Public private partnerships (PPPs) are a relatively recent form of major project procurement for delivery of major projects and infrastructure services. They account for less than 10% of state capital procurement in Australia and have introduced a more scientific approach to the delivery of large and complex public services measured in both quantitative and qualitative terms. The result has been a significant improvement in project delivery (cost and time), reduced procurement cost, greater certainty with full life cycle costing, higher levels of innovation and technology and better quality service outcomes. These benefits contribute to better value for money results for government than traditional procurement methods.
Recent events in international capital markets has had major impact on the ongoing rollout of PPPs and slowed their use. Capital has been hard to source especially for projects over $300 million, the patronage risk model for economic infrastructure is no longer available, debt is more expensive than it was 18 months ago and credit risk insurance is no longer readily available. This has affected bid markets and slowed the delivery of new infrastructures with longer-term implications for economic performance across the whole economy.
There are two broad approaches that government can take to PPP procurement. Firstly, it may make greater use of alternate procurement mechanisms such as alliance contracting, management outsourcing and traditional procurement. Secondly, it may rethink its role in the PPP process and preserve the model by reducing risk and/or participate in the provision of debt finance.
This research report is based on a three-stage methodology. First, a review was conducted of the international literature to re-examine the performance of PPPs (described in greater detail in an earlier Infrastructure Association of Queensland and Bond University report). Alternative procurement options are identified and compared. Second, a survey is made of prevailing capital market conditions and state investment evaluation. Third, the empirical evidence is examined to critically evaluate the options for state provision of infrastructure and direct financial participation in PPP projects.
This report makes the following findings:
• PPPs are delivering better procurement outcomes than other procurement methods captured in superior value for money performance
• The advantages of maintaining the PPP model in its present form significantly outweigh the disadvantages - PPPs rely on a combination if incentives, design and service innovation, risk transfer and sustainable service delivery not replicated in other procurement methods
• Current capital market conditions close the door on market risk models for land transport projects, constrain the availability of debt capital above $350 million, and impose limitations on capital structure and debt servicing capability for projects which increases the degree of difficulty raising debt capital for these projects
• There are a number of alternative methods for state provision of infrastructure - using existing appropriations, taxation, state debt, tax-preferred bonds, and mandated superannuation fund investment. The available evidence suggests that state debt, to the extent that this is prudent in fiscal terms, offers the least disadvantages to the state
• There are also several methods for state financial participation with PPP projects that preserve the model - state loans to PPP projects (which ultimately rely on state debt), indemnities and state debt guarantees. The advantages and disadvantages of these approaches are reviewed
• The form of state debt participation that best remedies prevailing deficiencies in capital markets, maintains the value for money drivers that are central to the success of the PPP model and, attracts lowest risk to the state, is the state debt guarantee option. Empirical evidence supports the proposition that this approach has a low probability and cost to government in the event of default under a PPP agreement.
My thanks to Professor Jim Smith, Head of the Mirvac School of Sustainable Development at Bond University for his review and assistance, the constructive comments of the management committee of the Infrastructure Association of Queensland and three anonymous referees. Nevertheless, all errors, omissions and deficiencies in this report remain with me.
Michael Regan
Mirvac School of Sustainable Development
Bond University
15st August 2009.