Reasons for optimism

Despite these problems, the prospects for PPP projects are reasonably good. They are attractive to the public sector as, historically, and where projects have been suitable for a PPP, they have provided strong value for money (VFM), delivering high quality outcomes on-time and on-budget. A 2004 review of PPP projects procured under the Partnerships Victoria policy3 reported that "each of the eight projects [reviewed were] … equal to or better value than … public sector provision … [with] the weighted average saving [being] 9 percent against the risk-adjusted [Public Sector Comparator]". Subsequent announcements on individual Australian PPP projects have all indicated that they have delivered VFM. Sources of VFM include:

•  synergies between design, construction, operation and maintenance

•  greater cost and time certainty4

•  maintenance being driven by performance requirements rather than budget availability

•  project risks being allocated to the parties best able to bear and manage them

•  the removal of some of the weaknesses inherent in traditional public sector procurement.

Although the increased margins charged by banks for PPP debt have an adverse impact on value for money, the GFC also has affected state governments' borrowing, with the spread over Commonwealth bonds increasing. This increase was particularly marked following the Commonwealth guaranteeing bank liabilities, though the provision by the Commonwealth in March 2009 of a guarantee of state's borrowings (for a fee) has reduced the spread.

PPP projects also are attractive to private sector contractors and services providers and, 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 revenue of social infrastructure projects generally is in the form of availability payments made by creditworthy public sector bodies. Any deductions from payments are, in practice, passed down to sub-contractors. Even economic infrastructure projects, if based on robust revenue projections, have stable revenues, as generally they are local monopolies. PPP projects also have long durations (typically, the construction period plus 20-25 years, or even longer for economic infrastructure projects).

The private sector parties bearing much of the risk of PPP projects - the construction contractor, the operator and maintenance contractor - normally are reasonably creditworthy. PPP projects also tend not to be inherently risky, although there are some exceptions. They typically do not use new, untried technology but instead use traditional construction and require relatively simple services.

As a result of these features, PPP projects typically can obtain low investment-grade credit ratings, normally in the BBB/Baa band but occasionally in the A band.

Some of these characteristics suit many major institutional investors such as superannuation funds and life assurance companies, who need assets to match their long-term liabilities. These investors were major buyers of PPP project bonds before the credit crisis. Unfortunately, there are three key factors inhibiting these investors' current participation:

•  they have limited resources to undertake for themselves a detailed initial evaluation of a PPP project, to structure and negotiate it, or to monitor it during its life

•  the pool of investment funds available for low investment-grade bonds is substantially smaller than that available for AAA-rated bonds

•  under SuperChoice, many superannuation fund members have switched their funds from the former default Growth or Balanced options to cash in reaction to current financial market conditions; and members' ability to do so requires superannuation funds to focus on liquid investments.

In the past, monoline insurers were able to overcome the first two factors: they had the resources to evaluate and monitor projects and enabled access to the full pool of investment funds through providing the benefit of their own AAA credit ratings by bearing project risks themselves. One route out of the current financial crisis for PPP projects is somehow to resurrect this model, separating out funding from bearing and managing risk. In addition, superannuation fund members need to become convinced of the creditworthiness of PPP assets.

PPP projects also remain attractive prospects for banks, reflected by the risk component of banks' interest margins arguably only having increased by a relatively small amount, as shown in Table 1 above. They too have the resources to evaluate and monitor projects. However, they are not natural providers of long-term finance, so again a route out of this crisis might be to separate out funding from bearing and managing risk. However, for the time being, banks remain the main providers of debt for PPP projects, though the liquidity created by the previously buoyant equity markets may take some time to return.

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3  Peter Fitzgerald, "Review of Partnerships Victoria Provided Infrastructure - Final Report to the Treasurer", January 2004.

4  See Colin Duffield, "National PPP Forum - Benchmarking Study, Phase II: Report on the performance of PPP projects in Australia when compared with a representative sample of traditionally procured infrastructure projects", December 2008; which showed, for the construction phase, cost and time overruns for PPP projects were substantially less than those for traditionally-procured projects.