1. Senior Road Executives Programme 2013 Performance-Based Road Contracting A New Approach To Road Network Management Kulwinder S Rao Senior Highway Engineer, GTIDR kulwindersrao@worldbank.org

2. Content What is a Performance Based Contract ? Why introduce Performance Based Contracts? Performance Based Contract Concepts Types of Contracts Practical Application of PBCs Issues to be considered Final Word 2

3. Traditional Road Contracts  “ Ok, tell me what to do and how to do it ” –Risk on the owner to design, specify, and control the work –Price driven approach- Lowest price  Use Recipe or M&M specifications –Material to be used (e.g. Polymer modified bitumen) –Method (required processes) Follow their Recipe! 3

4. What is an Output and Performance Based Road Contract (OPRC)?  “ Tell me what you want, but not how to do it” “the Contract…. to perform the services to be provided by the contractor and to execute, complete, and maintain the Works” – WB OPRC document “an approach to contracting that provides disincentives, incentives, or both to the contractor to achieve performance standards or targets for measurable outcomes and sometimes outputs” - NCHRP (US) 4

5. OPRC- A different way of Road Management Road Agency Planning Physical Investment Financing Design Build Construction Contracts Supervision Contracts Contract Management Maintenance Transfer to owner PMMR 5 Source: Y Kamhi

6. Content What is a Performance Based Contract ? Why introduce Performance Based Contracts? Performance Based Contract Concepts Types of Contracts Practical Application of PBCs Issues to be considered Final Word 6

7. Why use Performance Based Contracts? Issues  Challenges with quality or performance or both  Limited resources, shrinking budgets  Fast deteriorating infrastructure  Higher User/Public expectations  Frequent claims and variations  Lack of expenditure stability  Most risks with the employer 7

8. Why use Performance Based Contracts? Potential Benefits  Transfer risks to private sector  Accelerated construction  Fostering innovation  Pay as per performance  Achieve fixed levels of service  Ability to achieve expenditure stability –Avoids frequent claims and contract amendments  Do more with less –Reduction in contract administration requirements  Achieve life-cycle cost savings  Value for money 8

9. Value for Money Value of money= Change in Levels of Service Change in cost Better Value for Money if  The LOS remain the same and cost declines  The LOS improve for the same cost  The LOS improve and cost declines 9

10. Reported Cost Savings in OPRC as compared to traditional contracts  Norway: 20–40%  Sweden: +/- 30%  Finland: 30-35%  Holland: 30-40%  Britain: >10%  Australia: 10-40%  New Zealand: 20-30%  USA: 10-15% Source: Review of OECD contracts ( 2003)  Canada Alberta +/- 20% British Columbia: +/- 10% Ontario: +/- 10% 10

11. Content What is a Performance Based Contract ? Why introduce Performance Based Contracts? Performance Based Contract Concepts Types of Contracts Practical Application of PBCs Issues to be considered Final Word 11

12. Implementation Methodologies DesignBuild Maintain Transfer Bid DBT- Design & Build Contracts Input Based contracts DB0MT - OPRC format Maintenance Contracts (PMMR) 12

13. Setting and Measuring Performance Levels of Service(LOS) relates to all the facets of performance that a contractor is responsible for –Key business driver influencing all asset management decisions. –Cater to present and future demand –SMART –Cover Safety, Serviceability, and Sustainability –Auditable and easily Monitored “What gets measured gets done”. 13

14. Levels of Service  Usability of the Road.  Road User Comfort.  Durability Measures.  Other elements. Four Overall Criteria Levels Groups 14

15. Service Levels- Road Usability Usability of the Road 1.Road is trafficable at all times. 2.No interruptions 15

16. Service Levels- Road Comfort Road Comfort  Pavement Surface Defects Potholes ( max dimension< 150mm), max no 5/km) Cracks (<3mm wide ) Rutting (max<20mm,<10mm in 5% area) Edge failure  Shoulders (drop< 4cm)  Road Roughness 1.Max IRI 4.0 m 2.Avg IRI 3.0 m (2.0 for single interventions) R OAD S URFACE P ROFILER : Calibrated equipment 16

17. Service Levels- Road Durability Durability Threshold Deflection Value 0.7 mm measured with FWD 17

18. Service Levels- Other Elements Other Elements 1.Signaling 2.Road Safety 3.Drainage Structures 4.Vegetation 5.Structures 6.Slopes 18

19. Performance linked Payment Mechanism 19 Payment Schedule should ensure Value for Money Key considerations: Clearly defined Payment Schedule Keep the contractor interested in all contract phases Balance income vs expenditure Consequences for non-conformance Guarantees Contractual Deductions Delay Damages Payment Reductions

20. Examples of Payment Models 1 year maintenance Time Cost 6 years maintenance 2 years rehabilitation 1 year overlay Asset Handing over Advance payment Payment schedule Value of deferred payment 3 years maintenance 1 year overlay 3 years maintenance 2 years rehabilitation 1 year maintenance Asset Handing over Good pavement maintenance works upfront Poor pavement (upfront rehabilitation work) Time Cost curve Advance payment Payment schedule Cost curve 20 Source: Y Kamhi

21. Risk Allocation 21  Equitable sharing of risk  Allocate risk to the party best able to manage the risk  Share some part of risk as an incentive to minimize this risk.

22. Risk Allocation- Example Ground conditions Construction risk Quality risk Axle overload Excess of projected number of vehicles Exchange rates) Employer credit rating Civil war / riots Expropriation / nationalization Floods Earthquakes Epidemic Design & Construction Maintenance Financial Political Force Majeure Contractor Employer/ Donors 22 Source: Y Kamhi

23. Typical Guarantee Structure Tender Bond Performance Security during Construction phase Pre Transfer Bond 2-3 Years from Transfer Notice to Proceed Performance Bon during Maintenance Phase +3 months from SC. +1 year from Date of handover ~2 months before SC Substantial Completion 23

24. Remember the balance… 24 Risk Cost LOS Risk Cost LOS

25. Content What is a Performance Based Contract ? Why introduce Performance Based Contracts? Performance Based Contract Concepts Types of Contracts Practical Application of PBCs Issues to be considered Final Word 25

26. Types of PBCs… 26 Many names for PBCs Output and Performance Based Road Contract (OPRC- World Bank) Performance based Maintenance Management Contract (PMMR- World Bank) Performance Specified Maintenance Contracts (PSMC- NZ, Australia) Asset Management Contract (USA) Contract for Rehabilitation and Maintenance (CREMA-Argentina) Managing Agent Contract (UK) Area Maintenance Contract (Finland, Ontario, Canada) Engineering, Procurement and Construction Contract (EPC) “Turnkey” Contract

27. Types of PBCs… 27 Depending on scope of activities and asset addressed Single activity (e.g. Lane marking) Set of related activities (e.g. Rest Area) Single asset (e.g. Bridge) Depending on coverage of the network Corridor Area wide

28. Types of PBCs… 28 Hybrid Contract Combination of unit prices and lump sum Combination of method and performance specifications Phase linked Maintenance Contract Design Build Transfer (DBT) (with or without Warranty) Design Build Operate Maintain Transfer (DBOMT) Design Build Finance Operate Maintain Transfer (DBFOMT) Concession with tolling rights

29. Types of PBCs… 29 Input Driven Output Driven Outcome Driven Force Account Hybrid DBOMT/OPRC Concession Ad measurement (traditional) contracts PMMR Innovation Contract Duration Flexibility Contractor’s Risks Cost Savings

30. Content What is a Performance Based Contract ? Why introduce Performance Based Contracts? Performance Based Contract Concepts Types of Contracts Practical Application of PBCs Issues to be considered Final Word 30

31. Major Civil Works in Liberia adopting Performance Based Contracting Red Light to Gbanga Road Gbanga to Ganta Road Cotton Tree Buchanan Road Monrovia City Streets Vai Town Bridge Caldwell Bridge Fuel Unloading Facility US$ 166 Million US$ 70 Million US$ 50 Million US$ 19.6 Million US$ 18.1 Million US$ 8.3 Million US$ 11.3 Million Plus Monrovia Port Concession (Private Investment US$ 120 million) US$ 450 million+ in a Post Conflict Fragile State 31

32. Liberia OPRC- Key features Long Term Contracts (DBOMT methodology) Monrovia to Gbarnga Lot 1 Gbarnga to Ganta Lot 2 Project name Duration 10 years with handing over under agreed conditions Length (KM) Rehabilitation Period (including 6 months mobilization) Maintenance period (after Rehabilitation period) Periodic maintenan ce 180 36 months 7 years At the 8 th year of the project 69 18 months 8.5 years At the 8 th year of the project 32

33. Liberia OPRC- Key features Single Intervention Contracts (DBT methodology) Bokay Town To Buchanan Monrovia City Streets Project name Defect Liability Period of one year. Taking over under agreed conditions Length (KM) Rehabilitation Period (including mobilization) Status 57 25 months Completed on schedule 25 37 months Completed. 33

34. Vai Town Bridge Caldwell Bridge Project name Defect Liability Period of one year. Taking over under agreed conditions Length Construction Time including mobilization Remarks 240 m36 months Completed 120 m 18 months On schedule. Liberia OPRC- Key features Single Intervention Contracts (DBT methodology) 34

35. Results…… Monrovia City Streets Cotton Tree To Buchanan Road  Before  After 35

36. Results…… Vai Town Bridge In Monrovia Red Light Ganta Guinean Border Road  After  Before 36

37. DBOMT DBT INPUT 37 And costs……

38. Content What is a Performance Based Contract ? Why introduce Performance Based Contracts? Performance Based Contract Concepts Types of Contracts Practical Application of PBCs Issues to be considered Final Word 38

39. Issues to be considered Length of Contract term Shorter vs Longer Establishment of LOS Costing Overall linkage to Network LOS Incentives and Disincentive Usually focus is only on disincentives Contractor Selection Criteria Low Bid vs Best Value 39

40. Issues to be considered Internal Agency Support Inertia because of long history of Input contracting Threat to jobs, wages or benefits Training Change in culture Agency staff and contractor Multi Year Funding Commitment Safeguards Clearing the ROW before signing of contract 40

41. Content What is a Performance Based Contract ? Why introduce Performance Based Contracts? Performance Based Contract Concepts Types of Contracts Practical Application of PBCs Issues to be considered Final Word 41

42. Final word 42 PBCs represent a new paradigm Based on increasing experience around the world, PBCs have much to recommend it This approach is not panacea But a valuable instrument in a road agency’s contracting toolkit Partnership and Trust are key to success!

43. Senior Road Executives Programme 2013 Thank you for your attention Kulwinder S Rao Senior Highway Engineer, email: kulwindersrao@worldbank.org The World Bank 43