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Standing Committee on Infrastructure and Communications
25/09/2015
Smart information and communications technology in the design and planning of infrastructure

KAPOULITSAS, Mr Petros, Office Director, Independent Project Analysis Inc.

[10:53]

CHAIR: Welcome. Although the committee does not require you to give evidence under oath, I should advise you that this hearing is a legal proceeding of the parliament and therefore has the same standing as proceedings of the House. Would you like to make an opening statement before we go into discussions?

Mr Kapoulitsas : Certainly. As a taxpayer, I want to congratulate the government and encourage the government at all levels—departments, committees et cetera—to keep looking at opportunities to improve the ways in which infrastructure projects are selected, defined, developed and executed. Clearly, there is a lot documented around the importance of those projects going forward and, if we as IPA can contribute to improve the effectiveness with which we can execute those projects, then we would be particularly grateful. I am here on the premise that large, complex projects—and the majority of infrastructure projects fall under that broad category—can benefit from best practices that have resulted in good outcomes for major projects in the private sector. The capacity with which I can make that assertion is that IPA, Independent Project Analysis, has been evaluating projects for the last 29 years. We have looked at projects globally under just about every conceivable contracting configuration executed within a whole range of marketing conditions—in frontier regions and in regions where infrastructure requirements have been particularly challenging—and we have developed a good understanding of what makes successful projects successful and, equally importantly, what prevents projects from being effective in meeting their targets, and there is a broad definition of 'targets'.

On this premise, and on the recommendation of a particular client, we submitted a response to the terms of reference that the committee put forward with our thoughts on the effectiveness of ICT, information and communication technology. While we are not particularly familiar with and do not condone any particular structure or any particular architecture around ICT, our position is that, if an effective ICT structure is set in place to capture lessons learned in the early phase of project development, given that two thirds of a particular project's time line is about information exchange—collecting, developing, disseminating and acting on that information—at a relatively low cost to the overall outcome of the project, it can benefit not only the development of a particular project but future developments. We have presented a broad description of best practices based on our understanding of over 17,000 projects globally—practices that are reproducible, practices that are independent of project contracting configuration, location and a whole lot of other attributes, and practices that result in predictable outcomes for projects. We believe that having systems in place that support best practices can result in immediate and long-term value for all infrastructure proponents—for any users, for the financiers, for the public and for the contractors involved in executing those projects.

CHAIR: Thank you very much. You identified in your submission best practice and the use of smart ICT which you garnered from 17,000 projects. That is excellent.

Mr PITT: I congratulate you on a very good submission.

Mr Kapoulitsas : Thank you.

Mr PITT: I have a couple of questions. I am not the smartest guy in the room and I need you to explain something to me. In the section around 'Key shaping process', under 'Potential Value', you have a dot point that says:

Characterising the endowment versus context measures

I do not understand what that means. If you could expand on that for me, that would be great.

Mr Kapoulitsas : That is a very good question. We believe that the greatest value for any project is at the point at which the idea has been conceived. I will use a paradigm: a natural resource—a natural gas development, for example. The moment that development is identified, that is the greatest value. Value is ceded along the way in turning that opportunity into reality. The idea is that at some point, once we have satisfied stakeholders, developers, governments et cetera and we enter the commercial part of the project, there is enough residual value to make the project worthwhile. The question about endowment versus context is about the opportunity that we have in place versus what is required to turn that opportunity into a commercial and beneficial outcome. In other words, if it is too difficult and we are going concede too much of the initial value, then the project is not worth pursuing.

Mr PITT: Secondly, you spoke about the decline in global productivity. Could you comment on why you think that is occurring and not just here?

Mr Kapoulitsas : It is certainly not just here. Broadly speaking, in the 80s and the 90s, the engineering capability or the broad capability around developing projects passed on from private enterprises to the contracted world, if you like. Collectively, project management and project development are not seen as a core, if you like, of education or as a desirable outcome for a lot of young professionals. We define it as the accidental profession; you become a project person by accident, and therefore some of the key decision makers in the project world find themselves with limited opportunities to train et cetera. Over the years, productivity has declined as a result. Regardless of labour availability, regardless of labour mobility, productivity is an outcome of decisions. Productivity is an outcome of good information and good dissemination of that information into drawings and deliverables that the available labour can turn into an asset. Some of the projects in the Middle East, for a host of reasons, can mobilise up to 10,000, 15,000 or 20,000 workers on a particular project. Every evidence suggests—and IPA has evaluated those projects—that the net productivity gain is marginal, if at all. In other words, the availability of a certain type of labour and the mobility of labour does not result in better productivity outcomes, and the root causes are back to the fundamentals: the drawings were inadequate or inadequately developed, the communication of information was not properly executed et cetera. And those challenges are equally applicable and found equally across the planet.

Mr PITT: Given the propensity for public infrastructure projects to have overrun and enormous additional cost to the taxpayer, if there were something that you actually do about that—if you were the Prime Minister for the day, for example—what would it be?

Mr Kapoulitsas : I would charge a body to find out exactly what we know about the way we have executed projects to date, and the second dimension would be: what can we find out from the private sector? A Bentley report by Bentley Systems listed BHP Billiton, one of the world's largest mineral companies, as the second largest infrastructure holder in Australia. When a particular minerals company is developing a 450-kilometre railway from Newman to Port Hedland, it is likely to encounter as many interfaces and challenges as any infrastructure project on the east coast: community, stakeholders et cetera. When it is building that project next to an existing railway, that complexity increases. So what are the opportunities for the government to learn from that development, regardless of the outcome? Unfortunately, or fortunately, the lessons are in what not to do when it comes to executing some projects, but the opportunity for the government, from IPA's perspective, is that there are lessons learned—an abundance of lessons that the government can learn towards better shaping and better selecting projects moving forward.

Ms MARINO: Thank you very much. I particularly, like Mr Pitt, got a lot out of your submission in a practical sense. You have seen the terms of reference and I spoke to the previous witnesses, as you heard, not just about the design and build but about the lifetime maintenance issues and monitoring the capacity of ICT in that space, but also in what then become the broader issues around managing congestion and growth—just the pure issues around growth. As a committee representing the federal government, we have to make, or we want to make, some quite simple and practical recommendations to the minister and to the government of the day. Given your submission, what are two or three primary recommendations, in a practical sense, from your experience in the industry that you think would be particularly useful?

Mr Kapoulitsas : The private sector constantly struggles with the challenge of trading off initial expenditure versus the maintenance and operating requirements of that particular asset. The simple equation is: the better the design, the better the investor and the more expensive the investment, the lower the operating and maintenance requirements in the long term. However, there is a time penalty associated with that. It takes a while to develop a good project. If something is executed on the run with some expectations around improvements in the future, we are trading off a particular operability in maintenance, maintainability and opportunity, which we may not capture later on. It is difficult to rectify mistakes once the project is executed and operational. So one of our recommendations would be to really think about what are the future opportunities for that particular investment, and then to make the hard decision about forfeiting that investment or looking at alternative locations, if it is physical constraint, or other routes et cetera to satisfy the future requirement.

Looking at liquefied natural gas developments for example, nobody builds a single train, they design the project with the fourth and fifth train in place. The entire approach is to avoid sterilisation of the whole materials management corridor, and the location, with a view to those future developments. Of course, they have the luxury of doing that for land and so forth. Some of the public infrastructure projects do not have that luxury. So by having a feedback system, we have learnt from projects that have been rushed—these are my words—and we have forfeited the opportunity for future expansion and improvement. What can we learn from that particular approach? Can we avoid a similar scenario by proposing a particular facility within a particular physical constraint? This sort of endowment and context characteristics should identify that going down a certain option will prevent any future expansion opportunities, any improvements. Again, there is an opportunity to forfeit that outcome up-front.

The recurring theme, from our perspective, is to learn from previous projects that have not worked, as well as from the projects that have worked, not only in terms of how those projects were executed but in terms of the future benefits to Australia: what should we have done with that particular development? What didn't we do that prevented that project from realising its further value in the future? Again, we need to look back and review developments with a view to understanding what did not happen.

Ms MARINO: In that instance, who would have the skills to do that assessment from the perspective that you are talking about? Who would best have that expertise?

Mr Kapoulitsas : That is a very good question. The various partners—'contractors', as a broad definition—who have executed those projects know the projects intimately. One of the questions is the element of independence. You would need to set up a body or bring in an independent organisation to apply a reproducible process to look at these projects. They would be empowered to have access to information. The proponents of those projects—contractors and others—would be willing to provide that information to that third party, to that independent body. It would not be constrained by the decision-making process. They would then apply that reproducible process and provide the outcomes to the government or to the relevant authority.

Ms MARINO: So you would be looking at a model that you could develop and adapt to a range of projects to see where things worked equally well, or where they did not, or where it was not possible to accommodate the future needs so that that is not well replicated? Is that essentially what you are saying?

Mr Kapoulitsas : That is very well articulated. Spot on. It would be a model that is largely independent of project scope, complexity and location. In other words, it would be easily and readily adaptable. It can be calibrated depending on what information the model receives back from industry but, broadly speaking, that is the approach.

Ms MARINO: Given your evidence and your submission, would you like to put on record the percentage of projects that fit the criteria and the reason why we need to learn from historic decisions?

Mr Kapoulitsas : Broadly speaking, all the evidence from our evaluation of projects suggests that around 25 per cent of large, complex projects—and I can expand on that if you like—meet their targets in terms of being predictable on cost and schedule and delivering the operating benefits, however defined, to the initial stakeholders. In other words, the overwhelming majority of large, complex projects fail in one performance dimension, whether it is cost, schedule or, even more harmfully, operability—that is, delivering the ultimate value to the end user, whatever that end user is. The good news is that a small minority of successful projects are done extremely well—and there lies the hope. It is quite easy to see why projects have not worked, but it is more difficult—

Ms MARINO: Do you have a list of those successful projects?

Mr Kapoulitsas : We certainly have a list of private projects that we have evaluated and deemed successful by our definition.

Ms MARINO: Given the evidence in your submission, as part of our deliberations, if this were the way to go, having some benchmarks to start with, to say 'This is what a successful project looks like' would be good. I do not know whether you have ever evaluated the lifetime of the asset and whether it met not just its original build but also the management and its operability and the whole life of the asset. I know this is a new field and, probably, the historical information is not there but, if you had any practical examples that we could draw on, that would be useful for the committee as well.

Mr Kapoulitsas : Out of the 17,000 projects, if we were to reduce the sample to complex projects, there are probably about 2,000 complex projects and about 500-plus megaprojects. These are big developments, multi-billion. We have applied our assessment in evaluating those projects. We have revisited those projects at completion. We have revisited those projects at some point to verify their operating performance.

Our findings are based on completed projects, not on expectations or targets but actual outcomes, that help to calibrate and update our models as needed. Of the overall approach, we could certainly provide evidence, examples—qualitative and quantitative—to describe what approaches were implemented, from just about every facet you could think of, to deliver successful outcomes. There is the size of the organisation, the contracting approach, the duration it took to do the optioneering—looking at alternatives—the number of alternatives selected, the location of the project teams and the communication means. We can even look into the infrastructure communication approaches to make those projects effective. We have surveyed and interviewed the core project teams for these projects, so we have feedback on perceptions about how the project was set up and the outcomes. So there is a lot of evidence.

I apologise for the sales pitch. IPA has become the corporate memory for a number of our clients because, when mandated to look at their projects, organisations respond to market forces by letting individuals go and reshape any structuring. That information is retained with us. When a new wave of opportunity comes up, IPA is the first port of call on reminding them on how their performance went.

Going back to your question: absolutely. We know what works, we have seen what works and we learn from what works, particularly if it is something innovative, something above and beyond what we have seen, broadly speaking.

Ms MARINO: Thank you very much; I appreciate that.

CHAIR: Thank you very much for your submission. I refer to your diagram 'Most of a project is not construction', which is particularly pertinent. That diagram is based on the 17,000 projects you have analysed.

Mr Kapoulitsas : That is absolutely right. That is a fairly conventional approach in developing a project. We turn the idea, the thread, the opportunity, into a series of stages for looking at options and turning one option into the final decision. Although there are no durations, that is the sequence of broad events that is followed, by the overwhelming majority of projects that we have looked at.

CHAIR: That would be the 'before' model. If we bring in this Smart ICT modelling, that is going to dramatically change, is it not?

Mr Kapoulitsas : We would hope it would improve the effectiveness of the development of information during the two-thirds, particularly the early-end stuff—the basic data development, the acquisition of community related information et cetera—and potentially shorten the cycle, not only the overall cycle but also the execution cycle, the actual construction and delivery of the asset, by providing good information up-front. It has both a macro and micro component to it. We learn from a particular project and implement those lessons in the next project.

IPA talks about capital stewardship, and there are two dimensions to that. There is being effective with your capital but also looking at the right opportunity and executing that opportunity right. We know a lot about how to do the projects right. We collectively, perhaps, know less about the right opportunity. But we believe that if there is a process in place where capital effectiveness and capital stewardship is required and mandated, we—the organisation et cetera—become more selective about where to invest the capital, in the first place. Naturally, that first dimension of capital effectiveness improves.

CHAIR: Is there any comparison between government and non-government projects?

Mr Kapoulitsas : The relative performances are the same—that is, they are not done particularly well. There are different marketing forces at different levels of broader social accountability et cetera that are imposed on the private sector versus the government sector. In some ways, the regularity of elections, the transparency of the political climate, the accountability, can improve some predictability with these projects. In other words, while we cannot see what the market will do in iron ore, natural gas et cetera we know we can predict, with some confidence, how the community will grow, how our cities will grow.

That element of predictability should make those infrastructure developments a little more successfully developed, in the first place. The difference in outright performance is more or less the same. Neither one nor the other sector performs projects particularly well or particularly badly. There are some positives for public infrastructure projects, in terms of the political predictability, to some extent and there is the opportunity to learn from the private sector.

Australia will become the second largest liquefied natural gas exporter in about two or three years, with about a hundredth of the world's resources. We will overcome Russia, the Middle East, our neighbours in Indonesia and Malaysia et cetera with abundant resources. There is about $250 billion worth of investment. They are very complex projects in a tiny, in terms of population, continent yet they delivered—not particularly well, it is in the public domain, but that is not the point.

What can we learn out of this incredible opportunity or what are the lessons learned over the last 10 years? There lies that opportunity. What can we learn about projects on the east coast and the west coast? There are not only natural gas developments but also mineral commodities. There are a lot of opportunities and there are lessons learned.

Mr PITT: IPA would, clearly, hold a lot of data. That would need to be secure and would be from worldwide locations. How do you do that? Do you store that in the Cloud or do you have your own secure service? This is something the inquiry is trying to determine.

Mr Kapoulitsas : Absolutely. There is a database infrastructure that keeps the data as is. We collect data through electronic means and also through face-to-face conversations with project teams. We verify the story, the information, we take that data, we apply our models—variables, coding et cetera—and run benchmarks, develop assessments and provide a qualitative and quantitative assessment of the project's likelihood of success based on that data. Some of our clients have access to that information through our internal mechanisms, but that data and the size of that database is a competitive advantage for this organisation.

Mr PITT: If the government were to say that all this data needs to be made open sourced and available to everybody, what would be your response?

Mr Kapoulitsas : This is the position. We do not own the data, as such. Our clients, the industry, have collectively agreed to enrich the database through the provision of information for new projects. The models, the knowledge, improves. That information is then passed onto the industry, who benefit from the latest and greatest et cetera information on developing and executing projects. Technically, it is not our data to make available to the public. There are ways we can normalise the type of information. Although a particular number might not be visible for a particular project, an index would become available. So project A was 10 per cent more expensive than the average performance of similar projects in a similar part of the world.

CHAIR: One of our witnesses earlier today—the Victorian Spatial Council—suggested that we need legislation, and nominated legislation in South Africa, Japan and America. Do you think we need that sort of framework and legislation? Are you familiar with their legislation?

Mr Kapoulitsas : I am not, to be perfectly honest. We do a fair bit of work in South Africa. Is this legislation referring to the provisional—

CHAIR: This is really for the framework—I will try to be accurate in my terminology: it is legislation which makes the management framework consistent for supply management delivery of spatial information.

Mr Kapoulitsas : I am not particularly familiar with that. I am not sure if I can offer an opinion.

CHAIR: I guess in simplistic language it is standards.

Mr Kapoulitsas : Sure. All I know is that from our experience, organisations that have properly mandated project systems—and this is a broad definition of the type of organisation needed for the project: when to compile and develop the skill set required for that organisation, how to collect information, how to disseminate information, how to store information and how to capture lessons learned—have, not surprisingly, more predictable and better project outcomes for their capital investments.

CHAIR: Thank you very much. There are no more questions?

Ms MARINO: No. It was a very good submission—we really appreciate it.

Mr Kapoulitsas : Maybe I could have another 30 seconds?

CHAIR: Sure.

Mr Kapoulitsas : The genesis of IPA came through looking at infrastructure projects in the seventies and eighties. Following the oil shock, the US government realised that there was a lot of investment to be made in US government projects—power stations, nuclear stations, dams, roads and ports. So they charged the Rand Corporation with doing that work. Once the energy situation improved and the interest in that particular investment was lost, the president and founder of IPA, who developed that database in the first place, took the database and many lessons learned from working on large projects that were not particularly well executed, and gave birth to IPA's knowledge. So our genesis was understanding infrastructure and public-sponsored projects.

CHAIR: Thank you very much. We found your submission and evidence of great benefit to the inquiry. Thank you for attending our public hearing today. The secretariat will send you a draft transcript of proceedings so requests can be made to correct any errors of transcription. I think you did offer to provide some extra information in response to Ms Marino, which would be most appreciated, and if there is any other evidence from other witnesses which you want to respond to we would appreciate that for our inquiry and recommendations.

Mr Kapoulitsas : Absolutely.

CHAIR: Thank you very much for coming.

Mr Kapoulitsas : Thank you.