The partnership model is a hypothetical model that estimates the true financial cost to government to procure the required service under the public private partnership project delivery option. The development of the partnership model requires specialist skill and is therefore likely to be undertaken by the financial adviser to government. Items to be considered in the development of the partnership model include:
• Service payments. The partnership model represents an estimate of the project delivery option that the private sector would likely adopt to structure the project. The aim of this exercise is to estimate the service payments that the government would pay over the operating period of the project. Ultimately, the partnership model allows government to determine the likelihood of gaining value for money under a public private partnership delivery option. Additional discussion of service payments is in section 3.2.12.1 below.
• Financing. Where private financing is a feature of the public private partnership project delivery option, the partnership model must incorporate the likely financial structure that the private sector would use to finance the project. In general, the loan facility amounts are based on the construction cost for the project with a working capital allowance.
• Debt. Consideration should be given to the drawdown and repayment profile of debt. Usually the drawdown of funds will be matched to the construction period funding requirement and debt will terminate a few years prior to the end of the operating period. The timing of interest/principal repayment profile can be annual, semi annual, or quarterly. Upfront, commitment, agency and underwriting fees, as well as interest rates need to be considered.
• Equity. Equity can be paid into the project in any number and combination of ways. The specific structure will depend on many factors, including the sources of equity providers and their appetite for risk.
• Debt ratios. These ratios are a measure of the extent to which available cash flow from the project covers loan repayments, and are used by financiers to assess the 'riskiness' of the loan. Debt ratios need to be considered during the development of the partnership model to assist in understanding the acceptability of the project to financiers. Further advice on the use of these ratios should be sought from the financial adviser.
• Tax. Any structure devised for the delivery of a project must consider the taxation issues. As with all tax matters, the taxation consequences will depend on the precise and full facts of the structure proposed. Expert tax advice should be sought for the tax treatment of specific projects and the optimal way of structuring a project.
• Third party revenue. Third party revenue usually arises from commercial development that occurs outside of the normal course of business for the agency, but is allowed under a public private partnership arrangement. Assumptions regarding future demand and revenue should be carefully estimated and external advisers may be required in order to help estimate the revenue streams and the risks associated with them.
The attraction for government of third party revenue in the project is the potential decrease of the project cost to government. There are various ways in which government can structure the project that will impact on how the service payment is calculated. If all the commercial revenue is to go to the private sector, then the service payment could be calculated net of the commercial revenue. If, for example, government wishes to profit share in the commercial development, then the service payments could be calculated before any commercial revenue, and the profit share element separated out and paid to government in a separate payment. The calculation of the service payment with regard to commercial revenue will differ from project to project depending on how the project is to be structured. Once again, market sounding may aid in assessing the commercial potential of the project with and without specific commercial development.
• Revenues to government. Most privately funded projects will involve the private sector making payments to government in the form of land tax, stamp duty, payroll tax or other charges. These should be included in the partnership model.
• Cost of retained risks. Retained risks that were identified and quantified in the public sector comparator are to be added back to the partnership model such that a like-with-like comparison can be made.
• Residual value of the asset. If the project is structured so that government pays a residual value to the private sector at the end of the operating period, then this cash flow should be included in the partnership model. Expert advice should be sought in order to obtain an estimate of the value of the asset. Note that there will be tax and accounting implications resulting from the way this is structured, which may affect both the government and private sector approaches to the issue.
• Discount rate. The discount rate used to determine the net present value of the project must be developed in consultation with Queensland Treasury and the Department of Infrastructure and Planning.