20 Dec 2012
UK Treasury's PF2 - implications for the Australian PPP market
by Angus Foley, Peter Staciwa
New ideas both here and abroad for structuring PPPs could significantly impact how they will be structured and financed in the future.
The Public Private Partnerships (PPP) procurement model has now been used nationally and by States and Territories in Australia over the last decade. Our Australian PPP model was originally based on the UK PPP model, which has now been in operation for over 20 years and used for over 700 projects.
While there have been many successful projects in Australia procured under this model, a number of recent high-profile PPPs have received negative press as a result of the PPP either being late, over budget, in administration or, as quite often is the case, a combination of all three.
The ongoing impacts of the GFC also continue to affect PPPs globally. PPPs face numerous funding challenges in the form of the limited availability, limited tenor and an increased cost of bank debt. Added to this is a smaller pool of PPP equity investors, especially ones who are willing to take on both construction and refinancing risk together with being liable for growing bid costs.
In an attempt to address some of these issues and to maximise the efficiency of PPPs, earlier this month, after numerous months of consultation with the private sector, the UK Government released the "A new approach to public private partnerships" paper (PF2).
Generally PF2 aims to:
give the UK Government a minority equity share in PPPs;
assure the future of affordable debt finance;
apportion greater levels of public risk taking to improve value for money;
accelerate the delivery of projects; and
provide greater project transparency.
Similarly, on the other side of the world, the Victorian Government has recently released the "Future direction for Victorian public private partnerships: request for public comment" paper for public consultation which, with similar objectives, in part suggests some of the same reforms to those contained in PF2.
This article outlines the main themes of the PF2 insofar as they affect debt and equity participants in the Australian market and, where applicable, draws parallels to the initiatives proposed by the Victorian Government.
Impact on the equity market
PF2 suggests that the government should take a minority equity stake in PPPs, entitling them to a project vehicle board seat. This is a result of the UK Government considering that under the current PPP structure it has little project oversight, a limited capacity to mitigate project risks and current PPP equity investors are making windfall gains.
The UK Government's objective is to align better public and private interests, give the Government more say in project development, increase transparency and improve the public's value for money by receiving as minority shareholder a share of these windfall gains.
At this stage, the Victorian Government is not being as bold. Considering the increased cost of many PPPs and the limited finance available for them, it is currently seeking feedback from the market as to how government capital contributions in PPPs should best be structured. The Victorian Future Direction Paper contemplates either government capital contribution grants at various stages of a PPP's life or the Government providing some form of debt finance or guarantee. It does not suggest that the Government become an equity holder in PPPs.
Under PF2, there is potential for a conflict of interest with the Government both as equity holder and offtaker. If a project was in financial difficulty, with a Government board member, consideration would be required as to how that board member voted and what information it received. For example, this conflict would arise if the project company was considering launching litigation against the Government procuring authority or where the project company was seeking a Government capital contribution due to a funding shortfall. PF2 attempts to solve this by splitting the Government department procuring the PPP from the department which will hold the minority equity investment.
Impact on the debt market
PF2 suggests that PPPs should have greater access to the capital markets in order to diversify project financing and reduce reliance on short term bank debt. According to the UK Government, cheaper debt will be more readily available and costs would be decreased by effectively increasing the supply of long-term private debt and diversifying debt syndicates.
PF2 seeks to implement a tender process that will require long-term financial solutions independent of banks debt finance.
Banks and bank debt funding have also been targeted by the Victorian Government . The Victorian Future Directions Paper suggests that the State should have a pre-emptive right to purchase debt if sold in the secondary markets particularly at a discount, together also with a right to replace a financier (ie. Yank the Bank) in defined circumstances.
We would expect the market to be generally receptive to governments structuring PPPs so as to make all forms of debt and bond finance available. However, these proposals will need to be carefully worked-through with the private sector as they have the potential to significantly impact how PPPs will be structured and financed in the future.
You might also be interested in...