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Global economy: Positive growth, but IMF asks how long it can be sustained Regional economy: China continues to lead the way as APAC tops world growth High-level building cost June 2018 Asia Pacific Issue #7 Industry focus Constructive partnerships

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Page 1: Industry focus Constructive partnerships€¦ · electric car manufacturer Tesla. China continues to lead the way as APAC tops world growth The APAC-region is predicted to continue

Global economy:Positive growth, but IMF asks how long it

can be sustained

Regional economy: China continues to

lead the way as APAC tops world growth

High-levelbuilding cost

June 2018Asia Pacific Issue #7

Industry focus

Constructivepartnerships

Page 2: Industry focus Constructive partnerships€¦ · electric car manufacturer Tesla. China continues to lead the way as APAC tops world growth The APAC-region is predicted to continue

2June 2018 www.curriebrown.com [email protected]

Global economy: Positive growth, but IMF asks how long it can be sustained

Regional economy: China continues to lead the way as APAC tops world growth

High-level building costs

Industry focus:Constructivepartnerships

3

5

8

9

Contents

[email protected]

Welcome toInsight #7Global growth reached its highest level for more than six years during the second half of last year, and the International Monetary Fund (IMF) is predicting a further two years of improved conditions.

Its latest forecast is that the 3.7 per cent average growth figure for the second half of 2017 will rise to 3.9 per cent per year during 2018 and 2019. That positive is offset by the IMF’s finding that growth figures vary sharply across economies.

Growth rates in China, Japan, the United States and the eurozone rose beyond IMF expectations during the same period last year. There were also better-than-expected growth figures among those Asia-Pacific economies that export commodities, as well as similar countries in sub-Saharan Africa and the Middle East.

Although the general trend is upwards, the news isn’t universally good across global economies. Significant structural changes are underway in specific economic areas such as the Arabian Gulf, where the Gulf Co-operation Council (GCC) countries in particular are on a journey of diversification away from their enormous reliance on hydrocarbons, for example.

And in China, where growth continues to outstrip most other nations but is nevertheless lower than previous levels, a distinct change in strategy is underway as the government seeks to bring in more partners for significant infrastructure investments to the west and south of the country.

We examine the implications of all that for you and your business in Asia Pacific in this edition of Insight. We also look at significant news and developments as they affect the region.

This edition also includes a special look at P3, the standard for project management across the construction sector worldwide. The Association for Project Management (APM) defines P3 as “projects, programmes and portfolios”, but it might be described more succinctly as whole-life asset management.

P3 works across all types of procurement and project management, with particular relevance to public-private-partnership (PPP) projects, where there is a real incentive for all parties – clients, managers and contractors – to plan thoroughly. Governments and other agencies are increasingly turning to PPP as a form of procurement, especially in the Middle East and Asia.

Page 3: Industry focus Constructive partnerships€¦ · electric car manufacturer Tesla. China continues to lead the way as APAC tops world growth The APAC-region is predicted to continue

3June 2018 www.curriebrown.com [email protected]

Global economy:Positive growth, but IMF asks how long it can be sustained

Economies worldwide are experiencing positive growth, helped by better-than-expected performances in the United States and the eurozone countries, in an upturn that is being matched in most other regions.

The news is good across most major economic regions, with China and Japan leading the way in Asia. In the Middle East, strategic adjustments to public spending on projects continue to have an impact.

Oil prices made a further recovery over recent weeks – at one stage passing the US$80 a barrel level and settling comfortably above US$70. While that is welcome, particularly among many oil-producing economies, there is little sign that any of them are loosening spending controls or austerity measures

introduced since prices collapsed during 2014 and 2015.

The IMF pointed out that, as tax changes in the US filter through, there will be a slight slowing-down of growth after 2020. Its forecasters are also concerned that growth will be affected by the ageing populations of the mature economies, with higher costs and potentially lower tax income resulting from such demographic changes.

“While the expected recovery in investment will help raise potential output, weak productivity trends and reduced labour force growth due to population-ageing will constrain medium-term prospects in advanced economies,” notes the IMF in its latest bulletin.

The outlook is mixed across emerging market and developing economies.

Global economy

Page 4: Industry focus Constructive partnerships€¦ · electric car manufacturer Tesla. China continues to lead the way as APAC tops world growth The APAC-region is predicted to continue

4June 2018 www.curriebrown.com [email protected]

But it included a warning for other regions, many of which are dealing with political and economic uncertainty, or those countries with weak exports. “The outlook is mixed across emerging market and developing economies,” comments the latest IMF forecast.

“Prospects remain favourable in emerging Asia and Europe, but are challenging in Latin America, the Middle East and sub-Saharan Africa, where – despite some recovery – the medium-term outlook for commodity exporters remains generally subdued, with a need for further economic diversification and adjustment to lower commodity prices.”

The forecast adds: “More than one-quarter of emerging market and developing economies are projected to grow by less than advanced economies in per capita terms over the next five years, and hence will fall further behind in terms of living standards.”

On the upside, the IMF notes that what it calls the “growth spurt in advanced economies” could prove to be stronger and more durable than its baseline analysis might suggest. For example, labour markets may have more slack than is apparent, and investment could recover further to spark a “rebound in productivity, with higher potential growth post-2020”.

On the downside, the IMF analysis is that financial conditions could “tighten considerably” and reveal export vulnerabilities that it says have accumulated over many years. This is especially true in the United States, where fiscal tightening – when combined with that country’s very high current account deficit – could have damaging implications in global terms.

The messages coming from Washington – tax cuts, changing economic policy and import tariffs particularly on commodities like steel – are of concern to other governments and economists as they attempt to chart

a way ahead for the 2020s. The US policy on tariffs has sparked reprisals from the European Union, which has pressed forward with retaliatory duties against US$2.8 billion worth of US-made products. China’s central bank has cut reserves to unlock US$108 billion, which some China analysts say will help ease the impact of a potential trade war with the US.

Further, the continuing uncertainty in parts of the Middle East – with ongoing conflicts in Syria and Yemen and the continuing tension concerning Qatar – is being watched with unease in some quarters.

Global growthSource: worldbank.org

Global trade and investment growth, volumesSource: worldbank.org

The IMF notes that what it calls the “growth spurt in advanced economies” could prove to be stronger and more durable than its baseline analysis might suggest.

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5June 2018 www.curriebrown.com [email protected]

China continues to lead the Asia-Pacific economies in terms of growth, innovation and major investment, along with other significant exporting countries including Japan.

The APAC-region is predicted to continue experiencing strong economic growth to 2020, and even after that date rates of expansion may continue at a similar level, according to various forecasts led by the International Monetary Fund and World Bank over recent months.

Improved activity is being experienced in most parts of the region, from China to Australia. However, the geopolitical scene is being watched closely in case it has an impact on growth and stability.

In April, US President Donald Trump announced a range of tariff increases of 25 per cent on US$50 billion worth of Chinese imports to the US. Inevitably, China responded with its own tariffs on a similar value of US goods. The US is targeting more than 1,300 Chinese products, the biggest being data processing equipment, engines, heavy machinery and audio-visual equipment.

China exports much more to the US than the reverse, so its planned reprisals – covering key American exports such as soya beans, automobiles and chemicals – may have greater impact. Although the rhetoric accompanying the US announcement and the Chinese response appeared to indicate that there was still a chance of compromise, international credit agency S&P Global has warned that the overall level of risk to growth is increasing. “The tit-for-tat tariff dispute between the US and China could draw the countries closer to an all-out

trade war,” it added, remarking that consumer confidence, new investment and growth prospects were all at stake.

The second major event to affect APAC concerns North Korea, whose recent belligerence over long-range weapons testing and the development of its nuclear capabilities led to the June summit between President Trump and North Korea’s Kim Jong-un. Neighbours, including Japan, China and South Korea, continue to watch its outcome closely as the two sides hopefully enter more detailed negotiations.

China was influential in bringing about the summit while, similarly, the country continues to lead economic activity in the region. Apart from its international Belt and Road Initiative (BRI) which involves dozens of partner countries across Asia and further west, China continues to attract investment from major US companies such as the electric car manufacturer Tesla.

China continues to lead the way as APAC tops world growth

The APAC-region is predicted to continue experiencing strong economic growth to 2020, and even after that date rates of expansion may continue at a similar level.

Regional economy

China country growth vs world growth vs GDP growth Source: wits.worldbank.org

Page 6: Industry focus Constructive partnerships€¦ · electric car manufacturer Tesla. China continues to lead the way as APAC tops world growth The APAC-region is predicted to continue

6June 2018 www.curriebrown.com [email protected]

Regional economy

Just before the US declared its intended tariff increases, China had indicated a likely reduction in tariffs on US autos. It also said that rules on foreign ownership – a key stumbling block for Tesla owner Elon Musk, who has been negotiating to build a car plant in Shanghai – were likely to be relaxed.

If that happens, Tesla may provide stiff competition to indigenous electric vehicle manufacturers, including FDG, which has started construction of a 400,000-vehicle and battery plant in Sichuan Province, south-west China.

Just as China seeks recognition as a regional leader, there are important strategic reasons for its policy stances on investment. If successful, BRI could have a considerably beneficial impact on the status of the Chinese renminbi (RMB) as an international currency.

Meanwhile, investment continues a pace. The internet giant JD.com announced a US$1.2 billion venture in the Hunan city of Xiangtan, where it signed a strategic co-operation deal to strengthen various city initiatives covering logistics, cloud computing, the development of driverless vehicles and robot couriers.

According to the state-owned China Daily, the National Development and Reform Commission confirmed infrastructure and other investment amounting to US$10 billion during the month of April alone. It reported that the national economic planning agency had approved 15 fixed-asset investment (FAI) projects, mainly in social services and the high-tech industries. Commission spokesperson Meng Wei said that China's FAI spending had risen by seven per cent during the first four months of the year.

Infrastructure investment increased 12.4 per cent year-on-year for the same period, slightly down on the performance of the first three months of 2018. The government attributed this to ongoing efforts to regulate public-private partnerships (PPP) and the financial activities of local government.

The Philippines-based Asian Development Bank (ADB) is forecasting that Chinese economic growth will reach 6.6 per cent during 2018. Its annual outlook publication said that continuing strong demand both at home and abroad had prompted the growth. The bank expects this to ease off very slightly to 6.4 per cent during 2019, “as economic policy leans further toward financial stability and a more sustainable growth trajectory”.

The ADB said that the services sector is fuelling China's continued growth, increasing by 8 per cent in 2017. "Further progress on reforms such as strengthening financial sector regulation and supervision and addressing debt issues would lay a foundation for solid macro-economic stability," the bank’s report said.

Thailand has taken a significant step towards embracing PPPs, following the endorsement of a bill that will facilitate PPP in new infrastructure projects across the country.

Four state agencies have been given the powers to work on projects across 12 areas, under cabinet supervision,

according to the Bangkok Post. The areas comprise roads, railways, airports, sea ports, water services, irrigation, energy, telecommunications, science and technology, hospitals, schools and affordable housing.

The Post has also reported that a Thai “mega project” – the third expansion phase of the Laem Chabang port – is being fast-tracked in an effort to develop the Eastern Economic Corridor which covers Chachoengsao, Chonburi and Rayong provinces to the south-east of Bangkok. The port project includes large-scale investment in new facilities as well as road and rail links, and bids are expected to be invited before the end of the year.

The Thai transport ministry announced in April that it will invite bids for the construction and 30-year operation of a 970km-motorway from Bangkok to the Malaysian border in Songkhla province, completing in 2022. Transport Minister Arkhom Termpittayapaisith said it would improve traffic flow to the lower south region and support border trade with Malaysia. It will carry 20,000 vehicles daily.

Laem Chabang port, Thailand

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7June 2018 www.curriebrown.com [email protected]

Gleneagles Hospital, Hong KongSource: Gleneagles Hospital

The Hong Kong government has pledged a further US$3.8 billion (HK$29 billion) towards capital projects within its hospital plan for the next ten years. Hong Kong chief executive Carrie Lam told an audience at the opening of the Gleneagles Hong Kong Hospital that the money would in addition to the US$2.5 billion promised already, and hinted heavily that authorities would seek private partners to support ongoing investment in the city’s healthcare projects.

Malaysia’s high-profile decision to cancel a high-speed rail link (HSR) to Singapore is still having reverberations in the region. Construction of the link had been expected to start in 2019, and tenders were called as recently as April, according to Singapore’s Straits Times. However, the plans appeared to be cancelled just a few weeks later, shortly after the general election, with Malaysia citing its massive existing debts as the reason for the decision.

Finance minister Lim Guan Eng said that Malaysia "just cannot afford" the current cost of the HSR. "We may revisit it, but of course, we want to ensure the financial architecture of this project is fair to Malaysia," Mr Lim said in a briefing quoted by the Straits Times.

The rail link, when completed in 2026, was to have eight stations and the rail journey was projected to take only 90 minutes compared with the current four-hour car journey. Malaysian prime minister Mahathir Mohamad has told journalists his country may look at the project again when its overall debt situation has been tackled. He is to discuss possible compensation payments with his counterparts in Singapore.

In Australia, the federal budget has assigned around US$18 billion towards various transport projects, as part of a ten-year investment costing an overall US$55 billion. The spending will cover road, rail and public transport, and will be seen as a welcome boost for the construction sector.

Meanwhile, more than US$3.7 billion has been promised for the long-awaited airport rail link in Melbourne. But the deal comes with strings attached – prime minister Malcolm Turnbull wants the federal government to retain a 50 per cent stake in the project. The Victoria government – which has been campaigning for the investment – wants more central cash and few conditions, according to Melbourne’s The Age newspaper.

Regional economy

The Australian federal budget has assigned around US$18 billion towards various transport projects as part of a ten-year investment costing an overall US$55 billion.

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8June 2018 www.curriebrown.com [email protected]

Cost data

High-level building costs - Q1 2018Local currency/per m2 CFA

Australia(AUD)

China(RMB)

City Melbourne Sydney Beijing Shanghai Shenzhen

Offices High-rise 3,600 - 4,320 4,225 - 4,655 9,000 - 10,000 8,000 - 10,000 8,000 - 10,500

Medium-rise 3,500 - 4,140 3,900 - 4,320 7,500 - 9,000 6,500 - 8,000 6,000 - 8,000

Low-rise 3,270 - 3,690 3,470 - 3,920 5,500 - 7,500 5,000 - 6,500 4,500 - 6,000

Retail malls 2,145 - 3,180 1,800 - 3,765 7,000 - 9,000 6,500 - 9,000 7,000 - 9,000

Residential High-rise 3,425 - 4,175 3,900 - 4,680 4,500 - 7,000 5,000 - 7,000 4,500 - 7,000

Medium-rise 3,025 - 3,675 3,445 - 3,975 3,000 - 4,500 3,500 - 5,000 3,000 - 4,500

Town houses 1,500 - 2,700 1,500 - 2,700 5,000 - 6,500 6,000 - 8,000 4,500 - 6,000

Villas/houses 1,400 - 2,700 1,500 - 3,000 8,500 - 13,000 8,000 - 12,000 7,500 - 12,000

Hotels Five-star 3,657 - 4,770 4,005 - 5,255 11,000 - 15,000 11,000 - 15,000 12,000 - 16,000

Four-star 3,545 - 4,580 3,545 - 4,850 9,000 - 11,000 8,000 - 11,000 9,000 - 12,000

Three-star 3,510 - 4,025 3,110 - 3,900 7,000 - 9,000 6,000 - 8,000 7,500 - 9,000

Five-star FFE N/A N/A 600 - 850 500 - 650 700 - 900

Four-star FFE N/A N/A 450 - 600 300 - 400 400 - 600

Three-star FFE N/A N/A 300 - 400 200 - 300 300 - 400

Industrial 890 - 1,495 945 - 1,350 2,600 - 4,100 3,500 - 4,000 3,500 - 5,000

Data centres 5,500 - 10,000 5,500 - 10,000 22,000 - 30,000 20,000 - 28,000 22,000 - 30,000

Hong Kong(HKD)

Japan(Yen)

Singapore(SGD)

Thailand(Baht)

City Hong Kong Tokyo Singapore Bangkok

Offices High-rise 24,000 - 33,500 450,000 - 600,000 2,700 - 3,000 29,000 - 37,750

Medium-rise 18,000 - 23,000 400,000 - 450,000 2,100 - 2,700 27,000 - 35,200

Low-rise 16,000 - 20,000 300,000 - 400,000 1,700 - 2,000 24,500 - 31,650

Retail malls 25,000 - 36,000 N/A 2,907 - 3,200 28,550 - 35,750

Residential High-rise 24,500 - 35,000 N/A 2,100 - 4,300 27,550 - 66,300

Medium-rise 17,000 - 20,000 N/A N/A 24,500 - 36,750

Town houses 23,000 - 30,000 N/A 2,500 - 3,100 16,300 - 22,450

Villas/houses 40,000 - 60,000+ N/A 3,100 - 4,100 26,550 - 35,750

Hotels Five-star 36,000 - 45,000 550,000 - 650,000 2,700 - 3,500 55,000 - 69,350

Four-star 33,000 - 36,000 450,000 - 550,000 2,300 - 2,800 48,450 - 55,100

Three-star 28,000 - 33,000 350,000 - 450,000 2,100 - 2,400 37,250 - 46,950

Five-star FFE N/A 100,000 - 120,000 3,800 - 4,800 11,250 - 14,800

Four-star FFE N/A 80,000 - 100,000 3,200 - 4,000 8,700 - 11,250

Three-star FFE N/A 60,000 - 70,000 3,000 - 3,300 6,650 - 8,700

Industrial 12,000 - 17,000 100,000 - 150,000 1,100 - 1,950 17,850 - 24,000

Data centres N/A 1,050,000 - 1,200,000 8,000 - 12,000 97,000 - 168,300

Notes: Australia: Industrial buildings assume PCC frame and exclude office provisioning. Office rates assume prestige CBD standard. Australia, China and Singapore: Costs exclude GST/VAT. Data centres: Costs dependent on Kw/m2.

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9June 2018 www.curriebrown.com [email protected]

Focus

Achieving the delivery of construction projects that are the right outcome, smart, timely and meet the operating and investment objectives, requires the industry to continually innovate. This becomes further amplified in our world where client expectations are higher than ever, and budgets and procurement methods are under ever-increasing scrutiny.

There is no shortage of complexity. The industry has to respond imaginatively and convincingly to the challenges. Designs are increasingly ambitious, and often involve new materials and methods. The ‘future-proofing’ of the asset, through flexible design capable of incorporating intelligent design and altered working patterns, is important too. For mega-projects the complexities are compounded with multiple concurrent planning and investment decisions to be made in real time.

Incremental and important steps are taking place to enable the safeguarding of projects within a risk-

managed environment. The growing appreciation of the importance of collaborative working, with greater access to better quality information via increasingly sophisticated information technology that such technologies demand, is becoming key to achieving a fully integrated outcome. This is a new reality within developed markets, with BIM-led design and construction, and a queue of almost-ripe robotised construction systems ready to mobilise.

The gap between maximising the benefits afforded by technical innovation and the protection of commercial interests can be achieved through collaborative partnerships.

Increasingly, the industry is adopting so-called ‘P3 management’ (public-private partnerships) to achieve strategic success for built asset portfolios. Key to this is the need to take a wider, integrated approach to project identification, funding and procurement. As ever, both early involvement and building on new and established stakeholder relationships is vital.

Constructivepartnerships

Increasingly, the industry is adopting so-called ‘P3 management’ (public-private partnerships) to achieve strategic success for built asset portfolios.

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10June 2018 www.curriebrown.com [email protected]

Focus

Projects are also now being fundamentally evaluated against the optimisation of the completed asset across its operational lifespan: global consciousness demands longer-term thinking, with exposure to real fundamental issues, such as climate change, now impacting key decision-making. Project managers, cost managers and designers must account for and collaborate with end-users to place the project brief in the widest context. Accurate lifecycle cost modelling right at the project-initiation stage, with benchmarks taken against known costs, is essential to the development of the industry in newer markets, where public transparency, openness and accountability are increasingly demanded. The question is how quickly and effectively the industry can adapt to all this.

So what is P3 and how does it help? The Association for Project Management (APM) makes the point that “although projects, programmes and portfolios are often spoken of as being mutually exclusive, they are

actually combinations of managerial tools and techniques describing different circumstances.” Simply, the best-managed projects result from adopting an integrated approach to all three aspects.

Truly effective P3 demands that the industry helps its clients at the strategic planning stage, rather than waiting to be brought in almost immediately before contracts are tendered. That requires heightened awareness on the part of the clients – public and private – and a willingness to draw the industry closer into their thinking at the earliest stage.

There are differing motivators and interests in adopting P3-type structures across geographies and markets. A long history of examples abound in the mature construction markets of North America, Western Europe and Australia. The emerging construction markets of the Middle East and Asia have made exploratory moves and have had some successes with P3, although challenges remain.

In the Middle East, there are many current examples of high-profile projects that need such an integrated approach to succeed. They include the development of Lusail City in Qatar, the ‘financial cities’ of Jeddah and Riyadh in the Kingdom of Saudi Arabia, and region-wide developments such as university campuses, ‘hub-and-spoke’ health infrastructure, metro systems and power distribution networks incorporating nuclear, renewable and traditional, fossil fuel energy sources.

‘Joined up’ governance and strategic expertise are in demand for significant and ambitious regional plans such as the NEOM mega city project, also in Saudi Arabia.

Construction markets in the Middle East and large parts of the Asia-Pacific region are among the most vibrant in the world. They are home to some of the highest-profile and ambitious building projects, attracting interest from the global industry.

Truly effective P3 demands the industry helps its clients at the strategic planning stage.

Lusail City, QatarSource: lusail.com

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11June 2018 www.curriebrown.com [email protected]

Focus

Traditionally, such projects tended to focus on their capital expenditure, or capex. Public and private sector organisations measured progress by their capital expenditure. High-cost projects were usually funded directly by government that had no tradition of seeking private sector partners or investors to spread the risk. Funding came straight from public coffers, or public borrowing, often on a cost-plus basis, and little attention was paid to the operational cost (opex) side of the equation.

In the Asia-Pacific region, mega-projects, largely in transport infrastructure, housing and manufacturing, are becoming more numerous. The Belt and Road Initiative (BRI), China’s grand scheme to involve dozens of countries in a re-activation and expansion of the ‘Silk Road’ between the East and Europe, will involve large-scale funding and hundreds of development projects from the South China Sea to the Mediterranean and beyond.

In East Asia, massive endeavours such as the 55 kilometre-long Hong Kong–Zhuhai–Macau bridge and tunnel project, connecting three major cities, continue to test both cost limitations and project management systems. The significant doubt over

the project’s original completion date being met has proven justified, amid engineering problems and cost over-runs. Complexity is often the issue.

The Nikkei Asian Review reported that exports of high-speed railway systems from China to neighbouring partners – a key element of the Belt and Road Initiative – are lagging behind schedule because of challenges in the recipient markets, where land acquisition and project funding by the joint parties remain problematic.

One such rail project in Thailand has been two years in the gestation, although the ultimate aim of connecting the line to a pan-Asian rail network, as envisaged originally by China, remains elusive. For massive strategic ambitions to be realised, a real understanding of and commitment to advanced project planning is required. As can be appreciated, this is significantly more challenging when international politics are involved.

The Middle Eastern market – led by the Gulf region – has been slow to adopt whole-of-life (capex and opex) decision making. But the sands are shifting as governments and other major organisations change their attitudes towards project funding. Increasingly, they are embracing P3-

style procurement, where the private sector is responsible for operating the asset, and hence drives decision making in the development phase to protect the asset returns that are critical to the investment decision in the first place. That requires trust and openness in terms of planning at the strategic stage, founded on the fundamental principle that P3s are first and foremost partnerships and must respect the drivers of all the parties.

With a new generation of indigenous professionals moving up into decision-making positions, they demand that their future projects achieve or improve upon the operational efficiencies of comparable, world-class capital-heavy projects elsewhere, with transport infrastructure, healthcare and education being current major initiatives in play.

The message here is that collaborative partnerships adopting a P3 management approach will ultimately be more successful. This approach will provide greater surety in the way projects are funded and delivered, bringing significant benefits in terms of reducing waste, achieving capital and operational cost efficiencies and bringing projects to fruition in the most efficient and sustainable manner. As the size, cost and complexity of mega-projects continue to grow, the need to adopt such strategies will become even more vital.

Hong Kong-Zhuhai-Macau BridgeSource: worldhighways.com

P3s are first and foremost partnerships and must respect the drivers of all the parties.

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12June 2018 www.curriebrown.com [email protected]

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