Either or both the facility and the site from which the services are to be delivered may be of strategic importance to government. In making that assessment, government will have regard to:
• the nature and location of the site/asset
• the desirability of the asset continuing as part of a public network
• the potential design and technical life of the asset
• the likely alternative sources of service supply
• taxation considerations.
For example, a road provided under a public private partnership arrangement will be required to continue as part of the public road network.
If the site is of strategic importance, government will seek to secure the facility or site for itself when the contract term expires, or will require the asset to be transferred to a third party in order to re-tender the services. Where ongoing use of the facility is required at the end of the contract term, government will request that the asset meet various performance standards to ensure that it is in reasonable condition and fit for ongoing use at that point. These requirements implicitly protect the value of the asset.
The means by which government may seek to resume the facility or site may take a number of forms, including:
• granting a lease to the private party for a term co-extensive with the duration of the contract
• being granted a right to purchase for an agreed price or a price determined in an agreed manner (for example, fair market value)
• contractually requiring the private party to transfer the site to government at the expiry of the contract term (which may be for nil consideration or an agreed price).
The form in which government seeks to ensure the continuing availability of the site/facility will depend on the value for money aspects of the financial structuring sought by government and the private party. There is no preconceived approach. However, typically, with dedicated public infrastructure, the private party places little residual value on the property and seeks to amortise its asset and site costs fully over the contract term through the service charge. In certain projects, however, (such as some accommodation services projects), where there are other uses for the asset, the private party may be prepared to place a higher residual value on the asset, which may deliver better value for government.
Only in those cases where the infrastructure asset delivered under a public private partnership arrangement involves low risk technology is it appropriate for government to consider paying for an asset with a useful life significantly beyond the contract term. The risk of obsolescence posed by higher technology assets is one that government should not normally take.
Where the asset is to be transferred to government at the end of the contract term, government should be protected from inheriting an asset with negative value, (i.e. with significant liabilities attached or significant costs associated with its rehabilitation or removal from the project land).
There are circumstances where government may regard its ownership or control of the site or facility as unnecessary for the delivery of the relevant services.
Whether or not government ultimately has need of the site, the private party should be encouraged to devise a structure that maximises value for money for government and promotes acceptance of its bid, without prejudicing the commercial viability of the proposal. One such approach may be for the private party to seek tenure in the site exceeding the contract term, to enable secondary use to be made of the site and/or the facility. Any residual value imputed to the asset flowing from that tenure may be used to offset service charges to government.
If the asset is to be transferred to government on termination and government pays, through the service charge, the capital cost of the asset during the contract term or agrees to pay a pre-determined price on termination, government has some exposure to residual value risk. Such risk increases with the additional useful life that the asset is to possess on termination. Generally speaking, the private party is not significantly exposed to residual value risk, since it is unlikely to attribute significant residual value to the asset in its financial projections. However, to the extent that the private party incorporates an expectation of residual value into its financial structuring or retains the asset on contract expiry, it will bear residual value risk.