Introduction and summary

Private finance for Public Private Partnership (PPP) projects has become much more expensive and market capacity has reduced substantially due to the global financial crisis (GFC), leading to some commentators claiming that the PPP model is dead. However, the rationale for PPP projects remains. They are attractive to the public sector as, historically, they have provided strong value for money, delivering high quality outcomes on-time and on-budget. They are also attractive to private sector contractors and services providers. Further, despite the current problems in raising finance for them, well-structured PPP projects remain fundamentally good credit risks and hence attractive lending and investment prospects. The challenge for the PPP market is to ensure that PPP projects can be financed in current market conditions and that they still can deliver value for money.

One major problem is that long-term debt finance currently is unavailable, leading to the use of mini-perm bank debt structures with a typical tenor of only 5 years, and to a consequent refinancing risk at the end of this tenor. This risk is similar to the insurance cost risks that emerged following the terrorist attacks in New York in 2001 and therein lies a potential solution to the problem. A sensible compromise would be for government and the private sector to share the refinancing risk. In any case, governments already bear this risk for their own borrowings and those of state-owned enterprises.

The current problems that bidders and governments face in obtaining sufficient private debt finance for PPP projects have no simple answers. However, governments can take some practical measures to help. These measures include:

•  accepting a lower level of financing commitment in bids, instead of the traditional Australian model of requiring underwritten commitments of finance for a period of 6 months or more

•  taking measures to facilitate maximum competition for debt finance, which may involve a funding competition after appointing a preferred bidder

•  for larger projects (over $500 - 1,000 million), being willing to provide either capital grants, where such are appropriate and do not dominate the project's financing, or debt finance on a pari passu basis with banks (capital grants may not be appropriate for the largest projects - those over $1 billion)

•  investigating further the credit guaranteed finance or counter-indemnity models as possible ways of increasing market capacity and reducing funding cost. Under these models, the government either provides the finance or effectively guarantees it, but benefits from a guarantee of project risks

•  the Commonwealth increasing its guarantee to cover states' long-term PPP obligations.