09 March 2005
Key Points:
There are a number of important differences between the Public Private Partnerships policies published by the different State and Territory Governments, some of which could undermine PPPs' true potential.
All levels of Government are well aware of the need for co-ordinated policy in order to harness private sector involvement in infrastructure development. While various State Governments have had policy guidelines regarding private sector participation in public infrastructure development for many years, recently there has been a much more structured and co-ordinated policy focus on Public Private Partnerships (PPPs). This renewed policy focus kicked off with the publication by the Victorian Government of its Partnerships Victoria policy in 2000, and has seen a growing culture of flexibility and innovation on the part of Government.
All State and Territory Governments, and also the Federal Government, have now released policies and guidance material of differing levels of detail for PPPs. The various policy documents have the common objective of increasing private sector confidence in the development of PPPs. They also share many common features including the encouragement of innovation, a whole-of-life approach to the design, construction, operation and maintenance, and efficient risk transfer with a view to, in the case of most policies, delivering the best value for money outcome for Government. These and other common features will be well known to most readers. Less well understood are some of the points of difference between the various PPP policies and guidance materials, which include:
Delivery methods - The various policies mainly differ in the project delivery methods covered. Some policies, such as the Commonwealth and New South Wales policies, are quite explicit in their focus on privately financed PPPs, as opposed to publicly financed PPPs. Others, such as the Victorian and Queensland PPP policies, while more inclusive on their face, are also primarily directed at privately financed PPPs (shown by their encouragement of long-term serviced-based payment structures). Indeed, all of the eight Partnerships Victoria projects reviewed as part of the Fitzgerald review are privately financed projects.
The Northern Territory PPP policy, on the other hand, adopts a highly flexible and inclusive approach to PPP delivery models by expressly including all members of the Australian PPP family, including publicly funded PPP delivery models such as project alliances, and design, construct and maintain and long term service agreements. This approach provides a framework in which all possible PPP delivery models can be considered with a view to selecting the delivery model which provides the best value for money outcome for Government. The West Australian, South Australian and Tasmanian PPP policies also show a broader delivery model focus.
The focus of some PPP policies on privately financed projects is a deficiency which we have discussed in the June 2004 edition of Project Insights. It is also a deficiency which has been identified in the Fitzgerald review of the Victorian PPP policy, which recommends that the State seek to pilot new financial and partnership structures which combine the benefits of private sector risk-taking with Government's comparative advantage in securing funds.
Value for money vs overcoming fiscal constraints - The stated focus of some PPP policies, such as the Tasmanian PPP policy, continues to be on overcoming fiscal constraints. This can be contrasted with the current Victorian and NSW PPP policies, where the stated focus is on achieving value for money, rather than access to infrastructure financing without additional Government borrowing. If a Government adopts any suggestion that PPPs are merely a form of Government balance sheet-dressing, it could only open them to being legitimately criticised as just that, and allow their true potential to be obfuscated.
Commonwealth tax implications - The Commonwealth PPP policy explicitly recognises the potential for the private sector's use of tax effective arrangements to undermine the Commonwealth's tax base, and requires that these costs to be taken into account when assessing the relative value for money of a privately financed project at a whole-of-Government level. Clearly, the cost to the Commonwealth's tax base is not an issue which concerns State and Territory Governments. Indeed, the history of PPP projects in Australia has been quite the opposite, and the present issues associated with section 51AD and Division 16D of the Commonwealth Income Tax Assessment Act have, to some extent, been created by State Governments seeking to tap into depreciation and other allowances available to the private sector under the Commonwealth Income Tax Assessment Act to fund State infrastructure projects controlled by tax-exempt Government agencies.
Commitment to proceed - The Victorian PPP policy includes a commitment from the Government to proceed with a project for which a project brief has been issued, provided that it receives a conforming bid offering value for money in comparison with the Public Sector Comparator. The policies of the other States and Territories have not been quite so bold.
Accounting treatment - The Tasmanian PPP policy specifically prohibits agencies from entering into finance lease arrangements for capital assets. This position can be contrasted with, say, the positions in New South Wales and Victoria where the drivers are value for money and optimal risk allocation rather than the achievement of an ‘off-balance sheet' transaction. The Department of Defence's Patrol Boat project failed to proceed as a privately financed PPP project, in part, because of its inability to achieve an operating lease classification. Contrast this, for example, with the Victorian Berwick Community Hospital and Spencer Street Station redevelopment projects, which are both recognised as financing arrangements on the State of Victoria's balance sheet. This is an important consideration as, again, any suggestion that the true driver is to facilitate Government balance sheet window dressing merely allows ideological challenges which don't really address the key issue - that of value for money.
Disclosure of the Public Sector Comparator - The approach with respect to the disclosure of the Public Sector Comparator differs across the policies. Some policies, such as the Victorian, New South Wales and Northern Territory policies, adopt a flexible approach and say that the Public Sector Comparator (or a summary of it) will be disclosed where this is likely to assist the bidding process. Others, such as the Queensland, Tasmanian and Commonwealth policies, are silent on this issue.
Project value - The Fitzgerald review of the Victorian PPP policy includes a recommendation (which has been accepted by the Bracks Government) that the policy only apply to large projects such as those involving capital expenditure of over $100 million, subject to exceptions such as projects that are bundled (to be over $100 million), and projects that are smaller but in sectors where there is a strong value for money case. This can be contrasted with the PPP policies of the other States and Territories which indicate the policy can apply to smaller projects (NSW - $20 million (contract value); Qld - $30 million (capital value): $50 million (NPV); NT and ACT - $20 million (NPV); SA, WA and TAS - no threshold). The real constraining factor here, however, is not the particular threshold specified in the policy, but rather bid costs - unless the transaction costs associated with establishing a PPP project can be reduced below present levels then the scope for smaller projects to be delivered as PPPs is limited. There is also a tension between a high project value threshold and the need for sufficient deal flow to provide a competitive PPP market (particularly in the social infrastructure context).
Clearly there are a number of important policy differences between the PPP policies of the States, Territory and Federal Governments. Some of these, such as the Federal policy required to assess the impact of a proposal on the Commonwealth's tax base difference, are understandable. Other differences, such as narrow focus of some policies on privately financed projects or the focus in some policies on overcoming fiscal constraints, have the potential to open PPPs to ideological criticism and undermine their true potential in delivering value for money outcomes.
For further information, please contact Owen Hayford.
