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15 Nov 2011

Possible private sector pain offers public sector gain

by Brad Vann

PPPs have evolved to where the private sector is taking on more risk to the benefit of the public.

There simply isn't enough money available from the public purse to build the infrastructure necessary to sustain Australia's economic well being.

Governments need to preserve budgetary flexibility to meet unexpected or significant societal events (such as the recent tragic bushfires in Victoria, or the government-led response to the swine flu outbreak). The private sector is not subject to such constraints.

Sir Rod Eddington hit the proverbial nail on the head last month when he spoke of the need for a genuine, rational discussion around public-private partnerships.

The Infrastructure Australia chairman also rightly observed the critical role that the private sector – and PPPs – will play in helping governments deliver on their infrastructure programs in coming years.

While PPPs are not without their challenges, the model works – as has been proved time and again. The ability to fund projects in the current environment and properly allocating risk between the public and private sector, are two key challenges. But they are not insurmountable.

When discussing PPPs the focus should not be on whether they are a viable model for putting infrastructure in place – it should be on how governments and the private sector can work together to maximise their benefits.

Of course, PPPs are not the only delivery model for infrastructure and should only be used where they deliver value for money. But too often they are criticised merely because the private sector is involved in the funding of the project, conveniently ignoring the significant risk transfer to the private sector that the model entails.

Encouragingly, there has been a noticeable increase in the level of engagement between governments and private sector participants in the PPP market both locally and internationally to focus on the merits of the PPP structure. The consensus seems to be that the PPP is an efficient and effective model.

One of their main advantages of PPPs is flexibility. One example is the Biosciences Research Centre project in Victoria that, despite the funding problems that have dogged many projects, managed to achieve financial close on May 27. This occurred with only modest tweaking to the usual risk allocation seen in most recent PPPs in Victoria.

Although the funding problem persists it is also encouraging that governments and the private sector are working together to explore several alternative solutions, as well as re-examining the way they allocate risk on projects.

In Queensland, for example, the south-east Queensland schools project recently reached financial close as a PPP using what is known as the supported debt model. The private sector financed construction and assumed the construction risk.

When construction is completed the Queensland Government, through the Queensland Treasury Corporation, will take on 70 percent of the funding over the operating term, which is seen as a lower risk period for a project.

This approach preserves one of the main advantages of the PPP model – the commercial pressure on the private sector to bring projects in on time and on budget is maintained while allowing more advantageous funding through the Government for the period where there is lower project risk (during the operating phase).

Victoria's Peninsula Link is tackling the funding problem in a different way. The private sector will be required to design, construct, finance, operate and maintain the proposed freeway. However, unlike toll-road PPPs, the private sector will not be repaid its debt nor source equity returns from road users, but from the Victorian Government. Availability payments will begin only once the freeway is operational, when payments will be based on the availability of the freeway and its operation and maintenance to defined performance levels.

This way the Government will still have access to private-sector delivery disciplines without incurring an unacceptable risk margin if it sought to have the private sector assume patronage risk – one of the criticisms of most recent toll roads in Australia.

The debate over PPPs will continue, but it should be a rational debate based on facts. The PPP model works – even in challenging economic times.

Brad Vann is a partner at Clayton Utz in Melbourne, specialising in PPPs, including the Biosciences Research and Peninsula Link projects.

 

This was written by Brad Vann and was first published in The Age on 2 July 2009

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