In Finland, for example, the Finnish Transit Agency (FTA) has recently launched a new project aimed at upgrading and modernizing more than 90 kilometers of rail line along a major freight and passenger route. And while the deal will involve capital expenditure of some €90 million, the agency is keen to ensure that the potential for innovation is realized so that risk is appropriately shared across all participants in the project and the final price remains in line with market norms.
The birth of the European Alliance Model
To achieve this, the FTA has launched Europe’s first Alliancing project. The Alliancing Model, which has already seen strong utilization in Australia, effectively creates a partnership between the public sector and private sector contractors and consultants where all parties share a proportion of both the upside benefits and the downside risks of the project.
It is important to note that the Alliancing Model tends to also include a floor on the downside that caps a developer’s exposure to risk at a reasonable level, while offering incentives around key metrics such as (in this case) the overall effect on rail traffic and environmental impacts.
As a result, in comparison to a fixed price design and build contract, the model piloted by the FTA limits project risk to the private sector with the aim of reducing the overall cost to the public sector by stripping the risk premiums out of the pricing while – at the same time – encouraging the two parties to work together effectively in managing the project risks.
Choosing the right partners
The selection process is also much more collaborative and transparent than what the construction industry is traditionally used to. In the case of the FTA, five consortia submitted outline proposals and participated in in-depth interviews to ascertain their ability to service the contract and meet the project requirements.
From here, two parties were selected to participate in one-on-one workshops with the FTA where specific project challenges were discussed and debated. This allowed the FTA to test the working relationship with each of the candidate consortia and develop a better understanding of the type of outputs and problem solving skills that could be expected from each bidding party.
The FTA worked with the two bidders to develop the commercial contracts and agree on the definitions of the reimbursable costs and, following an external audit to ensure that the projections were within normal parameters, the bidders were then invited to submit their consortia’s overhead and profit margin requirements to the selection team who considered these as part of the process of selecting the preferred bidder.
A new tool for infrastructure procurement?
Based on this experience and that of more than 350 similar projects already concluded in Australia under the Alliancing Model, this approach is particularly suitable for projects that carry significant technical risks which – under a fixed price contract – would have inflated the overall contract price.
And while the FTA’s rail upgrade project is not necessarily overly-technical, the Finns have used this opportunity to develop experience, capacity and insight into the model for more technical future projects such as a major city-centre tunnel that is already in procurement.
Based on the current market response to the FTA’s approach and early results from the project, it seems clear that alternative models such as the Australian Alliancing Model will soon take their place within the infrastructure procurement mix in Europe and – if successful – further afield.
By Kai Rintala, KPMG in Finland