Revitalisation of Central Station using the Developer Partner Model

In August I wrote about the proposed Revitalisation of Sydney’s Central Station, which will involve not only the opportunity to revitalise the surrounding Central Precinct but also opportunities to generate significant revenue from the development of property within the Station and Precinct. I suggested that this and other railway station upgrade projects provide the NSW Government with an opportunity to develop Public Private Partnership (PPP) structures that are more akin to true partnerships involving the sharing, rather than allocation, of risks and rewards. Partnerships that would enable the NSW Government to not only harness the expertise of the private sector in the development of business opportunities associated with these projects, but to also share in the rewards associated with them.

I also mentioned some of the challenges that partnerships of this nature will present, such as the need for government to be prepared share responsibility for managing the risks involved in realizing these business opportunities, in order to share in the rewards that will flow if these risk are managed well; and the potential reluctance of the private sector to ‘get into bed’ with a government partner that can be expected to put government’s broader interests (including its interest in getting re-elected) ahead of generating profits when making decisions concerning the project.

But these challenges are not insurmountable, and that there is no reason why an innovative PPP structure cannot be devised that allows government to share in the rewards of the business opportunities associated with these projects, on a basis doesn’t expose either side to unacceptable risks.

Potential PPP models

The spectrum of contractual structures available to the NSW government is almost limitless. The challenge for the NSW government is to find the sweet spot on the spectrum, based on its objectives, capabilities and appetite for risk and reward. 

At one end of the spectrum, the relevant NSW government agency, Transport for NSW (TfNSW), could focus its attention on those parts of the project that relate to the transport service outcomes it is seeking, and leave risks and rewards associated with the associated business opportunities to the private sector alone – much like it has done in the past with projects like the Chatswood Transport Interchange. Under this form of PPP, the government would:

• require the private sector to design, construct and maintain the upgrades to the station transport infrastructure (station platforms, concourse, wayfinding signage, ingress and egress routes etc) in accordance with government specifications, in return for fixed payments from the government; and
• sell the right to profit from developing the government owned land in the vicinity of the new station infrastructure, in return for a reduction to amount payable by government for the transport infrastructure upgrades.

Importantly, under this model the risks and rewards associated with the property development business would be fully transferred to the private sector. 

At the other end of the spectrum, TfNSW could assume the role of property developer, and solely bear all risks and rewards associated with the property development business – much like the “rail plus property” model utilized by the MTR Corporation in Hong Kong.

Between these two extremes, there are numerous models under which TfNSW could engage the private sector to assist TfNSW to manage the risks, and share in the rewards, associated with the property development business.

Developer Partner Model

One possible model that TfNSW might consider is a variant of the Delivery Partner Model utilized for the upgrade of the Pacific Highway between Woolgoolga and Ballina. Let’s call the variant the Developer Partner Model. Under this model, TfNSW would supplement its existing internal property development capabilities by engaging one or more development partners to assist it with the property development activities.

By engaging this expertise, TfNSW would be able, with the assistance of its development partner(s), to act like a 'sophisticated developer'. This would enable TfNSW to properly manage the risks associated with the property development business, thereby maximizing the prospect of completing a successful and profitable development.

The remuneration regime for the development partner(s) could comprise 3 limbs:

• limb 1 - the reimbursement of the development partner's actual costs (salaries and overheads) on an open book basis;
• limb 2 - a fixed fee to cover the development partner's profit for business-as-usual outcomes; and
• limb 3 - a gainshare or painshare payment.

The gainshare or painshare payment would be built around project outcomes that will deliver value to the TfNSW. These would include target costs, a target completion dates and quality measures each proposed development. Other KPIs could also be included, such as ‘place-making/destination’, community and stakeholder engagement, impact on rail operations during construction, fostering innovation and new technology and a way that preserves the station's heritage, and operational performance of station.

If the project achieves better than business-as-usual outcomes against a KPI, this would result in a gainshare payment from TfNSW to the development partner(s). Conversely, if the outcome against a KPI is worse than business-as-usual, it would result in a painshare payment by the development partner(s) to TfNSW. If the actual outturn cost of a development is less than its target outturn cost, a share of the cost savings could be added to the maximum potential gainshare payment. The maximum potential painshare payment could be capped at the amount of the limb 2 fee, or a significant portion of it.

To ensure value for money, all significant design and construction services would be competitively tendered, with the delivery partner(s) only performing such services by exception, with TfNSW's agreement. TfNSW would retain control over the appointment of contractors, suppliers and consultants, and engage them directly (or via the development partner, acting as TfNSW's agent). In the event a contractor, supplier or consultant failed to perform its contractual obligations, TfNSW's remedy would be against the relevant contractor, supplier or consultant. However, this risk would also be shared with the development partner(s), as poor or outstanding performance against a KPI as a result of the performance of a contractor, supplier or consultant would affect the development partner's gainshare/painshare payment.

The downside of this model is less cost and time certainty at the time TfNSW contractually commits to the project, compared to the more traditional Chatswood Interchange PPP model. TfNSW would ultimately bears these risks without the protection that a more traditional principal/contractor style PPP contract would provide. This risk is mitigated, however, by the alliance style gainshare/painshare regime, which would financially motivate the development partner(s) to help TfNSW manage these risks effectively. The margin paid to the development partners for their services would also less than what would have been charged them for wrapping the development risks, on account of the lower level of risk borne by them.

Importantly, the model would enable TfNSW, with the assistance of its development partner(s), to act like a 'sophisticated developer', properly manage the property development risks, and share in the associated rewards, on a basis that doesn’t expose either side to unacceptable risks. 

As mentioned above, this is but one model on the spectrum that could work for TfNSW and NSW taxpayers. Do you have any ideas on the contract model the NSW Government should adopt for this project? If so, why not share them by posting a comment?