

regi

me

for

the

entir

e de

liver

y ph

ase

whe

n en

terin

g in

to t

he c

ontr

actu

al a

rran

gem

ents

bec

ause

the

nee

d fo

r oc

cupa

tions

is li

kely

to

evol

ve a

nd c

hang

e as

de

sign

is f

urth

er d

evel

oped

and

as

the

wor

ks a

re

deliv

ered

. It

is t

here

fore

like

ly t

hat

the

cont

ract

or

wou

ld n

eed

to in

clud

e a

sign

ifica

nt r

isk

prem

ium

to

man

age

thes

e ris

ks a

nd/o

r tha

t th

e S

tate

may

be

expo

sed

to m

ater

ial c

laim

s an

d va

riatio

ns. 32

Eva

luat

ion

cr

iter

ion

A

llian

ce

Fran

chis

ee D

eliv

ery

D&

C

from

sub

cont

ract

ors

on a

val

ue f

or m

oney

bas

is o

n th

e ba

sis

envi

sage

d by

the

Pro

ject

s A

gree

men

t.

–Th

ere

is a

key

inte

rfac

e w

ith t

he T

unne

l and

S

tatio

ns P

PP a

nd t

he c

ontr

actu

al f

ram

ewor

k un

der

the

met

ropo

litan

rail

fran

chis

ee m

odel

wou

ld n

ot b

e ab

le t

o im

pose

liqu

idat

ed d

amag

es c

omm

ensu

rate

w

ith t

he a

dver

se im

pact

on

the

PPP

if, f

or e

xam

ple,

ei

ther

of

the

port

als

wer

e no

t del

iver

ed o

n tim

e.

Sco

ring

(Prio

rity:

Hig

h)

Tim

e Th

e al

lianc

e m

odel

pro

vide

s an

opp

ortu

nity

to

deve

lop

cons

truc

tion

appr

oach

es th

at p

rovi

de a

n op

timal

bal

ance

bet

wee

n tim

e re

quire

d fo

r co

nstr

uctio

n, a

cces

s an

d oc

cupa

tions

whi

ch s

houl

d in

crea

se c

onfid

ence

tha

t tim

efra

mes

can

be

met

. P

ain/

gain

sha

ring

mec

hani

sms

can

be b

uilt

into

the

al

lianc

e to

pro

vide

ince

ntiv

es f

or th

e pa

rtie

s to

co

mpl

ete

the

wor

ks w

ithin

the

req

uire

d tim

efra

mes

. Th

e A

RTO

s w

ill b

e pa

rty

to t

he a

llian

ce a

nd a

ble

to

assi

st in

def

inin

g re

quire

men

ts, a

ssis

ting

with

a ‘b

est

for

proj

ect’

and

bes

t fo

r ne

twor

k ba

lanc

ed a

ppro

ach

to o

ccup

atio

ns a

nd a

cces

s, a

nd p

rovi

ding

con

tinue

d en

gage

men

t and

fle

xibi

lity

durin

g co

nstr

uctio

n.

The

allia

nce

mod

el a

lso

prov

ides

an

oppo

rtun

ity t

o co

mm

ence

the

del

iver

y ph

ase

early

and

for

the

al

lianc

e pa

rtne

rs t

o de

velo

p co

llabo

rativ

ely

appr

oach

es t

o co

nstr

uctio

n th

at b

alan

ce a

cces

s /

occu

patio

n re

gim

es w

hich

may

sup

port

sho

rter

co

nstr

uctio

n tim

efra

mes

(rat

her

than

rel

ying

on

pred

efin

ed o

ccup

atio

ns a

nd a

cces

s re

gim

es).

Fina

ncia

l inc

entiv

es c

ould

be

built

into

the

Fra

nchi

see

mod

el t

o en

cour

age

timel

y co

mpl

etio

n. F

or e

xam

ple,

th

e pa

ymen

t arr

ange

men

ts c

ould

be

stru

ctur

ed o

n a

mile

ston

e co

mpl

etio

n ba

sis

and/

or a

por

tion

of a

ny

mile

ston

e/pr

ogre

ss p

aym

ents

cou

ld b

e re

tain

ed u

ntil

final

com

plet

ion.

In

add

ition

, the

met

ropo

litan

rai

l fra

nchi

see

shou

ld b

e st

rong

ly d

riven

to

com

plet

e th

e w

orks

and

brin

g th

em in

to s

ervi

ce (p

artic

ular

ly t

he re

alig

nmen

t of

the

exis

ting

lines

) in

orde

r th

at t

hey

can

mee

t th

eir

serv

ice

deliv

ery

oblig

atio

ns u

nder

the

Fran

chis

e A

gree

men

t (a

lthou

gh it

is li

kely

tha

t th

e fr

anch

isee

w

ould

be

gran

ted

relie

f fr

om it

s op

erat

iona

l pe

rfor

man

ce r

egim

e w

hile

the

wor

ks a

re b

eing

de

liver

ed w

hich

wou

ld r

educ

e th

is in

cent

ive

to s

ome

degr

ee) a

nd s

tart

gen

erat

ing

reve

nue

from

the

se

wor

ks (i

.e. f

areb

ox r

even

ue).

Fina

ncia

l inc

entiv

es c

an b

e bu

ilt in

to D

&C

con

trac

ts

to e

ncou

rage

tim

ely

com

plet

ion.

For

exa

mpl

e, t

he

paym

ent a

rran

gem

ents

cou

ld b

e st

ruct

ured

on

a m

ilest

one

com

plet

ion

basi

s an

d/or

a p

ortio

n of

any

m

ilest

one/

prog

ress

pay

men

ts c

ould

be

reta

ined

unt

il fin

al c

ompl

etio

n. In

add

ition

, D&

C c

ontr

acts

typi

cally

in

clud

e liq

uida

ted

dam

ages

to

cove

r th

e ow

ner’s

ge

nuin

e pr

e-es

timat

ed lo

ss a

risin

g fr

om a

ny d

elay

to

com

plet

ion.

H

owev

er, g

iven

the

sig

nific

ant

desi

gn a

nd

cons

truc

tion

com

plex

ity a

nd e

xten

sive

and

un

cert

aint

y of

inte

rfac

es w

ith t

he A

RTO

s, t

he t

ime

requ

ired

to c

lear

ly d

efin

e sc

ope

and

unde

rsta

nd r

isks

an

d ar

ticul

ate

thes

e in

ten

der

docu

men

ts w

ill b

e su

bsta

ntia

l. Fu

rthe

r, t

he a

bilit

y to

dev

elop

a

deliv

erab

le c

onst

ruct

ion

prog

ram

with

in a

pre

defin

ed

acce

ss r

egim

e is

unl

ikel

y fo

r th

ese

wor

ks, w

ith

flexi

bilit

y re

quire

d in

rel

atio

n to

occ

upat

ions

and

the

co

mpl

exiti

es in

rel

atio

n to

con

stru

ctab

ility

(mea

ning

th

at t

he S

tate

wou

ld li

kely

be

expo

sed

to e

xten

sion

of

tim

e cl

aim

s fr

om a

D&

C c

ontr

acto

r fo

r th

ese

wor

ks, t

here

by e

rodi

ng s

ome

of th

e tim

e-ba

sed

risk

tran

sfer

).

Sco

ring

(Prio

rity:

Hig

h)

Pric

e an

d bu

dget

ce

rtai

nty

A

lthou

gh a

n al

lianc

e do

es n

ot r

esul

t in

a f

ixed

pric

e co

ntra

ct (o

n th

e ba

sis

that

fix

ed p

ricin

g ca

nnot

be

obta

ined

on

valu

e fo

r mon

ey b

asis

– i.

e. w

ithou

t a

sign

ifica

nt r

isk

prem

ium

), th

e al

lianc

e m

odel

pro

vide

s an

opp

ortu

nity

to

deve

lop

a fu

ll un

ders

tand

ing

of

risks

and

sco

pe t

o de

velo

p a

TOC

, with

con

sulta

tion

betw

een

the

Sta

te, c

ontr

acto

rs a

nd A

RTO

s. T

his

Alth

ough

the

met

ropo

litan

rail

fran

chis

ee m

ay b

ear

som

e ris

k in

rel

atio

n to

the

cos

t of

del

iver

ing

the

wor

ks (f

or e

xam

ple,

the

fra

nchi

see’

s m

argi

n m

ight

be

at

risk)

, the

met

ropo

litan

rail

fran

chis

ee is

unl

ikel

y to

pro

vide

a f

ixed

pric

e fo

r th

e w

orks

. A

lthou

gh t

he f

ranc

hise

e m

ight

be

able

to

driv

e so

me

com

petit

ive

tens

ion

in t

he p

rocu

rem

ent

of

Und

er a

D&

C m

odel

the

met

ropo

litan

rai

l fra

nchi

see

is n

ot c

ontr

actu

ally

ince

ntiv

ised

to

colla

bora

tivel

y w

ork

with

the

Sta

te t

o m

inim

ise

desi

gn a

nd

cons

truc

tion

cost

s.

33

Eva

luat

ion

cr

iter

ion

A

llian

ce

Fran

chis

ee D

eliv

ery

D&

C

colla

bora

tive

proc

ess

shou

ld p

rovi

de c

onfid

ence

tha

t th

e TO

C is

ach

ieva

ble

(with

the

alli

ance

par

ties

bear

ing

a de

gree

of c

ost r

isk

if th

e TO

C is

not

ac

hiev

ed).

In a

dditi

on, t

he a

llian

ce is

pro

pose

d to

be

stru

ctur

ed

as a

com

petit

ive

TOC

alli

ance

whe

reby

a T

OC

is

deve

lope

d by

tw

o co

mpe

ting

allia

nces

, the

reby

in

trod

ucin

g co

mpe

titiv

e te

nsio

n in

to t

he t

ende

r pr

oces

s.

The

earli

er in

volv

emen

t of

the

cont

ract

or(s

) with

the

pr

ojec

t te

am a

nd w

ith in

put

from

the

AR

TOs

(and

in

cent

ivis

ed p

artic

ipat

ion

by t

he A

RTO

s) s

houl

d al

so

ensu

re a

mor

e cl

early

def

ined

sco

pe a

nd

spec

ifica

tions

and

bet

ter

unde

rsta

ndin

g of

the

acc

ess

and

occu

patio

ns r

egim

es, r

esul

ting

in m

ore

effe

ctiv

e ris

k pr

icin

g th

an a

chie

vabl

e un

der t

he D

&C

mod

el.

Rec

ent

expe

rienc

e on

the

thr

ee c

ompe

titiv

e TO

C

allia

nces

for

the

Reg

iona

l Rai

l Lin

k de

mon

stra

ted

stro

ng p

rice

and

budg

et p

erfo

rman

ce.

subc

ontr

acto

r w

orks

(alth

ough

thi

s m

ay b

e ch

alle

ngin

g as

not

ed a

bove

), th

e ar

rang

emen

t be

twee

n th

e S

tate

and

the

fra

nchi

see

wou

ld

effe

ctiv

ely

be e

nter

ed in

to o

n a

‘sol

e so

urce

’ bas

is (i

n co

ntra

st t

o a

com

petit

ive

TOC

alli

ance

). Th

is c

ould

re

sult

in a

less

cer

tain

and

/or m

ore

gene

rous

bud

get.

Und

er t

his

appr

oach

the

fra

nchi

see

wou

ld b

e en

title

d to

a m

argi

n on

all

wor

ks r

equi

red

for

the

entir

e pa

ckag

e, t

here

by r

esul

ting

in s

igni

fican

t ‘m

argi

n on

m

argi

n’ (n

otin

g th

at t

he s

ubco

ntra

ctor

(s) w

ould

als

o re

quire

a m

argi

n fo

r de

liver

ing

the

wor

ks).

Und

er a

n al

lianc

e th

e fr

anch

isee

wou

ld o

nly

be e

ntitl

ed t

o a

mar

gin

on a

ny w

orks

it d

eliv

ers.

Sco

ring

(Prio

rity:

Hig

h)

Inno

vatio

n an

d in

cent

ive

E

arly

invo

lvem

ent

of t

he c

ontr

acto

r w

ith t

he S

tate

an

d A

RTO

s in

crea

ses

the

oppo

rtun

ity t

o id

entif

y in

nova

tion

and

optim

ise

the

acce

ss r

egim

es.

The

Sta

te w

ill a

lso

shar

e in

the

ben

efit

of f

urth

er

inno

vatio

ns id

entif

ied

(pos

t de

velo

pmen

t of

the

TO

C)

durin

g de

sign

and

con

stru

ctio

n.

The

colla

bora

tive

allia

nce

envi

ronm

ent a

llow

s al

l pa

rtie

s to

mod

ify t

he d

esig

n an

d co

nstr

uctio

n ap

proa

ch o

n an

on-

goin

g ba

sis,

on

a be

st f

or p

roje

ct

basi

s. T

his

can

crea

te in

cent

ive

for

all p

artie

s to

be

‘inno

vativ

e’ w

hen

deal

ing

with

ris

ks a

nd is

sues

as

they

aris

e (w

here

as, f

or e

xam

ple,

und

er a

D&

C t

here

w

ould

be

little

or

no in

cent

ive

for

the

met

ropo

litan

ra

il fr

anch

isee

to

cont

ribut

e to

inno

vativ

e ‘w

orka

roun

d’ s

olut

ions

suc

h as

diff

eren

t oc

cupa

tions

re

gim

es).

The

Fran

chis

ee m

odel

pro

vide

s im

prov

ed s

cope

for

de

sign

and

con

stru

ctio

n in

nova

tion

com

pare

d to

the

D

&C

mod

el a

s a

resu

lt of

the

met

ropo

litan

rail

fran

chis

ee b

eing

in t

he b

est

posi

tion

to o

ptim

ise

the

acce

ss r

egim

es.

Giv

en t

he n

atur

e of

the

se w

orks

, the

rel

ativ

ely

fixed

na

ture

of

a D

&C

con

trac

t may

mak

e it

diff

icul

t for

the

co

ntra

ctor

to

inno

vate

dur

ing

the

deta

iled

desi

gn

deve

lopm

ent

proc

ess

or d

urin

g de

liver

y of

the

wor

ks

beca

use

any

chan

ges

to s

cope

or t

he o

ccup

atio

ns

regi

me

wou

ld r

equi

re a

var

iatio

n.

In a

dditi

on, u

nder

a D

&C

mod

el, t

he S

tate

pot

entia

lly

wou

ld n

ot s

hare

in a

ny in

nova

tion

bene

fits

real

ised

du

ring

desi

gn a

nd c

onst

ruct

ion.

Sco

ring

(Prio

rity:

Med

ium

)

Flex

ibili

ty a

nd

cont

rol

The

allia

nce

mod

el p

rovi

des

sign

ifica

nt f

lexi

bilit

y to

ch

ange

the

sco

pe, d

esig

n or

con

stru

ctio

n ap

proa

ch

post

con

trac

t aw

ard.

The

Sta

te c

ould

impl

emen

t a c

ontr

actin

g st

ruct

ure

unde

r th

e P

roje

cts

Agr

eem

ent

whe

reby

a s

igni

fican

t de

gree

of

flexi

bilit

y is

bui

lt in

to t

he p

roce

ss.

Alth

ough

a D

&C

con

trac

t wou

ld in

clud

e a

varia

tions

re

gim

e to

ena

ble

chan

ges

post

con

trac

t aw

ard,

the

fix

ed t

ime,

fix

ed p

rice

natu

re o

f th

e co

ntra

ct li

mits

34

Eva

luat

ion

cr

iter

ion

A

llian

ce

Fran

chis

ee D

eliv

ery

D&

C

The

allia

nce

mod

el a

lso

has

the

flexi

bilit

y to

am

end

occu

patio

ns a

nd a

cces

s re

gim

es w

ith t

he A

RTO

as

they

are

par

t of

the

alli

ance

.

The

Sta

te w

ould

hav

e le

ss d

irect

con

trol

ove

r th

e de

liver

y of

the

wor

ks t

han

unde

r an

allia

nce

beca

use

it w

ould

hav

e no

dire

ct r

elat

ions

hip

with

the

su

bcon

trac

tors

eng

aged

by

the

fran

chis

ee t

o de

liver

th

e w

orks

.

flexi

bilit

y to

som

e de

gree

. In

part

icul

ar a

nd a

s pr

evio

usly

dis

cuss

ed, a

s th

e m

etro

polit

an ra

il fr

anch

isee

wou

ld n

ot b

e pa

rty

to th

e co

ntra

ct t

here

m

ay b

e a

lack

of

flexi

bilit

y (o

r ap

prop

riate

ince

ntiv

es

for

the

met

ropo

litan

rail

fran

chis

ee) t

o m

anag

e an

y re

quire

d ch

ange

s to

the

acc

ess

and

occu

patio

ns

regi

me.

Giv

en t

he u

ncer

tain

ty in

rela

tion

to

occu

patio

ns, a

fle

xibl

e fr

amew

ork

will

be

part

icul

arly

im

port

ant

for

this

pac

kage

.

Sco

ring

(Prio

rity:

Med

ium

)

Mar

ket i

nter

est a

nd

appe

tite

11

Con

trac

tor m

arke

t app

etite

is e

xpec

ted

to b

e st

rong

un

der

any

proc

urem

ent m

odel

. M

arke

t sou

ndin

g pa

rtic

ipan

ts in

dica

ted

a pr

efer

ence

fo

r a

com

petit

ive

allia

nce

deliv

ery

met

hod

for

pack

ages

invo

lvin

g si

gnifi

cant

inte

rfac

e w

ith t

he

AR

TOs

and

ther

efor

e su

ppor

t us

ing

a co

mpe

titiv

e al

lianc

e m

odel

for

the

Rai

l Inf

rast

ruct

ure

pack

age.

Th

is m

odel

is a

rgua

bly

the

‘mar

ket s

tand

ard’

ap

proa

ch f

or h

igh

valu

e, c

ompl

ex, b

row

nfie

ld w

orks

in

a li

ve ra

il en

viro

nmen

t an

d ha

s be

en p

rove

d fo

r si

mila

r w

orks

on

Reg

iona

l Rai

l Lin

k.

The

Sta

te w

ould

nee

d to

con

firm

the

capa

city

and

ap

petit

e of

the

met

ropo

litan

rail

fran

chis

ee t

o co

mpl

ete

thes

e w

orks

and

neg

otia

te a

ppro

pria

te

com

mer

cial

ter

ms.

N

otw

ithst

andi

ng t

he a

bove

, as

per a

llian

ce,

cont

ract

or m

arke

t app

etite

for

the

dow

nstr

eam

rol

es

is e

xpec

ted

to b

e st

rong

.

As

per

allia

nce,

con

trac

tor

mar

ket a

ppet

ite is

ex

pect

ed t

o be

str

ong

unde

r any

pro

cure

men

t m

odel

. How

ever

, the

re is

like

ly t

o be

less

mar

ket

appe

tite

for

a D

&C

tha

n an

alli

ance

(and

/or s

tron

g m

arke

t pu

sh-b

ack

in r

elat

ion

to a

‘typ

ical

’ D&

C r

isk

allo

catio

n) g

iven

the

com

plex

ity o

f th

ese

wor

ks, t

he

sign

ifica

nt in

terf

ace

with

the

live

net

wor

k an

d th

e ne

ed f

or m

ultip

le /

exte

nsiv

e oc

cupa

tions

.

Sco

ring

(Prio

rity:

Med

ium

)

Sou

rce:

Dep

artm

ent a

naly

sis

11 R

efer

to

Sec

tion

2 fo

r a

deta

iled

sum

mar

y of

the

key

the

mes

fro

m th

e pa

ckag

ing

and

proc

urem

ent m

arke

t sou

ndin

g pr

oces

s he

ld in

Jun

e 20

15 a

nd D

ecem

ber

2015

, res

pect

ivel

y.

35

4.4.2. Summary of assessment

Based on the comparative analysis summarised above, the delivery models have been assessed and rated as per the table below.

Table 14 - Summary of assessment

Evaluation criterion Priority Alliance Franchisee D&C

Risk transfer High

Time High

Price and budget certainty High

Innovation and incentive Medium

Flexibility and control Medium

Market interest and appetite Medium

Overall ranking 1 2 3

Source: Department analysis

The analysis undertaken for this Business Case recommends delivery under a competitive alliance as the optimal procurement approach for the Rail Infrastructure package. This is consistent with the approach recommended in the 2013 Procurement Strategy Update (including the supporting 2012 Peer Review) as it relates to the eastern portal works, noting that the western portal works were previously included in the Tunnel and Stations package. The State should have a high level of confidence in the competitive TOC alliance model given its successful Regional Rail Link experience.

The key drivers for this recommendation for each of the procurement assessment evaluation criteria are as follows:

Risk transfer – Given the significant interface risks with the existing network and the rail franchisees, it will be difficult for the private sector to develop a fixed price, fixed time proposal on a value for money basis without the rail franchisees’ input and cooperation. A competitive alliance model is expected to provide the best commercial framework through which these risks can be managed in a live rail environment.

Time – The complexity of the works (particularly at the eastern portal), including the need for rail occupations, creates significant program risk and any delay will potentially have adverse consequences for the delivery of the project. An alliance framework is best placed to mitigate this risk because the competitive alliance parties can commence design and construction planning early and, if an unforseen event does occur, the parties are motivated to collectively resolve the situation in the timeliest manner.

Price and budget certainty – A competitive alliance including appropriate KPIs should deliver a level of certainty and provide value for money. In addition, the alliance is proposed to be structured as a competitive TOC alliance, thereby introducing significant competitive tension into the tender process.

Innovation and incentive – Under a competitive alliance delivery method, the ARTOs will be directly involved in the planning and delivery phases, which should facilitate the development of innovative approaches to design, construction and access by the

36

contractor(s). This approach should also align incentives and create an environment in which ARTO interface can be appropriately managed.

Flexibility and control – A competitive alliance delivery method provides significant flexibility to deal with any necessary changes in scope, design and/or construction methods during delivery.

Market interest and appetite – Market sounding participants indicated a preference for an alliance delivery method for packages involving significant interface with the existing rail network and ARTOs and therefore support using a competitive alliance model for the Rail Infrastructure package.

In addition to the above, certain Rail Infrastructure works will need to be undertaken in a densely populated area, requiring significant rail and road disruptions. These works will therefore have a significant impact on the local community. Under an alliance model all parties will be incentivised to work together to effectively manage communications and relationships with the community.

The metropolitan rail franchisee will operate and maintain the majority of the works delivered by the Rail Infrastructure alliance.

4.4.3. Mitigation of key work package specific risks

The key risks specific to the Rail Infrastructure package and how the recommended competitive alliance model will mitigate these risks is summarised below.

Table 15 - Mitigation of key Rail Infrastructure risks

Key risks Mitigation under delivery model

Stakeholder interface with ARTOs (MTM, V/Line, VicTrack, etc.) less effective and efficient than expected resulting in delay. There is insufficient ARTO capacity, or the franchisee is under-resourced for the project.

Key factors relevant to the proposed delivery model that mitigate these risks include:

The key risks in this package relate to the interface issues in relation to the live rail network. A competitive alliance model is expected to provide the best forum through which these risks can be managed, with the State, the contractor(s) and the ARTOs all working together to identify, mitigate and manage these risks. This extends to understanding and mitigating risks around the franchisees’ capacity to deliver the works. As the ARTOs will be directly involved in the planning and design of the works, this should align incentives and create an environment in which the ARTO interface can be appropriately managed and appropriate ARTO resources applied.

Source: Department analysis

Procurement assessment – Rail Systems

As noted above, rail systems are highly complex and will have significant interfaces with the Tunnel and Stations package, new HCMT rolling stock that will operate on the new Sunshine – Dandenong Line, existing signalling infrastructure, rail operations and the broader network. Rail systems are also fundamental to the successful commissioning of the Tunnel and Stations package and to successful integration of the new infrastructure into the existing network.

The competitive alliance and Franchisee delivery relationship based models have been considered for the purposes of the current analysis (noting that the assumed structure of the alliance is a competitive TOC alliance which would include the State, the metropolitan rail franchisee and the rail systems contractor(s) as participants). In addition, for completeness, a D&C model has also been assessed.

37

4.5.1. Analysis against evaluation criteria

The table below presents a summary of the analysis against each evaluation criterion, focusing on the key points of differentiation between the various delivery models.

38

Tab

le 1

6 -

Rai

l sys

tem

s p

rocu

rem

ent

asse

ssm

ent

Eva

luat

ion

cr

iter

ion

A

llian

ce

Fran

chis

ee D

eliv

ery

D&

C

Ris

k m

anag

emen

t E

arly

invo

lvem

ent

of t

he c

ontr

acto

r(s)

with

the

pr

ojec

t te

am a

nd t

he A

RTO

s du

ring

the

desi

gn p

hase

in

crea

ses

the

oppo

rtun

ity t

o un

ders

tand

the

rai

l sy

stem

s te

chni

cal c

ompl

exiti

es a

nd t

o be

tter

iden

tify,

m

itiga

te a

nd m

anag

e ris

ks. A

n al

lianc

e m

odel

is

expe

cted

to

prov

ide

the

optim

al f

orum

thr

ough

whi

ch

thes

e ris

ks c

an b

e m

anag

ed, w

ith th

e S

tate

, the

rai

l sy

stem

s pr

ovid

er(s

) and

the

AR

TOs

all w

orki

ng

toge

ther

on

a ‘b

est

for

proj

ect’

bas

is.

A c

ompe

titiv

e al

lianc

e m

odel

incl

udin

g th

e ra

il sy

stem

s co

ntra

ctor

(s) a

nd t

he r

ail f

ranc

hise

e en

able

s th

e ra

il sy

stem

s pr

ovid

er(s

) to

deve

lop

a ra

il sy

stem

s so

lutio

n in

an

envi

ronm

ent

that

incl

udes

app

ropr

iate

in

cent

ives

for

all

part

ies

(incl

udin

g th

e ra

il fr

anch

isee

) to

wor

k to

geth

er t

o ac

hiev

e th

e re

quire

men

ts. T

his

is

part

icul

arly

impo

rtan

t fo

r th

e ra

il sy

stem

s pa

ckag

e gi

ven

that

a la

rge

prop

ortio

n of

the

wor

ks r

elat

e to

up

grad

ing

exis

ting

infr

astr

uctu

re t

hat

will

for

m p

art

of

the

new

Sun

shin

e –

Dan

deno

ng L

ine

and

notin

g th

at

fran

chis

ee a

ccep

tanc

e of

the

rai

l sys

tem

s w

ill b

e cr

itica

l to

the

succ

ess

of t

he p

roje

ct.

The

Fran

chis

ee m

odel

may

hav

e so

me

prim

a fa

cie

adva

ntag

es o

ver a

n al

lianc

e in

ter

ms

of b

ette

r m

anag

emen

t of

ris

ks r

elat

ing

to n

etw

ork

inte

grat

ion

and

appr

oval

s an

d ac

cred

itatio

n.

Not

with

stan

ding

the

abo

ve, t

he f

ollo

win

g fa

ctor

s ar

e re

leva

nt:

–O

ne o

f th

e ke

y dr

iver

s of

an

allia

nce

is t

o ca

ptur

e th

ese

bene

fits

by in

clud

ing

the

met

ropo

litan

rai

l fr

anch

isee

in t

he a

llian

ce a

nd in

corp

orat

ing

appr

opria

te in

cent

ives

.

–Th

e sc

ale

and

natu

re o

f the

rai

l sys

tem

s pa

ckag

e (a

nd t

here

fore

its

risk

prof

ile) i

s di

ffer

ent

to t

he

type

s of

wor

ks t

ypic

ally

del

iver

ed b

y th

e fr

anch

isee

. For

exa

mpl

e, t

he f

ranc

hise

e ha

s no

t pr

evio

usly

del

iver

ed H

CS

pro

ject

s an

d th

e hi

ghly

co

mpl

ex s

yste

ms

inte

grat

ion

and

com

mis

sion

ing

requ

ired

for

this

pro

ject

will

be

mat

eria

lly d

iffer

ent

and

will

invo

lve

sign

ifica

ntly

mor

e ris

k th

an w

orks

ty

pica

lly d

eliv

ered

by

the

fran

chis

ee (s

uch

as lo

cal

conv

entio

nal s

igna

lling

and

pow

er u

pgra

des)

. The

fr

anch

isee

is t

here

fore

arg

uabl

y no

t be

st p

lace

d to

m

anag

e th

ese

risks

with

out s

peci

alis

t in

put.

–Th

e ra

il sy

stem

s pa

ckag

e ha

s th

e po

tent

ial t

o cr

eate

sig

nific

ant

dela

ys t

o co

mm

issi

onin

g an

d th

e op

erat

iona

l com

men

cem

ent

of t

he p

roje

ct

(par

ticul

arly

giv

en H

CS

tech

nolo

gy is

cur

rent

ly

unte

sted

on

Mel

bour

ne’s

rai

l net

wor

k an

d no

ting

the

com

plex

inte

grat

ion

and

com

mis

sion

ing

requ

irem

ents

dis

cuss

ed a

bove

).

The

desi

gn, i

nsta

llatio

n, in

tegr

atio

n an

d co

mm

issi

onin

g co

mpl

exity

of t

he r

ail s

yste

ms

pack

age

is s

uch

that

it m

ay b

e di

ffic

ult

to e

ffec

tivel

y tr

ansf

er t

hese

ris

ks u

nder

a f

ixed

tim

e, f

ixed

cos

t co

ntra

ct o

n a

valu

e fo

r mon

ey b

asis

(i.e

. with

out

a m

ater

ial r

isk

prem

ium

). Fo

r ex

ampl

e, g

iven

the

ex

tent

of

wor

ks t

hat

rela

te t

o up

grad

ing

exis

ting

infr

astr

uctu

re, i

t will

be

diff

icul

t to

pre

-agr

ee a

fix

ed

occu

patio

ns r

egim

e fo

r th

e en

tire

deliv

ery

phas

e w

hen

ente

ring

into

the

con

trac

tual

arr

ange

men

ts

beca

use

the

need

for

occ

upat

ions

is li

kely

to

evol

ve

and

chan

ge a

s th

e ra

il sy

stem

s de

sign

is f

urth

er

deve

lope

d an

d as

the

wor

ks a

re d

eliv

ered

. The

co

mpl

exity

of

the

syst

ems

inte

grat

ion

and

com

mis

sion

ing

requ

ired

for

this

pro

ject

will

als

o be

di

ffic

ult

to p

rice

on a

fix

ed t

ime,

fix

ed c

ost b

asis

–

part

icul

arly

prio

r to

und

erta

king

det

aile

d de

sign

(w

hich

wou

ld b

e un

dert

aken

pos

t sig

ning

a c

ontr

act

unde

r a

D&

C m

odel

), w

ithou

t si

gnifi

cant

fra

nchi

see

inpu

t (n

otin

g th

at f

ranc

hise

e ac

cept

ance

of t

he r

ail

syst

ems

will

be

criti

cal t

o th

e su

cces

s of

the

pro

ject

) an

d w

ithou

t ce

rtai

nty

as t

o th

e tu

nnel

s an

d st

atio

ns

desi

gn a

nd t

he a

cces

s re

gim

e fo

r in

tegr

atio

n an

d co

mm

issi

onin

g ac

tiviti

es.

Sco

ring

(Prio

rity:

Hig

h)

Tim

e Th

e A

RTO

sta

keho

lder

s ha

ve a

par

ticul

ar in

tere

st in

th

e ra

il sy

stem

s de

sign

and

ope

ratio

ns a

nd c

an d

elay

co

mm

issi

onin

g if

rail

syst

ems

do n

ot m

eet

thei

r re

quire

men

ts. A

s su

ch, a

n ap

proa

ch t

o en

able

co

ordi

natio

n of

the

se k

ey s

take

hold

ers

and

invo

lvem

ent i

n th

e ra

il sy

stem

s de

sign

and

in

stal

latio

n is

req

uire

d. A

com

petit

ive

allia

nce

mod

el

is e

xpec

ted

to p

rovi

de t

he b

est f

orum

thr

ough

whi

ch

this

can

be

achi

eved

to

man

age

this

inte

rfac

e.

Fina

ncia

l inc

entiv

es c

ould

be

built

into

the

fra

nchi

see

mod

el t

o en

cour

age

timel

y co

mpl

etio

n. F

or e

xam

ple,

th

e pa

ymen

t arr

ange

men

ts c

ould

be

stru

ctur

ed o

n a

mile

ston

e co

mpl

etio

n ba

sis

and/

or a

por

tion

of a

ny

mile

ston

e/pr

ogre

ss p

aym

ents

cou

ld b

e re

tain

ed u

ntil

final

com

plet

ion.

In

add

ition

, the

met

ropo

litan

rai

l fra

nchi

see

shou

ld b

e st

rong

ly d

riven

to

com

plet

e th

e w

orks

and

brin

g th

em in

to s

ervi

ce (p

artic

ular

ly t

he re

alig

nmen

t of

the

exis

ting

lines

) in

orde

r th

at t

hey

can

real

ise

capa

city

Fina

ncia

l inc

entiv

es c

an b

e bu

ilt in

to D

&C

con

trac

ts

to e

ncou

rage

tim

ely

com

plet

ion,

incl

udin

g m

ilest

one/

prog

ress

pay

men

ts a

nd/o

r liq

uida

ted

dam

ages

. Th

e ab

ility

to

deve

lop

a de

liver

able

inst

alla

tion

prog

ram

with

in a

pre

defin

ed a

cces

s re

gim

e is

un

likel

y fo

r th

e ra

il sy

stem

s, w

ith f

lexi

bilit

y re

quire

d in

rel

atio

n to

occ

upat

ions

for

the

bro

wnf

ield

wor

ks

and

acce

ss t

o th

e tu

nnel

s an

d st

atio

ns f

or f

inal

in

tegr

atio

n an

d co

mm

issi

onin

g (m

eani

ng t

hat t

he

39

Eva

luat

ion

cr

iter

ion

A

llian

ce

Fran

chis

ee D

eliv

ery

D&

C

The

allia

nce

mod

el a

lso

prov

ides

an

oppo

rtun

ity t

o co

mm

ence

the

dev

elop

men

t ph

ase

early

to

ensu

re

that

the

wor

ks m

eet

the

oper

atio

nal r

equi

rem

ents

w

ithin

the

req

uire

d tim

efra

mes

.

uplif

ts t

hat a

re e

xpec

ted

to b

e de

liver

ed f

rom

the

rol

l-ou

t of

HC

S t

echn

olog

y.

Sta

te w

ould

like

ly b

e ex

pose

d to

ext

ensi

on o

f tim

e cl

aim

s fr

om a

D&

C c

ontr

acto

r fo

r th

ese

wor

ks,

ther

eby

erod

ing

som

e of

the

tim

e-ba

sed

risk

tran

sfer

).

Sco

ring

(Prio

rity:

Hig

h)

Pric

e an

d bu

dget

ce

rtai

nty

Th

e al

lianc

e is

pro

pose

d to

be

stru

ctur

ed a

s a

com

petit

ive

TOC

alli

ance

whe

reby

a T

OC

is

deve

lope

d by

tw

o co

mpe

ting

allia

nces

, the

reby

in

trod

ucin

g co

mpe

titiv

e te

nsio

n in

to t

he t

ende

r pr

oces

s.

Alth

ough

the

met

ropo

litan

rail

fran

chis

ee m

ay b

ear

som

e ris

k in

rel

atio

n to

the

cos

t of

del

iver

ing

the

wor

ks (f

or e

xam

ple,

the

fra

nchi

see’

s m

argi

n m

ight

be

at

risk)

, the

met

ropo

litan

rail

fran

chis

ee w

ould

not

pr

ovid

e a

fixed

pric

e fo

r th

e w

orks

. A

lthou

gh t

he f

ranc

hise

e m

ight

be

able

to

driv

e so

me

com

petit

ive

tens

ion

in t

he p

rocu

rem

ent

of

subc

ontr

acto

r w

orks

(alth

ough

thi

s m

ay b

e ch

alle

ngin

g as

not

ed a

bove

), th

e ar

rang

emen

t be

twee

n th

e S

tate

and

the

fra

nchi

see

wou

ld

effe

ctiv

ely

be e

nter

ed in

to o

n a

‘sol

e so

urce

’ bas

is (i

n co

ntra

st t

o a

com

petit

ive

TOC

alli

ance

). Th

is c

ould

re

sult

in a

less

cer

tain

and

/or m

ore

gene

rous

bud

get.

Und

er t

his

appr

oach

the

fra

nchi

see

wou

ld b

e en

title

d to

a m

argi

n on

all

wor

ks r

equi

red

for

the

entir

e pa

ckag

e, t

here

by r

esul

ting

in s

igni

fican

t ‘m

argi

n on

m

argi

n’ (n

otin

g th

at t

he s

ubco

ntra

ctor

(s) w

ould

als

o re

quire

a m

argi

n fo

r de

liver

ing

the

wor

ks).

Und

er a

n al

lianc

e th

e fr

anch

isee

wou

ld o

nly

be e

ntitl

ed t

o a

mar

gin

on a

ny w

orks

it d

eliv

ers.

Und

er a

D&

C m

odel

the

met

ropo

litan

rai

l fra

nchi

see

is n

ot c

ontr

actu

ally

ince

ntiv

ised

to

colla

bora

tivel

y w

ork

with

the

Sta

te t

o m

inim

ise

desi

gn a

nd

inst

alla

tion

cost

s an

d to

ach

ieve

suc

cess

ful

com

mis

sion

ing

of t

he ra

il sy

stem

s (n

otab

ly in

clud

ing

the

new

HC

S t

echn

olog

y).

Sco

ring

(Prio

rity:

Hig

h)

Inno

vatio

n an

d in

cent

ive

E

arly

invo

lvem

ent

of t

he c

ontr

acto

r w

ith t

he S

tate

an

d A

RTO

s in

crea

ses

the

oppo

rtun

ity t

o id

entif

y in

nova

tion

in d

esig

n an

d op

timis

e th

e ac

cess

re

gim

es f

or t

he b

row

nfie

ld w

orks

. Thi

s w

ill b

e pa

rtic

ular

ly im

port

ant

in t

he c

onte

xt o

f ro

lling

-out

the

ne

w H

CS

tech

nolo

gy w

hich

is c

urre

ntly

unt

este

d on

M

elbo

urne

’s m

etro

polit

an n

etw

ork.

In

add

ition

, an

allia

nce

shou

ld d

rive

/ fac

ilita

te

inno

vatio

n by

brin

ging

all

stak

ehol

ders

tog

ethe

r w

ith

alig

ned

ince

ntiv

es a

nd a

foc

us o

n ‘b

est

for

proj

ect’

outc

omes

.

The

Fran

chis

ee m

odel

pro

vide

s im

prov

ed s

cope

for

de

sign

inno

vatio

n co

mpa

red

to t

he D

&C

mod

el a

s a

resu

lt of

the

met

ropo

litan

rail

fran

chis

ee’s

dire

ct

invo

lvem

ent i

n th

e de

sign

pro

cess

and

in s

ettin

g th

e ac

cess

reg

ime

for

the

brow

nfie

ld w

orks

.

It w

ould

be

diff

icul

t fo

r a D

&C

con

trac

tor

to in

nova

te

in d

esig

n to

the

ext

ent

poss

ible

und

er a

n al

lianc

e du

e to

the

lack

of

dire

ct f

ranc

hise

e in

volv

emen

t (no

ting

that

fra

nchi

see

acce

ptan

ce o

f th

e ra

il sy

stem

s w

ill b

e cr

itica

l to

the

succ

ess

of t

he p

roje

ct).

Giv

en t

he n

atur

e of

the

se w

orks

, the

rel

ativ

ely

fixed

na

ture

of

a D

&C

con

trac

t may

mak

e it

diff

icul

t for

the

co

ntra

ctor

to

inno

vate

dur

ing

the

deta

iled

desi

gn

deve

lopm

ent

proc

ess

beca

use

any

chan

ges

to s

cope

or

the

occ

upat

ions

reg

ime

wou

ld re

quire

a v

aria

tion.

Sco

ring

(Prio

rity:

Med

ium

)

40

Eva

luat

ion

cr

iter

ion

A

llian

ce

Fran

chis

ee D

eliv

ery

D&

C

Flex

ibili

ty a

nd

cont

rol

The

allia

nce

mod

el p

rovi

des

sign

ifica

nt f

lexi

bilit

y to

ch

ange

the

sco

pe, d

esig

n or

inst

alla

tion

appr

oach

po

st c

ontr

act a

war

d.

The

allia

nce

mod

el a

lso

has

the

flexi

bilit

y to

dev

elop

th

e sy

stem

s de

sign

, am

end

occu

patio

ns a

nd a

cces

s re

gim

es w

ith t

he A

RTO

(as

they

are

par

t of

the

al

lianc

e) o

r adj

ust

the

appr

oach

to

syst

ems

inte

grat

ion

and

com

mis

sion

ing

to a

lign

with

the

Tu

nnel

and

Sta

tions

pac

kage

(for

exa

mpl

e, t

he

acce

ss r

egim

e fo

r th

ese

activ

ities

).

The

Sta

te c

ould

impl

emen

t a c

ontr

actin

g st

ruct

ure

unde

r th

e P

roje

cts

Agr

eem

ent

whe

reby

a s

igni

fican

t de

gree

of

flexi

bilit

y is

bui

lt in

to t

he p

roce

ss.

The

Sta

te w

ould

hav

e le

ss d

irect

con

trol

ove

r th

e de

liver

y of

the

wor

ks t

han

unde

r an

allia

nce

beca

use

it w

ould

hav

e no

dire

ct r

elat

ions

hip

with

the

su

bcon

trac

tors

eng

aged

by

the

fran

chis

ee t

o de

liver

th

e w

orks

.

Alth

ough

a D

&C

con

trac

t wou

ld in

clud

e a

varia

tions

re

gim

e to

ena

ble

chan

ges

post

con

trac

t aw

ard,

the

fix

ed t

ime,

fix

ed p

rice

natu

re o

f th

e co

ntra

ct li

mits

fle

xibi

lity

to s

ome

degr

ee. I

n pa

rtic

ular

and

as

prev

ious

ly d

iscu

ssed

, as

the

met

ropo

litan

rail

fran

chis

ee w

ould

not

be

part

y to

the

cont

ract

the

re

may

be

a la

ck o

f fle

xibi

lity

(or

appr

opria

te in

cent

ives

fo

r th

e fr

anch

isee

) to

man

age

any

requ

ired

chan

ges

to t

he a

cces

s an

d oc

cupa

tions

reg

ime.

Giv

en t

he

unce

rtai

nty

in r

elat

ion

to d

etai

led

desi

gn o

f th

e sy

stem

s, in

tegr

atio

n an

d co

mm

issi

onin

g an

d th

e oc

cupa

tions

reg

ime

for

the

brow

nfie

ld w

orks

, a

flexi

ble

fram

ewor

k w

ill b

e pa

rtic

ular

ly im

port

ant

for

this

pac

kage

.

Sco

ring

(Prio

rity:

Med

ium

)

Mar

ket i

nter

est a

nd

appe

tite

12

A k

ey m

arke

t ris

k ha

s be

en id

entif

ied

in r

elat

ion

to

pote

ntia

l cap

acity

con

stra

ints

of s

uita

bly

qual

ified

ra

ilway

sig

nalli

ng t

echn

icia

ns a

nd e

ngin

eers

with

in-

dept

h kn

owle

dge

of M

elbo

urne

’s m

etro

polit

an ra

il ne

twor

k. In

the

eve

nt t

hat

ther

e ar

e re

sour

ce

cons

trai

nts,

thi

s w

ill b

e an

issu

e un

der

any

proc

urem

ent m

odel

(i.e

. thi

s is

not

onl

y re

leva

nt t

o th

e al

lianc

e m

odel

). N

otw

ithst

andi

ng t

he a

bove

, con

trac

tor

mar

ket

appe

tite

is e

xpec

ted

to b

e st

rong

und

er a

ny

proc

urem

ent m

odel

with

a n

umbe

r of

maj

or

sign

allin

g pr

ovid

ers

activ

ely

seek

ing

oppo

rtun

ities

in

the

Aus

tral

ian

mar

ket.

Mar

ket s

ound

ing

part

icip

ants

indi

cate

d a

pref

eren

ce

for

a co

mpe

titiv

e al

lianc

e de

liver

y m

etho

d fo

r pa

ckag

es in

volv

ing

sign

ifica

nt w

orks

on

the

exis

ting

netw

ork

and

AR

TO in

terf

ace

and

ther

efor

e su

ppor

t us

ing

a co

mpe

titiv

e al

lianc

e m

odel

for

the

rai

l sy

stem

s pa

ckag

e.

As

per

the

allia

nce,

the

re is

a p

oten

tial c

apac

ity

cons

trai

nt o

f sui

tabl

y qu

alifi

ed r

ailw

ay s

igna

lling

te

chni

cian

s an

d en

gine

ers.

Th

e S

tate

wou

ld n

eed

to c

onfir

m th

e ca

paci

ty a

nd

appe

tite

of t

he m

etro

polit

an ra

il fr

anch

isee

to

com

plet

e th

ese

wor

ks a

nd n

egot

iate

app

ropr

iate

co

mm

erci

al t

erm

s.

Not

with

stan

ding

the

abo

ve, a

s pe

r alli

ance

, co

ntra

ctor

mar

ket a

ppet

ite f

or t

he d

owns

trea

m r

ole

is e

xpec

ted

to b

e st

rong

.

As

per

the

allia

nce,

the

re is

a p

oten

tial c

apac

ity

cons

trai

nt o

f sui

tabl

y qu

alifi

ed r

ailw

ay s

igna

lling

te

chni

cian

s an

d en

gine

ers.

A

s pe

r al

lianc

e, c

ontr

acto

r m

arke

t app

etite

is

expe

cted

to

be s

tron

g un

der a

ny p

rocu

rem

ent

mod

el. H

owev

er, t

here

is li

kely

to

be le

ss m

arke

t ap

petit

e fo

r a

D&

C t

han

an a

llian

ce (o

r str

ong

mar

ket

push

bac

k ag

ains

t a ‘t

ypic

al’ D

&C

risk

allo

catio

n)

give

n th

e co

mpl

exity

of t

hese

wor

ks, t

he s

igni

fican

t in

terf

ace

with

the

live

net

wor

k an

d th

e ne

ed f

or

mul

tiple

/ ex

tens

ive

occu

patio

ns.

Sco

ring

(Prio

rity:

Med

ium

)

Sou

rce:

Dep

artm

ent a

naly

sis

12 R

efer

to S

ectio

n 2

for a

det

aile

d su

mm

ary

of th

e ke

y th

emes

from

the

pack

agin

g an

d pr

ocur

emen

t mar

ket s

ound

ing

proc

ess h

eld

in Ju

ne 2

015

and

Dece

mbe

r 201

5, re

spec

tivel

y.

41

4.5.2. Summary of assessment

Based on the comparative analysis summarised above, the delivery models have been assessed and rated as per the table below.

Table 17 - Summary of assessment

Evaluation criterion Priority Alliance Franchisee D&C

Risk transfer High

Time High

Price and budget certainty High

Innovation and incentive Medium

Flexibility and control Medium

Market interest and appetite Medium

Overall ranking 1 2 3

Source: Department analysis

The analysis undertaken for this Business Case recommends delivery under a competitive TOC alliance as the optimal procurement approach for the Rail Systems package. This is broadly consistent with the approach recommended in the 2013 Procurement Strategy Update in that the earlier strategy also recommended a relationship based procurement model. The State should have a high level of confidence in the competitive TOC alliance model given its successful Regional Rail Link experience – including the use of this approach for the rail systems package (Work Package G).

The key drivers for this recommendation for each of the procurement assessment evaluation criteria are as follows:

Risk transfer – Given the significant interface risks with the existing network and the rail franchisees, and the significant complexities in relation to systems design, integration and commissioning, the private sector could not develop a fixed price, fixed time proposal on a value for money basis (i.e. without a significant risk premium) and without the rail franchisees’ input. A competitive alliance model including the rail systems contractor(s) and the rail franchisee enables the rail systems provider(s) to develop a rail systems solution in an environment that includes appropriate incentives for all parties to work together to achieve the requirements. This is particularly important for the rail systems package given a large proportion of the works relate to upgrading existing infrastructure that will form part of the new Sunshine – Dandenong Line.

Time – The ARTO stakeholders will be interested in the rail systems design and operations and can delay commissioning if rail systems do not meet their requirements. This requires an approach that coordinates these key stakeholders’ involvement in the rail systems design and installation. A competitive alliance model is the best forum to achieve this.

42

Price and budget certainty – A competitive alliance that includes appropriate KPIs should deliver a level of certainty and provide value for money by aligning the commercial interests of the alliance participants, reducing the likelihood of costly scope changes.

Innovation and incentive – An alliance should drive / facilitate innovation by bringing all stakeholders together with aligned incentives and a focus on ‘best for project’ outcomes.

Flexibility and control – A competitive alliance introduces flexibility in the design process and enables the State to access the expertise and innovative thinking of rail systems providers.

Market interest and appetite – Market sounding participants indicated a preference for an alliance delivery method for packages involving significant ARTO interface and therefore support using a competitive alliance model for the rail systems.

Consistent with the rest of the metropolitan rail network, the metropolitan rail franchisee will operate and maintain the rail systems.

4.5.3. Mitigation of key work package specific risks

The key risks specific to the rail systems package and how the recommended competitive alliance model will mitigate these risks is summarised below.

Table 18 - Mitigation of key rail systems risks

Key risks Mitigation under delivery model

Stakeholder interface with ARTOs (MTM, V/Line, VicTrack, PTV, etc.) is less effective and efficient than expected resulting in delay. There is insufficient ARTO capacity, or the franchisees are under-resourced for the project.

Key factors relevant to the proposed delivery model that mitigate these risks include:

The key risk mitigating factors relating to ARTO involvement outlined for the Rail Infrastructure also apply to Rail Systems.

Source: Department analysis

Procurement assessment – Wider Network Enhancements

A defining characteristic of the Wider Network Enhancements is that they will be undertaken in a brownfield, live rail environment. Works need to be conducted in a manner that enable the passenger rail and freight networks to continue to operate with minimal disruption during construction, requiring careful scheduling and staging, and management of access and occupations.

As the rail network is a complex operating environment with multiple interdependencies and interfaces, having the metropolitan rail franchisee, contractors and other stakeholders work closely together in this environment is critical to the project’s success.

As the scope of the Wider Network Enhancements is developed to a greater level of definition and design, optimum packaging will be assessed considering aspects such as coordinated construction staging to minimise disruption to the network.

Given the significant interface risks involved, the potential for unforeseen changes and the importance of stakeholder management, a competitive alliance or metropolitan rail franchisee delivery model may be suitable for aspects of these works to help manage these risks and

43

ensure on budget and on time delivery (noting that the Department will also seek opportunities for fixed time, fixed cost models, where appropriate).

As previously noted, certain Wider Network Enhancements will be included in the Rail Infrastructure and Rail Systems packages. The remaining Wider Network Enhancements will be subject to a separate, more in-depth stand-alone packaging and procurement assessment (noting that the procurement processes for these works do not need to commence for several years), including consideration of opportunities for certain works to be incorporated with the Level Crossings Removal Project. Consistent with the rest of the metropolitan rail network, the metropolitan rail franchisee will operate and maintain these enhancements.

Preliminary packaging and procurement solution

Table 19 summarises the structure of the preliminary packaging and procurement solution as developed under Step 2 and Step 3.

Table 19 - Preliminary packaging and procurement solution

Works package Description Procurement model

Early Works Estimated cost of capital works: $ m

Tram works Tram diversion works Yarra Trams led

Utilities relocations / protection and site preparation

Relocation / protection of utility services in conflict with the project alignment, plus other site preparatory works Managing Contractor

Construction power

Provision of power for construction activities Direct USP procurement

Tunnel and Stations Estimated cost of capital works: $ bn

Main tunnelling works, five underground stations, station fit-out, mechanical and electrical systems, specific operation and maintenance services for the infrastructure delivered by the package and commercial opportunities at the new stations1

Availability based PPP

Rail Infrastructure

Estimated cost of capital works: $ m

Works at the eastern and western portals including cut and cover tunnelling, decline structures and local reconfiguration and realignment of existing lines2

Competitive alliance

Rail Systems

Estimated cost of capital works: $ m

Rail systems design (including conventional signalling, HCS, train and power control systems and ICT), brownfields installation works, rail systems integration and commissioning3

Competitive alliance

Wider Network Enhancements

Estimated cost of capital works: $ m

Works which are required across the wider existing above ground rail network (outside of the tunnel and beyond the tunnel portals), including track modifications and signalling system upgrades

Case by case

1 Estimated cost includes installation of rail systems in the tunnel. 2 Estimated cost includes the western and eastern turnbacks. 3 Estimated cost includes signalling upgrades on the Sunshine – Dandenong Line.

In addition to the above, it is also noted that:

The metropolitan rail franchisee will operate the services using the infrastructure delivered by the project as there are significant advantages to maintaining a single operator across the network.

44* Redacted - commercial-in-confidence

*

*

*

*

*

The HCMTs that will operate on the Sunshine – Dandenong Line will be procured separately to the project on a network wide basis. PTV is procuring HCMTs that will be deployed on the Dandenong Line to meet short-term capacity requirements.

5. Step 4: Market validation

Market sounding process background

The preliminary packaging and procurement solution outlined above, along with a number of other procurement and packaging options that were considered as potential but less favoured options, were then taken forward to Step 4: Market validation to test the market’s views on packaging, procurement models, risk allocation and service(s) delivery.

Two stages of packaging and procurement market soundings were undertaken by the Department in conjunction with DTF and its external advisors. Stage 1 was undertaken in June 2015 and involved 16 domestic and international entities representing tunnelling and station contractors, financial sponsors, signalling systems providers and rail designers. Stage 2 was undertaken in December 2015 and aimed to build on the outcomes of Stage 1 and focus on more granular packaging and procurement issues relevant to establishing the project’s ‘go-to-market’ procurement strategy. Stage 2 involved 26 participants from substantially the same sectors as Stage 1.

Market sounding key themes

Key themes from the market sounding processes relevant to establishing the overarching procurement strategy outlined in this Appendix included:

There is strong domestic and international market interest in the project and broad support for the packaging and procurement strategy. A clear majority of participants stated that the size of the Tunnel and Stations and the PPP delivery model is attractive and acceptable from a market capacity perspective. There was market interest in all works packages.

Participants indicated the market currently has a growing capacity for larger assets, with a large volume of competitive debt ( ) and equity available. There was also support for State capital contributions for the Tunnel and Stations PPP.

The key project risks were seen to be the rail franchisee / existing network interface risk (particularly during the commissioning stage), ground conditions risk, the need to manage the works in the CBD (including the interface with local businesses) and industrial relations risk. All of these risks were considered manageable provided appropriate commercial arrangements between the State, rail franchisee and the relevant contractors can be established (as applicable).

All participants indicated a preference for the Tunnel and Stations PPP to be quarantined from the live rail environment at the portals, indicating clear market support for separate delivery of the portal works. Most civil contractors indicated that it would make sense for the eastern and western portal works to be packaged together given the works are of a similar nature.

The majority of participants supported delivering the rail systems separately to the Tunnel and Stations package, primarily due to the associated brownfield risks and the limited number of signalling providers with knowledge of Melbourne’s rail network.

Most participants suggested that early establishment of the Rail Systems Alliance could assist in managing the interface between this package and the Tunnel and Stations PPP.

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*

* Redacted - commercial-in-confidence

Additional market interactions

For completeness, it is noted that a structured process of further market testing of the recommended packaging and procurement strategy will be undertaken progressively as part of the detailed pre-procurement planning activities.

6. Step 5: Business Case recommendation

The analysis above indicates that:

An availability PPP is the optimal procurement strategy for the Tunnel and Stations package and that there is market capacity and appetite for delivery of these works under this structure.

A range of project works should be packaged and procured separately to the Tunnel and Stations package.

The Figure 2 shows a project procurement strategy alignment map outlining the relevant works packages and associated delivery models.

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Figure 2 - Procurement strategy alignment map

Further work will be undertaken as part of detailed pre-procurement planning activities for the project to determine the precise scope delineation between works packages, including developing strategies to mitigate interface risks. This work will also consider the outcomes of the further market interactions noted above.

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