Updated: Jul 10
Whether you realise it or not, infrastructure is a major part of our lives. We rely on it from when we check Instagram when we wake up to switching off the lights before bed. It consists of all the physical systems that allow society to function. These are the roads we drive on, the pipes taking water to our houses, the mobile phone networks we connect to and the power lines running to our house. Infrastructure will also be one of the keys to solving the problems of the future whether it’s through better healthcare, clean energy or sustainable transport. It is also probably more complex and expansive than you ever imagined.
Take the highly oversimplified example of what’s involved in having clean, fresh water run out of our taps. The water we drink starts its journey to us by flowing into large storage reservoirs in the mountains. These reservoirs are built by blocking existing streams using massive dam walls. These dam walls are built to last hundreds of years and to withstand earthquakes. They need to have spillways and be able to maintain environmental flows to ensure the downstream river ecosystems remain healthy. Pumping stations usually connect multiple storage reservoirs to allow it to be moved where it is required.
Once water leaves a storage reservoir, it is treated and purified in water treatment plants to make it safe to drink. Historically, this step was skipped resulting in the occasional cholera outbreak. The water undergoes a complex series of treatments to cause any bacteria to coagulate so it can be filtered out. Fluoride is added and the pH is corrected producing clean drinking water. To achieve this, the treatment plant uses a complex operation of pumps, tanks, pipes, generators and electrical and instrumentation equipment.
The ready to drink water can now be delivered to your house. This happens through a very long network of pipes. While pipes aren’t too complicated, the asset management strategy behind them is. You can see the results of it in the absence of broken water pipes flooding the footpath. This happens due to a comprehensive prescriptive maintenance and refurbishment program as well as corrective maintenance crews available to provide a rapid response when faults or accident damage take place.
The purpose of the above wasn’t to provide a perfect overview of how the water supply system works but to highlight the complexity of it. With the amount that’s involved, it’s impressive to think that every time you open the tap, you can drink without having to worry about water shortages or getting sick. Extend this to switching on the lights, connecting to the internet, catching trains and it’s truly impressive how well the physical systems we’ve built and use every day work.
How do we make sure all this infrastructure gets built and works though? Effectively, we (society) follow a pretty simple process. We decide what infrastructure is required, we build the infrastructure and we operate and maintain it. Everybody is involved in this process. We help finance it when we pay taxes, use toll roads and pay electricity bills. If you’re reading this book, you’re probably even further involved by working for one of the private or public sector players that put this money into action.
The Infrastructure Market
Like any capitalist society, all this activity occurs in a marketplace where public and private sector players can exchange goods and services. This is known as the infrastructure market. Due to the scale of projects and the public good delivered by them, the infrastructure market has a strong public sector presence through the government and government agencies. Private companies also play a full range of roles.
The different roles can be summarised at a high level into the following:
1. Choosing what infrastructure is required to be built and finding the funds for it. This activity is known as project development.
2. Designing and Building the project
3. Operating, Managing and Maintaining the infrastructure to realise its full benefit
The different players within the market may perform one, numerous or all these roles. For example, Telstra act as a project developer and an operator and maintainer while CPB only operate in the construction space. The specific approach varies widely depending on the project, the industry and the company. Therefore, it is hard to provide a cookie cutter framework to describe all the different companies in the industry. The basic company types explained in more detail below are:
· Project Developers / Asset Owners
· Professional Services Companies
The above isn’t a holistic list and lots of companies exist that don’t fit any of these basic types such as equipment suppliers, labour hire companies, etc. The three types listed above give a good enough structure for the purpose of this book.
The Project Developer / Asset Owner
Project developers decide what infrastructure is required and ultimately see it become a reality. They will assess a market, conduct feasibility studies, develop business cases, finance projects, procure the contractors and deliver projects. While developers often outsource parts of this process, the project developer is the one taking ownership of the end to end process. They will then become responsible for the successful operations and use of the infrastructure when it has been built. Developers are typically also the asset owners however this may not always be the case.
Project developers fall into two major categories: public or private. The key difference being the government develops infrastructure to maximise the benefit to society while private companies do so to maximise the financial returns to shareholders. The ultimate process and roles are very similar.
Take the example of the Melbourne Metro Tunnel, in this case, the project developer is the Victorian State Government. Over years, the Victorian Government has looked at ways to respond to Melbourne’s population growth and heavily congested train lines. They conducted economic and social research by studying forecast population growth and public transport usages. They also conducted detailed feasibility studies and early stage engineering design for multiple proposed solutions to determine the most practical and cost-effective ways to resolve this problem.
All this information was then fed into developing a business case. This is a summary of the project’s costs and benefits. The purpose is to prove that the metro tunnel provides the best value for money solution for Melbourne’s congested rail networks. Effectively, that it is worth the money planned on being invested.
Once the business case was established and the Government decided to pursue the project, the process of delivering the metro tunnel began. This required financing the project. The initial feasibility study would have produced some estimates at to the total costs of construction, operations and maintenance of the tunnel as well as revenue generated from extra passengers and ticket sales. Based on these and the timing of these payments, the Government had to make allowances in the budget and arrange debt financing to ensure they would be able to pay for its completion.
The Government also needed to select contractors to deliver the works. This process is called procurement. Procurement is the process of acquiring all the goods and services necessary to deliver a project. Due to the size, complexity and resourcing required for the Metro Tunnel, the Government elected to outsource the delivery to contractors. This was done through competitive tenders for each package of works to select the preferred contractors. A tender involves the government sending out a package of information to private sector companies including a scope of works, contracts, performance specifications, design drawings and more to ask for a proposed solution and price to complete the works.
Once the contractors were selected, works commenced. The Government has now taken on a contract and stakeholder management role; reviewing and approving payment claims and variations from the contractors, monitoring progress and quality and ensuring stakeholders are managed appropriately. Like all major projects, the Metro Tunnel will have and has already run into significant issues that may have time, cost and quality impacts. The Government will need to work closely with the contractors to resolve these issues to ensure successful delivery of the project.
On completion of the construction, there will be a testing and commissioning phase where the Contractors prove to the Government that the project has been completed to a satisfactory level. When this phase is complete and the government is satisfied the project has been delivered as per the original requirements, practical completion for the Design and Construction component will be completed.
The Metro tunnel has a slightly more complicated delivery model and the design, construction, operations and maintenance were procured under a single package as a Public Private Partnership. Typically, though, when construction is completed, the developer would take ownership of the infrastructure to begin the operations and maintenance phase. As the operations and maintenance of the Metro Tunnel have been included in the PPP package, the contractor will be responsible for ensuring its safe and successful operations. The Government will again take on a contract management role, ensuring that the maintenance contractor is fulfilling their obligations.
In some cases, the developer and the asset owner may be different. Developers will sell off finished projects to asset owners. In these cases, asset owners may be super funds or investment groups. This is commonplace in commercial property and energy infrastructure.
While the above example related to the Metro Tunnel, the development process is very similar across industries and companies. Chevron will need to perform feasibility studies before building a new LNG processing facility, Melbourne Water will need to procure contractors to upgrade a water treatment plant and the local council will need to manage their operations and maintenance program to ensure parks remain safe places for kids to play.
Contractors work with project developers and asset owners to design, construct and maintain their capital projects. Their staff are full of engineers, project managers, site supervisors, health and safety professionals and other delivery specialists who can take a basic design and project specification and transform it into a real piece of infrastructure. Sometimes maintenance providers are considered separately and referred to as services providers, yet for simplicity and due to the very similar business models, we’ve included them under the banner of a contractor.
As the name suggests, the contractor will be engaged contractually to deliver an agreed upon scope of works. From project to project, the specific scope and responsibilities will vary enormously. Typically, the contractor will be responsible for the development of the detailed design and then the co-ordination and oversight of all the labour, plant, materials and subcontractors required to build the project. With a maintenance contract, the maintenance contractor will typically be required to do the same but relating to the maintenance and/or operations of the infrastructure.
Like how the specific scope will vary, so will the contract model used to deliver the project. Contracting models vary primarily based on how much risk the contractor is required to take on. The lowest risk form of contract is a “cost-plus” or “time and materials” contract where the contractor is simply paid based on how much they spend plus an agreed upon margin. They take on no performance risk. Obviously in contracts like this, there is little incentive for contractors to control costs and save money, hence developers don’t tend to like this model. The more commonly used contracting model are Design and Construct fixed price contracts. This is where through a competitive tender process the contractor submits a fixed price to design and construct a piece of infrastructure. The developer only pays the contractor the fixed price for the project. The contractor keeps any additional savings below the fixed price but also must wear any additional costs over the fixed price.
Contractors are typically selected by developers through tender processes. Once the developer has decided on a project, a delivery model and arranged financing, the developer will typically send out an invitation to the market inviting contractors to bid to complete the work. The contractor will review the developer’s requirements and submit an offer price and usually a proposed delivery solution. If the developer is happy with the contractor’s offer and quote, then the developer will engage the contractor to deliver the project. Larger contractors will bid multiple projects at once and typically have whole teams devoted just to bidding and securing new projects.
Contractors vary based on the types and size of projects they target. Some contractors specialise in oil and gas work while others specialise in purely civil infrastructure. The size of project that contractor’s target is often referred to as the “tier” of the contractor. Large construction firms like CPB or John Holland that target mega projects (>$1b) are referred to as Tier 1 contractors. Companies that target smaller projects and even subcontract to larger companies are referred to as Tier 2s and tier 3s etc.
To give an example of a contractor in action, UGL, a large mechanical and electrical contractor with a renewable energy business arm, won the Engineering, Procurement and Construction (EPC) contract to deliver the Mugga Lane Solar park for the project developer; the Maoneng Group. UGL was required to design and construct a 15.3MMWDC photovoltaic solar farm utilising UGL’s design, project, construction, health and safety management services. Additionally, UGL was required to provide operations and maintenance of the solar farm for a two-year period.
An EPC contract is a contract option like a Design and Construct contract where the performance standards the contractors are required to meet revolve around the output of a plant or process, in this case a solar farm. Using a contracting structure like this, the Maoneng Group was able to transfer all budget, schedule and performance risks to UGL, a specialist company for these types of works.
On award of the contract, UGL completed the detailed design, interfaced with stakeholders such as electricity networks, procured all the materials such as piles, electric cables and solar panels, constructed the solar farm and commissioned it. UGL managed the entire process and delivered a fixed PV single axis tracking system and operations and maintenance facility that connected to the ACT electricity network. UGL’s specialist management of the entire process resulted in export of power early than planned, without any penalties and within budget.
The Professional Services Firm
The final key player in the infrastructure market are professional services firms. While a contractor provides outsourced project delivery, professional services firms provide outsourced engineering problem solving. A key difference to contractors is that professional services firms usually won’t take on delivery and project risks and are paid based on the services they provide on a daily or hourly basis. Their staff are full of designers, town planners, engineers and other technical specialists who provide expertise to their clients.
The types of services provided vary from industry to industry but will typically span all the requirements of the asset lifecycle from planning, designing, delivery support and asset management. In the planning stage, these firms will support project developers in preparing feasibility studies, conducting field investigations and developing basic concept design. During delivery, they will develop detailed designs that can be used for construction or provide owners on-site representation to monitor a contractor’s performance. Professional services firms will also provide services to asset owners to support operations and maintenance efficiencies or to introduce new technologies. While the above range of services is very broad, it revolves around providing technical expertise to both contractors and project developers / asset owners without assuming delivery the delivery risk.
As an example, take the Australian company SMEC’s support of upgrades to the Lesotho electricity network. SMEC was engaged by the Lesotho Electricity Company to help resolve issues from limited and dilapidated power infrastructure, particularly required to help improve the supply to the Lesteng diamond mine. SMEC conducted the feasibility study and identified the most cost effective and efficient way to upgrade the network. They then produced detailed civil and electrical designs for this proposed solution, supported the procurement of contractors to deliver the works by preparing and managing tenders and bid evaluations and provided contract management and on-site supervision of the works to deliver the upgrades.