Public Private Partnerships evolution or revolution?
GLOBAL BUSINESS CHALLENGES
“Our survey results strongly confirmed what we had felt for some time from talking to clients - that for the private sector, the most important thing by a country mile is a clear pipeline of projects. If governments can deliver that, the private sector will find the money to make them happen.� Geoff Wood, Partner Baker & McKenzie, Sydney
Contents Foreword
i
Market perspectives
ii
Executive summary
v
PPP landscape
1
Key findings −− A good model for delivering infrastructure?
8
−− Market challenges
14
−− Market opportunities
18
Current issues
29
Conclusion
45
References
47
Methodology
48
Contacts
49
“States run their
own projects and the Commonwealth separately does its own things. It would be better to have a whole of Australia approach…”
Respondent – Government sector
Foreword Welcome to the second report in our Global Business Challenges series. Our first report explored bribery and corruption in the international business community, and started a conversation about whether Australian companies were taking these issues seriously. Now, in our second report, we look at a topic that’s closer to home: the current state of Australia's Public Private Partnership (PPP) market. Ken Gray
Public Private Partnerships – evolution or revolution? presents the results of our survey of a broad range of industry players with recent experience in the Australian PPP market. Our survey respondents cover the full spectrum of market participants from government and the private sectors. Our respondents overwhelmingly endorse the PPP model as a key means of infrastructure procurement, but also identify room for improvement in the interests of more efficient and effective infrastructure delivery. PPPs are now an entrenched feature of Australia’s infrastructure market but challenges and calls for the model to be changed continue.
Geoff Wood
The challenge is to move beyond broad calls for change, recognise that the PPP model is largely appropriate, and identify in greater detail the key concerns and the potential solutions. The overarching objective must be to ensure that the PPP model continues to meet the objectives of all participants so critical infrastructure is delivered in a manner that provides value for money for the public and private sectors, whilst allocating risk appropriately and providing incentive for the private sector to provide the efficiency and innovation it is best placed to deliver. This report seeks to contribute to the continuing evolution of the PPP market in Australia through our survey of active market participants and our analysis of some of the key areas for improvement suggested by our survey participants. We hope you enjoy reading our report and look forward to continuing the conversation.
Ken Gray Partner, Baker & McKenzie
Geoff Wood Partner, Baker & McKenzie
PPP – evolution or revolution? | i
Market perspectives Transfield Services There is no doubt concerning the significant economic impact of PPPs over the past 25 years; Infrastructure Partnerships Australia estimates it at some $60 billion. In a direct sense, this represents investment which would not have been made or which would have been delayed if paid for from the public purse. PPPs have also had indirect benefits, which have served Australia well in a globalised economy. The use of PPPs has (with privatisation) helped break the public sector's monopoly in the provision and operation of infrastructure in Australia. Governments now have competitive benchmarks, and the standard of procurement has lifted. PPPs have demonstrated that risk can be effectively transferred to the private sector. The question now is, is there a continuing appetite for PPPs? The evidence provided by this Baker & McKenzie report is positive. Although we are experiencing a period of global economic instability, fundamentally Australia is still in pretty good shape. There is money available. In my own company, I know that we have had little difficulty in finding partners interested in co-investing in the development of projects such as wind farms. Why is this so? Getting beyond the headlines, infrastructure, whether economic or social, makes good investment sense. The services are generally "essential". The revenue streams are generally linked to inflation and are very long term. But we still need to do more to encourage PPP development, and there are still issues with our Australian model. In my view, Government could facilitate and encourage PPPs through addressing bid costs and tender period issues, and a fresh approach to risk allocation. They could also provide financial support on appropriate projects and do more to encourage true long term partnerships. They also need to strongly take the lead in publicly promoting the benefits of PPP projects, and in building a clear and reliable PPP pipeline. We have been doing modern PPPs in this country for 25 years now, since Baker & McKenzie's Geoff Wood and I worked together on the Sydney Harbour Tunnel in the mid 1980s. They have been a great success, but there is still work to do. It is time to focus on how we can refresh the model based on the lessons we have learnt and in response to current market conditions. Tony Shepherd Chairman, Transfield Services Limited Patron, Infrastructure Partnerships Australia President, Business Council of Australia
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“It is time to focus on how we can refresh the model based on the lessons we have learnt and in response to current market conditions.” Tony Shepherd Transfield Services Limited
“...significant benefits can come from looking at the opportunities available from taking a wider perspective than just the road, rail line or port.” Michael Deegan Infrastructure Australia
Infrastructure Australia Public Private Partnerships will continue to play a key role in infrastructure provision in Australia. The evidence that they deliver superior value for money to governments and the community means that they deserve to be a preferred delivery model for many projects. While many of the benefits of PPPs come from the private sector’s discipline in managing whole-of-life costs and delivery risks, there are other areas where they can add value. Increasingly, as Infrastructure Australia (IA) looks at major projects, it is clear that significant benefits can come from looking at the opportunities available from taking a wider perspective than just the road, rail line or port. While governments recognise the benefits that can come from integrating infrastructure into the fabric of our cities or of designing it to promote better places, they do not usually recognise the full opportunity set. Many of these opportunities are commercial in nature and not an area where governments have strong experience or skills. By providing the private sector with the opportunity to conceive of how infrastructure could be best designed to promote the most value to the community - as well as a financial return – the opportunity inherent in infrastructure provision can often be better realised. Especially when budgets are stretched and the demands are on governments to provide more, we cannot pass up the opportunity to capture this extra value. Michael Deegan Chief Executive Officer, Infrastructure Australia
PPP – evolution or revolution? | iii
“Stronger political
understanding of the benefits of PPP projects will help support the process…”
Respondent
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Executive summary Baker & McKenzie’s thought leadership report on PPPs investigates the state of the Australian PPP market, outlining issues of concern for industry and government, and ways to improve the current market. The survey asked respondents a number of questions covering: competition in the market place; the efficiency of procurement process management; the provision of information and the quality of briefs; risk allocation and opportunities; PPP financing; and the potential for future growth in the market, looking specifically at the feasibility of widening the scope of asset classes subject to PPPs. The survey also probed opinions around current developments, including IA's issue paper Infrastructure Finance Reform – July 2011 and its impact on infrastructure growth and PPPs in Australia. With the obvious need to replace and expand infrastructure in order to cope with capacity challenges and finite capacity of traditional procurement models, future opportunities for PPPs are set to increase. The role of the private sector as a source of finance and expertise reinforces the case for the expansion of the PPP model. Despite this, there are concerns among the private sector that there are insufficient opportunities to get involved with PPP projects – 73% of those we surveyed in the private sector thought there were not enough PPP opportunities. However, private sector players do not feel that there is excessive capacity to deliver projects through the PPP model. When questioned on the number of private sector subcontractors in areas such as construction, design, operation and facilities management: ■■ Only 14% thought that there was an insufficient number of subcontractors in the market ■■ Only 11% thought that there were too many players in the market ■■ Whilst public sector respondents were generally satisfied with the current depth of the PPP market, 35% of public sector respondents expressed a concern that there are not enough subcontractors to undertake the design, construction and operations of PPP projects ■■ A similar percentage of public sector respondents claimed that there are insufficient sponsors in the PPP market.
PPP – evolution or revolution? | v
Despite general satisfaction with the PPP market, the process through which managers bid for PPP contracts is clearly in need of renewal: ■■ 95% of private sector managers said the current bidding process is too expensive ■■ Over half of respondents (56%) strongly agreed that this was the case, indicating that procurement costs could potentially be seen as a barrier to market entry ■■ In addition to cost concerns, the process of bidding for PPPs is too complex according to 82% of private sector respondents ■■ The Public Sector Comparator (PSC) is not held in high regard by the private sector, as only 20% of respondents thought it to be effective. One solution could see the Government reimburse some of the bid costs in projects which take an unexpected turn. Not surprisingly, this proposal was supported by an overwhelming 86% of those we surveyed in the private sector. Other solutions to common concerns could include more standardised terms and conditions for PPP projects, a reexamination of the Government’s probity processes to ensure the system is not overly complex and facilitates the sharing of information, and a willingness on the Government’s part to consider adopting elements of alliancing or other relational contracting aspects of procurement in PPPs. In addition, our survey findings indicated strong backing for central units – a centralised government approvals mechanism for PPP projects. Our report identifies a procurement process which is both more centralised and standardised as two examples of where Australia can and must learn from international best practice. We asked respondents if there are overseas PPP models which serve as best practice examples for the Australian PPP market. We found that a large proportion (45%) of respondents believed there are, and out of these 48% thought that the Canadian model is the best international example from which to learn. We found that the Canadian model is admired by Australian industry for its efficient and streamlined approach to the bidding and procurement stages of the PPP process, among other factors. We also found support for user charges as an alternative financing mechanism – 76% claimed that user charges or other marketbased mechanisms could be used in at least some projects. Despite this support there was widespread recognition that such alternative methods of financing may not be accepted by the public or communities.
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95% of private
sector managers said the current bidding process is too expensive
76% of
respondents claimed that user charges or other market-based mechanisms could be used in at least some projects
Parallel negotiations with two or more preferred bidders are a common occurrence experienced by nearly 60% of those we surveyed. It is interesting to note that opinion was divided as to whether parallel negotiations are beneficial overall. Whilst 68% of respondents believed parallel negotiation delivers benefits to the state, 51% thought that participating bidders lose out. Our survey analysed attitudes to IA's Infrastructure Finance Reform paper and asked whether the proposed innovations in the report - availability payments, demand risk insurance, development of infrastructure funds, establishment of an infrastructure bond market, joint property development, sale of brownfield assets, tax breaks and tax increment financing - would have an impact on the PPP procurement process. We found that there was broad support for the IA innovations with tax breaks and availability payments, in particular, viewed as having the most likely positive impact. Since our survey was conducted, there has been substantial commentary about the challenges facing two PPP projects in New South Wales - Reliance Rail and the Cross City Tunnel. It is not the intention of this report to address specific projects such as these, but obviously the lessons to be learned from them will be critical in improving the PPP model. While high profile, troubled projects such as these will generate calls for "change", particularly regarding the allocation of risk, the important task is to identify with some precision the exact risks that need to be addressed, and the exact changes that will satisfactorily address them. PPPs are very much here to stay. This report highlights some of the steps that can be taken to ensure the PPP model continues to evolve.
PPP – evolution or revolution? | vii
“The Australian PPP market has shown real resilience in the face of a challenging global environment. But more can be done, particularly in developing more options for funding PPPs, to facilitate transactions.� Roy Weitzman, Partner Baker & McKenzie, Melbourne
PPP landscape The 21st century has already given rise to a series of global trends which have increased the rate of social and economic changes. Changing demographics, principally ageing and growing populations, are placing increasing demands on existing economic and social infrastructure. Meanwhile, we have seen how globalisation is deepening competition between nations and regions, increasing the need to develop high quality and state of the art infrastructure such as transport hubs, logistics and information technology. Creating the necessary state-of-the-art infrastructure to meet all these demands comes at a price. Estimates of the required investment in national infrastructure range between $450 billion and $770 billion over the next decade.1 At the same time, there are other demands on government budgets intensifying the public policy imperative to deliver high quality projects at a cost-effective and sustainable price. Although the public and private sectors have a history of working together, the current discourse surrounding the most recent form of PPPs has been building since the mid 1980s. In the pre-PPP world, government at central or local level determined policy, decided whether or not to consult others, allocated resources and then announced the chosen procurement process. Throughout the 1990s and early 2000s, increasingly more countries – both within and outside the Organisation for Economic Cooperation and Development (OECD) area – started using PPPs as a mode of delivery. PPPs are attractive to policymakers for various reasons. PPPs can offer value for money, greater cost certainty, secure private sector expertise and innovation, more efficient allocation of risk and can potentially spread the cost of projects over a longer period of time. Whilst PPPs remain politically controversial, our report does not seek to resolve these debates. This report takes as its starting point that 62% of our survey respondents, from government as well as the private sector, are satisfied with the most recent PPP on which they worked in Australia (Fig.1). Given this level of satisfaction, we therefore focus on current issues and room for improvement, as well as address the misunderstandings that underlie the arguments against PPPs.
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Fig. 1 Do you agree the PPP project was well considered and developed?
5%
10%
14%
19%
52%
Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree
62% of
respondents were satisfied with the most recent PPP on which they worked
What is PPP? The expression PPP covers a range of different arrangements whereby the private sector delivers a public project or service. These arrangements range from relatively short-term service contracts through to long term leasehold ownership of publicly utilised assets (such as a major road). Generally, PPPs fill a space between traditionally procured government projects and full privatisation. The feature of a PPP that distinguishes it from privatisation is the reversion (at least in theory) of ownership of the asset to the Government at the end of a stated term. Not surprisingly, the arguments against PPPs tend to be the same as the arguments against privatisation generally. PPPs can conceptually address any infrastructure need. Two successful examples of Australian PPPs are Sydney Harbour Tunnel and Royal Children's Hospital – one of the earliest and one of the most recent projects respectively. ■■ Sydney Harbour Tunnel. This immersed tube road tunnel was developed as a partnership between the Government of New South Wales and private investors. Transfield and Kumagai Gumi formed a joint venture company, which constructed the tunnel. Westpac provided the inflation indexed bond finance. The joint venture also had a 30-year operating contract for the management of the tunnel. The tunnel is tolled and the toll revenue repays the investors. The project was opened on time and on budget in 1992. ■■ Royal Children's Hospital. In 2006 the Victorian Government contracted with the private sector for the replacement of the Royal Children's Hospital in Melbourne. The hospital has been rebuilt, with the prior hospital site now reverting completely to parkland. The private sector consortium will also deliver facilities management services for the contract term. The hospital is the leading children's hospital in Melbourne, containing more single bedrooms, more neonatal cots, and more operating theatres than the prior hospital. There is also a 2,000-space underground car park, a two-storey aquarium and scienceworks display and a 90-room medi-hotel. The hospital has a leading research facility in the Murdoch Children's Research Institute, and incorporates the Department of Pediatrics of the University of Melbourne. The project was opened on time and on budget in December 2011.
PPP – evolution or revolution? | 2
Market evolution It is not surprising that PPPs continue to be reviewed and evolve given the breadth of critical infrastructure that is, or could be, delivered via the PPP model. Continued, and continual, discussion as to the pros and cons of PPP models is essential. Some major changes in the Australian market are set out below. ■■ A great expansion in the categories of assets subject to PPPs. Modern projects include convention centres, research facilities, desalination plants – any project with a large capital component ■■ The capital value has also increased enormously. While the early projects were in the $50-250 million range, most current projects are around the $1 billion mark ■■ Risk allocation has changed in significant respects over time. Predominantly, this has been to the benefit of the private sector, although risk allocation, generally speaking, is still quite severe. The major influences on the modern PPPs have been: ■■ The resources boom. Prior to 2007, this boom led to significant labour cost escalation in most projects ■■ The Global Financial Crisis. This adversely affected the cost of debt as well as the availability of finance for many projects. In some cases this led to a severe downgrading of the project debt with adverse consequences for the rating of many deals (Reliance Rail being a recent example). Governments around the world are reviewing models for delivering infrastructure projects efficiently and cost effectively. In December 2011, the UK Treasury issued a consultation on the Private Finance Initiative (PFI), as PPPs are known in the United Kingdom, outlining the case for a "new model". Since 1992 PFI has delivered around 700 projects across a range of sectors including healthcare, education and transport. Despite this, policy makers in the United Kingdom have concerns that PFI contracts "can be too costly, inflexible and opaque". The overall objective of the PFI consultation is to create a new model of delivering public projects that: ■■ Are more cost effective, with an efficient and speedier procurement process ■■ Increase the availability of a broader range of financing sources ■■ Are flexible enough to accommodate changing needs over time ■■ Are financially transparent ■■ Have in place the right incentives, risks and rewards allocation.
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“The current review of PPP structure and processes allows the opportunity to consider new approaches to PPP risk allocation, incorporating approaches from relationship contracting such as Alliances.” Alex Hartmann, Partner Baker & McKenzie, Sydney
“...the processes underlying the PPP model in Australia need to be reviewed.”
The Government of India has also recently consulted on PPPs. A draft National PPP Policy was announced in the Government’s budget for 2011/12. The draft policy is designed to encourage and create a comprehensive framework for the development of PPPs at central and state-government levels. India has seen a huge growth in PPPs over the last fifteen years and the National PPP Policy is designed to ensure that the expansion in the use of PPPs is an effective method for meeting "the growth aspirations of the nation".2 These are just two of many examples of governments around the world looking to develop and enhance PPP regimes as they seek to overcome their own infrastructure development challenges. Australia shares this challenge and, in its report to the Council of Australian Governments in December 2008, IA highlighted the need to “find ways to make better use of existing infrastructure, to remove the bottlenecks and gaps that are holding back Australia's growth, and to identify opportunities for new capital investment”. The Infrastructure Finance Reform paper of July 2011 highlighted a number of issues for discussion designed to tackle the "infrastructure deficit" – a concern that demand is outstripping investment in infrastructure.3 The paper looked at obstacles to investment in infrastructure and calls for views on ways to increase the role of the private sector through enhancing the pool of finance available for infrastructure, maximising available funding and reducing the costs associated with delivery. The debate is not just restricted to methods of financing and generating sufficient returns – as our survey suggests, the processes underlying the PPP model in Australia need to be reviewed. PPP is certainly here to stay, but reform is necessary to ensure both sides of the partnership – the government and private sector – are rewarded.
PPP – evolution or revolution? | 4
“The overall standard is
high, and at their best, PPPs are world-leading.� Respondent
“There is a lack of political
will, and government agencies often don’t trust PPPs as an option… There's an attitude that getting the private sector involved in delivery is 'selling the farm'.” Respondent – Power, Utilities & Infrastructure
Key findings
A good model for delivering infrastructure? FACTS AND FIGURES A majority of respondents (62%) said that the most recent PPP procurement project on which they worked was well considered and developed One-third of public sector respondents were concerned at the lack of private sector capacity to deliver PPP projects. 35% of public sector respondents also thought that there are not enough subcontractors to undertake the design, construction and operations of PPP projects 83% of private sector respondents supported a proposal for the Government to consider simplifying the procurement process with the introduction of standardised terms and conditions Only half of private sector respondents (51%) agreed that the process currently worked in a predictable manner. A similar number (53%) thought that the Government team functioned well Only 23% of respondents agreed that the PSC was realistic A majority of respondents (59%) indicated that there were parallel negotiations with two or more preferred bidders in their last experience with a PPP
Our questions on public and private sector views of the PPP market probed two key factors – opportunities and management. Satisfaction was measured among a number of variables, including views of PPP opportunities and market depth, management and procurement process, most recent experiences with PPP procurement and the outcomes of PPP procurement. These angles allowed us to measure satisfaction along a number of parameters to develop a comprehensive picture, highlighting specific gaps and remedies to improve the PPP model.
Market views of current PPP opportunities We asked respondents in the public sector if they agreed that there are not enough sponsors in the PPP market and whether they agreed that there are not enough subcontractors (construction, design, operations, facilities managers, etc). ■■ One-third of public sector respondents are concerned at the lack of private sector capacity to deliver PPP projects (Fig. 2) ■■ A similar number (35%) also thought that there are not enough subcontractors to undertake the design, construction and operation of PPP projects (Fig. 3) ■■ 50% disagree or strongly disagreed with the statements that there are not enough sponsors and not enough subcontractors in the PPP market. Private sector respondents did not feel that there was either excessive or insufficient capacity when questioned about the number of private sector subcontractors in areas such as design, construction, operation and facilities management. ■■ Only 14% said there are insufficient numbers of subcontractors in the market ■■ Only 11% said there are too many players in the PPP market ■■ Over half of respondents disagreed that there are too many players in the market
PPP – evolution or revolution? | 8
These responses suggest scope for growth in the market with new market entrants, particularly as opportunities for PPP projects look set to increase in the coming years. Of more concern to the private sector is the lack of current PPP opportunities – nearly three‑quarters of those surveyed (73%) thought that there are not enough PPP opportunities. Almost one-third of respondents (29%) strongly agreed that this was the case, with the lack of opportunities seen to be greatest among those in financial and professional services, followed by those working in the power and utilities sector.
Market views on current PPP procurement Respondents from the private sector agreed that there are a number of opportunities for improving both PPP and procurement practices. Key amongst these is to reduce the cost of bidding for PPP projects and make the bidding process less complex. 95% of private sector respondents agreed that bidding for PPPs is currently too expensive and over half of total respondents (56%) strongly agreed that this was the case, indicating that procurement costs could potentially be seen as a barrier to entry for private sector contractors. Efforts to reduce costs and simplify the procurement process could therefore help to introduce greater competition and choice into the market place and, in turn, help to improve value for money for the public sector. ■■ 83% of private sector respondents said they supported a proposal for governments to consider simplifying the procurement process with the introduction of standardised terms and conditions. This rose to 9 out of 10 of those in the construction sector ■■ One solution to the cost concerns could see the Government contribute to the bid costs for losing consortia in projects which take an unexpected turn. This proposal was supported by 86% of those in the private sector ■■ In addition to cost concerns, the process of bidding for PPPs is seen to be too complex according to 82% of private sector respondents ■■ 73% would also welcome steps to reexamine the Government's probity processes, which are currently seen to be too complex and act to hinder the sharing of information. This view was particularly strong amongst private equity providers (85%) and financiers (77%). Other reforms the Government should consider include being more open to procuring infrastructure via alliancing or other types of relational contracting. 57% of those in the private sector supported this view.
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Fig. 2 Do you agree there are not enough sponsors in the PPP market? 50
46% 40
30
27% 20
15% 10
8% 0
4% Strongly agree
Agree
Neither Disagree Strongly agree nor disagree disagree
Fig. 3 Do you agree there are not enough subcontractors* in the PPP market? 60
50%
45
30
31%
15
0
15%
4% Strongly agree
0% Agree
Neither Disagree Strongly agree nor disagree disagree
*Subcontractor refers to construction, design, operations, facilities managers
Fig. 4 Do you agree that the PSC was realistic? 40
34%
30
30%
20
0
Experiences of the most recent PPP procurement process
21%
12%
10
3% Strongly agree
Agree
Two specific recommendations were supported by private sector respondents, suggesting that the Government should be playing a bigger role in facilitating PPP: 90% agreed that the PPP market needs an accurate and public "pipeline" of project opportunities, and 72% agreed that governments should be more actively involved in coordinating PPP projects.
Neither Disagree Strongly agree nor disagree disagree
To gain a better understanding of the level of satisfaction of the PPP procurement process, we asked respondents about their experience. Significantly, there was a generally high level of satisfaction with their last PPP procurement process: ■■ 66% agreed that the delivery method proposed in the brief was the most appropriate ■■ 75% agreed that private sector teams functioned well. Issues of privacy and confidentiality did not emerge as concerns as 83% stated that these issues were well managed. Only 15% of public sector respondents thought that the private sector needed to take confidentiality and legal privilege more seriously, while nearly twothirds (62%) did not think this was an issue. However, there were a number of specific areas highlighted as areas where Australia could make particular progress to improve the PPP market. Three of the parameters with the lowest ratings were: ■■ Only 51% agreed that the process currently worked in a predictable manner ■■ Only 53% agreed that the Government team functioned well ■■ Only 24% agreed that the PSC was realistic. This was an area singled out for specific concern (Fig. 4). Of note, there was a divergence of opinion on whether the Government team functioned well, depending on whether the respondent was from the public or private sector. Public sector respondents were much more likely to think that the Government team functioned well – 77% – as opposed to a minority of 47% in the private sector. In contrast, there is a general view in the marketplace among both public and private sectors that the private sector is competent in understanding PPP briefs. Surprisingly, the public sector had more confidence in the private sector understanding PPP briefs than the private sector had in itself. 73% of those in the public sector believed the private sector understood the briefs, compared to only 62% of those in the private sector.
PPP – evolution or revolution? | 10
The effectiveness of the Public Sector Comparator
Fig. 5 Did the disclosure of the PSC assist bidders in the PPP process?
The PSC is a tool used by governments in many jurisdictions to compare the value for money projections resulting from the delivery of a project using the PPP model with the delivery of the same project by traditional procurement methods. When asked whether the disclosure of the PSC assisted bidders in the PPP process, three-quarters of respondents (76%) stated that it did. (Fig. 5). All of our public sector respondents (100%) agreed and 69% of private sector respondents thought the PSC was of assistance, demonstrating some unease amongst the private sector.
24%
76%
Yes No
However, both public and private sector respondents expressed concerns, with the majority of the private sector respondents believing that the PSC offers an ineffective comparative tool. Overall, only 20% thought it to be effective, compared to 46% who did not think it was effective. This study probed views around the benefits of disclosing the PSC, with many respondents arguing that full disclosure and further details are necessary for it to be truly beneficial. Calls were made for PSC disclosure to include details on the assumptions underlying the PSC, details of the transferred risk adjustment, and greater transparency about the methodology and underlying calculations.
Fig. 6 Do you agree that parallel negotiations deliver benefits to the participating bidders?
Parallel bidding
60
80
Government
A majority (59%) of our respondents indicated that there were parallel negotiations with two or more preferred bidders in their last PPP. 68% thought that parallel negotiations added value to the state. There was, however, a significant divergence depending on whether the respondent was from the public or private sector. 100% of public sector respondents agreed that the parallel negotiations delivered added value to the state. This figure fell to 62% of private sector respondents. When asked whether parallel negotiations delivered benefits to the participating bidders (ignoring any offset advantages incurred), 64% of public sector respondents agreed, compared to only 21% of private sector respondents (Fig. 6).
Agree Disagree or no opinion
64%
40
Private sector 20
21%
0
-20
36% -40
-60
79% -80
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“ …it would be beneficial if the government/procuring body effectively gave some level of compensation to a losing bidder.” Respondent — Business Unit Head, Government sector
PPP – evolution or revolution? | 12
“There's clearly room
to engage the private sector in a wider range of asset classes, if government is willing to be creative.� Ken Gray, Partner Baker & McKenzie, Melbourne
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Key findings
Market challenges FACTS AND FIGURES
Satisfaction with PPP outcomes
The most highly rated policy intervention came in the form of tax breaks, with 86% of respondents stating that this would have a positive impact on the procurement process
In total, 71% of our private sector respondents had been involved in a winning PPP bid during the previous three years. Whilst on the surface this is a high percentage, the fact that nearly one-third of the market had not won a deal in three years raises significant questions for the viability of continued participation in PPP bidding for those companies.
62% of respondents believed that demand risk insurance would positively impact on the PPP procurement process 56% of respondents felt that the risk allocation in PPP projects was both overly onerous for private sector participants, while at the same time not representing value for money for government. This concern was greatest among those working in property and construction (65%) and in primary industries (88%) Nearly three-quarters of respondents believed user charging could be more widely applied in the market, though concerns over public hostility could be a barrier to wider adaption
Our survey identified that private sector respondents thought there was room for more parties in the market. When a third of the existing market has not won a deal in three years, this desire for greater competition seems hard to reconcile. A measure of whether the market is working well is the extent to which these private sector respondents were satisfied with outcomes negotiated in PPP projects. Where risk allocation in relation to industrial action had been an issue, the outcomes had been largely satisfactory - 48% either satisfied or extremely satisfied. Only 20% were either dissatisfied or extremely dissatisfied. Equally positive outcomes were noted in dealing with allocation of risk from vandalism (where 57% were satisfied or extremely satisfied) and market disruption (where 50% were satisfied or extremely satisfied). There were, however, a number of market challenges where a significant minority of respondents were less happy with negotiated outcomes. In the following cases we found: ■■ 36% were dissatisfied or extremely dissatisfied with the design approval process negotiated in their contract ■■ 25% were left dissatisfied or extremely dissatisfied when negotiating inclusion of entitlements to extensions of time ■■ 24% were dissatisfied or extremely dissatisfied when negotiating risk allocation regarding contamination ■■ 22% were dissatisfied or extremely dissatisfied when negotiating on refinancing
PPP – evolution or revolution? | 14
■■ 20% were unhappy regarding allocation of risk in relation to industrial action ■■ 19% were unhappy with negotiated outcomes on planning approvals. Given the potential for issues to arise during the course of a project, the need for flexibility in dealing with unforeseen changes is clearly crucial. On this point, there were sharply divergent views over the extent to which both the public and private sector teams were able to adapt: ■■ 73% rated the private sector team as either flexible or extremely flexible
Fig. 7 Which of the innovations have had a positive impact on the PPP process? 90
86% 80
78% 74% 70
71%
60
■■ Only 26% gave the same rating to the public sector team.
MAXIMISING FINANCE MECHANISMS AND REPAYING INVESTORS – SUGGESTIONS IN THE INFRASTRUCTURE FINANCE REFORM PROPOSALS Enhancing the pool of available finance
Maximising available funding
Superannuation funds
Availability payments
Infrastructure bonds
User chargers and network pricing
Infrastructure funds
Tax Increment financing
Government equity and debt assistance
Joint property development
Sales of brownfield assets
Fig. 8 Which of the innovations have had a positive impact on the PPP process? 80
80%
70
Demand risk insurance Sale of brownfield assets
Infrastructure funds
In 2011, the Australian Government announced the formation of the Infrastructure Finance Working Group (IFWG) under the auspices of IA. The IFWG made a number of recommendations to improve financing and funding of infrastructure projects which are listed below.
Infrastructure bonds
Taxation of infrastructure investments
Financing and funding PPP projects
50
65% 62%
60
Taxation treatment of infrastructure investments Source: Infrastructure Australia, Infrastructure Finance Reform Issues Paper, July 2011
Project financing: enhancing the pool of finance available The global financial crisis is having a prolonged effect on the availability and cost of private project finance. The diminishing appetite for risk has seen the growth of larger consortia of multiple funders and of the trend towards tougher loan covenants.
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50
Available payments
Tax increment financing
Demand risk insurance
Fig. 9 Do you agree that tax breaks have had a strong impact on the PPP process? 60
55% 45
30
Tax treatments of infrastructure projects
32%
The most highly rated policy intervention came in the form of tax breaks. Not a single respondent disagreed that tax breaks would have a positive impact, while as many as 87% thought that they would play a positive role (Fig. 9).
15
13%
0
0% Strongly agree
The majority of respondents thought that each of the innovations proposed by IA in its 2011 report would have a positive impact on the PPP market by enhancing the pool of finance available (Fig. 7 and Fig 8). Our survey asked respondents what overall impact they thought each of the potential measures would have on the procurement process. The findings revealed widespread support for measures that will enhance the pool of available finance.
Agree
0%
Neither Disagree Strongly agree nor disagree disagree
The impact of tax breaks clearly has a positive role to play in promoting further PPP activity, yet the wider tax system should also be considered when attempting to create attractive conditions for long-term investment, as taxes will have a major impact on the cost of capital and investment decisions made by the private sector.
Demand risk insurance Fig. 10 Do you agree that demand risk insurance has had a strong impact on the PPP process? 50
43%
40
30
20
19%
0
9% 1% Strongly agree
Agree
The results show that IA's discussion around the role of demand risk insurance is seen in a largely positive light among PPP market participants, with 62% of respondents believing that this innovation would positively impact the PPP procurement process. This compared to only one in ten who disagreed (Fig. 10). If demand risk insurance helps to bridge the gap between public and private sector appetites for patronage risk for the delivery of future toll roads then it is a worthwhile innovation to the market.
28%
10
Although support for demand risk insurance was relatively lower, it is a subject worthy of further review in light of the role demand forecasting has played in PPP projects.
Neither Disgree Strongly agree nor disagree disagree
Project funding: The need to maximise available funding Going forward, the Government could consider a range of new funding options which could fundamentally alter the way in which risk is shared between the public and private sectors. The IA Issues Paper 2011 sets out options for reform ranging from the Government taking an equity stake in projects (as in the case of the National Broadband Network) through to the co-funding of projects.
PPP – evolution or revolution? | 16
“States run their
own projects and the Commonwealth separately does its own things. It would be better to have a whole of Australia approach...” Respondent – Business Unit Head, Government sector
Key findings
Market opportunities FACTS AND FIGURES Canada was cited as the most obvious place to look for best practice (48%) 65% of public sector respondents would welcome a centralised state government mechanism for approving PPP projects. 72% of private sector respondents felt that the Government should be more active in coordinating projects and 70% thought that this should be done through a centrally managed process through which PPP projects are approved 95% of private sector respondents believed that bidding for PPPs is too expensive 90% of private sector respondents believed that the market needs an accurate and public "pipeline" of project opportunities 83% of private sector respondents believed governments should consider a stripped down procurement process, with model terms and conditions, and limited returnable schedules
Does Australia need a more centralised approach? While 53% of survey respondents believed that the Government team functioned well in their most recent procurement process, our survey found that across both the public and private sectors it was clear that there is support for a more centralised procurement approach. ■■ Two-thirds of those in the public sector said they support a centralised approval mechanism for PPP projects ■■ 65% of public sector respondents would welcome a centralised state government mechanism for approving PPP projects. Nearly one quarter (23%) strongly support this. Mirroring the views of those in the public sector, there is a general sense that the market could benefit by having greater centralisation via a "pipeline" of PPP opportunities: ■■ Private sector respondents felt that the Australian Government should be more active in coordinating projects (72%) ■■ 70% agreed that this should be done through a centrally managed process through which PPP projects are approved ■■ 67% agreed that in order for PPPs to be efficiently procured, a centralised state government approvals mechanism is needed ■■ Financiers are most likely to believe (82%) that a centralised state government approvals mechanism is needed. IA has already identified that the need to deliver better governance represents a major challenge in overcoming some of the inefficiencies and inconsistencies which might otherwise impact adversely on infrastructure operations and investment. This view was shared by our respondents, the majority of whom called for the introduction of a more centralised system of procurement. A number of respondents also called for a more streamlined decision making process by government.
PPP – evolution or revolution? | 18
Overseas models that work 45% of respondents thought that Australia could learn from PPP models used in other countries (Fig. 11). This rose to 65% of those who work in the public sector. Only 12% thought it was not possible to learn from overseas markets. In contrast, many respondents were able to cite specific areas where Australian PPP projects could benefit from expertise built up elsewhere - in particular Canada and the United Kingdom.
World leaders in PPP development - Canada
65% of public
sector respondents said they would welcome a centralised state government mechanism for approving PPP projects
With Canada cited as the most obvious place to look for best practice (according to 48% of respondents) our survey returned large amounts of positive feedback on the Canadian PPP model (Fig. 12). One respondent claimed that “Canada has a greater commitment to PPPs, and generally manages to avoid the frequent use of multiple bid stages. Overall, the bid process is simpler, with less required of bidders".
Fig. 11 Does another market provide a good example for the Australian PPP market?
Another respondent claimed that Canada had a "systematic approach to using PPPs for delivery". The Canadian PPP system can be said to have gone through three waves of development. The first wave, in the 1980s and 1990s, was largely characterised by individual projects (i.e. a non co-ordinated program). Significant projects included:
43%
45%
12%
■■ The Confederation Bridge between the eastern provinces (the longest bridge in the world, crossing ice-covered water)
Yes
■■ Nova Scotia schools (Canada's first venture into P3 schools)
Don't know
■■ The 407 ETR toll highway (the world's first all-electronic, barrier free toll highway). In the second wave, from 2000 to 2005, activity started to ramp up and provincial programs and specialist agencies emerged. The second wave also saw dominant models (build/finance and design/build/finance/operate) and dominant sectors (hospitals and roads) emerge. There were a number of key success factors which characterised the second wave. These included developing pilot projects, developing a financing model, identifying champions, building expertise, providing value for money, risk identification and allocation, engaging the market and legislative reform.
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No
Fig. 12 Which jurisdiction provides a good example for the Australia PPP market?
The third wave from 2006 to 2010 resulted in a series of highway, hospital and municipal services projects across Canada, with some jurisdictions more involved than others.
50
In Canada the responsibility for infrastructure investment is quite diverse. The Federal Government maintains a strong interest in projects of national significance, such as major ports and borders, and provides financial support to provinces and territories. In general, provinces have responsibility for hospitals, large intercity highways and schools, while municipalities have responsibility for local infrastructure such as roads, water and sewerage services.
48%
40
32% 30
20
10
4% 0
Canada
United Europe Kingdom TENs
2%
2%
Hong Kong
Singapore
One of the key benefits to the Canadian PPP system is that it has the public's strong backing. Generally, Canadians see the need for private sector involvement in infrastructure renewal. PUBLIC-PRIVATE PARTNERSHIPS IN DIFFERENT SECTORS (SUPPORT/SOMEWHAT SUPPORT %) Hospitals
Roads
Water
Sewage
Recreation
Transit
Schools
2011
66
71
67
67
75
73
66
2010
62
72
53
58
74
67
62
2008
63
71
55
58
72
67
60
2007
63
73
55
60
71
66
63
2006
63
72
55
60
72
67
2005
63
71
53
58
73
67
2004
62
72
54
60
73
65
Source: The Canadian Council for Public-Private Partnerships, From the Ground Up: Canadian Opinion on Public Private Partnerships 2004-2011
Canadian pension funds are among the most active investors in infrastructure, with some funds having a portfolio allocation towards equity infrastructure of 10% or more. After testing the waters through third party managed funds, Canadian pension funds over the years have been able to acquire the knowledge, expertise and resources to invest directly in infrastructure. Not only are they able to co-invest, but also to take leading roles in consortia, competing with other funds and financial sponsors when bidding for projects. This means that the funds investors have in-house resources to produce their own research and risk assessment for infrastructure projects without being dependent on external consultants. Pension fund investment in PPPs is encouraged indirectly by way of offering such funds a predictable, relatively safe investment for funds with Canadian Government co-investment, rather than by way
PPP – evolution or revolution? | 20
of specific incentives to pension funds to invest in PPPs. For example, the Government of Canada took a leadership role in developing PPP opportunities within Canada through two initiatives, both part of the Building Canada plan approved in 2006. The first was the C$1.25 billion Public Private Partnerships Fund. This program supports innovative projects that provide an alternative to traditional government infrastructure procurement. The PPP Fund has helped expand infrastructure financing alternatives in Canada, provided incentives to attract investments from the private sector, and increased knowledge and expertise in alternative financing. The PPP fund provides up to 25% of the value of a project’s direct capital costs, leveraging municipal and provincial commitments which will cover for the rest of the costs. The C$1.25 billion directly leverages C$5 billion in PPP infrastructure investments in Canada. In addition, the PPP Office, funded by the Government of Canada, facilitates a broader use of PPPs in Canadian infrastructure projects, including through the identification of PPP opportunities at the federal level. The Building Canada plan also encourages the development and use of PPP best practice by requiring that PPPs be given consideration in larger infrastructure projects funded through the Gateways and Border Crossings Fund and by the Building Canada Fund. Specifically, all projects seeking C$50 million or more in federal contributions must assess and consider the viability of a PPP option. While the Canadian PPP market grows as a whole, provincial differences will continue to dissolve as a result of market forces. As jurisdictions compete for infrastructure investments, they will have to become competitive within the Canadian landscape. Significant industry organisations, such as the Canadian Council for Public-Private Partnerships, play a role in making information about projects available to a variety of bidders, thereby increasing competition. However, there remain differences (particularly in the types of investments and legal documentation) between provinces which must be managed when working across multiple Canadian jurisdictions.
World leaders in PPP development – United Kingdom It is not surprising that the United Kingdom has been identified as a leader, as it is undoubtedly a reference jurisdiction for PPP projects. The United Kingdom is one of the countries that has implemented the largest number of PPP projects in the widest variety of sectors in recent years. However, PPPs have always been politically controversial and particularly since the change of government in 2010 and the ongoing economic crisis in Europe, there has been increasing scrutiny of the efficacy of the model.
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“Canada has been quite innovative, particularly after the GFC. They’ve got centralised approvals, but they’ve also got a stronger political commitment to them.” Respondent – Government sector
“The UK experience is valuable because they... have more appropriate performance measures for PPP in social infrastructure.” Respondent – Power, Utilities & Infrastructure
A central, government-led review of PPPs is currently underway, which will lead to changes in the nature of PPPs in England and possibly through the rest of the United Kingdom. Growth of PPPs in the United Kingdom In much of the post-Second World War period, private investment in public infrastructure was limited to a few examples. However, in the late 1980s a number of legal restrictions were removed and a framework for actively encouraging PPPs was introduced by the Conservative Government in 1992 under the name of the Private Finance Initiative. The PFI was strongly supported by the successor Labour Government from 1997 to 2010. As of 2010, over 920 projects across all sectors had been recorded, including health, education, defence, road and rail transport, street lighting, waste, accommodation (prisons, courts, etc.), social housing and IT. It is estimated that PPP projects accounted for 60% of schools projects and 70% of hospital projects in those years.4 Different regional models Though the United Kingdom is not formally a federal state, under the 1997-2010 Labour Government, significant powers were devolved from the central UK Government to regional governments in Scotland, Wales and Northern Ireland, with central government departments retaining responsibility for England. The decision whether to implement PPP projects now rests with the regional governments and so in practice, a federal-type arrangement exists under which each of England, Scotland, Wales and Northern Ireland are able to develop different models for the implementation of PPP projects. The nature of the devolution arrangements has meant that there is the greatest scope for divergence in models between England and Scotland. All four regions have implemented projects under the PFI, but Scotland has now developed the "non-profit distributing" or NPD model.5 Implementation of PPP projects in the United Kingdom Prior to developing any infrastructure project, public authorities in England are required by guidance from the Treasury (the UK's finance ministry) to compare the estimated cost of procurement through the PFI and on a conventional basis and carry out an assessment as to which procurement option represents the best value for money.6 There has been some form of central PPP unit in place for a number of years to advise public authorities on the implementation of PPPs.
PPP – evolution or revolution? | 22
Responsibility for PPP policy has long been under the direct or indirect responsibility of the Treasury, though for much of the 2000s, a body called Partnerships UK (which was itself a PPP) performed many of the roles of a central PPP unit. It was replaced in 2010 by a Treasury unit called Infrastructure UK, which includes representatives from the private sector. A number of individual ministries (e.g. Ministry of Defence) and local authorities have also established their own PPP units. Accordingly, there is a high degree of awareness of PPPs at all levels of government in the United Kingdom. Respondents to our survey made a number of references to the use of standardised documentation in the UK. The PPP Policy Team within the Treasury has developed a detailed set of guidance for the implementation of PFI projects, including mandatory wording for contract documentation. This has evolved over time to reflect changing market conditions and is now in its fourth version (known as SoPC4).7 Use of SoPC4 is mandatory for PFI projects in England except in sectors where separate standard forms have been developed, such as health, education, housing and defence. The bid process and approach to risk allocation is clearly understood and has generally been accepted by the sector stakeholders involved. Use of SoPC4 has undoubtedly had a positive impact on the efficiency of the bidding and negotiation process for PPPs in England by eliminating the need to "reinvent the wheel" for each project and the renegotiation of minor issues. However, SoPC4 is by no means perfect and the following (non-exclusive) high-level criticisms may be noted: ■■ The UK model could benefit from shorter procurement periods. The Canadian model is useful here, including lock down of documentation post-selection of preferred bidder and penalties for delay beyond a prescribed date (post preferred bidder) to reach financial close ■■ Standardisation has not eliminated the complexities caused by project-specific factors, planning regulations and commercial issues ■■ The use of standardised documentation itself can give rise to inefficiencies in the process as where changes to SoPC4 are required, the public authority must apply to the Treasury for specific derogation from SoPC4 ■■ From a practitioner's perspective, the SoPC4 documentation itself can be unnecessarily long and complex.
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Summary of respondents' views on varying international approaches to PPP Canada It was felt that Canada has a greater commitment to PPPs, managing to avoid the frequent use of multiple bid stages: "Overall, the bid process is simpler, with less required of bidders". Approach to risk allocation and documentation makes for a more cost-effective bid process.
United Kingdom It was cited how the use of standardised contracts by HM Treasury and the Project Review Group concept in the UK was beneficial to the overall management of PPP schemes. The United Kingdom was also praised for sensible risk allocation between the public and private sectors and its track record in delivering more projects over time.
“...the UK has a more streamlined process, and standardised documents that make the bid costs lower.” Respondent – Finance and Insurance
Recent criticisms of PPPs in the United Kingdom and review of the PFI As with the use of PPPs in most jurisdictions, PFI in the United Kingdom has been controversial since its inception. It is not possible to address all the issues here, but criticism has primarily been based on perceptions that PFI enabled the private sector to make an excessive profit from the provision of public services, that the cost of developing a PFI project is greater than the cost of conventional procurement, and that PFI projects are overly complicated. For example, until 2002, the private sector was frequently able to keep the entire benefit of refinancing gains. The UK's Conservative-Liberal Democrat coalition government came to power in May 2010 and approved a number of PFI projects in its first year in office, but in October 2010 reduced the incentives that authorities in England had to implement PFI projects and in November 2011 announced that it intended to carry out a fundamental reform of the PFI in England. In essence, the objective is to retain public private partnerships in a broad sense for the delivery of public infrastructure, but at a reduced cost and in a way that maximises the potential benefits for the public sector more effectively than has hitherto been the case. Whilst not all of the goals may be achievable (particularly given the current state of financial markets and institutions in Europe), the process of debate and eventual evolution of the model mean that the United Kingdom will remain an interesting jurisdiction for international comparisons.
PPP across Asia Pacific Our survey respondents also noted Hong Kong and Singapore as jurisdictions from which Australia might learn, but to a much lesser extent than Canada or the United Kingdom. Across the Asia Pacific there have been trends towards public private partnerships. In Asia’s more developed economies, PPP (also referred to as PFI in Asia) has already become an established tool of public policy, with Japan a leader in the field. Since enactment of Japan's PFI law in September 1999, 375 PFI projects (as at 31 December 2010) have been carried out, and the PPP model has steadily become established as a method through which public facilities can be provided. Amendments to the PFI Law were introduced in June 2010 as part of the Japanese Government's "new growth strategy" aiming to expand the contribution of the PPP model to growth of the wider economy. Changes include encouraging private operation of state owned facilities
PPP – evolution or revolution? | 24
pursuant to a concession, expanding the class of eligible assets, encouraging the private sector to propose opportunities for PPP projects, obliging government to publish plans for PPPs, greater transparency as to PPP terms and encouraging the secondment of government officials to the private sector to improve knowledge sharing. Interestingly, in light of our survey results, the changes to the law establish the "PFI Promotion Department", as a special department in the Cabinet, with the prime minister as chairman. The PFI Promotion Department is to liaise with and coordinate the actions of other relevant administrative bodies in relation to PFI matters and to ensure that such processes take place smoothly. In the fast emerging economies of Asia, the continued high economic growth necessitates the development of infrastructure across all sectors of the economy – power, water, roads, ports, airports, urban bus and metro lines, health and education facilities. In Vietnam, a PPP law has been enacted and 28 projects (as at December 2011) have been proposed for consideration by the private sector, with the eight priority projects involving highways, an airport, water treatment plants and hospitals. In India, it has been estimated that to bridge the infrastructure gap, over Rs 24 trillion (US$500 billion) in investments was required with at least US$150 billion needed from the private sector, over a five year period (2007-2012). A National PPP Policy has been announced and consultation is underway on the Public Private Partnership (Preparation, Procurement and Management) Rules 2011, Usefully, the Ministry of Finance has established a website - www.pppinindia.com - as a central source of information on PPPs.
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“...Hong Kong and Singapore [are] jurisdictions from which Australia might learn.�
“There are a couple of PPPs out there that have gone badly – the good ones don't get press.” Respondent - Manufacturing, Wholesaling & Retailing
“I’m unconvinced about
the financial structures of PPPs – they are high risk...have been pushed to a point where banks get uncomfortable...” Respondent – Finance and Insurance
Current issues Fig. 13 Which sectors support a stripped down procurement process? 100%
100
■■ How can we make the PPP transaction more efficient?
91% 90
87%
■■ How can we expand the PPP market?
Unfortunately, and inevitably, issues of process are usually interconnected, and sometimes work in opposite directions. They cannot be viewed in isolation, and the private sector, as well as government, needs to appreciate where trade offs arise in the pursuit of objectives. Standardisation of documents, for example, simplifies bidding for a PPP but at risk of compromising flexibility, and it is important that users of standard documents (government and the private sector) understand the documents and particularly what can be departed from, when and why. A response that a requirement is "standard" or "market practice" is never as effective as a reasoned justification for a requirement. As noted earlier, 83% of respondents favoured a stripped down procurement process, including standard terms and conditions, rising to 91% in the construction industry (Fig. 13) (perhaps understandable given the experience in that sector with well developed Australian standard documents).
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78%
72% Subcontractor (facilities management)
Subcontractor (design)
Subcontractor (construction)
70
Financier
Many of our survey respondents commented on the PPP procurement process including on matters ranging from the standardisation of documents to probity, and also more substantive matters such as the reimbursement of bid costs and the bidding process. All of these relate to the "process" by which PPPs are developed and awarded and, as our survey reveals, all have the potential to impact upon the market for, and popularity of, delivery of infrastructure by means of a PPP.
79%
77% 77%
Private equity provider
Process – the fourth "P" of PPPs
79%
Advisor (private sector)
How can we make the PPP transaction more efficient?
80
Arranger/SPV manager
■■ How can we best leverage the tax system?
Other
■■ What is the best way to finance PPPs?
Subcontractoror (operations)
The responses to our survey raised some thought-provoking issues as to the opportunities for further improvement and advancement of the PPP model in Australia. This section of the report contains our observations on some of those issues based on the following overall concerns:
30% of private
sector respondents supported the suggestion that government guarantees the bidding costs of losing consortia
PPPs, particularly as they extend to new asset classes, will be highly complex, high value transactions, with much at stake in terms of not only financial issues but also the delivery of public services. Only with a reasonably high volume of transactions in a particular assets class will it be possible to achieve the "commoditisation" of the process that has been seen in so many other forms of financial transactions and in UK PPPs. This is yet another reason for encouraging a strong pipeline of projects which our survey respondents are looking for. Other process issues deserving of comment are: ■■ Not surprisingly, 86% of our private sector survey respondents supported the suggestion that government guarantees the bidding costs of the losing consortia. Our survey reveals an overall picture of a market looking for opportunities, as the more opportunities the more chances of success and the greater ability to spread costs. There is presently enormous pressure on private sector proponents to win each transaction due to the heavy investment in bidding costs and because the next transaction may not come for some time. As welcome as it would be for the Government to bear some of the bid costs, greater efficiency would be derived from improvements to other aspects of the bidding process, as this suggestion merely transfers risks and cost from the private sector to the Government (which is less able to manage this risk). Absent some fault in the management by the Government of the procurement process or unforeseen abandonment of the project, there seems little to be gained overall by simply passing responsibility for bidding costs from one party to another. The most effective way of mitigating the adverse impact of bid costs would be to have a larger and more certain pipeline of projects, offering more chances of success and the ability to spread costs further. ■■ 73% of our private sector respondents would welcome steps to reexamine government probity processes. There is a significant risk that probity might interfere with the ability to achieve innovation in PPPs. Particularly when new asset classes are under discussion for PPP procurement, there is nothing to be gained by hindering discussion of options outside of the specific brief (and in some projects an interactive, workshopped process to develop the brief is effective). Bidders should be able to explore options with the Government, and obtain feedback, without the Government feeling obliged to create a "level playing field" for all bidders, or as obliged to treat a tender as non-conforming. As noted above, if the outcomes conform, the methods of achieving those outcomes should not be viewed as non-conforming.
PPP – evolution or revolution? | 30
â– â– Parallel bidding and a BAFO requirement obviously create cost for the private sector (and the Government) but it is hard to see an alternative in complex, high value transactions. Only in high volume, largely commoditised transactions might it be reasonable to expect that the "binding" bids are as well developed as they can be, and that nothing material is to be gained by taking forward two or three of the field of bidders, or requiring them to put forward a "best and final offer". In more complex, high value transactions, it is to be expected that there may be more value to be extracted by the Government by a period of negotiations with a very small group of bidders. It is, however, reasonable to ask why this should be more than one party. For the private sector, a period of exclusivity is the price they require in order to truly develop the most finely priced and attractive offer (as only exclusivity offers the justification for the investment of the final level of money and other resources to get to a bid as attractive to the Government as possible).
Design review A significant proportion of respondents (36%) were dissatisfied or extremely dissatisfied with negotiated outcomes as to design, making it the issue in relation to which the highest level of complaints were made (while noting that a healthy majority of respondents were therefore basically happy at least with how the issue was being handled) (Fig. 14). There has been much press coverage in early 2012 of the NSW Government's decision to "bail out" the Reliance Rail consortium to keep the troubled rolling stock project on track. This is one of only very few instances of such action by an Australian Government on a PPP contract (Spencer Street Station and the Sydney Airport Rail Link projects being the others). Press coverage of that project has for some time indicated that a major alleged cause of the delays that have plagued the project has been the very slow and complicated design approval process stipulated by the State Rail Authority. From our experience, this is only the latest of a number of projects where design approval has been a source of great friction in public/ private sector interaction. The subject is a complex one. Private sector players argue that if government is engaging them for their demonstrated expertise, and placing full design and construction responsibility on them (which carries with it the legal commitment to ensure the end product is fit for purpose, an absolute commitment enforceable regardless
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Fig. 14 How satisfied were you with the design approval process?
6%
4%
30%
47%
13%
Extremely satisfied Satisfied Neither satisfied nor dissatisfied Dissatisfied Extremely dissatisfied
“Private sector players argue they should be allowed to get on with the job.”
of whether the private sector has been negligent or not, backed up by extensive guarantees and bonds which the private sector must provide), then the Government entity involved should concentrate on carefully articulating its end user requirements in the contract specification. Private sector players argue they should be allowed to get on with the job, free to innovate and determine the best way to ensure they meet their fitness for purpose warranty obligations. If they fail to do so, they argue, the Government can sue for any losses suffered. On the other hand, government organisations pride themselves on their role as the guardian of the public interest (especially where, as in transport and health sector projects, there are serious safety issues to address). Government is at pains to ensure that it does not, by failing to rigorously review every minute detail of the private sector's design – in recent years, increasingly not only by using their own staff, but also by engaging costly independent consultants – leave any risk of a system or equipment failure that might compromise the service to, or safety of, the public. There is merit in both sides of the debate – the problem, however, is that the private sector is usually encouraged to commit to very ambitious timelines for project completion. The major area for concern is that these timelines become greatly threatened (exposing the private sector to delayed cash flow, liquidated damages liabilities to the Government and to default under their financing documents) if the design review process takes materially longer than anticipated. This is especially the case if the review process produces requests by the Government entity for a myriad of minor detail changes of questionable importance, as it sometimes seems to do. Of course, the root cause of delay in the process can sometimes be incompletely or unprofessionally prepared design on the private sector's part (or the design not really embodying what was promised in the tender), in which case the private sector cannot complain if its errors are identified. Greater care (or candour) on the private sector's part on these issues would discourage governments from stipulating excessive bid requirements (like mandating a mark up of the design brief). One way of trying to address these tensions contractually is to provide for deemed approval of designs if the Government fails to indicate its view within a specific negotiated time frame for its review after designs are submitted. Governments, however, often resist being made subject to such strictures, or pragmatically avoid the issue by continuing to issue queries or requests for further information to buy themselves more time.
PPP – evolution or revolution? | 32
On balance, there seems to be a genuine need for governments to look seriously at this practical "log jam" area, and propose pragmatic ways in which their reviewers, both in house and consultants, can minimise the delays to the review processes being experienced currently. The "knock on" effects of delays to the review process in the context of project finance arrangements and extremely tight PPP timetables are potentially too dire for governments to ignore, and simply do things at the slower pace common on traditionally procured projects, especially given that winning PPP consortia will invariably include carefully selected, technically expert and financially deep pocketed contractors able to stand behind their commitments and fix problems if they emerge. Governments must try harder to resist the urge to "second guess" the private sector's design approach along the way.
PPPs and other forms of contracting Our survey respondents recognised that PPPs are just one form of project delivery, and some suggested further consideration of alternatives such as alliance contracting (Fig. 15). It is interesting to consider whether and how alliance contracting principles can be built into PPPs. "Pure" alliance contracts adopt a fundamentally different approach to contract administration and risk allocation between the alliance participants from that adopted in PPP structures by: ■■ Incorporation of a "no blame" clause, under which the parties agree to release each other from legal claims, except in limited and extreme circumstances of "wilful default" ■■ Payment of the non owner participants for their actual costs of performing work (as opposed to margin and profit) in nearly all circumstances (even in instances of delay, negligence, cost overruns and rectification of negligent work) to ensure that a contractor does not incur a loss on the project ■■ Incentivisation of alliance participants by the opportunity for increased profitability by payment of gainshare for "game breaking performance" ■■ Conversely, margin and profit placed at risk by the painshare regime if the private sector participants fall below pre-agreed benchmarks (including where project costs exceed the target cost estimate)
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Fig. 15 Do you agree that governments should be more open to procuring infrastructure via alliancing or relationship contracting? 1% 8% 19%
38% 34%
Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree
■■ All decisions regarding the management of the project require unanimous agreement between all alliance participants on a "best for project" basis (other than a small number of owner-reserved powers) ■■ Management of the project by a team drawn from all alliance participants, appointed on a "one team" and "best for project" basis. Whilst the objective of these features of alliance contracts is to incentivise behaviours which deliver better project outcomes (including on both budget and program), they do not provide the apparent certainty of a traditional fixed price/ fixed completion date construction contract and clear legal rights of recourse invariably required by financiers of PPP projects to date. For this reason, alliance contracting has so far been rejected as insufficiently "bankable" for use in PPP projects. Proponents of alliancing argue that the supposed certainty of traditional construction contracting is greatly overstated and a true comparison of the risks of both procurement methods demonstrates that alliance contracts are in reality significantly less risky, and more reliable on time and cost outcomes, than traditional procurement. Alliance contracting also offers a greater degree of flexibility than traditional PPP structures to respond to scope change arising during the lifespan of a project (e.g. due to demographic, technological or government policy changes). Notwithstanding these features of "pure" alliance agreements, the apparent gap between alliance contracts and PPP structures may be able to be bridged in the following ways to make alliances bankable: ■■ Careful structuring and due diligence regarding operation of the gainshare/painshare mechanism to ensure that it creates a comprehensive and consistent commercial incentive to successful delivery of the project ■■ Provision of completion guarantees by non-owner alliance participants and key suppliers and subcontractors ■■ Deadlock breaking mechanisms to avoid the "nuclear" option of dissolution of the entire alliance structure ■■ Specialised insurance regimes which respond in the absence of legal liability between the alliance participants ■■ Requirements for greater initial subscription of equity or standby contingent equity or financing for use in the event that costs overrun the target outturn costs, recognising that this will add to the costs of the project
PPP – evolution or revolution? | 34
What is the best way to finance PPPs? Bond markets One of the key recommendations in the IA issues paper is that action be taken to revitalise the project bond market. The bond market has historically provided a useful tool for project financing as bonds typically have long tenors and sharper pricing. The disappearance of the bond market after the global financial crisis has had a significant and adverse effect on PPPs. Unsurprisingly, 78% of respondents found the establishment of an infrastructure bond market to have a positive impact on the PPP procurement process (Fig. 16). On the other hand, little concrete detail exists as to how they might reinvigorate the market. In their issues paper, IA discussed tax concessions or direct grants attached to bonds to make them more attractive. Their commentary reflects an underlying suspicion of this proposal. For example, they suggest that much of the benefit might be captured by financiers, and note that experience showed indifferent results in leveraging tax advantages in this way. In our view, it is likely that the advantage to be derived from attaching tax concessions to bonds would be marginal (although much would depend on how generous the tax concession was). Rather than
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74%
71% 65%
60
62%
40
20
Demand risk insurance
0
Tax increment financing
Adoption of the above suggestions, coupled with increasing academic studies showing favourable comparative outcomes of alliances following rigorous investigation of projects procured on an alliance basis, could see a greater willingness by both government and the private sector to incorporate alliance principles in PPP projects.
78%
Sale of brownfield assets
■■ Use of "hybrid" alliance contracts under which specific liabilities are retained by and enforceable against the non - Owner participants (although this risks undermining the benefits of "pure" alliances).
80
Development of infrastructure funds
■■ Engagement of third party subcontractors and suppliers to perform packages of works on traditional legal fixed cost/fixed time/legal recourse contracts (including collateral warranties to financiers)
Fig. 16 Which innovations have had a positive impact on the PPP process?
Establishment of an infrastructure bond market
■■ Potential for competition between PPP consortia only in respect of suitability to perform the owner/operator role, leaving the successful proponent to tender the construction and financing of the project as "Reimbursable Costs", with the tendered costs of finance and construction subsequently paid by government on an open book basis
“There’s a need to spend some political capital to convince the public that some of these public assets – even social infrastructure like schools and hospitals – could be privately owned.” Respondent – Power, Utilities & Infrastructure
a stream of new projects, such a concession might contribute to perhaps just one or two. The cost of the administrative burden might outweigh the advantage. One item not addressed in the IA report is to examine the ratings system for project bonds. Traditionally, unwrapped project bonds have had a shadow rating of investment grade (BBB+). This is out of the range of some investment funds. There is, however, a good argument that based on their track record project bonds, at least for availability payment based projects, should enjoy a much higher rating. This could have a significant effect on the market. In the medium term, another option may be to revive the monoline insurer model, particularly by a clear focus by one of the remaining AAA rated monoline insurers on the project bond market. It is noted that it was not project bonds that caused the ratings of most of these insurers to be reviewed, but rather their participation in the subprime mortgage area. The most substantial factor which, in our view, would contribute to the revival of the PPP bond market is to facilitate the participation in the market by superannuation funds.
Superannuation funds IA devotes part two of its issues paper to superannuation. It examines a number of particular areas in which superannuation funds could be encouraged to invest in the bond market. It discusses a number of issues, including: ■■ A mandate for Australian superannuation fund trustees to participate in infrastructure as an investment class ■■ Focus on a long term pipeline to give certainty to funds ■■ Making available infrastructure expertise. The suggestion that superannuation funds be mandated by law to invest in Australian infrastructure should, in our view, be dismissed. Superannuation funds themselves indicated that despite the stringent asset class risk limits, the main constraints are not a lack of desire to invest in the industry but rather impediments that make it less attractive than other assets. The principal concerns were in regards to competing bid costs. A mandate would not repair these issues. Similarly, the repair of these issues would make a mandate irrelevant. Overall, it would, in our view, cause more harm than good to mandate as it might have the effect of making some funds involuntarily overexposed to this sector.
PPP – evolution or revolution? | 36
1998-2000
2003-2010 1998-2000
∙∙ Defence ∙∙ Prisons ∙∙ Hospitals ∙∙ Seaports ∙∙ Airports ∙∙ Roads ∙∙ Schools
∙∙ Water ∙∙ Power ∙∙ Rail ∙∙ Airports
1994-1997
On the other hand, some funds are able to rely on project evaluation by co-funding bank financiers. Indeed, this dynamic can also add in resolving the concerns that funds have in taking construction risk – one could posit a transaction where a bank provides construction funding (i.e. for the construction phase only), and upon completion it is taken out by long tenor superannuation funding. The fund can take comfort from the bank participation and due diligence, the bank can deploy funds against its favoured tenor, and the consortium avoids refinancing risk.
∙∙ Water ∙∙ Power ∙∙ Prisons ∙∙ Seaports
∙∙ Water ∙∙ Roads
Broadening the scope of PPPs to other asset classes Given the expanding scope of PPP over the previous two decades (Fig. 17), there was a distinct minority view suggesting that the maturing PPP market had reached the natural boundaries of its potential growth. When asked if there was scope to expand PPP into other sectors one respondent replied: "if there was, we'd have already found it!". However, the majority view was in favour of expanding private finance into areas where there was a “logic, need and appetite”, and there is clearly room for more innovation. The appetite for increased PPP projects in new asset classes reflects the increasing need for capital investment across a diverse range of social, economic and environmental demands.
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ECONOMIC PROJECTS
However funds are still not likely to take exposure for substantial bid costs. On balance most funds, expertise aside, will prefer to fund an already financially closed or an operating project.
How to expand the PPP market?
∙∙ Defence ∙∙ Hospital ∙∙ Schools ∙∙ Convention centre ∙∙ Courts ∙∙ Roads ∙∙ Water ∙∙ Waste ∙∙ TAFE College training ∙∙ Housing ∙∙ Ports and terminal ∙∙ Rolling stock ∙∙ Sports complex ∙∙ Broadband ∙∙ Public transport ∙∙ Aged care ∙∙ Research facilities
Pre 1990s-1993
Expertise may be of concern, with many funds lacking the capacity for project evaluation. Some had previously relied on the monoline insurers to fulfil that role. Although this concern is true in general terms, it is caveated in the context of individual funds. For example, funds managers increasingly have significant expertise in project evaluation capacity as demonstrated in the recent Victorian Comprehensive Cancer Centre PPP in Melbourne, the first greenfields debt issue by a superannuation fund in PPP in some time.
Fig. 17 Evolution of the PPP market
ECONOMIC AND SOCIAL PROJECTS
The concern in relation to deal flow expressed by superannuation funds is the same concern held by the market as a whole. Private sector survey respondents almost uniformly agreed (90%) that the publication of a project pipeline would be welcomed, and that there are not enough current PPP opportunities (73%).
Source: Japan External Trade Organisation (JETRO) on Public Private Partnerships in Australia and Japan
“I do not think there is any asset type which wouldn't benefit from the PPP approach.” Respondent
If government is prepared to expand the field of asset classes in innovative ways, it is more than likely that the private sector will respond appropriately. The defence industry provides a good example. PPPs have been utilised to develop accommodation (LEAPS Phases 1 and 2), headquarters for joint operations command and some aircraft leasing is classed as a PPP, but there seems to have been some reluctance to go further, despite the recommendations of the Mortimer Review 8 and international examples (particularly in the United Kingdom) of far wider use of PPPs in defence. This Review recommended that all defence projects be assessed for their potential as public private partnerships, noting that training and simulation projects would fit the characteristics of projects most suited for PPPs . In its submission to the Mortimer Review, Infrastructure Partnerships Australia identified current projects for helicopter training (AIR 9000 Phase 7) and fixed wing training (Project 5428) as suitable for procurement on a PPP basis,9 but neither project appears to be proceeding as a PPP. Interestingly, the Singapore Airforce has contracted for fixed wing training on a PPP basis (at RAAF Pearce, in Western Australia).10 Similarly, a PPP model appears to have been rejected for the Defence Services Logistics Project11 despite New Zealand's successful implementation of a similar project on a PPP basis. These examples illustrate that the ability of the PPP model to be applied to other asset classes depends on the willingness of governments to create the opportunity.
Demand risk insurance There is increasing acceptance that the state obtains the best value for money on PPPs by expanding the range of services that are subject to the contract. For example, it is more common than ever for prison PPPs to be let, including an obligation on the private sector to deliver correctional services. The Wiri Prison Project in New Zealand is a recent example. Consideration is being given in New South Wales to leveraging the experience of private health service providers to deliver public health services (as has been done in other jurisdictions). Critics have pointed to failed projects – such as the Latrobe Regional Hospital Project and the Port Macquarie Base Hospital Project – which followed this model. Many public sector health employees and their unions object to their being transferred to work for the private sector on such projects.
PPP – evolution or revolution? | 38
In our view this is a welcome development, particularly as it expands the range of projects to be delivered. Where this has worked well, there are significant benefits to the public in this type of transaction. IA summarises the proposal for demand risk insurance as follows: "Under a demand risk insurance model, the government provides an insurance policy against the risk of traffic volumes being significantly lower than expected. This model charges a commercial premium to the project and would pay out an agreed sum per vehicle multiplied by any shortfall in actual traffic volumes in a period below a specified level. The premium is "commercial" in that it reflects the probability of the government making payments and the potential amount of payments, in line with the practices of commercial insurers. A benefit of this method is to promote accuracy in traffic forecasting. However, this structure could create a contingent liability on the government's balance sheet." Clearly, demand risk insurance is not IA's favoured option. IA would prefer to invest energy in creating better skills for traffic forecasting. Our view, however, is that most lenders will be wary of forecasts of greenfields traffic volumes for some time to come, and that something is needed to aid in the delivery of new PPP roads projects. The state could underwrite the project through availability charges (as for instance was done in the recent Peninsula Link project in Victoria) but, as IA says: "Governments underwriting projects by taking on demand risk would … depart from the principle that particular risks should be taken on by those that are best placed to manage them." More importantly, structuring the project in this way requires the state to recognise the full project cost on its balance sheet. Given the current political impetus to run surpluses (or at least not to run deficits that would imperil credit ratings), this option seems less promising. The proposal for demand risk insurance described above seeks to meet the current articulated concerns of lenders and governments. In particular: ■■ It seeks to meet the concerns of banks that some toll road projects were won by consortia based on over-aggressive forecasts of traffic revenue and that if the forecast had been more realistic it would've been clear that debt would not be repaid from patronage ■■ It seeks to meet the concerns of the state that toll road projects remain substantially immune from state balance sheet support. They are substantially underpinned by user patronage revenue.
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“The one thing we want to see returned…is a competitive long term bond market as an alternative to short term bank club syndicates.” Respondent
“I'm in the evolution camp. There are areas of PPP procurement and structuring which could be revisited to create a more liquid market. On the tax side, changes to the treatment of tax losses is part of that and a form of TIF financing could be workable.” Sean Duffy, Partner Baker & McKenzie, Sydney
Considering these elements, the most important variables are: ■■ How to price the insurance. For example, will it be priced differently for each bidder (a function, perhaps, of their tolls)? At what volumes will it be set – again, different volumes will cover different debt levels for different consortia? ■■ Will the guarantee be truly off the state balance sheet? This is a question largely for the states, however under the previous accounting standards a contingent liability of this sort would, in most cases, be reflected in a note to the accounts rather than recorded on the balance sheet itself. Under the new accounting regulations the treatment is less simple. If the guarantee needs to be brought into account on state balance sheet this undermines the entire utility of this model.
How to best use the tax system? Tax reform The Australian Government has already responded to calls for tax reform in relation to infrastructure, announcing in the 2011-2012 budget rules to assist the preservation of the tax losses that are common in the early years of capital intensive projects. The proposed changes aim to provide certainty for infrastructure projects, by securing the future availability of tax losses. The suggested rules will exempt the tax losses from both the continuity of ownership test and the same business test. Losses are also protected against inflation, as the value of carried forward tax losses will be uplifted by the 10 year government bond rate. The new rules will, in broad terms, only apply to an entity whose sole business consists of a designated infrastructure project of national significance (broadly speaking, a project on IA's National Priority List of projects). The new rules will apply from the date of Royal Assent of the enabling legislation. At the time of writing this report, draft legislation had not yet been released. However, the Australian Government issued a Discussion Paper in October 2011 and is currently involved in consultation with industry regarding the proposed new rules. Although these new rules make incremental improvements in the tax treatment of PPPs (some of the same effects were already being achieved by securitised licences etc) the fact that they give certainty is much welcomed. As much as anything, they give a level playing field to the market, such that differential tax treatment does not make one bid more desirable than another.
PPP – evolution or revolution? | 40
Tax increment funding IA's report examines the use of tax increment financing (TIF). Although not yet commonly used in Australia, TIF is widely used as a source of project funding in the US and has recently been introduced in the UK. It was also mentioned by IA in its 2011 paper. TIF involves offsetting some or all of the cost of developing an infrastructure project, usually a transport project, by a local government authority levying a tax on those land owners and/or businesses adjacent to the project who stand to benefit from it. There are drawbacks to TIF, for example, the imposition of a tax may encourage land owners and businesses to move outside the surcharge zone, thereby eroding the project's customer base. There is also a risk that the expected tax increment will not emerge, which may deter investors. Critics also argue that the use of TIF encourages investment in projects in prosperous areas, while other areas with more pressing needs are ignored. It remains to be seen whether the Australian Government will enact legislation enabling the widespread use of TIFs as a project funding mechanism.
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65% of
respondents agreed that tax increment financing has had an impact on the PPP process
“If government can’t generate a pipeline of major projects then advisers and financiers will look elsewhere. There are other sectors in Australia that are more receptive to projects at the moment.” Respondent – Government sector
“Even the failures have
turned out well for the public as a whole.�
Respondent
Conclusion Looking to the future it is clear that increasing pressures on social welfare systems, industry and the environment will necessitate greater levels of investment in the very infrastructure which enables economic activity and growth to take place. It is clear that the Government – and consequently the taxpayer – cannot afford to procure all of these competing capital investment needs without assistance with funding, expertise and innovation from the private sector. This means that PPP is very much here to stay, though it will inevitably continue to develop new models as both the public and private sectors reassess over time how best to ensure cost-effective delivery of PPP projects which can demonstrate best value for money. Going forward, it is clear that efforts are required to improve the efficiency of Australia's PPP market. International jurisdictions, notably the United Kingdom and Canada, provide well-developed best practice in demonstrating how to improve the framework within which the private sector contributes to public infrastructure. The current review in the UK should be monitored closely so that any suggested developments can be assessed for adoption in Australia. While no revolution is required, reforms aimed at delivering greater legal certainty, consistency and predictability should be considered as a necessary prerequisite to address our respondents' greatest concerns: ■■ Deepening and clarifying the pipeline of work, particularly in making clear which projects will be funded as PPPs ■■ Introduce greater centralisation in each jurisdiction of procurement, including the creation of a central PPP unit to provide more strategic and consistent guidance across all PPP projects ■■ Make efforts to simplify and accelerate the procurement process and streamline costs, in order to remove the perception that the procurement bidding process is too slow and costly ■■ Encourage greater flexibility in public sector teams to deal with unforeseen events
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“There should be more PPPs, and there are good opportunities for more. But it principally comes down to government making those opportunities available through agencies.” Respondent – Power, Utilities & Infrastructure
■■ Introduce measures to encourage project finance, in particular through the tax system, but also through adopting measures such as the issuing of infrastructure bonds ■■ Make greater efforts to maximise revenues from PPP projects. This will necessitate efforts to remove the widely acknowledged barriers to user-charging in some areas and should be accompanied by government-led efforts to build greater public support. Troubled projects will obviously provide valuable lessons as to potential improvements to the PPP model, provided they are accessed logically and with a view to identify the specific issues that troubled these projects. Hopefully our report will assist in understanding the room for improvement in the PPP model, as well as assist in the evolution of this important infrastructure delivery model.
PPP – evolution or revolution? | 46
References 1. Business Council of Australia, quoted in The Australian, May 2011 2. Department of Economic Affairs, Ministry of Finance, Government of India, National PPP Policy 2011 - Draft for Consultation, 2011, available at: <http://www.pppinindia.com/pdf/draftnationalppppolicy.pdf> 3. Infrastructure Australia, Infrastructure Finance Reform Issues Paper, July 2011, available at <http://infrastructureaustralia.gov.au/files/ Infrastructure_Finance_Reform_July_2011.pdf> 4. Partnerships UK, Projects Database, February 2011, available at: <http://www.partnershipsuk.org.uk/PUK-Projects-Database.aspx.> The database does not include projects under the Building Schools for the Future or NHS LIFT programmes. 5. Scottish Futures Trust, NPD Model Explanatory Note, December 2011, available at: <http://www.scottishfuturestrust.org.uk/docs/582/ Explanatory%20Note%20on%20the%20NPD%20Model%20(Updated%20 December%202011).pdf> 6. Her Majesty's Treasury, The Green Book, July 2011, available at: <http:// www.hm-treasury.gov.uk/data_greenbook_index.htm> 7. Her Majesty's Treasury, Standardisation of PFI Contracts, version 4 (SoPC4), March 2007, available at: <http://www.hm-treasury.gov.uk/ ppp_standardised_contracts.htm> 8. Commonwealth of Australia, Report of the Defence Procurement and Sustainment Review, September 2008 9. Infrastructure Partnerships Australia, Submission to Defence Procurement and Sustainment Review, June 2008 10. Lockheed Martin Corporation, Lockheed Martin Selected By Republic of Singapore to Lead 20-year Pilot Training Program, November 2006, available at: <http://www.lockheedmartin. com/us/news/press-room/press-releases/2006/november/ LockheedMartinSelectedByRepublicOfS.html> 11. Australian Government, Department of Defence, Defence Logistics Transformation Program, available at: <http://www.defence.gov.au/jlc/ DLTP.html>
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Methodology Baker & McKenzie developed a comprehensive research questionnaire and commissioned Beaton Research+Consulting in late 2011 to undertake detailed fieldwork which consisted of a mix of telephone and internetbased interviews conducted on a sample of 105 respondents representing 54 organisations across Australia.
Fig. 18 Respondents’ industry sector
40
37%
30%
30
29% 26%
The sample included a mix of both public sector and private sector workers across a range of industries (Fig. 18). Respondents working in local listed public companies were the most represented, making up 37% of all respondents (Fig. 19).
20
13% 10%
10
7% 2%
Fig. 19 Respondents’ organisation type 2% 2%
1% 1%
3%
Other
Manufacturing, wholesaling & retail
Primary industry
Government & community
Power, utilities & infrastructure
Professional services
Finance & insurance
Property construction
0
In total, 82% of the respondents work in the private sector. The most common job titles interviewed were business unit heads (18%); business owners (14%); in-house lawyers (12%); project managers (9%); and CEOs (7%). The remainder consisted of board members, consultants, risk managers and accountants. Each of the respondents has been involved in working on or bidding in public-private procurements (PPPs) during the last three years across a wide range of sectors including: ■■ Property and construction ■■ Finance and insurance ■■ Professional services ■■ Power, utilities and infrastructure
7%
■■ Government, public sector 37%
8%
■■ Primary industry.
13%
26%
Local listed public company Private company Partnership Wholly owned local subsidiary of an overseas company Government department Unlisted public company Non-local listed public company Sole operator Statutory authority Other
PPP – evolution or revolution? | 48
Contacts AUSTRALIA Ken Gray Partner +61 3 9617 4292 kenneth.gray @bakermckenzie.com
ENGLAND
Geoff Wood
Marc Fevre
Partner +61 2 8922 5123 geoff.wood @bakermckenzie.com
Partner +44 20 7919 1041 marc.fevre @bakermckenzie.com
Alex Hartmann Partner +61 2 8922 5176 alex.hartmann @bakermckenzie.com
CANADA Greg McNab Partner + 416 865 2311 greg.mcnab @bakermckenzie.com
Roy Weitzman Partner +61 3 9617 4282 roy.weitzman @bakermckenzie.com
JAPAN
Sean Duffy
Naoaki Eguchi
Partner +61 2 8922 5270 sean.duffy @bakermckenzie.com
Partner +81 3 5157 2723 naoaki.eguchi @bakermckenzie.com
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The information contained in this report should not be relied on as legal or investment advice and should not be regarded as a substitute for detailed advice in individual cases. No responsibility for any loss occasioned to any person by acting or refraining from action as a result of material in this report is accepted by Baker & McKenzie. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. © Baker & McKenzie 2012. All rights reserved.
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PPPs - evolution or revolution?
Global Business Challenges
2012