Figure 1 Risk management plan 7
Figure 2 Key data in the project of Terminal 5, United Kingdom (Khumpaisal et al. 2010) 10
Figure 3 Key players involved in the Project Terminal 5 United Kingdom (Khumpaisal et al. 2010) 10
Procurement and tendering of a Major Infrastructure Project
Project Name and Location
Mater Hospital Extension, Newcastle, NSW
Introduction
The Mater Hospital is the first ever hospital that is being built under public-private partnership in New South Wales. The Government of NSW has signed a contract with private sector partner Novacare for 28 years. That involves the construction of new hospital buildings, extension of existing ones, transferring of the local mental health services to the sites along with maintenance of hospital buildings, car parking and grounds. The Novacare is also responsible for providing a range of non-clinical services along with managing public sector health employees under a Labor Services Agreement.
Historical Background
The study of historical development is essential to understand the need for change and what are the global procurement practices being observed. Procurement shouldn’t be considered as an isolated activity rather it is the integral part of the processes of any organization. In early 1970s, Ansof thought that the purchasing process played a passive role in the organizations but it didn't have any strategic role (Ellram and Carr, 1994, P 10-18). Subsequently, in 1973-74, global oil crisis and other raw material shortage brought considerable importance to the purchasing phenomena. Even though, the top management and the purchasing professionals didn’t react to enhance the importance of purchasing in corporate strategies until when Porter came along with his five force model. That completely reshaped the competitive nature of the industry, having identified the buyers and sellers are the two of the five critical forces. Hence, the strategic importance of the supplier and the organization being the buyer as an entity started receiving recognition in the strategy literature. By 1980s, the formation of procurement was changed and evolve to accommodate more strategic levels (Ellram and Carr, 1994, P 10-18; Thai, 2001, P 9-50).
The Mater hospital is expected to provide the largest provider of radiation of Oncology services in New South Wales. The hospital was originally developed in 1921 by the Sisters of Mercy, Singleton and works as a Schedule 3 hospital for the NSW Department of health. The hospital and its operating unit, Mercy Health Care (Newcastle) Ltd was purchased recently by a Catholic health provider known as the Little Company of Mary’s (LCM) Healthcare.
The Mater hospital was originally completed in three stages that had been completed in 2009. The first stage services were commenced from January 2008 which included the non-clinical services. NSW Government has been seeking opportunities for providing quality healthcare services to the people of Newcastle. This is the reason it has made a contract with Novacare for the construction and extension of hospitals in Newcastle under public-private partnership method. This mechanism of procurement helps the risk to be analyzed and processed by the private sector.
Role of Government
The government is considered committed to sustainable improvement in procurement. It takes such decisions in order to develop its policies that how it has to run its buildings and how it buy its goods and services. All government departments /or officials need to make sure that their policies and activities contribute to their sustainable development. How government supports procurement strategy is evident in the shape of annual reports and departmental business plans. Departments review the reports and make proper adjustments and audits when required.
Need for Change
Purchasing and selling decisions are important factors in any business, so it has to be given considerable importance in any organization either it is private or government. So procurement has brought the change in making business strategies and making procurement as an important consideration in making business plans. This has revolutionized the business world at all, and the work has been done in a more systematic way.
Procurement Selection and Recommended Partnership Strategy
Procurement strategy development has three distinctive components which are as follows:
- Analysis
Analysis is the assessing and setting priorities for the particular objectives that have been set for the project and requirements.
- Choice
Choice is to make the considerable options, evaluation before selection among the most appropriate choices.
- Implementation
Implementation makes the selected strategy into action.
The best suitable procurement strategy that is being considered for the extension plan of Mater hospital is the Private Public Partnership abbreviated as “PPP”. Public-private partnerships especially Private Finance Initiatives projects are developed in order to provide services. They are not for the sake of assets like commercial buildings. Thus, it is desirable to search for a PPP at priority as it encompasses needs of the users contrary to the traditional style of the construction project that are decided as the solution option. Tendering in this procurement method is quite difficult and requires negotiation instead of indulging in competitive tendering. (Babatunde et al. 2010, P 1-7). This procurement strategy can help in achieving the following main functions (Axelsson et al., 2006, P 135-169):
- Cost optimization that means the reduction in the transaction and overhead cost,
- Asset utilization that means outsourcing and inventory management within the company,
- Value creation that means process/product development and improvement in the overall quality of the services or the end product being delivered by the company.
Risk Management
Risk management is an activity in the business management paradigm where risk is to be analyzed and evaluated in every step of construction and business process. Risk could be involved in multiple things like cost, time, resources and so forth. Risk management team works in collaboration with the people who prepare project budgets and the people who work on the project. Best risk management strategy would be the one that would reduce the risk probability to appear in the project to a maximum extent before it actually gets apparent and disturbs the flow of the work. Proper care has to be given to allocating the time, budget and resource at right places so that the risk may not appear while working. Even though if any risk gets appeared, there must be a resource left aside to deal, and it may not affect the overall project progress. Risk management should be viewed as the third leg of shareholder's value creation (Kaplan, 2009). The flow chart of risk management works presented as Figure 1.
Figure 1 Risk management plan
The risk management strategy as has been decided for the Mater hospital extension plan has been described in the flow chart as Figure 1. Risk will have to be analyzed by the private sector and Novacare at every stage in this particular case. It is imperative to conduct the risk analysis before the start of the project. There should be strategies to bring up by the company for risk improvement so that it may not affect the original project if any risk raised. Since the risk may arise in every crucial component like time, cost, resource and manpower so there must be an insurance plan ready to tackle the risk that will help a lot to control the risk. The risk management unit should plan the follow-up actions if any risk been observed. Accordingly rehabilitation plan should be developed using the insurance plan guidelines and after that the risk audit has to be done to see how much damage has been done by the risk (if any). This strategy will help the private sector to remain ready to hardly any risk if appeared during the extension project.
Tendering Strategy
The successful project is one that has the highest quality at the lowest possible price. A well-decided tendering strategy can reduce the cost of the project by 20 percent. In order to produce the effective tendering strategy, the first basic step is to evaluate the scope of the project. This is the first place where the cost will be reduced. When the scope is determined, unit rates are needed to be established. All the unit rates are based on the activities described within the scope of the project. These unit rates are normally determined by combining market information, standard knowledge bases and historical data for any similar project. Indirect cost must also be monitored to observe the hidden cost during the project life. After scope and unit rates have been finalized, there would be a reference estimate to be prepared that would be used for the comparison of all bids. Cost engineering professionals should be hired for the cost control, budget overflow and quantity surveying. Cost engineering team can also help in preparing the best tendering strategy. Bidders need to make sure that their bids perfectly reveal the private information of the bidder regarding the value improvement that they offer by taking over (Hirshleife and Titman, 1990, P 295-234).
Terminal-5 had been one of the complex and mega projects constructed in United Kingdom. It consists of 16 main as well as 147 sub-projects including massive and complex program of works. Figure 2 presenting key data regarding Heathrow Airport, Terminal- 5 London, United Kingdom.
Figure 2 Key data in the project of Terminal 5, United Kingdom (Khumpaisal et al. 2010)
Figure 3 Key players involved in the Project Terminal 5 United Kingdom (Khumpaisal et al. 2010, P 108-134)
Apart from the main terminal building, the terminal-5 comprises of 60 aircraft stands, 2 satellite buildings and one air- traffic control tower. In addition, it consists of multi-storied car parking having capacity of 4000, new spur road starting from M25, one hotel having 600 bedrooms, 13 Km long tunnel and diversion of two rivers. (Khumpaisal et al. 2010, P 108-134).
The work completed in different stages as follows:
Stage 1: The site having area of 260 hectare was surveyed with subsequent excavation by archeologist. Then preparation for the construction started by leveling the site.
Stage 2: The construction of the foundation, as well as sub-structures for the basement, then carried out including rail tunnels and the drainage system.
Stage 3: Erection of huge roof structure free of standing for the main building was carried out. It also involved the multi-storied car parking and roof of the building for the first satellite.
Stage 4: The building was constructed having all modules of services like heating, power and so forth.
Stage 5: Operational readiness was performed to ensure infrastructure for terminal-5 to make the system comprehensive.
Adaptation of Procurement Strategy
BAA recognized that this complicated and huge infrastructure might carry high risk and thus needed a new approach for construction management. BAA carried out research and their experience of last two projects pointed out two main issues such as disinclination to acknowledge the risk, cultural conflicts and so forth. BAA developed a commercial partnership agreement with suppliers and contractors in order to save the terminal from delays, heavy costs and over-budgeting. This agreement was termed as "The Terminal-5 Agreement." This contract was based on behaviors and relations that were designed to evaluate the risk instead of transferring it to other particular parties.
This procurement strategy achieved many advantages that are as follows (Khumpaisal et al. 2010, P 108-134)
- UK best practices of construction were employed to ensure the project meeting its milestone and deadlines regarding high quality as well as the cost of construction that was observed keeping in view the safety standards,
- It brought a motivation program that encouraged teams for effective working together to achieve efficient ways of completing the milestones.
- BAA accepts to carry all the risk associated with this project as per the agreement,
- It focused on the causes related with the problems instead of their effects,
- Work carried out in integrated teams even in an uncertain environment,
- Focus was given to proactive management regarding the risks instead of avoiding it,
- It also incorporated the concept of accountability on the part of each and every person associated with the team. This also encouraged the work to be done in more innovative way.
- Under this specific agreement, a premium was set to deliver results and solutions.
Procurement and Success of a Project
The successful project is one that has the highest quality at the lowest possible price. A well-decided tendering strategy can reduce the cost of the project by 20 percent. In order to produce the effective tendering strategy, the scope of the project will be evaluated at first, and unit rates need to be established. All the unit rates are based on the activities described within the scope of the project (Hirshleife and Titma, 1990, P 295- 324).
Infrastructure Value
The design, planning, construction and commissioning for the extension of Mater Hospital comprises of 196 bed extension and new radiotherapy department. The initial financial support that has been provided by the Government is $50 million, and an additional $180 million are required to compensate the whole extension.
Infrastructure Description
This project is all about the extension of the Mater hospital including construction of new facilities in three stages extended over three and a half years program. The extension would include the following:
- Accident and emergency department,
- Addition of 196 beds in the hospital,
- New Intensive care and coronary care unit,
- Additional three radiotherapy bunkers and two linear accelerators,
- Three additional operating theaters and day surgery unit,
- Additional single medical center and allied health services,
- Chemotherapy unit,
- Additional diagnostic center,
- Chapel and meditation area,
- Enhancement of Medical records department,
- Addition of 96 mental health beds,
- Extension of psychiatric emergency center,
- Extension to psychiatric intensive care unit,
- Construction of ambulatory care and consulting rooms,
- Extension of existing laboratory for better services.
This project also includes redevelopment of new roads, traffic signals and local roads upgrades along with routes to the extended buildings and children’s park.
Financial Description
The design and construction phase will be done by the additional finance of approximately $180 million along with equity funding of $50 million as promised by the Government. For the purchase of equipment, there would be a need of additional funds.
Process
Since the extension project has been initiated as public-private partnership so the procurement timetable will be as follows:
Time Frame from Construction to Operation
The three stage construction for the extension of Mater hospital will commence from January 2017.
Stage 1: January 2018- Completion of West block and Radio Oncology,
Stage 2: January 2019- North-East Block and part of mental health facilities along with car parking,
Stage 3: Mid 2019-Mental health reminder, main entrance, roads to extension and a new car parking, children’s park,
Economic and Social Impact of the project
The immediate benefits of the extension plan to the community will come from the provision of mental health services. For health workers, this extension will be a modern and efficient work environment. For patients, the extension will bring more efficient and effective service delivery resulting in health improvements.
Procurement planning
Procurement planning involves pre-scheduling the activities such as finalizing the dates and investigation of the detailed engineering. It ensures the actives to be accomplished in effective manner. The Procurement planning act involved surveying, investigation of the site and the materials along with planning and analyzing the design.
Also as a matter of concern, the available budget allocated by the government is very low to that of estimated budget. Hence, it is necessary that the funds to be collected through various available criteria's.
Collection of Funds
The fundraising rules vary from state to state, and it should be done with the authority. It can be achieved by applying for charitable fund collection under ‘Charitable Collections Act 2003 (“Fundraising Legislation”, 2014). The collection of funds through this act gives the authority to raise required funds within two years. These can be achieved by following forms (Fundraising Legislation”, 2014):
Donations
Donations can be claimed with the help of local and national charities and NGOs. Retail chains and shopping centers are an added advantage as they helped in raising funds via charity boxes.
Sponsorship
Sponsorship from various available sources such as corporate sectors can provide an enormous support. It will provide the opportunity for the sponsors to promote themselves by indulging themselves in social reforming programs.
Competitions and Lottery
Conducting a lottery draws, and sports-related competitions encourage people to get involved and to work further. Competitions motivate people, and it stands as good fund raising campaign all around the globe. In addition, Lottery is the fastest way to raise the funds accordingly.
Tie-Ups with Insurance Companies
Insurance companies act an important role in the health sector as they are getting a large boom of profit by providing a variety of health insurance policies. Mutual agreements can be signed with a health insurance company to get the funds.
Apart from these conducting telethons, other sports such as marathons, local community football matches can ensure suggestible collection of funds.
The shortage of allocated funds by the NSW government and the higher costs of construction can be neutralized by various means of fund raising techniques as described in Table 2. Even though, the time frame needed was a bit high. An effective means of tendering process and selection of a reliable bidder will overcome this issue.
Tender Process and Selection of Contractor
The tendering process will enable selection of the company after receiving bids to complete the extension project within available time and funds. As the ongoing project is completely a social reforming task, the project team has studied the impacts and consequences and selected the most reliable bidder. The team also make ensure the quality profile of the company by investigating its past projects.
Personal Opinion
Since the project is about public health services, so the Private Public procurement strategy is well suited for the extension of Mater Hospital. Although there is a shortfall in funds, but the extension plan can be completed by fundraising strategies including lotteries, agreement with the insurance company, sponsorship and so forth. In the case of shortfall in fundraising, few units can be removed from the extension project that can be delayed this stage to avoid risk during execution. So the best option is to concentrate for the generation of funds. In addition, due to the nature of partnership strategy, it would be an effective option if the issue of funds shortfall is discussed with private partners of the project. The commercial strategic partners of NSW Government, who takes care of the construction and extension of hospital buildings can accompany road, parks and car parking. It will also help to support the additional equity funds for the completion of the project. This is the benefit of Private Public Partnership that the private sector has accommodated all the risk, and not a single percent of it is transferred to public sector. So the private partners of NSW Government will be taking care of every risk that may arise during the whole extension project of Mater Hospital.
Conclusion
The Mater Hospital was built under an agreement between Government of NSW and Novacare. There is a need for extension of existing infrastructure including the local mental health services, emergency care unit, maintenance of existing hospital buildings, car parking. Grounds and so forth. Procurement is the integral part of any organization to run the functions effectively. The procurement process employed here consists of three main activities including procurement planning, preparation of the bidding documents and conducting the pre-procurement conferences. Procurement planning ensures the activities to be accomplished in effective manner involving surveying, site investigation, analysis of design and so forth.
There is a matter of concern that the available budget is $50 million which is very low to that of estimated budget. Hence, it is imperative to plan a cost effective strategy as well as collection of funds by various methods to complete the extension project to a practical extent.
References
Axelsson, B., Bouwmans, P., Rozemeijer, F. and Wynstra, F., 2006.Developing and Managing knowledge and competencies, Developing Sourcing Capabilities – Creating strategic change in purchasing and supply management, 1st Edition, John Wiley, West Sussex, ”, pp. 135- 169
Babatunde, S.O., Opawole, A., and Ujaddughe, I.C., 2010. An Appraisal of Project Procurement Methods in the Nigerian Construction Industry”, Civil Engineering Dimension, 12(1), pp. 1-7
“Fundraising Legislation and Regulations” (n.d).[Online] <http://www.fundingcentre.com.au/help/fundraising-legislation> (Accessed October 23, 2014)
Ellram, L.M. and Carr, A.S. 1994, Strategic purchasing: A history and review of the literature”, International Journal of Purchasing and Supply Management, 30(2), pp. 10-18
Hirshleifer D. and Titman, S. 1990, Share Tendering Strategies and the Success of Hostile Takeover Bids, The Journal of Political Economy. 98(2) pp. 295-324
Kaplan, R.S. 2009.Risk Management and the Strategy Execution System”, Harvard Business Publishing
Khumpaisal, S., Noor, M.N.M., Nisham, Z.M., and Ross, A.D.,2010.An application of the analytic network process to assess risks in a mega-construction project, International Journal of the Analytic Hierarchy Process, 2(2), pp.108-134
Thai, K.V. 2001.Public Procurement Re-Examined”, Journal of Public Procurement, 1(1), pp.9-50
