Capital Projects in the Netherlands
Introduction
The Netherlands has a rich history of capital projects. Our historical battle against flooding has forced us to carry out massive projects such as the Delta Works, land reclamation and the construction of dykes. These directly illustrate the main characteristics of capital projects: large-scale projects with a clear public interest, commissioned by the central government and undertaken in cooperation with commercial contractors. These projects have been of such a scale and complexity (and therefore involving such a high risk profile) that their performance has always been in the spotlight.
In the last few years the PPP (Public Private Partnership) concept has become generally accepted as an important tool to improve the performance of capital projects in the Netherlands. It is no wonder that the concept has become even more popular in the current financial crisis. This article describes the different approaches used to improve the performance of capital projects in the Netherlands by utilizing the strengths of both public and private sectors. Following an outline description of the typical phases and success factors of capital projects, the different PPP concepts are described and illustrated by current developments and examples.
Typical phases and success factors of capital projects
From a government perspective, capital projects are typically undertaken through four main phases. The first is the policy phase, where options are evaluated and a decision is made as to whether a project will go ahead. It is crucial in this phase that clear goals are set and adhered to throughout the process. This is less obvious than it seems. Ask people working on the project to state its main goals and one will be surprised by the different answers one receives. Another important factor in this phase is the establishment of a clear business case that describes the main cost and benefit drivers and the main risks. This is what will steer the future project.
The second phase is the procurement phase, in which cooperation models are explored, a procurement strategy is chosen, output specifications are written and finally a contract is concluded. The main challenges of the procurement phase are that the risks and rewards need to be shared fairly and that both private and public sector organizations need to feel comfortable with its outcome. This lays the foundation for a successful project.
The third phase is the realization phase. Now the project needs to deliver and adhere to scope, time and budget constraints. Project control appropriate to the contract is the main issue in this phase.
In the fourth phase the project has to fulfil all promises made, including the added value promised in the business case. The project is often handed over from the project organization to the owner. The success factor here is that the organization is prepared in time and that a change management approach is used.
History has taught us that the performance of capital projects has not always been very good. Budget and time overruns have occurred in many cases and the performance has failed to meet the public sector’s expectations. The application of PPP concepts can help to improve performance. Below we describe some different approaches and cooperation models used to improve capital project performance, focusing on the first two phases.
Different maturity levels of cooperation models
The needs for private sector involvement differ according to the specific characteristics of the project and government policy. In this respect we currently distinguish between three cooperation models that differ in their maturity level. We elaborate on these different cooperation models below and provide examples of Dutch capital projects that have applied them.
The DBFM(O) concept aims at increasing efficiency and performance
This concept is currently the most mature PPP model used in the Netherlands. It is based on the UK’s Private Finance Initiative (PFI) model, which has become the international PPP standard. This concept has been extensively developed in the past few years, especially for the Rijkswaterstaat’s Design, Build, Finance, Maintain (DBFM) highway construction projects and the Rijksgebouwendienst’s Design, Build, Finance, Maintain & Operate (DBFMO) public housing projects.
Thanks to the efforts of PPP knowledge centres at the various Ministries, standard contracts and guidelines have been developed. The concept aims at establishing partnerships that focus on delivering better performance for citizens at lower costs. Government goals are therefore translated into clear output specifications and an availability-based payment scheme is used to realize a risk allocation appropriate for both public and private sectors. Upcoming projects that use this model include Schiphol Amstardam Almere (SAA), a major road project, and several housing projects.
In order to tackle traffic congestion around Schiphol, Amsterdam and Almere, a plan study was started in 2004. This plan study opts for an expansion of the existing infrastructure, the 'Streamline alternative'.
It consists of five sub-projects:
1. A10-Oost and A1-Diemen
2. A1/A6 Diemen- S101
3. A6- S101-Almere Buiten-Oost
4. A9 Gaasperdammerweg
5. A9 Amstelveen Badhoevedorp- Holendrecht
For this project a public private comparator (PPC) was set up to compare different cooperation models. This resulted in a DB contract for the A10-Oost and four DBFM contracts. The first DBFM contract will be the A1/A6, for which the tender process will begin in 2011.
Joint ventures aiming at value capturing
Area development projects have chosen another approach to involving the private sector. The aim of the government in these cases is to benefit from the capability of private partners in the development of new concepts for using buildings or areas of land. This not only harnesses the efficiency of the market but also the ability to generate additional revenue. We expect that the application of this ‘value capturing’ concept will continue to grow in future capital projects in the Netherlands. Whether the possibilities for its application exist needs to be examined on a project-by-project basis. Good examples are the regional developments around railway stations, airports and football stadiums, where commercial activities around transport hubs often generate synergies and increase the financial feasibility of projects. The joint candidacy of the Netherlands and Belgium for the 2018 FIFA World Cup and the probable Dutch candidacy for the 2028 Olympics calls for the development of new infrastructure and value capturing to increase the return on these projects. The first ideas have already found their place in the bid book for the 2018 World Cup. This will certainly lead to new projects in Amsterdam, Rotterdam and Enschede.
New developments looking for appropriate risk and reward sharing – the risk sharing model
A newer area of capital projects involves those that require the development of innovative technologies. Good examples of these are renewable energy projects, in which a new concept is applied in an existing electricity market. The government seeks partnerships to develop these new technologies using the innovative power of the market. In such projects there should be a focus on stimulating the development of new technology instead of solely aiming for greater efficiency and reliability. A risk-sharing model for the technology development could be part of the cooperation model. The contract should contain a balance of incentives for both performance and innovation.
Because space for land-based wind turbines in the Netherlands is limited, offshore wind farm locations may be the solution for achieving the objectives that the country has set itself. In order to generate sufficient renewable energy to meet 2020 targets, a total of 6,000 megawatts would need to be generated at sea. Given the current average turbine capacity of three megawatts, this would involve the deployment of 2,000 wind turbines.
There is little experience with this technique at sea, making offshore wind energy a young market with many uncertainties. The achievement of the objectives will therefore not be easy, especially since a large number of players would need to be involved: project developers, utilities, offshore manufacturers, turbine manufacturers, electrical infrastructure suppliers and financial institutions. A complex business case will need to be made involving the seamless coordination of all these parties in order to meet the 2020 objectives.
The offshore wind energy task force has advised the government to change its current financing model and create a more appropriate risk allocation to realize more value for money in these projects. The government’s ambitions should become clear following the forthcoming elections.
Projects aimed at both technological and business model innovations – the development model
The least experienced area of capital projects involves both a new concept and a new market. The government aims to leverage the innovative power of the market not only for the development of new concepts but also for the development of a viable business model in the newly created market. A good example of such a project is Anders Betalen voor Mobiliteit (Alternative Payment for Mobility), the nationwide road pricing initiative implementing a new way of paying road taxes based on kilometres driven instead of monthly payments based on car ownership. The government has created a new market by legislation for the road pricing project. A new law will oblige car owners to register the distance they have driven via a highly innovative registration device. A certification process will ensure that private sector parties will only be allowed to enter the market once they have met a certain quality standard.
The model that will be used is still the subject of discussion. The proposed model is highly innovative. Under new legislation on kilometre-based pricing, all vehicles will be required to carry a working onboard unit that records their journeys. Car owners are obliged to buy a kilometre price registration unit or service. The ministry expects suppliers to compete to provide these units as a product or service to all 8 million car owners. This interesting new market was created by the legislation passed by the government. It is an attractive market where private parties can compete for clients and deliver kilometre price services. The proposed PPP model aims at ensuring a sustainable drive for innovation and competition in the market. The main elements of the system, which will consist of services relating to the onboard units to be installed in all vehicles, will be designed, built, financed and operated by the private sector at its own expense and risk in an open market, based on certified service providers. The introduction of a comprehensive system of certification should both ensure revenues for the government and that high quality services are provided to vehicle owners.
Credit crunch and budget deficits will boost PPP projects
The influence of the credit crunch is obvious. Euro-zone countries are facing significant challenges, with huge budget deficits and large debts that will be further exacerbated by growing pension obligations. The infrastructure of the Netherlands is one of the most highly utilized and occupied in the world and investments are needed to increase its capacity. Yet while there is great demand for finance, public sector budgets will be constrained for the next few years. Current political programmes support the assumption that these circumstances will increase the number and scope of PPP projects in the Netherlands.
Martin Blokland, Partner Capital Projects and Infrastructure, PwC Advisory Netherlands
Fons Kop, Director PPP, PwC Advisory Netherlands
Paul Swanenvleugel, Director Finance, PwC Advisory Netherlands
Gijs Buijsrogge, Senior Advisor PPP, PwC Advisory Netherlands