PPPs have evolved to where the private sector is
taking on more risk to the benefit of the public, writes Brad
There simply isn't enough money available from the public
purse to build the infrastructure necessary to sustain
Australia's economic well being.
Governments need to preserve budgetary flexibility to meet
unexpected or significant societal events (such as the recent
tragic bushfires in Victoria, or the government-led response to the
swine flu outbreak). The private sector is not subject to such
Sir Rod Eddington hit the proverbial nail on the head last month
when he spoke of the need for a genuine, rational discussion around
The Infrastructure Australia chairman also rightly observed the
critical role that the private sector – and PPPs
– will play in helping governments deliver on their
infrastructure programs in coming years.
While PPPs are not without their challenges, the model works
– as has been proved time and again. The ability to fund
projects in the current environment and properly allocating risk
between the public and private sector, are two key challenges. But
they are not insurmountable.
When discussing PPPs the focus should not be on whether they are
a viable model for putting infrastructure in place – it
should be on how governments and the private sector can work
together to maximise their benefits.
Of course, PPPs are not the only delivery model for
infrastructure and should only be used where they deliver value for
money. But too often they are criticised merely because the private
sector is involved in the funding of the project, conveniently
ignoring the significant risk transfer to the private sector that
the model entails.
Encouragingly, there has been a noticeable increase in the level
of engagement between governments and private sector participants
in the PPP market both locally and internationally to focus on the
merits of the PPP structure. The consensus seems to be that the PPP
is an efficient and effective model.
One of their main advantages of PPPs is flexibility. One example
is the Biosciences Research Centre project in Victoria that,
despite the funding problems that have dogged many projects,
managed to achieve financial close on May 27. This occurred with
only modest tweaking to the usual risk allocation seen in most
recent PPPs in Victoria.
Although the funding problem persists it is also encouraging
that governments and the private sector are working together to
explore several alternative solutions, as well as re-examining the
way they allocate risk on projects.
In Queensland, for example, the south-east Queensland schools
project recently reached financial close as a PPP using what is
known as the supported debt model. The private sector financed
construction and assumed the construction risk.
When construction is completed the Queensland Government,
through the Queensland Treasury Corporation, will take on 70
percent of the funding over the operating term, which is seen as a
lower risk period for a project.
This approach preserves one of the main advantages of the PPP
model – the commercial pressure on the private sector to
bring projects in on time and on budget is maintained while
allowing more advantageous funding through the Government for the
period where there is lower project risk (during the operating
Victoria's Peninsula Link is tackling the funding problem in
a different way. The private sector will be required to design,
construct, finance, operate and maintain the proposed freeway.
However, unlike toll-road PPPs, the private sector will not be
repaid its debt nor source equity returns from road users, but from
the Victorian Government. Availability payments will begin only
once the freeway is operational, when payments will be based on the
availability of the freeway and its operation and maintenance to
defined performance levels.
This way the Government will still have access to private-sector
delivery disciplines without incurring an unacceptable risk margin
if it sought to have the private sector assume patronage risk
– one of the criticisms of most recent toll roads in
The debate over PPPs will continue, but it should be a rational
debate based on facts. The PPP model works – even in
challenging economic times.
Brad Vann is a partner at Clayton Utz in Melbourne, specialising
in PPPs, including the Biosciences Research and Peninsula Link
This was written by Brad Vann and was first published in The
Age on 2 July 2009
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
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