New rules foreshadowed for NSW local council Public Private Partnerships

By Clive Craven and Alex Rees.

Key Points:
New rules which are to govern New South Wales local councils' involvement in major Public Private Partnerships to be effective from 28 June 2004.

A report commissioned by the New South Wales Minister for Local Government in 2003 and authored by Professor Daly, an expert in the field of urban development, has been completed. In particular, Professor Daly has released three reports on a Public Inquiry into Liverpool City Council and its involvement in the Oasis Project. He found that the Council was incapable of dealing with a Public Private Partnership ("PPP") of such a scale as the Oasis Project. The Council's losses from its engagement in the Oasis Project were at least $22m.

PPP's use in infrastructure projects

Over the next few years it is likely that PPPs will emerge as a beneficial means for providing infrastructure and services on behalf of councils. In particular we are likely to see PPPs with councils for the development of land. Councils often have plenty of land and often in prime positions. Developers are attracted to this land and may see benefits in partnering with a council in order to deliver new infrastructure for the council (eg. civic centres, aged facilities, or sporting facilities) in conjunction with a commercial or residential development. Another perceived benefit, from the private sector perspective, in dealing with councils is their role as consent authority. However, this role has been heavily criticised in the context of PPPs and is regarded as potential conflict of interest which needs to be addressed.

Legislative changes

Professor Daly's second report provides recommendations for PPPs in local government. As a result of these recommendations the New South Wales Government has announced that it will amend the Local Government Act 1993 to regulate councils' involvement in PPPs to reflect the Daly recommendations. It is anticipated that the amending legislation will be introduced during the Spring session of Parliament, but will apply to projects executed after 28 June 2004. In the event that a council has entered into PPP arrangements with the private sector before 28 June 2004, the Director-General of the Department for Local Government suggests that these councils should have regard to the recommendations contained in Professor Daly's second report.

Key recommendations

In summary Professor Daly recommended that:

The new regime will apply to all PPPs as defined in the regulations which have a value of:

• an estimated total project cost of $30m or more; or
• an estimated total project cost equal to or greater than, 25% of a council'stotal annual revenue,

whichever is the lower;

Section 358 of the Act be strengthened by requiring the Minister's consent to a Council forming, or participating in the formation of, a commercial organisation with private sector entities.

Section 55 of the Act be strengthened to ensure that councils go to the market when considering entering a PPP, whether the proposal is solicited or unsolicited. Section 55 of the Act currently provides that a council must invite tenders before entering into some contracts including a contract to perform a service or to provide facilities that would ordinarily be performed or provided by the council (except in extenuating circumstances). The Council did not go to the market for the Oasis Project.

The Director-General of the Department of Local Government issues guidelines to assist councils which might be considering a PPP. These guidelines will be similar to the New South Wales "Working with Government Guidelines" for PPP Projects. A task force, including Treasury, will be created to work on these guidelines.

The Act be further amended to provide the Minister for Local Government with the power to make regulations concerning the participation of councils in PPPs. The regulations are likely to provide for the following:

• the processes to be followed by councils in considering a PPP, including:

• establishing a need for the infrastructure or services;
• establishing whether the project is in the public interest and establishing a community relations plan;
• establishing a probity plan;
• establishing a project plan;
• undertaking a preliminary risk analysis;
• establishing a cost to council of providing the infrastructure or service without a private sector partner and establishing benchmarks to assess the benefit/cost advantages of having a private sector partner or partners (similar to the comparator modelling done for State Government PPP projects);
• having adequate reporting and appraisal mechanisms;

• the structures that a council would need to put in place to develop, evaluate and manage those processes, including:

• establishing a steering committee;
• appointing a Probity Auditor;
• establishing advisory committees made up of council officers, State Government representatives, legal representatives, technical/design representatives and finance representatives;

• a Local Government Project Review Committee. The Director-General of the Department of Local Government would establish this body. It would have a significant role in assessing the viability of the proposal, and the council's capacity to enter into a PPP; and
• a review of the roles, responsibilities, and obligations of the elected representatives of a council entering a PPP. Professor Daly recommended that the Government should give serious consideration to ensuring that elected representatives assume similar responsibilities and obligations in a PPP to those of the directors of a registered company. The Mayor's position would be similar to the Chair of a company board.

We will provide a further update on the amendments when a draft of the amending legislation becomes available.

Other changes affecting councils

Other recent changes affecting councils include:

• The Local Government Amendment (Discipline) Bill 2004 was assented to on 28 September 2004. This Act will introduce a comprehensive code of conduct that all councils will be required to adopt and apply.
• Minister Knowles' proposed overhaul of the planning system is intended to reduce the time taken to assess development proposals and eliminate red tape. The changes proposed include reducing the number of zoning categories from 3,100 down to less than 25, reducing the number of LEPs from 5,500 to 152 (one for every local government area) and reducing the number of planning decisions that currently have to be referred by councils to State Government departments by as much as 70 per cent. This will hopefully mean that builders, developers and councils will have much more certainty when they are planning a proposal.

For further information, please contact Clive Craven.