Chartered Institute of Management Accountants Public Private Partnerships Peter Murray Executive Director, Infrastructure Finance and Advisory 22 October 2014 1
Agenda Overview of Public Private Partnerships (PPPs) Types of PPPs Typical contract arrangements What they seek to achieve Challenges during contract management The ACT Government s new policy framework Pipeline of PPP projects in the ACT Risk Allocation and Value for Money 2
What is a Public Private Partnership? A Public Private Partnership or PPP is a long-term contract (up to 20-50 years) between the public and private sectors, which involves the delivery of an asset, provision of services, and the use of private sector finance Government engages the private sector to deliver infrastructure and related services to support it in its broader remit to the public. These can include: Social infrastructure e.g. hospitals, prisons, schools etc. Economic infrastructure e.g. roads/bridges/tunnels, ports, utilities, rail etc. PPP projects typically include a capital component and an ongoing service delivery component Key PPP characteristics include: Private sector: design, construct, maintenance, operation, financing risks Private sector receiving service payment from government or taking on demand risk for service provision 3
Examples of Australian PPPs Social New Royal Children s Hospital (Melbourne) Melbourne Convention Centre Sydney International Convention, Exhibition and Entertainment Centre Precinct Victorian County Court CBD Courts Complex Perth Economic Gold Coast Light Rail Sydney Light Rail Westlink M7 (Sydney) Eastlink (Melbourne) Brisbane Airport Rail Link Lane Cove Tunnel (Sydney) 27 October 2014 4
PPP and related delivery models Build, Own, Operate, Transfer PPP ( BOOT PPP ) A BOOT PPP is typically used for economic infrastructure projects that are fully financed and where demand risk can be transferred to the private sector Availability Payment PPP ( Availability PPP ) Availability PPP is generally used for social infrastructure projects that are fully financed and where Government pays the private sector payments for service availability Design, Construct, Maintain, Operate ( DCMO ) DCMO is used on infrastructure projects where the private sector is contractually obliged to provide construction and comprehensive service delivery but where private finance is not required and the Government wants to retain direct control over the entire life of the project. 27 October 2014 5
Typical PPP contract arrangement TERRITORY Financier Direct Deed Project Agreement Service Payment Service Provision Debt Financiers Project Co Direct Deeds Equity Equity D&C Contract Services (FM) Contract(s) Builder Service Provider(s) 6
Why can they be good for Government? Utilises the private sector s ability to innovate and achieve cost saving efficiencies to deliver infrastructure A report by Infrastructure Partnerships Australia (2009) estimated cost savings of up to 11.4%, on average under a PPP, compared to traditional procurement methods Provides an alternative source of funding in a capital constrained environment Transferring project delivery risks to the party best able to handle it Provides delivery model options to expedite a government s infrastructure agenda Locks in financial outcomes for an extended period of time Ensures facilities are well maintained and efficiently operated under long term commitments 7
What are the challenges of PPP? PPPs involve longer procurement lead times with far greater up front work Government s procurement costs and proponent bid costs are often higher than other delivery models Private sector cost of capital is higher than government and must be offset through risk transfers and efficiencies PPPs generate life-of-project transactions over their duration such as refinancing, debt and equity assignments, re-gearings, change-of-control, etc PPPs require specialist expertise from within government to procure and manage over the life of the project PPPs can be more inflexible than more traditional models 8
ACT Government policy framework The Capital Framework ( TCF ) was introduced in 2013 the overarching policy for infrastructure procurement in the ACT It has 3 objectives: 1. Allocating scarce capital where best justified 2. Achieving optimal risk allocation and delivery models 3. Ensuring fit-for-purpose for size of jurisdiction and project The Partnerships Framework ( TPF ) is an extension of TCF and aligned to broader ACT Government objectives It provides specific guidance on complex infrastructure delivery, such as Public Private Partnerships ( PPP ) and Design Construct Maintain Operate ( DCMO ) 9
The Partnerships Framework: intended outcomes The Partnerships Framework: Is a succinct, effective and readily accessible by both the public and private sectors Facilitates co-ordination, selection, funding, implementation, delivery and whole-of-lifecycle asset management of infrastructure Is consistent with existing policy guidance in Australia, i.e. Infrastructure Australia s National PPP Guidelines Informs decisions about infrastructure projects with expert professional analysis and advice 10
PPPs in the ACT A project will only be pursued as a PPP if it has been approved by Cabinet based on the recommendation from the Chief Minister, Treasury and Economic Development Directorate ( CMTEDD ). The responsible Minister for PPPs is the Treasurer. CMTEDD will coordinate and manage the PPP project during the transaction period (i.e. pre-procurement, procurement and negotiations). CMTEDD will also manage life of project transactions i.e. refinancings and review contract management practices. Day-to-day responsibilities will be carried out by a central delivery agency post financial close during construction. 11
Infrastructure Finance and Advisory A project will only be pursued as a PPP if it has been approved by Cabinet based on the recommendation from CMTEDD. The responsible Minister for PPPs is the Treasurer. The Infrastructure Finance and Advisory unit is established within CMTEDD to: Support and advise on PPP transactions, including procurement Provide whole-of-life project transaction support Develop and implement The Partnerships Framework (TPF) policy Review PPP contract management arrangements Provide commercial support on unsolicited proposals. 12
Prospective PPP projects for the ACT ACT Courts Redevelopment The ACT Law Courts project proposes the redevelopment of the Supreme Court to provide a fully functional integrated courts facility. Since its construction in 1963, the requirements of the Supreme Court have changed. The original ACT Law Courts Building was built to service a population of 100,000; today, the population of the Territory is over 380,000. Modifications and additions (including the construction of the Magistrates Court in 1996), have only temporarily alleviated issues with space, circulation, layout, facilities and security, all of which have continued over time. Procurement has commenced with an Expression of Interest process. Six bids have been received and two have been shortlisted to develop detailed proposals.
Prospective PPP projects for the ACT City to the Lake City to the Lake is a transformational project being developed within The City Plan, and is integral to realising the City s potential as we embark on our second century. City to the Lake is about creating a new public waterfront address and identity for the City. It is about realising Commonwealth Park and City Hill as celebrated urban parks unified with the centre of the City. The includes several important civic projects: New lakeside residential, business and leisure opportunities. Replacement convention centre (Australia Forum). 30,000 seat rectangular stadium Regional aquatic centre.
Prospective PPP projects for the ACT Capital Metro Canberra s population growth continues as the city enters is second century. Meeting the needs of the ACT s existing and new residents will require key investments to be made in urban renewal, including in our transport networks. Capital Metro will be a light rail service along a 12 kilometre route from Gungahlin to the City centre. This includes integration of transport and land use planning to create revitalised centres, provide better access to public transport and generate a range of housing and commercial opportunities.
Risk Allocation PPPs involve significant allocation of risk to the private sector PPP analysis typically quantifies: Transferred risk Retained risk Further analysis is undertaken to determine the Systematic Risk Adjustment This is the risk of all the components of the PPP interfacing Design, Construct, Maintain, Operate, Finance 27 October 2014 16
Public Sector Comparator ( PSC ) Understanding these risk adjustments including private sector efficiencies allows the preparation of the PSC The PSC is compared against the PPP Proxy and/or bids to assess if the project offers value for money The final financial outcomes are only determined following rate lock at financial close Due to the short term nature of bank debt tenors some risks may revert to Government; i.e. refinancing 27 October 2014 17
Life of Project Risks Signing of the PPP contract is the commencement of a long term commitment ie. 20-50 years Life of project transactions reintroduce risk and need to be managed over the agreement term: Refinancings Regearings Change of Control Good faith negotiations Debt and equity assignments 27 October 2014 18
Failed Projects vs. Failed PPP Commonly misunderstood area A project can fail but the PPP can hold up Did the risk allocation envisaged under the PPP hold up or revert to Government? Cross City Tunnel project collapsed and was resold twice both times with Government consent Ararat Prison project collapsed during construction and require Partnerships Victoria to step in and restructure 27 October 2014 19
Discussion