A limited number of PPP arrangements can create opportunities for commercial development by the private sector. The extent to which the public sector can benefit from such arrangements is a complex issue, but warrants detailed examination and policy development. Obviously, revenue received by the government from such arrangements should be maximised where possible, depending on a range of factors.
The Committee observed from a financial analysis undertaken in 2001 of the Southern Cross Station project that the preferred developer was willing to pay the state $68.6 million for the commercial rights to the interchange facility and adjoining properties. Under the public sector comparator, these rights were estimated under a traditional process to be worth $39.9 million, a variance of $28.7 million or 72 per cent less than the Civic Nexus offer. Civic Nexus eventually paid $66 million for the rights, a factor that substantially influenced its winning bid, as the tender for the interchange facility and rail modifications was $313.9 million, substantially more than the PSC of $296.7 million.
The Committee makes the further observation that more attention and expertise should be directed towards identifying and valuing commercial rights in any future projects.
The Committee acknowledges the complexity of this issue, but considers a policy should be developed on the exploitation of commercial rights. Such a policy should form part of the Standard Commercial Principles, issued by Partnerships Victoria in June 2005.
A further example of the complexity of commercial arrangements can be found in Citylink.
At the time the contract was entered into (in 1995), it was one of the largest infrastructure projects ever undertaken in Australia. The contract was awarded to Transurban, a consortium comprising Transfield Holdings Pty Ltd and Obayashi Corporation. The CityLink project involved the linking of three major freeways in Melbourne, leading to the construction of 22 kilometres of road, tunnel and bridge works as well as other related works.
The main contractual document for the arrangements was the 'Concession Deed' entered into in October 1995, which detailed the risk sharing arrangements, toll levels, control of the property, rights to cash flows, concession fees, and the length of the concession period (34 years). The concession period could be reduced if the project provided a net return to CityLink shareholders of 17.5 per cent per annum.82
The concession fees represented a return to the state to compensate for the cost of acquiring the tollway land and the undertaking of associated works, costing around $365 million relative to the tollway. Under the terms of the Concession Deed, Transurban was to pay these fees on the basis of $95.6 million per annum for the first 25 years, $45.2 million per annum for years 26 to 34 and $1 million per annum for the remaining three years.
The concession fees are paid in the form of concession notes issued each year which represent promises to pay the government the annual fee either at the completion of the concession period (in 2034), or when certain profitability levels were achieved. The Committee understands that the profitability level was deemed as a net 10 per cent return. A further option was that the concession notes could be redeemed by the government if Transurban achieved an after tax return of 17.5 per cent and had repaid all its borrowings for the project.83 The concession notes were non-interest bearing, which meant that their real value decreased each year in line with inflation.
The Committee acknowledges that the incentives and concessions provided by the government to developers are designed to encourage private sector participation in major projects. Evidence provided to the Committee by a large developer84 stated that the average investor's return from PPP projects was between 11 and 13 per cent. The Committee accepts that in order to attract private sector developers, an adequate return on capital must be available. However, Parliament should be informed when significant changes are made to a PPP contract beyond the initial contractual arrangements.
__________________________________________________________________________________________________
82 G Hodge, The risky business of public private partnerships, National Council of the Institute of Public Administration, Australia, 2004
83 Finance and Treasury Professional Journal, August 2003, p.19
84 R Opiat, Director, Business Development, Baulderstone Hornibrook, transcript of evidence, p.180