Public private partnerships have delivered significant improvements to the science of public procurement and improved the quantitative and qualitative performance of public services. The difficulties posed in present market conditions threatens to slow down the rollout of new infrastructures and reduce private participation in project delivery and management. There are options in the form of alliance contracting, outsourcing and traditional procurement using the gateway process. However, the principal catalyst for change will diminish and the expectation of further refinement of incentive frameworks, the output specification, risk transfer and the value for money measure of procurement performance, will not be met.
This report finds that for these reasons, the PPP model should be maintained and further developed for specialised applications. This will require the state to consider two types of interventions.
First, the provision of financial support to PPPs in the short-term. To preserve those characteristics of PPPs that support innovation, certainty, risk transfer and essential incentive frameworks, a case can be made for support in the form of full, partial or short-term guarantees for bank finance in the form of senior debt.
Second, greater state sharing of risk in the problem areas that are of most concern to bank lenders. The market has closed the door on patronage risk projects in the medium-term and IPOs for single-asset land transportation projects. However, there is opportunity to further develop the PPP procurement solution for social infrastructure projects. Victoria continues to lead the way with new projects in the justice, health and education sectors and demonstrated both flexibility and a willingness to innovate in present market conditions. The Melbourne Desalination project received 5 expressions of interest in its first testing of market appetite for a debt requirement exceeding $2 billion. Sourcing debt was always going to be difficult and the project was a state priority. The government's response was to run a 2-bidder tender process and then pool lenders from both bids whilst minimising the number of syndicated lenders. The government offered a take or pay contract for a base component of the contract providing a unitary payment to the consortium that will service a significant component of the debt. The government also offered an underwriting of part of the consortium's debt requirement as a lender of last resort at market rates. The consortium is confident that all of the debt would be sourced from private sources before the project was commissioned in 2011.
The response of the Victorian government was to achieve a number of things. First, it preserves an independent role for the lending panel, holds down transaction and agency costs and preserves the important lender incentive framework and the market discipline that this brings to a PPP transaction. If the state is required to provide a loan to the consortium, it will share the same security status as the bank lenders.
Second, the approach preserves the PPP model and the improvement that this will bring to service outcomes over a 30 year project life.
Third, it provides an important signal to capital markets that the government is committed to PPP procurement and will act to deliver certainty as the circumstances require.
Fourth, it suggests that the Victorian Government is willing to react quickly and with innovation to assist the market in adverse conditions. The solution was not a policy formula or a prescriptive model of general application such as the credit guarantee fund or the supported debt approach. It was a solution that met the requirement of the project and the time and provides a template for other jurisdictions in Australia.