Australia: Department of Treasury and Finance calls for comment on reforms to Victorian PPPs

Last Updated: 10 December 2012
Article by Catie Burdett, Andrew Mansour and Rebecca Roberts

The Department of Treasury and Finance (the Department) released a discussion paper on Wednesday 28 November titled "Future direction for Victorian public private partnerships".

The paper outlines the Department's position on potential reforms required in light of the changing financial climate and lessons learnt from recent experiences with Victorian public private partnerships (PPPs) such as the Wonthaggi desalination plant and Ararat prison.

In order to increase the attractiveness of PPPs for investors, while ensuring the continued delivery of value for money for the State, the Department is seeking comments by Wednesday 19 December 2012 on the following five key areas of reform:

1. Value for money assessment

The current formulation of the Public Sector Comparator (PSC) has been criticised for being limited in its application, particularly for encouraging a "point in time" estimate that is not revised for any material changes which may occur to the tender's underlying assumptions.

The Department is seeking comment on the following potential reforms:

  • strengthening the robustness of the PSC by engaging a technical adviser to review each PSC prior to the release of a request for tender
  • better informing bidders of government expectations by using the PSC as a general affordability benchmark rather than a "pass or fail" test
  • releasing the total benchmark amount to bidders (where appropriate) for complex projects rather than the raw cost without risk estimates
  • developing a "scope ladder" which will guide bidders on the priority of each item tendered in circumstances where meeting the affordability benchmark is difficult
  • better ensuring that qualitative factors (such as innovative design) are given their appropriate weight in value for money determinations.

These reforms are aimed at creating a framework which will provide incentives to achieve the best technical and design outcomes, as well as a benchmark that allows the State to better measure the risks and costs of project delivery.

2. Financing structures

The Department has identified reforms they believe are required to adequately address the impact that the global financial crisis has had on the availability, cost and willingness of parties to provide private financing for PPPs.

In principle, these reforms aim to identify circumstances where modified financing options may be required to the standard PPP financial model. In particular, while the Department considers that wholly privately financed PPP projects are still possible, projects over A$1 billion are likely to require some level of public financing. In these circumstances, the model preferred by the Department is a partial capital contribution from the State as a milestone payment or proportionately alongside private finance. This model would, in the Department's view, deliver the benefits of private financing while allowing the timing of State funding to be optimised to reduce the overall cost of a project.

Capital contribution models have been used successfully across Australia for projects including the Gold Coast Rapid Transit Project (where Middletons acted for TransLink Transit Authority) and the Sunshine Coast University Hospital.

The Department is seeking comment on:

  • the key considerations involved in determining the benefits of a contribution made at completion vs construction
  • the optimal level of government contribution to be made
  • outside of government contributions, the most effective models for delivering value for money while retaining optimal risk allocation.

In addition, they also invite discussion on whether the "compensation on termination" model is still appropriate and if, in certain circumstances, the State should be given a pre-emptive right to replace a financier and purchase debt in the second hand market.

3. Expanding service delivery in PPPs

The Department are currently considering whether the PPP model may be used to deliver services (for example core services like prisons) which have not traditionally been delivered via PPPs. The Department believe that a PPP model would, in these circumstances, deliver whole of life savings and improve operational efficiency.

The Department is seeking comment on what issues should be addressed when considering what additional services should be delivered as PPPs and what sectors provide opportunities for extending their use.

4. Streamlining procurement processes and bid costs

The Department recognises the importance of improving the bid process for PPPs to minimise the cost of bidding.

Proposed improvements to the bidding process include:

  • ationalising information submission requirements
  • shortlisting only two bidders
  • avoiding extended "best and final offer" processes.

In addition, the government has proposed a trial to reimburse specified bid costs for significant projects.

The Department is seeking comment on:

  • how the tender phase may be reconsidered in order to streamline the procurement process
  • who should be liable to pay the bid costs. Suggestions include that the successful bidder should pay the bid costs of other tenders for use of their intellectual property or that a contribution be made by all parties to cover the unsuccessful bid costs. It is still to be determined whether only unsuccessful bidders should be entitled to costs.

5. Developing a streamlined PPP model

The Department also identifies the benefits of extending the PPP model to smaller projects provided that the existing PPP model (particularly in respect of design elements) is streamlined.

The Department is seeking comment on the classes of infrastructure where a streamlined model could apply, how key elements of the PPP procurement process and value for money assessments could be tailored to smaller scale procurement and the market appetite for a streamlined approach.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Middletons has been awarded a 2012 EOWA Employer of Choice for Women citation acknowledging our commitment to workplace diversity.

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