The WWG defines economic infrastructure as:3
Fixed assets that support economic activity and development in a fundamental way. Typical examples of economic infrastructure are networks of roads, telecommunication facilities, airports, ports, water storage distribution and sewerage, railways, electric power generation and distribution facilities.
Typical characteristics of economic infrastructure are:
■ private revenues are derived from third party users
■ the private provider faces market / demand risk
■ traditionally delivered through a Government Business Enterprise (including a state-owned corporation)
■ revenue risks are a key driver of financial outcomes.4
The SHT is an interesting project for a number of reasons. The project was an unsolicited proposal from Transfield/Kumagai, received by the Department of Main Roads in 1985. Being the first unsolicited proposal, the project was not market tested or put out to competitive tender, processes now required under modern policy. The lack of competitive tension surrounding the project concerned many, including the Auditor-General.
The SHT is unique in that the project was governed by its own legislation - the Sydney Harbour Tunnel (Private Joint Venture) Act 1987 (the Act). The Act was necessary due to Government not having a policy apparatus in place to deal with PPP procurement in the 1980s. The Act also set out the Government's responsibilities and streamlined planning approvals.
The need for the SHT's own legislation also reflected the fact that NSW did not have an appropriate legislative regime in place to regulate PPP transactions. Furthermore, NSW did not have a central agency designated as the first point of contact for the private sector.
The SHT also raised a number of tax issues which had not been previously encountered. The Australian Tax Office was concerned that the private sector was going to become eligible for capital allowance deductions that did not exist before the advent of large infrastructure sales, and later PPPs. The Federal Government introduced section 51AD of the Income Tax Assessment Act 1936 - prohibiting capital allowances deductions in respect of property used in certain leveraged arrangements i.e. the SHT.
Following the opening of the SHT, the NSW Government released Guidelines for Private Sector Involvement in Infrastructure Provision, which clarified the management of unsolicited proposals and how they should be processed, including intellectual property rights associated with proposals.5 These Guidelines have evolved over time and now take the form of the WWG.6
A number of toll roads in NSW have been procured since the SHT, implementing valuable lessons learnt. Sections of the M4 and M5 motorways that were procured through PPPs saw the introduction of a competitive tender process.
Positive attributes coming out of the M4 and M5 were that the operators accepted all patronage and cost escalation risk without recourse to Government, while the RTA retained the risk of property acquisition and took interest rate risk up until financial close.
The M2 Motorway in Sydney is recognised as a groundbreaking project due to the broad inclusion of lessons learnt from past projects. A defining characteristic of the M2 was the fact the project had to deal with adverse economic conditions during procurement in the early 1990s. Other defining features included:7
■ rising interest rates during the assessment and negotiation period of the detailed proposals, resulting in an increase in the Government contribution from zero to $59m
■ the inclusion of a Material Adverse Effects clause in the Project Deed which became a model for later projects.
In light of the Auditor-General's negative opinion of the SHT procurement process, the Auditor-General concluded that the M2 contractual arrangements had soundly transferred and valued the project's risk. The M2 contract and financial structure was used as a model for the CityLink project in Melbourne, Australia's first fully electronic toll road.
More recently the Cross City Tunnel, Westlink M7, and Lane Cove Tunnel projects have been procured by way of PPP. The experiences associated with these projects further refined PPP procurement of economic infrastructure.
The Cross City Tunnel consortium originally offered to pay the NSW Government for the concession as part of their bid. While there has been a change in ownership of the Cross City Tunnel following the financial difficulties experienced by the initial owners, the project was delivered to the public at zero cost to Government. The contractual arrangements and the project's risk allocation shielded Government from patronage and associated ramp-up risks.
The North-South Bypass Tunnel in Brisbane highlighted the evolution and growing consistency in economic infrastructure PPP contracts, using its predecessors as the initial pro forma. ConnectEast in Melbourne also added to the development of optimal contract and risk allocation practises for economic infrastructure PPPs, with a legacy of the Westlink M7 being the first distance based fully electronic toll road in Australia.
The RTA considers the lessons learnt through previous projects has lead to changes to their PPP procurement practices, which include:8
■ conforming proposals based on the RTA's concept design were invited with opportunity to submit optional variants
■ registrations of interest were invited instead of preliminary proposals, as the RTA was specific in detailing its concept design, ultimately being less costly to the private sector
■ financial parameters, e.g. toll charges, toll indexation regimes, and terms for conforming proposals were defined
■ the scope of works and technical criteria were enhanced over previous projects, to ensure that the Government's project requirements were met through private sector delivery
■ the confidentiality and probity of the RTA's assessment process were improved
■ the proposals were exhaustively reviewed by RTA and its technical, financial and legal advisors to ensure that proposals were acceptable to Government, future users and the community
■ a comparative value assessment was undertaken against a 'public sector comparator' - a hypothetical, risk-adjusted estimate of the net present cost of delivering the project through traditional procurement
■ competition was maintained throughout the tender phases
■ the Minister for Planning's approval of the project was obtained prior to the submission of detailed proposals.
The greatest benefit that has evolved over time is the fact that the private sector has become aware of, and accustomed to, State Governments' preferred risk allocation in economic infrastructure PPPs.
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3 NSW Treasury, 2006. Working with Government: Guidelines for Privately Financed Projects page 83. http://www.treasury.nsw.gov.au/wwg
4 NSW Treasury, 2006. Working with Government: Guidelines for Privately Financed Projects page 54. http://www.treasury.nsw.gov.au/wwg
5 Current NSW Treasury guidance regarding intellectual property can be found at: http://www.treasury.nsw.gov.au/wwg/intellectual_property_guideline_for_unsolicited_private_sector_proposals_submitted_under_working_with_government
6 Working with Government: Guidelines for privately Financed projects can be found at http://www.treasury.nsw.gov.au/wwg
7 Humphrey, Garry. 2008, Toll Road Procurement in NSW, presentation to the National Electronic Tolling Committee Industry Forum in Melbourne, April 2008.
8 Humphrey, Garry, 2008. Toll Road Procurement in NSW, presentation to the National Electronic Tolling Committee Industry Forum in Melbourne, April 2008