2.1.2 Forms of private investment in public infrastructure

A range of private sector options is available for the provision of public sector infrastructure. The World Bank suggested these options lay along a continuum from wholly public at one end to wholly private at the other:36

Exhibit 2.1: Forms of private investment in public infrastructure

The first few public orientated options may include the private sector providing public infrastructure through sub-contracts or management contracts, but they do not address the issue of funding constraints on government. Funding difficulties may be bridged through the latter options, not least BTO concessions and divestiture.

Traditional public ownership (contracting out) arrangements may include design and construct, where the government specifies the asset required in terms of its functions and desired outcomes. The private sector is responsible for designing and building the asset and assumes related risks before the asset is passed onto government to operate.37 This arrangement is quite different from the BOOT (build, own, operate, transfer) arrangement, whereby the service provider is responsible for the design, construction, finance, operations, maintenance and commercial risks associated with the project. The service provider owns the asset during the concession period, before the asset is transferred back to the government, often at no cost.38

Previous Victorian Governments have not developed an official classification system of private involvement in infrastructure. However, the Commonwealth Economic Planning Advisory Commission produced an early classification system, illustrating the spectrum of private involvement in the provision of infrastructure, ranging from full private ownership to traditional public ownership (and no private involvement).39

Exhibit 2.2:

Private involvement in
economic infrastructure - taxonomy

Key: P=Private, G=Government, C=Consumer, BOO=Build-Own-Operate, BOOT=Build-Own-Operate-Transfer, BTO=Build-Transfer-Operate

The Commission explained the various forms of involvement as follows:40

• Under full private provision, the private sector provides infrastructure in much the same way as other goods and facilities. Thus the provision of the infrastructure service reflects normal commercial criteria, subject only to a broad regulatory framework. In practice there is often a fine line between BOO projects (where government is responsible for project planning) and full private provision.

Privatisation of public infrastructure can be achieved through the sale of existing facilities or the removal of barriers to entry in areas which are not natural monopolies. Under full private provision, governments may still provide subsidies to secure the provision of non-commercial facilities, or to reduce costs for particular groups of consumers.

• Under traditional public ownership (and in-house labour), government was responsible for virtually all aspects of provision. This has largely been phased out over the past two decades in Victoria;

• Traditional public ownership (with contracting out) involves government financing a project, but contracting out to the private sector some or all of the project design, construction, operation and maintenance through competitive agreements;

• BOOT-type arrangements are individual project concessions in which private operators finance and build a public facility in return for the right to operate the facility and charge a user fee. In most cases, such facilities operate within a publicly owned network. The key difference between these arrangements and contracting-out is that under a BOOT structure, the private entity provides at least some of the finance for the venture and thereby assumes some of the project risk.

BOO, BOOT and BTO arrangements are three of the numerous possibilities here. BOO schemes remain privately owned facilities in perpetuity but under a BOOT scheme, ownership of the facility transfers to the government at the end of the concession period, usually without payment. Under a BTO scheme, the public sector takes ownership of the project on completion, and leases it back to the private provider. The government, therefore, assumes earlier ownership of the asset, although this is largely 'cosmetic'.

Governments often supplement project revenue in recognition of wider social benefits. The government contribution may take the form of a grant, land or some other physical asset, a concession loan, or equity (that is, joint ventures).

The Victorian Government's Partnerships Victoria Guidance Material, Overview states that there is no preferred or standard model for projects under this policy, but that for a given project, the model of partnership is determined by three criteria:41

• whether the government should deliver any part of the proposed service;

• whether the involvement of the private sector will deliver value for money and, if so, how to optimise that value; and

• whether the project will satisfy the public interest criteria that form part of the Partnerships Victoria policy.

The overview document states that as a result of these criteria, there is likely to be a greater variety of models than in the past. Exhibit 2.3 illustrates the different models of government and private party involvement in projects under Partnerships Victoria.

Exhibit 2.3:

Different roles of government and private sector
in projects under Partnerships Victoria42

Source: Department of Treasury and Finance, Partnerships Victoria, Guidance Material, Overview, July 2006, p.9

The earlier mentioned inconsistencies in terminology are also evident throughout the various types of project schemes. Two prominent academics, Broadbent and Laughlin,43 noted that PFI in its purest form is a design, build, finance, operate (DBFO) system, involving a private sector consortium providing public based services to a public sector purchaser for a lengthy period. In contrast, the Department of Treasury and Finance advised the Committee that the Melbourne CityLink project was 'financed by the private sector as a build, own, operate, transfer (BOOT) scheme'.44

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36 Guislain P and Kerf M, Public Policy for the Private sector, note no.59, Concessions – The Way to Privatize Infrastructure Sector Monopolies, October 1995

37 Australian Council for Infrastructure Development (AusCID), submission no.18, p.7

38 ibid.

39 Economic Planning Advisory Commission, Private Infrastructure Task Force Report, September 1995, pp.5-7

40 ibid.

41 Department of Treasury and Finance, Partnerships Victoria Guidance Material, Overview, July 2006, pp.8-9

42 ibid., p.9

43 J Broadbent and R Loughlin, 'PPPs: Nature, Development and Unanswered Questions', Australian Accounting Review, 14(2) 4–10, 2004, p.335

44 Department of Treasury and Finance, submission no.35, attachment B