Governance structures of a PPP A review of some projects in Victoria, Australia

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1 Governance structures of a PPP A review of some projects in Victoria, Australia Abstract. Governance has been identified as a critical aspect of successful project delivery for major projects; yet for major Public Private Partnership (PPP) projects there remains little clear guidance as to the structuring of specific and appropriate governance arrangements. This paper seeks to crystallise and prioritise governance requirements for PPPs based on an indepth analysis of PPP projects in Victoria. The findings of this analysis support the concept that governance of PPPs is more complex than either traditional projects or corporate governance. It proposes a new framework of governance for PPPs that accounts for the phase of the project and the complexity of internal interfaces. Keywords. Governance, PPP, Victorian Case Studies Introduction The Federal and State Governments in Australia have over the past two or three decades have begun to use different procurement mechanisms involving third parties to deliver services such as water, transport, health and justice. In some cases this has involved non-profit organisations and in others for profit businesses. In particular one of the methods that has gained considerable use is the public private partnership or PPP. This parallels similar developments of governments in Europe and North America and this has been reflected in numerous academic studies of different types of partnerships (Ghobadian et al. [1], Rosenau [2], Osbourne [3], Grimsey and Lewis [4]). There is some debate about the relative merits of PPPs about whether they deliver a better outcome than traditional procurement methods (see for example Hodge and Greve [5]) but there is no doubt that they are being employed because of their inherent perceived advantages (for certain types of projects) of delivering long term government services. They appear to offer governments a more effective and superior method of managing projects because there is evidence that they consistently provide better time and cost management than traditional approaches. However, there have been examples where PPPs have not delivered on expectations and the process of governance of PPPs is seen as an important factor contributing to successful project outcomes. This paper builds on the earlier work by Wilson et al [6] and explores the role of governance in PPPs and proposes governance structures depending on the type of PPP that is being implemented. The paper defines PPPs in the Australian context, briefly reviews governance requirements for PPPs prior to introducing and analysing eight case study projects from Victoria. Defining PPPs There is agreement generally that PPPs involve long term service contracts between the public sector with a private sector organisation to deliver government services. There are many different arrangements for PPPs and a good definition is provided by Grimsey and Lewis [4]. They define PPPs as: arrangements whereby private parties participate in or provide support for, the provision of infrastructure and a PPP project results in a contract for a private entity to deliver public infrastructure based services Grimsey and Lewis [4] p2. Page 1 of 10

2 The idea behind the use of a PPP is that the private sector can bring skills to bear on a project that a government department may not have. Government departments are typically hierarchical and by definition bureaucratic. This is in contrast to the private sector where it is often the case that there is more flexibility, less rigidity in processes, a need for innovation and risk taking is more acceptable. This contrasts with government departments where rules and processes can limit the amount of innovation in projects. It is often the case that in order to avoid making mistakes, the public sector will use proven techniques and methodologies, which may be perceived as being risk averse. Governments, for some time have been working on reforms of the public sector in order to improve efficiency and delivery. Public sector executives have become aware that in order to deliver on the expectations of government policies, new approaches to service delivery are necessary and the private sector is seen as having desirable characteristics that can be utilised. However, it has been noted that there is inertia in government that can resist the adoption of private sector business processes (Faulkner [7]; Huxham, and Vangen [8]). The governance of PPPs is seen as important in establishing successful outcomes that enable the public sector and the private sector to work together. Relevant PPP governance Governance is a term with an exceptionally broad and deep range of meanings. In the various branches of economic theory it is used to describe the way transactions are managed. Coase [9] and then Williamson [10] identified the minimization of transaction costs as the explanation for the arrangement of firms and markets in their various combinations. The structures of firms and markets are from their perspective, mechanisms of governance of the fundamental unit the transaction. From a legal perspective a contract is a form of governance of a transaction. Macneil [11] has shown fairly effectively that it is impossible to draft a complete contract about a transaction because of the nature and environment in which transactions occur. Along with Ostrum et al [12], he supports the view that it is necessary to develop a climate of cooperation and flexibility to resolve the almost inevitable conflicts that will arise about a transaction. These authors have formed the underlying foundations for project governance and in particular for PPPs. A PPP is of course one of the most complex of project transactions and the message is therefore quite significant. Prepare for disagreement. This therefore requires the development of a relationship which is robust and tolerant so that conflict and disputes can be effectively managed. Governance has become an increasing issue in the business world and in this context it is known as corporate governance. Its importance increases with each large corporate collapse that involves losses of large sums of money and results in legal action to hold executives accountable (Clarke [13]). Corporate governance is seen as a way of reducing the risk of corporate misadventure. It is also being seen as important in the way projects are managed and this has been discussed in Wilson et al [6]. Table 1 matches the governance principles adopted by the Australian Stock Exchange to PPPs based on review of the literature of PPPs. Table 1: Comparison of Corporate governance with project governance Corporate governance best practice, PPP governance (summary of literature) ASX [14] Lay solid foundations for management and oversight Structure the board to add value Corporate structuring is part of PPPs Page 2 of 10

3 Promote ethical and responsible decisionmaking Safeguard integrity in financial reporting Make timely and balanced disclosure Report the rights of shareholders Recognise and manage risk Encourage enhanced performance Remunerate fairly and responsibility Recognise the legitimate interests of stakeholders Public interest test Public interest test & policies Potentially (government/minister as sole shareholder innovation / value for money - Transparency Improved services, especially for all - considered in detail in this paper When establishing PPPs - the focus is often on the benefits it will bring, with little attention placed on the organisational relationships within the PPP structure, decision making, and actions that are required. This is important to the success of a PPP, and further research needs to be undertaken in this area. PPPs can generate large volumes of legal documentation regarding the formal contract but as Williamson [10], Ostrum et al [12] and Macneil [11] have noted, the interpersonal relations between the various parties in the PPP are critical to its success. At the core of a PPP there is always some sort of project mechanism that government requires in order to deliver a service. Often with PPPs it may involve construction of an asset and therefore project management becomes involved. Invariably when the public sector decides to outsource it is because what is required is complex and may require skills that are not available in a department. Much of the current literature about PPP governance is concerned about how to set up good governance structures and the benefits that PPP structures can bring. This is highlighted in documentation created by the UNECE [15].PPPs incorporate various corporate model structures and these lead to different obligations and benefits and thus alternate governance models (UNECE [15]). The UNECE [15] report highlights the fact that PPPs are still in their infancy in most countries, and processes, procedures and institutions, that is governance matters, are the main barriers to extending their use. The Victorian government is acknowledged as an experienced practitioner in the PPP arena and as such it is useful to critique a selection of their projects to gain an insight into governance of PPPs. The emphasis of this review is on government s internal structuring and later comments regarding corporate and legislative responsibilities. Specific and detailed project governance requirements such as transparency, selection processes, public interest, fairness, fair incentives for risks transfer, and safety are not dealt with. Page 3 of 10

4 Victorian PPP case study projects Choice of projects PPP s have been used in Australia for the past twenty years. A review of the PPP projects delivered in Australia showed that they can be broadly categorised in to three types where projects are either delivered within a departmental structure (type 1), a subset of a department or specialist PPP team (type 2) or a new authority (type 3). A sample of these types during the period from 2000 to 2010 using cases from Victoria, Australia is provided in Table 2. Table 2: Examples of PPPs in Victoria Examples Type 1 Convention Centre ($1.4b), completed County Court ($195m), completed 2009 Correctional Facilities ($275 million), completed 2006 Type 2 Royal Children s Hospital ($950 million), to be completed 2011 Royal Women s Hospital ($365 million), completed 2008 Type 3 City Link (toll road) ($2 billion), completed 2000 Southern Cross Station ($700 million), completed 2005 Eastlink (toll road) ($2.5 billion), completed 2008 (Sourced from [accessed January 2010]) Case study details Each case study project is introduced to provide a level of context behind the chosen governance structure. At a project or program level, governance is the control framework through which delivery is achieved within corporate visibility and control. This is achieved through leadership, stakeholder engagement, organisational structure, and articulation of clear roles and responsibilities. The forms taken to achieve this are described below for the case study projects. County Court ($195 million) : This was Victoria s first PPP project signed under the Partnerships Victoria policy and involved the provision of courtrooms and associated services for 20 years. The Liberty Group delivered the project early and the facility became operational in 2002 and was upgraded to accommodate 8 additional courtrooms in 2008 to now have 54 high class state-of-the-art facilities. Governments governance of this project was a classic Department led structure as depicted in Fig 1. Ultimate responsibility remains with the Secretary of the lead agency with advice and input from key internal stakeholders via the steering committee and day to day project control via the Project Director who interfaces closely with a counterpart from the Special Purpose Vehicle (for the County Court, The Liberty Group). Convention Centre ($1.4 billio n): In addition to providing Melbourne with a world class 5,000 seat multi use auditorium, the centre shares facilities with the State run Exhibition Centre and newly built commercial Hilton Hotel. The developed site also contains a significant shopping precinct whilst maintaining heritage features of Melbourne s early trade on the Yarra River. It was completed in Governance for this project was similar to that of the County Court even though there were added complexities with the integration of existing government businesses. These internal arrangements were controlled via a Page 4 of 10

5 memorandum of understanding that linked the single agreement between State and SPV back to one agency but with internal control of other related Departments. Lead agency Secretary/ CEO Project sponsor Accountability State Steering committee Probity Auditor Agreement Project Director Communication SPV Business Advisors Legal Advisors Financial Planning Technical Other specialist advisers Figure 1: Type 1 governance Victorian Correctional Facilities ($275 million): This project comprises two facilities: a 600 bed maximum security men s remand centre; and a new 300 bed medium security men s correctional programs centre. The interesting interface with these facilities is that core services are publicly operated by Corrections Victoria. The control of core and non core services have been governed via a type 1 structure with Departmental staff working closely with the SPV management via a contractual communication link via the Project Director/ Contract Director. Royal Children s Hospital (RCH) ($950 million): This facility will have capacity to treat 35,000 patients each year and provide a range of ancillary services. Whilst a complex facility, the governance arrangement is most interesting as the hospital is managed by an independent board that are accountable for the operation and management of the hospital. Major capital programs become the direct responsibility of the relevant government department, in this case the Department of Human Services (DHS). In this PPP the concession agreement is between the State and SPV but the ongoing provision of core services, and responsibility for overall hospital performance rests with the RCH Board. Further complicating the governance is that the management of project and the complex stakeholder interfaces between the SPV, DHS and the RCH Board is undertaken by a specialist group trained and developed specifically for such complex projects, i.e. they are not simply undertaking normal duties of the Department. The governance arrangement reproduced as Fig 2 outlines the introduction of a Project Board to manage the PPP without diverting the responsibility of the RCH to govern the hospital or the DHS to interface with community and policy matters. This project is on schedule to be completed in Page 5 of 10

6 Minister for Health RCH Board RCHRP Project Board RCHRP Project Control Group Dept of Human Services RCH Project Co (SPV) RCH CEO RCHRP Steering Committee RCH Project Director RCHRP Project Director (DHS) RCH Redevelopment Team RCHRP Project Team (DHS) Figure 2: RCH project s governance structure (based on VAGO [16]) Royal Women s Hospital ($365 million) : The Royal Women s hospital is a replacement hospital for the previous Women s hospital in Melbourne. The facility is co-located with the Royal Melbourne hospital and as such shares some key facilities such as operating theatres and emergency generation of electricity. The project involved demolition of a wing of the Melbourne hospital, equivalent service provision to the old Women s hospital, a new 60 bed private hospital and associated car parking and services. The project was completed in 2008 and was governed in a similar way to that described for the RCH hospital. Major transport facilities bring added complexity by way of geographic size and the necessity for multiple levels of approval from government authorities such as environmental approval, works approvals, land acquisition and legislative requirements. The risk of delay to a private proponent is so large that government has seen fit to provide certainty through the establishment of a new authority, with appropriate authority, to manage the agreement. CityLink (toll road) ($2 billion): This was the first major tollroad in Victoria and the actual contractual agreement was enacted into legislation such that the newly established City Link Authority had full authority to deliver the project. This project was successfully completed in 2000 and involved 22km of freeway, 2 tunnels, a major bridge, and the world s first electronic tolling system. This project was governed by way of a new authority, which has been classified as a type 3. The authority was appropriately staffed as required to ensure government fulfilled its responsibilities under the agreement. Ten years on the need for specialist staff in a stand alone authority has diminished and the main contract administration functions are now managed from the states road authority. The legacy of the contract being enacted in legislation has reduced the flexibility for changing the overall governance Page 6 of 10

7 arrangements and this legacy has resulted in government refining its arrangements for providing certainty to an SPV via the use of a stand alone authority. Southern Cross Station ($700 million) : This project involved the full redevelopment of Melbourne s major rail terminal under full operating conditions for metropolitan and country rail services. The project was completed in 2005 but the delivery of the project was delayed by interface issues with the operating rail system. Governance was managed via the newly formed Southern Cross Station Authority (SCSA). The driver for the establishment of the authority was to enable a separation from the complexities of the institutional project governance arrangements. SCSA was created with the responsibility to initially manage the existing station and its operations. It was also assigned the PPP contract, but delegated the contract management and project delivery to the Department of Infrastructure. The SCSA did not take over the project governance until well in to construction. In particular, complex issues during the handover period was an obvious opportunity for the SCSA to be the lead for the project. The generic structure of a stand alone authority, governance type 3, is detailed in Fig 3. In 2009, the SCSA transferred project / contract management (corporate governance) back to the Department of Infrastructure (DOI). This was deemed a natural progression to achieve ongoing cost effective governance once the project was in a stable operating phase. Government DOI - transport policy focus (esp institutional governance) Treasury & Finance PPP policy and Value for Money focus SCSA project and integration (existing and new services) Premier & Cabinet Whole of government Transport (governance) Project (governance) Ongoing involvement via: - Act for the Authority - PPP Board - Inter Departmental committee - Project control group Southern Cross Station Authority Concession Agreement SPV (CivicNexus) Fig 3: Southern Cross Station - inferred governance structure Eastlink ($2.5 billion): This 39km tollroad is the largest urban road project ever constructed in the State of Victoria. It was completed in The governance of the project demonstrates a maturing of governmental arrangements where the project has demonstrated flexibility in its structuring to accord with changes over a project s life cycle. Originally there were two projects being managed by VicRoads (agency of Department of Transport) but these projects Page 7 of 10

8 were brought together as a PPP to gain commercial value. During the initial development phase, the project governance was transferred to DoI. The project team were within DoI when a stand alone authority the Southern and Eastern Integrated Transport Authority (SEITA) was created; at which point the project team transferred to the new authority. The change over was based upon lessons learnt from the CityLink project. SEITA delivered the project, and then at a natural point, terminated. A new authority, the Linking Melbourne Authority was created under the Department of Transport which now has a wider charter than just management of one PPP project. Linking Melbourne will manage the early operational phase of the project and assist it to transition back to the management within VicRoads. Discussion of types of governmental governance of PPPs A type 1 governance structure is typically used where a project requires a significant level of operational interface at various planning and tendering stages, and is usually (to date at least) a social infrastructure project. Issues that emerge include: the focus is very much toward project outcomes and not necessarily on the key decision making interfaces required of government; the relationship with stakeholders is not clear or well defined; and the role and authority arrangements is unclear due to the overarching involvement of a steering committee. Type 1 and Type 2 structures are similar, except the complexities of governance required for the project are increased for Type 2, due to the interface with organisations which are at arms length to government. Type 2 projects are not managed in the project or program office but they have a dedicated team/agency to deliver the project. Both types have standard project management methodology structures, typically involving: Project steering committee (PSC); Project Director and project manager/s; and a Project working group (PWG). Central agencies are always represented on the PSC and PWG, as PPPs require additional responsibilities by the Treasurer post business case approval. This is a significant difference with the Project Governance arrangements of traditional projects. During construction and initial operation, the steering committee still functions until a natural point occurs where the need for a steering committee disappears. Contract Management during the corporate governance stage is managed via a Memorandum of Understanding between the Department and the operators, which spells out the consultation process for decision making under contract. Type 3 governance has evolved as discussed above and it appears the early disadvantage of lack of flexibility has been largely overcome. It is also interesting to note that this form of governance tends to revert to a type 1 once the asset is in its operating phase. Institutional and corporate governance Fig 4 proposes a model of the relationship between corporate governance, project management and a PPP. A PPP effectively spans both parts of corporate governance and project management but unlike a project it has a longer life span because it is embedded in the ongoing operations of both a public sector and private sector organization. Both the public and private sector organizations have governance requirements and these would form the basis of the governance of a PPP. The initiation, planning and delivery stages of a PPP are strongly dominated by project management governance processes. To try to simplify the different governance requirements Fig 4 presents four aspects of PPP governance. Section A of Fig 4 details how governments typically govern in a business as Page 8 of 10

9 usual manner. The figure also details that government has multiple internal stakeholders who need to be integrated into the overall governance outcome. Government governance - Business as usual Assurance/ advice Government project s governance for individual infrastructure projects Project setup Project Hand over Project hand back central agencies (premier/ prime minister, treasury/ finance) Line agency Corporate structure - Department project - Subset of Department (agency) - New authority Governance effort Institutional governance Project governance Corporate governance Institutional governance time Concept and Feasibility Planning and implementation Operation utilisation decision special purpose vehicle, or within corporate structure + contract Project set up Project hand over Corporate governance Figure 4: PPP Governance: Interaction between Governmental and Corporate governance Section B of Fig 4 provides an indication of the effort required in terms of governance during the life of a PPP agreement. It should be noted that during the concept development phase of the project there is commensurate effort required to establish reporting and responsibility aspects of the project. This is formalised in the contractual agreement for the project and thus imposes explicit requirements on both government and the SPV. Section C of Fig 4 details where in the life cycle specific forms of governance take precedence, e.g. during the planning and implementation of a PPP the project governance features required for traditional projects is critical. Interestingly over the period of a PPP contract the SPV has to manage both corporate governance requirements and project governance requirements. In addition to both of these, the contractual agreement obligates the SPV to report to both its parent corporate entity and government in sufficient detail to enable both of these groups to meet their governance obligations. Section D of Fig 4 indicates that the term of governance of the parent entity of the SPV (which may in fact be multiple organisations) runs over a longer duration than the PPP agreement. It is also worth noting that the SPV may change ownership during the duration of the agreement and thus transitional arrangements need to be considered at the time the contractual agreements are formulated. It should also be noted that there are examples where specific SPVs have not been formed but rather the parent corporation has managed the PPP internally. Conclusions This paper has established the relationship between corporate and governmental governance of PPP projects. Three types of internal governmental governance structures involving internal management, specialist teams and the creation of a new authority have been analysed Page 9 of 10

10 and each type found to be sensible for the correct application. Interestingly, the use of a new authority is only used where major changes are required that impact on the community and the use of authorities changes over the life of a project. Generally authorities cease and migrate back to business as usual, within a departmental structure, over time. Whilst the three internal government forms of governance have worked adequately for current projects there appears to be space for greater use of joint venture style arrangements in the future. The reflection of PPP governance through a longitudinal lens of project lifecycle and the balance between corporate and governmental reporting opens the door for interesting and ongoing investigation. References 1. Ghobadian, A., Gallear, D., O Regan, N., and Viney, H. Eds. Public Private Partnerships; Policy and Experience, Palgrave Macmillan, Rosenau, P.V. Ed. Public Private Partnerships, MIT Press, Cambridge, Massachusetts, Osborne, S.P. Ed. Public-Private Partnerships; Theory and practice in international perspective, Routledge, Grimsey, D. and Lewis, M.K. Public Private Partnerships; The Worldwide Revolution in Infrastructure Provision and Project Finance, Edward Elgar, Hodge, G. and Greve, C. The PPP phenomenon: performance and government insights, O Flynn, J and Wanna, J. Eds. Collaborative Governance; A new era of public policy in Australia? The Australian National University Press, Canberra ACT, Australia, Wilson, DI, Pelham, N. and Duffield, CF. A review of Australian PPP Governance Structures, Journal of Financial Management of Property & Construction, (in print 2010). 7. Faulkner, K. Public Private Partnerships in Ghobadian, A., Gallear, D., O Regan, N., and Viney, H. Eds. Public Private Partnerships; Policy and Experience, Palgrave Macmillan, Huxham, C. And Vangen, S. Doing Things Collaboratively: Realizing the Advantage or Succumbing to Interia? in O Flynn, J and Wanna, J. Eds. Collaborative Governance; A new era of public policy in Australia?, The Australian National University Press, Canberra ACT, Australia, Coase, R., The Nature of the firm, Economica Vol. 4, 16, pp , Williamson, O. The Mechanism of Governance, Oxford University Press, Macneil I.R. The Many Futures of Contracts, Southern California Law Review 41, May , Ostrum, E., Burger, J., Field, CB, Norgaard, RB and Policansky, D. Revisiting the Commons: Local Lessons, Global Challenges, Science 284, pp , Clarke T. Theories of Corporate Governance: The philosophical foundations of corporate governance, Routledge, Oxford, United Kingdom, Australian Stock Exchange (ASX) Corporate Governance Principles and Recommendations, Australian Stock Exchange, Corporate Governance Council, 2nd Edition, United Nations Economic Commission for Europe (UNECE) Guidebook on Promoting Good Governance in Public-Private Partnerships, United Nations, New York and Geneva, Victorian Auditor General Office (VAGO) The Royal Children s Hospital a public private partnership, report :20, May Page 10 of 10