PPPs have been widely employed in developing economies for over 10 years as a small but significant alternative method of procuring economic and social infrastructure. During calendar year 2008, international capital markets experienced high levels of instability with a sharp fall in the share market prices of listed infrastructure securities, a sudden and acute contraction in structured and project debt markets and institutional restructuring that saw state bailouts or acquisitions of a large number of privately owned financial institutions. These events were quickly felt in Australia and reflected in sharp falls in security prices, a decline in business and asset-based lending and a sharp rise in lender spreads for corporate, project and structured finance. Capital market observers suggest that current market conditions are the worst they have been since the Great Depression and economic forecasters are predicting continued capital market instability in the short to medium term and a long recovery period.
In Australia, PPPs account for around 10% of state capital spending in Victoria, around 7% in Queensland and lesser proportions in the other States and the Commonwealth. PPPs are highly leveraged in listed or private forms and rely on capital markets for both equity and debt capital.
A significant body of evidence points to the advantages of PPPs over traditional procurement methods. The benefits include:
1. The delivery of projects on time and on budget
2. Reduced procurement costs and improved value for money outcomes
3. Improved project management - integration of design and construction processes and full lifecycle costing
4. Adoption of an output specification to encourage design and construction innovation and new technologies
5. Improved public services and qualitative user outcomes (Mott McDonald 2002, Fitzgerald 2004, Allen Consulting 2007; National Audit Office 2005).
These results are supported by a comparative review of state procurement methods undertaken in 2008 by Bond University (Regan 2008c). This study identifies the improved performance of PPPs, build own operate transfer (BOOTs) and, to a lesser extent, alliance contracting methods using ex ante measures of value for money, the optimal alignment of incentives and process management. The executive summary from this study is set out at Appendix 2.
PPPs also offer a rigorous project selection and evaluation process using a risk-weighted analytical framework that features both qualitative and quantitative measurement techniques. This process is now being applied to traditional procurement processes and is achieving similar value for money improvements.
The empirical evidence suggests that PPPs are improving government infrastructure performance in three additional ways:
1. PPPs are an important innovation in the evolution of the science of major project procurement and studies suggest they are a more efficient method of project delivery than the alternatives (See Appendix 2).
2. PPPs are worth preserving - along with alliance contracting and the input specification models, they are driving favourable value for money outcomes and form part of the diverse procurement tool box available to government for appropriate applications.
3. Private capital markets provide an important alternative source of capital for governments hard pressed to meet the high levels of investment needed to renew Australia's ageing infrastructure.
The performance of PPPs as a method of infrastructure procurement is examined in further detail in Appendix 1.