Risky business

SP infrastructure finance ratings director Jon Manley told CEN increasing redevelopment of brownfield sites, the competitiveness of the bidding process, the relatively small number of contractors in Australia, and increasing technical and logistical challenges of PPP projects had changed “the nature of the construction task”.“The basic change is that the PPP projects that are now part of the pipeline of prospective deals are brownfield, such as the Royal Women’s Hospital refurbishment/rebuild, as opposed to greenfield sites,” he said.“This presents a greater challenge in respect of programming the works, potential existing ground conditions or structure problems and the key issue of site access.“These new risks are coming at the time that bid competitiveness is meaning that bidders are trying to cutback on the third party supports (such as bonds, etc) provided to mitigate the construction risk.”Leighton Contractors’ significant loss on its delayed Spencer Street Station project in Victoria has received recent media attention, highlighting that even the biggest players can get caught out. Private sector participants needed to make sure all risks were identified and the transfer of risk needed to be passed on to parties with the ability to absorb them, Manley said.“Ultimately, this (managing risk) is a responsibility of both contractors and governments – the latter to ensure that there is a sensible allocation of risks at the outset of projects to these best able to control them, and the former to ensure that the risks transferred are appropriately managed – that is, the construction program bid has appropriate time and financial contingencies,” he said.Investor interest in PPPs, a growing sector of the domestic infrastructure market with $5 billion of projects in the pipeline, was likely to increase. It was important suitable risk management strategies were put in place, Manley said.“The Australian PPP construction experience to date has been generally positive, reflecting the proper consideration of the various risks,” SP credit analyst Jonathan Manley said.“However, it is also clear that as a result of the commercial reality of the local market, as well as the changing nature of the construction task itself, the risks of this element of the PPP process are likely to increase.“The onus, therefore, remains on project companies to provide suitable mitigation measures, and learn from previous experiences, to ensure that the Australian PPP sector continues to benefit from a positive performance in this area.”

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