Cecily Davis looks forward to increasing investment in the UK’s creaking infrastructure and argues that a new approach to procurement is needed. A recent best practice guide suggests the way forward for an alliancing approach, she argues.
- The UK remains in need of infrastructure investment despite economic recovery
- The Infrastructure Client Group has produced an Alliance best practice guidance document
- The oil and gas industries pioneered an alliancing approach
- A no blame culture is essential for the success of alliancing
- Pure Alliance vs Strategic Alliance
While there is no consensus about the shape of the recovery, nor on whether it is sustainable, at long last, there is little debate that the very worst of the Great Recession is behind the UK. Now, as was the case at the time of the 2010 general election, there remain challenges about how best to achieve the level of infrastructure investment signalled by many commentators as being essential for our recovery and advancement.
In 2009, just before the nation last spoke, the think tank Policy Exchange published the report, ‘Delivering a 21st Century Infrastructure for Britain’. Written by Professor Dieter Helm and Goldman Sach’s James Wardlaw, the report explained the unique disadvantage of the UK as against its European and other global competitors. It focussed on the ability of global companies to elect on their locations for head and back offices. While Britain has a great deal of advantages such as the City of London, the English language, superb universities and highly trained and qualified employees, it is plagued by weak and ever worsening infrastructure.
In 2005 a report of the Transport Select Committee reported that as much as 70% of senior executives found the infrastructure in the UK to be poor and worse than that in many countries traditionally considered to be in the UK’s shadow. The Policy Exchange report makes pessimistic reading. It anticipates that £434 billion in investment is required by 2020 and, in doing so, recognises these figures to be conservative.
Infrastructure investment can have the effect of boosting the economy. Indeed, the two great infrastructure back stories of modern times, Crossrail and HS2, are described in terms of their catalytic and rebalancing effects respectively. High Speed 2 is now acknowledged as being very little to do with speed but largely driven by the need to address capacity. Further still, the argument which the government is keen to show as being compelling is that HS2 will enable more economic activity between the principal cities of the north.
Since the last general election much has been said and written about the need to attract and encourage diverse forms of investment to deliver infrastructure across the UK. In particular, the pension and life funds have been targeted to play a more significant role in pushing savings into infrastructure projects. Interestingly, what success has been realised sits around investment in projects where the construction risk has passed, and more in the acquisition of secondary assets. Campaign after campaign has articulated the real benefits to government of spending in the construction industry. ‘Never waste a good crisis’ written and published by Constructing Excellence in 2009 declared the era of client led change to be over and that the challenge for the construction industry in recession was to demonstrate how, through innovation, collaboration and integrated working, it could create additional economic and social value. This same question was posed by Sir Michael Latham in his report Constructing the Team a decade before.
The recommendations made by Latham in Constructing the Team were punctuated by references to trust, fairness, partnering and collaboration. His mantra was that good relationships were at the core of benefiting the client and ensuring that its objectives were met.
Key factors of success in project delivery
Increasingly, there is more focus on the behaviours of a client when looking at the key factors of success in project delivery. Government departments have been encouraged to recognise the value of becoming ‘intelligent’ in the way in which they procure resources. Certainly in the build up to delivering the 2012 Olympic and Paralympic Games and in the procurement of Crossrail (and now HS2) there has been a real focus on the intelligent client’s characteristics and its role in successful procurement. Intelligent clients must empower and equip themselves to direct investment in a way that is effective and to judge whether the relevant and necessary competencies are available. The intelligent client is capable of clearly defining its requirements and properly managing key stakeholders. Government has been ‘smart’ in building leadership skills in the key delivery departments for infrastructure improvement. Accordingly, central departments are now better placed to steer investment and expenditure and manage their stakeholder relationships more meaningfully. A full discussion of the characteristics of an intelligent client is a paper in itself, but at the heart of an intelligent client’s competences in times of great austerity must be the ability to buy better for cheaper.
When the UK government announced the creation of Infrastructure UK, as an independent unit within HM Treasury, one of its key responsibilities was to improve on value for money for taxpayers. It seeks to do this by improving the way in which the nation plans for costs and delivers major economic and social infrastructure.
In 2010 Infrastructure UK announced the Infrastructure Costs Review and targeted a hugely ambitious saving of around 15% off the cost of typical infrastructure expenditure by 2015. The Review set out a series of actions to improve the behaviour of government clients. It was envisaged that savings of 15% could be achieved against the costs of infrastructure delivery. Last year, Infrastructure Cost Review- Measuring and Improving Delivery was published with a road map for more collaborative behaviour, and identifying over £3 billion per annum of cost savings. As collaboration between government and industry clients, the Infrastructure Client Group is supported by IUK and the Commercial Secretary to the Treasury.
One of the key products of the Infrastructure Client Group is the Alliancing Best Practice guidance document. The guidance celebrates the UK’s capability in delivering successful projects and innovation, where the imperative and conditions for success have been properly prepared through reforming procurement practices and effecting behavioural and cultural change. Alliancing is one form of collaborative working which remains less widely used in the UK than is the case in other countries, most obviously Australia where a very significant proportion of infrastructure is delivered for the public sector through an alliance either pure or strategic.
In the UK it was the oil and gas industries which first developed and experimented with the use of alliancing. In the early nineties when the construction industry was weathering economic conditions not dissimilar to those experienced over the last six or seven years, BP on its Andrew and Hyde projects pioneered a new procurement method which they heralded as being much more than a ‘nice to have’ but a matter of survival. Alliancing was a response to the very tough experience BP had with its supply chain, characterised by short termism and also by adversarial and non-aligned relationships.
For the purposes of engineering procurement and construction projects alliancing is a form of procurement which involves the creation of a collaborative arrangement with a number of service providers for the purpose of delivering one key project. At its core is the establishment of aligned objectives. The most common characteristics of an alliance are:
- The collective assumption of risk by the participants.
- A truly integrated team operating under a single agreement.
- A no fault no blame culture and environment.
- Unanimous principle-based decision making, ideally without resort to external dispute resolution.
- A cost reimbursable payment scheme.
Contractual organisation is of enormous importance in establishing a proper foundation for a successful alliance. To this, add expert project and process management. Successful alliances require the willingness to invest in people and, perhaps most importantly, to acknowledge that sometimes failure is a step towards success and that rather than expending energy and resource on penalising the party ‘responsible’ for the failure, the project would best be served by the alliance collectively managing the failure and using it to build a step to the next success. This is the core of the no blame culture essential for effective alliancing. Alliances are about results and so parties to an alliance must focus on co-operation to meet their collective goals.
Historically on most major projects, owners seek to enter in to a time fixed, price certain ‘turnkey’ contract for the delivery of the facility so that all the usual risk associated with construction such as delay and cost overrun, are held at contractor level. Inevitably the passing of this risk to the contractor gives rise to greater project costs because the contractor will be keen to secure a much greater reward or return than he might otherwise have sought. An alliance will work together to perform its collective obligations so that where one party’s performance is wanting the project participants will undertake whatever remedial action is required.
In the pure alliance contracts common in Australia it is usual for a provision seeking to exclude liability to be included in the structure to reinforce the fact that there are intended to be no disputes or ligation save in respect of what is known as wilful default. The failure by any project alliance participant to perform any obligation or to stage any duty in connection with this alliance agreement will not give rise to any enforceable obligation at law or in equity save to the extent that the failure constitutes a wilful default.
On a project specific alliance, the parties will be collectively accountable for the performance of works and assume a collective ownership of the risk associated with project delivery. The project owner will pay the participants for their work and service on an open book cost reimbursable basis. He is paid a fee to cover overheads and profit and an equitable share of the pain or gain. Leadership across the alliance is delivered through a body comprising senior representatives of all the participants.
One aspect of the role of an intelligent client is to give consideration to the most appropriate method of delivery structure to achieve value for money. The biggest issues to consider will be factors such as risk transfer, ensuring that the real whole costs of a project are considered through fully integrating the up-front design costs with back end construction costs, making best use of assets and innovation.
There are a number of big ticket infrastructure projects UK plc is eying which, it is contended, would most likely benefit from alliancing. Accordingly it is timely that the Infrastructure Client Group has focussed on alliancing as a method of delivering infrastructure. The main conclusions within the Alliancing Guidance note were:
- In complex delivery environments, many alliances deliver far better outcomes than traditionally arranged projects.
- Success is only delivered when parties focus on behavioural aspects of the individuals involved and their organisations.
- Success also requires a very high degree of participant integration and effective leadership and management.
HS2 is arguably a prime example of an infrastructure project which might benefit from the use of an alliance. It is a project which requires solid and dependable access to an extended supply chain which itself is able and willing to act in an integrated manner. The long term nature of infrastructure projects such as HS2 make it worth investing the time to establish and build trust across the supply chain, in turn giving rise to a greater likelihood of success.
With the level of investment in infrastructure high and the resource available to dedicate low, it is clear that new methods of working are essential. Those charged with the delivery of the next generation of infrastructure assets must not allow themselves to head off down established procurement routes without exploring more unusual methods of delivery which in other markets are delivering success.
This article was first published in the May issue of Construction Law Journal.
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