December 4, 2020

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The Treble Alliance

Just as P3 is establishing itself as a go-to form of infrastructure financing across the globe, another model has joined the party. Dan Colombini reports on how the alliancing model is becoming another string to the industry’s bow
The Treble Alliance

There exists an old saying in the UK that involves waiting an age for a bus to arrive only for three come along at once.

While the metaphor may be a loose one in this instance, this famous old adage could apply to the admittedly far more nuanced world of infrastructure financing and development as we make our way through the extremely complicated and bizarre year that has been 2020.

There has almost always been the twin concepts of publicly funded infrastructure and private investment - some would argue the very first toll roads were embryonic P3s. Since the final years of the 20th century, P3s as we currently know them have come in many guises (good and bad).

But over the past year or so, we have begun to see rapid growth of a third type of model, that although comes with similar procurement methods of more traditional public-private structures, is providing more options for many regions to address their infrastructure needs: the alliance model.

So what is this form of development that could take many a project by storm and how does it work?

UK North Sea oil

The alliance model originated in UK North Sea offshore oil and gas projects in the early 1990s, but is becoming increasingly prevalent across a range of sectors.

It was first fully pioneered in Australia. On a base level it is a complex process for “marrying” a project owner, designer, and contractor. Alliancing bears some resemblance to the process more commonly utilized in the US known

as “construction manager/general contractor”, or CMGC. The overarching characteristic of both alliancing and CMGC is a shared risk/reward protocol between all project participants and a common quest to achieve a “best for project” outcome.

“The primary difference is that CMGC typically does not involve financial participation by the designer or contractor, where alliancing normally includes a funding/finance component. In the US specifically, CMGC is typically funded and financed by the public authority sponsoring the project,” explains Mike Schneider, managing principal at advisory Infrastrategies.

In other words, CMGC might be characterized as a “DBOM” model, while alliancing would be more related to a “DBFOM” model. That said, the US application has generally been limited to the capital aspects of a project; operations and maintenance are normally performed by the public authority or contracted to private sector operators/maintainers under separate procurement(s).

“The model is a reaction against the traditional form of project procurement and delivery, where the public owner and the private developer adopt an ‘adverse’ position, with each trying to win its points and get the best deal for itself,” explains Roddy Devlin, partner at law firm Nixon Peabody.

But why the rise in popularity now? “Alliance models are starting to be used all over the world as an alternative to the standard Design-BidBuild process,” says Louis Gunnigan, programme leader for Campus Development - Campus Planning Office, City Campus at the Technical University, Dublin. “They were initially designed to try to spread the risk on a project more evenly by bringing the builder into the process earlier and resolving the buildability issues in early design.”

This is an important point, as the inability of most P3 models to allow partners to come on board at the concept stage has often been considered the model’s Achilles heel.

Binding decisions

“There are two different approaches,” continues Gunnigan. “The FAC/TAC contracts are agreements that sit on top of an underlying contract. If alliancing doesn’t work, all parties can revert to the underlying contract. The NEC contract is a full contract in its own right. Both have a structure whereby project issues are discussed jointly and binding decisions are agreed.

“A gain/pain sharing mechanism is agreed, with the aim for the client to get a better project with a lower cost, whilst the contractor is rewarded financially for greater efficiency and innovation. Savings in the construction process are used to fund extra work, for which the contractor gets paid extra for extra overheads and makes a greater amount of profit overall from the project.”

To the untrained ear or eye this is certainly no less complex than a standard P3, but it may have its advantages for the public sector looking to consider its options. After all, it’s not as if traditional P3s have comprehensively won the crowd over. But Devlin believes this model can win over at least some naysayers.

“The model puts the project first, encouraging creative problem solving and collaboration,” he adds.

“This typically results in fewer cost overruns and delays. The model can also encourage greater invocation and bring new technologies into the project to a greater degree than you see in a typical procurement.

“Owners can also bring projects to the market sooner under this model, as the project parameters and goals can be developed with the winning team (unlike a traditional procurement where the project parameters need to be well developed pre-procurement).”

Gunnigan agrees. “The approach, when successful, leads to stronger relationships between the parties, resulting in much more repeat work for the contractors and greater value for the clients.”

Investors also have reasons to be cheerful, with the model providing valuable certainty around pricing and, ultimately, a strong prospect of healthy returns - something that has not always been such a sure thing with past deals of a different nature. Sadly, there is no shortage of examples either.

“The principal advantage is the investors presumably trust that the best team and best price can be arranged through alliancing,”  continues Schneider. “Often, investors find that the teams that self-select may sub-optimize in one area or another in the team formation process, allowing the typical ‘mating ritual’ to be based on marketing, firm availability, exclusivity arrangements, and other factors unrelated to assuring the best companies in each of the required disciplines are mated.”

Surely that can only be a good thing, but the question remains over whether this will merely become another stick with which to beat the privately financed infrastructure market, adding greater confusion to how projects are funded, financed and delivered from the point of view of taxpayers. After all, this is hardly paint by numbers and comes with its own pitfalls.

“If there is not a sufficient understanding of the process and a commitment to making it work from all parties, trust can break down,” warns Gunnigan. “Like any relationship, it needs work.”

“The principal disadvantages in the alliancing or CMGC models fall into two areas,” continues Schneider. First, he explains that it is possible that the “arranged marriage” of the firms by the owner ends in divorce rather than marital bliss, resulting in the need for significant owner intervention or even re-procurement.

“Second, it is possible that the ultimate project pricing may be overstated owing to the comparatively reduced competitive environment resulting from negotiated pricing rather than competitive bidding.”

But we are seeing success stories in the market, outside of Australia and the trailblazing nations. Swift progress is being made in Canada, with Infrastructure Ontario’s Go Rail Expansion - Union Station Enhancement deal. At this stage, IO is remaining tight-lipped on the details but the RFP was issued in February and - as is often the case with Canada - a swift and effective procurement can be expected.

So, where next for the industry and will we see the model take off in new markets? After all, we have seen little actual alliancing in the US specifically to date, though there have been some successful examples of CMGC procurements, notably the $2bn Mid-Coast Corridor LRT extension in San Diego and several projects in both the highway and transit modes in Utah.

Most alliancing seems to have still been undertaken in Australia and Europe, although even in these regions the process is still relatively rare.

“At present, I would say the process is still in the experimental stage, with both some success and some lack thereof,” concludes Schneider. “If it can be shown that ‘contractually arranged marriages’ are better in terms of cost saving and risk mitigation than pre-nuptial arrangements, the process will grow.”

He continues: At the risk of over-using the marriage metaphor, some would say that teams that ‘self-arrange’ may have better relations over the long course of the marriage than partnerships in which the parents select the partners and say, as we learned in Fiddler on the Roof, “you will learn to love each other…” A project alliance that ends in divorce can be quite costly to all parties.

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Just as P3 is establishing itself as a go-to form of infrastructure financing across the globe, another model has joined the party. Dan Colombini reports on how the alliancing model is becoming another string to the industry’s bow

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