Australia

Australia's experience with PPPs goes back a hundred and fifty years, to the time of the first railways. Indeed, a recent recommendation by Infrastructure Partnerships Australia (2009) for grants and government guarantees for nationally significant PPPs projects echoes a proposal made in 1852 for grants and a government guarantee for a railway from Melbourne to Mount Alexander (Vogel 2009). The recent wave of PPPs dates from the 1980s. Since then, they have been used by all Australia's states and territories, for a wide variety of projects (Table 1). The one that has made the most use of them, by number and value, is Victoria, which has used them for jails, courts, hospitals, and convention centers, and two big urban motorways, City Link and EastLink.

In the 1980s and early 1990s, state governments used PPPs to build infrastructure without having to report more debt.6 At the time, the intergovernmental Australian Loan Council set limits on state borrowing,7 and accounting standards allowed states to enter into PPPs without recognizing any liability. Over time, this motive for PPPs has diminished, because the Loan Council no longer limits state borrowing and accounting standards now require governments to recognize a liability on their balance sheet when entering into at least some kinds of PPP.

Perhaps the biggest common contingent liability in Australian PPPs relates to early contract termination.8 The amount of the government compensation for early termination depends on the cause of termination. If the cause is the project company's breach of its obligations, the payment is normally the market value of the project, which is either found by rebidding the contract or estimated by an independent valuer. If the cause is force majeure (a natural disaster, for example), the government normally pays an amount linked to the project company's debt and, in some cases, to the book value of its equity. If the cause is the government's breach of its obligations, the government fully compensates lenders and shareholders for their losses.

Table 1 PPPs in Australia, value (A$ million) and number of projects by jurisdiction, to December 2006

Source: English (2006).

Note: N.S.W is New South Wales. N.T. is Northern Territory. S.A. is South Australia. Tas. is Tasmania. W.A. is Western Australia. For each category of project, the numbers in roman type in the first row are estimates of cost in million dollars, and the numbers in italics in the second row are numbers of projects. The estimates of cost marked with an asterisk exclude the costs of Mount Gambier Prison and the South-West Health Campus, respectively.

The extent of the contingent liabilities assumed by Australian governments has varied over time. In 1852, the government guaranteed shareholders in the Melbourne-Mount Alexander railway a dividend of five percent of paid-up capital for 25 years (Vogel 1929). In the 1980s, the NSW government entered into an "ensured revenue agreement" with the developers of the Sydney Harbour Tunnel that protected them from traffic risk (Government of New South Wales, Auditor-General's Office 1994). By contrast, the City Link and EastLink concessionaires in Victoria bear the traffic risk in their projects. The State does bear several risks in these projects, but those risks are narrowly defined and (mainly?) under the government's control.9 For example, the state agrees to compensate the concessionaire for changes in law that relate specifically to toll roads, but not for other changes in law. The contracting agency for EastLink says the following (SEITA 2008, note 16):

The State has retained some specified risks associated with the Project … known as Possible Key Risk Events… Where sufficient redress is not able to be achieved through [changes in tolls or other means not requiring payment in cash by the state] a financial contribution from the State may be available (as a last resort). However, such a contribution is only available for Possible Key Risk Events which are within the control of the State. A financial contribution from the State is not available in relation to changes in law (other than Discriminatory Changes in State Law), Uninsurable Force Majeure Events or [Environment Protection and Biodiversity Conversation] Events.

As the earlier discussion of guidelines illustrates, the approach in the Eastlink contract is not always taken. Australian states do generally bear some risks related force majeure.10 Whether the financial crisis causes Victoria and other Australian states to assume more such risks remains to be seen.

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6  Walker (2003); Maguire and Malinovitch (2004); and Quiggin (2004).

7  See http://www.directory.gov.au.

8  See Government of Australia (2008a, vol. 3, and 2008b).

9  See Grimsey and Lewis (2004, 37) on City Link and SEITA (2008, note 16) on EastLink.

10  See also Government of Australia, Infrastructure Australia (2008a, vol. 2, ch. 10, 2008b, ch. 15).