15 Aug 2013

The PPP model has a healthy future in Australia

by Owen Hayford

A new Clayton Utz report dispels the myths about Public Private Partnerships.

Despite their critics, Public Private Partnerships (PPPs) still have a role to play in helping to deliver on Australia's future infrastructure needs – if they are used on the right projects where they can demonstrate their true value.

This is the conclusion of our new report, Improving the outcomes of Public Private Partnerships (PDF 1.8MB), which outlines the track record of PPPs in Australia and how the PPP model could be improved for future projects.

PPPs in Australia

The term PPP describes arrangements in which the public and private sector work together to achieve an outcome. They usually involve private sector finance and the bundling of design, construction, maintenance and sometimes other services into a single long-term "whole of life" contract.

There are two basic types of PPPs in Australia, traditionally described as "social infrastructure" and "economic infrastructure" PPPs. The first is more accurately described as a government-funded PPP, where the main source of revenue or funding that repays the private sector finance used to build the facility takes the form of a service or availability payment from government.

An economic infrastructure or "user-funded" PPP is where the main source of funding takes the form of charges paid by the users of the infrastructure, such as tolls paid by the users of a toll road.

Most infrastructure in Australia is procured using contractual delivery models other than PPPs. PPPs represent less than 10 percent of total government infrastructure procurement in Australia, which is appropriate because traditional procurement methods will deliver better value for money than a PPP for most projects.

Finding the right project for PPPs

PPPs had been unfairly maligned due to the very public collapse of toll road projects such as the Cross-City Tunnel and Lane Cove Tunnel. There are many other examples where the model had worked successfully – both in Australia and around the world – and which support the future use of PPPs for the right projects.

It is unfortunate that the PPP model has been perceived as a failure because of toll road projects that have not met traffic projections – which is essentially a failure of traffic flow modelling rather than the PPP model itself. The PPP model is essentially sound, and has proven time and again to deliver greater certainty of cost and time outcomes compared to traditional procurement methods – largely as a consequence of the additional rigour which private sector finance brings to the management of a project.

That's not to say that the PPP model couldn't be improved, because it could. For example, governments could engage in more risk sharing, encourage less aggressive financing structures, and minimise the additional cost of using private sector finance while still capturing the risk management disciplines which private finance brings.

Governments could structure their tender processes and evaluation criteria to encourage consortia that are led by those who will be the long-term owners of the projects such as super funds rather than investment banks and contractors who are interested only in short-term returns.

And to ensure that government is obtaining the best service solution possible for each aspect of the project, it could unbundle the PPP and separately tender one or more of the construction, maintenance or debt financing packages.

These potential improvements are, of course, not without their challenges. However, the industry has shown it has the ability to innovate when it comes to infrastructure delivery, so I predict a strong and healthy future for the PPP model.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.