Capital infrastructure projects are built to meet the functional and societal needs of the public. However, even in countries such as Canada with dedicated public procurement agencies like Infrastructure Ontario, projects can take years to be delivered. Government’s best intentions to proactively deliver meaningful benefits often battle to get off the ground. Metrolinx’s Regional Express Rail Program is one such example, which has incurred delays informed by fundamental strategic changes. These strategic considerations included advancements in propulsion technologies (the consideration of hydrogen fuel cells to electrify the regional GO rail network) and innovation in both procurement model and funding mechanisms.
The challenge for the government has always been to proactively identify optimal societal solutions, while delivering return on investment. However, the pace at which these are required is accelerating, and user needs are no longer neatly defined. Thus the solution often no longer rests in a clearly defined project scope. Nor is the silver bullet the selection of an effective procurement model. To help deliver a return on investment, inclusion of innovation in all stages of the project life cycle is fundamental.
Value for money versus value for the user
Public sector’s capital spend is scrutinized with unrelenting pressure to deliver value for money and societal benefits. The drive to deliver value through consideration of lowest cost and technical competence, combined with the fractured nature of the construction value chain, inherently creates a climate hostile for innovation. Rarely are new technologies the most cost effective, nor are the risks (threats and opportunities) or benefits associated with these innovations transparent, let alone tangible. This makes it difficult for stakeholders to agree on the potential long-term benefits, amplifying the challenge of appropriately allocating budget, achieving certainty in schedule or compliance, and in securing public favour.
Part of the challenge is the industry standard in assessing value for money. A Value for Money (VfM) study attempts to evaluate and compare whole life costs and benefits of potential solutions. It’s underpinned by the concept of risk being transferred to the party best suited to manage it (an efficient risk transfer). As such, it considers risk categories, including but not limited to financial; planning; design; construction; commissioning; and regulatory. The concept is sound but falls short in practice, as it relies on historical data derived from previous projects’ performance and assumes that this performance, and the corresponding expenses and savings, are transferable.
The timing of the VfM study (generally undertaken prior to project scope finalization and with limited private sector involvement) leads to an inability to accurately account for innovation, flexibility or agility in procurement and project delivery methods. The proposition, however, is that value for the user is better delivered by an effective risk transfer, which aligns risk transfer to appropriate incentives to create the most efficient delivery for the project as a whole.
Public sector authorities as early adopters and collaborators
Technological advancements have changed the profile and behaviors of consumers. As a result, regardless of income, geography or culture, user needs are becoming increasingly sophisticated.
While technology accelerates the rate at which potential infrastructure solutions are available, the ability of government to deliver these solutions, even with private sector collaboration, has proved challenging.
In order to satisfy consumers, the public sector authorities need to continuously seek to improve their performance and deliver infrastructure solutions which are considered competitive, if they are truly going to deliver a return on investment.
One such challenge facing urban environments is in the conversion of road users to transit users. While the public recognize the environmental and societal benefits of transit, road vehicles are still more attractive (convenient, economical, timely, comfortable, flexible) than many current public transit options. Transit can be a competitive option by adding value in the customers commute by incorporating solutions that address these intangible needs.
In 2018, the Hong Kong-based property developer, landlord and operator of Hong Kong’s High Speed Rail, MTR, launched passenger service after applying an innovative approach to land use, resulting in a positive change in user behavior. MTR looked beyond the functional requirements of a rail station and considered the factors influencing positive public appeal. As a result, through collaboration between government and developers, commercial and residential hubs were established adjacent to the rail station. This collaborative approach notably reduced public funding requirements and fundamentally increased the likelihood of consumers selecting transit over road vehicles.
Innovation in infrastructure delivery specifically as an aide to increase user value is not new. In 2008, Singapore’s Changi Airport Terminal 3 similarly invested in the intangibles, establishing the first airport-based Butterfly Garden – offering benefits to travelers including reduced travel stress and the opportunity to learn more about species native to Singapore and Malaysia.
To become and remain competitive, public sector authorities delivering infrastructure need to reinvent themselves as innovators, or at the minimum, early adopters. Becoming ‘innovation-ready’ enables public sector to access potential economic, environmental and social benefits otherwise not available.
Appetite for risk: impact on procurement and innovation
While not a guarantee of success, an appropriate project delivery method does assist in delivering innovative projects. Unfortunately, the inclusion of innovation through traditional, P3 and hybrid procurement routes is still lacking. It is still the allocation of risk and an entity’s appetite for risk which enables or curtails the opportunity to create infrastructure solutions that are nimble enough to adapt to consumers’ evolving needs.
In theory, determining an optimal risk allocation should be relatively simple. In practice, the ability to articulate, quantify and agree on risk allocation between stakeholders on innovative solutions, with the required flexibility to adapt to societal needs, is challenging. However, as seen with MTR’s approach, when there is collaboration, a shared consumer-centric vision, and innovation throughout the project, the resultant risk allocation drives significant value for all parties and delivers an adaptable solution which is able to meet evolving needs.
The role of public sector authorities
To position for innovation, public sector authorities should start by shifting how projects are scoped, designed and constructed. An interesting idea is to approach a project as a singular prototype, with focus not on repeatability of an innovative process or solution, but rather the standardization of the inclusion of innovation along all stages of the project lifecycle. This facilitates the exploitation of new practices, creating a competitive edge and a stronger strategic approach. This mind-set requires looking beyond value for money and supports an iterative development approach, where value for the consumer is paramount.
Secondly, a new procurement approach is required that capitalizes on collaboration and the core competencies of public and private sectors. Procurement can be characterized as a succession of calculated risks requiring management. The current approach of utilizing an end-to-end procurement process managed by public sector authorities with scope restricted by the RFP, and assigned contracts awarded on lowest price reduces the flexibility required for innovation. Attempting to select an “optimal” procurement method to mitigate risk is difficult as neither public nor private sector can articulate all potential risks inherent in a project.
To ensure the creation of competitive solutions, early engagement between public and private sector is crucial. The most influential decisions affecting scope, cost, quality and sustainability are undertaken early in the project lifecycle. Further, for agile project delivery, performance goals, stakeholder expectations, risk sharing and accountabilities are to be agreed and reconfirmed at all stages.
Innovation and collaboration are not new topics in infrastructure. However more than ever there is an immediate requirement to prioritize collaboration and the inclusion of innovation to create competitive user value.
Suzelle de Wet is a Director at Turner & Townsend, leading their governance and assurance offering across Canada as part of their advisory business.
The preceding is excerpted from Turner & Townsend’s 2019 Canada Market Intelligence Report.
