The WWG defines social infrastructure as:9
Although loosely used, this term generally refers to items of physical infrastructure that aid the provision of social, rather than economic or industrial, services. Hospitals, schools, police stations, day care centres and prisons are examples of social infrastructure.
For social infrastructure PPPs, the assets created and associated services provided are usually paid for by Government from consolidated revenues in the form of monthly service payments (MSPs). Private providers are typically not exposed to market risk, with the MSPs being tied to a "payment mechanism" - an incentivised performance based payment regime that is structured around key performance indicators (KPIs). If the private provider fails to meet identified KPIs, their MSP will be abated accordingly. Cost and performance risks are a key driver of financial outcomes in social infrastructure PPPs.10
Social infrastructure projects were delivered in NSW and Victoria following the growing use of PFI in the United Kingdom. There has been a large amount of knowledge sharing between representatives of HM Treasury, NSW Treasury and Partnerships Victoria. In NSW, the introduction of the UK PFI social infrastructure policy was adopted through a Green Paper in 2000, which led to NSW Treasury publishing the first WWG in November 2001.
The WWG were updated in 2006, taking into account past lessons learnt and a number of the key recommendations from PPP inquiries. In May 2007, after industry consultation and feedback, NSW Treasury published Risk Allocation and Commercial Principles, a policy document which is primarily targeted towards the procurement of social infrastructure projects.
NSW has procured schools, hospitals, prisons and social housing in a short period of time since the release of the first WWG in 2001.The NSW Schools I & II projects are viewed by many in Industry and Government as being an example of social infrastructure PPP best practice.
The schools were built in high population growth areas on greenfield sites. The savings to the public were in excess of 20 per cent, with the Auditor-General's Performance Audit reporting that teaching staff were extremely happy with the arrangement, being able to focus on core activities rather than maintenance. Overall, the Auditor-General favourably viewed the PPP.11
In social infrastructure projects, it is up to the private sector to compete against a current Government service and also rival bids - creating two separate competitions. For example, a number of services were removed from the final Orange Hospital PPP following a value for money assessment, after the successful consortium stated that they could not match the public sectors efficiencies in some areas.
In October 2008, NSW showed that even in the most adverse economic conditions, a social PPP project can be delivered if its fundamentals are sound, reaching financial close on the Royal North Shore Hospital in Sydney. Contract negotiations and financial close were conducted during a time when project financing was extremely difficult.
Social infrastructure PPPs have unique budget and accounting implications. The NSW Treasury adopts a budget rule, a framework which is also adopted in Victoria. The budget rule separates the investment and procurement decisions, in accordance with the following:
1. Decision to invest (is the project worth pursuing?)
■ Cost Benefit Analysis / Business Case
■ Prioritisation.
2. Method of procurement (PPP?)
■ Value for Money
■ Public Interest.
By adhering to the above, the Government dispels the common misconception that PPPs are an alternative to Government borrowing. That is, PPPs are not used as a means of extending the State's budget constraint. While private finance may be used to initially construct the infrastructure, it will ultimately be funded by Government through ongoing payments over the life of the contract.
The Government strictly adheres to its budgeting policy and will only consider using a PPP for social infrastructure where projects:
■ are part of an agency's capital expenditure priorities for service delivery
■ are budgeted for by way of capital expenditure in an agency's forward capital budget (assuming traditional procurement)
■ offer value for money compared with Government's traditional procurement methods.
For a social infrastructure project, an agency must have the budget to cover the service payments over the period of the arrangement. In proceeding with PPP procurement, an agency's original forward capital budget for the project, which assumes traditional procurement, is converted into PPP capital payments. Implicit in the MSP which the Government agency is required to pay to the private provider, is the recoupment of the providers capital cost associated with creating the asset.
The process of converting traditional capital funding into PPP funding requires a capital amortisation profile to be sculpted, with PPP capital being "dip fed" to the agency over the life of project to cover the capital component of the MSP. Service related components of the MSP are budgeted for as recurrent funding.
From an accounting perspective, social infrastructure projects are considerably different to economic infrastructure projects, resulting in different balance sheet impacts. Currently, there is no accounting standard for PPPs in Australia. The Australian Heads of Treasury, however, endorsed the UK FRS 5 as an accounting model. In applying this model, the majority of NSW social PPPs to date behave akin to a finance lease, with AASB 117 - Leases providing guidance on the accounting implications. Accordingly, the majority of social infrastructure PPPs are classified as on balance sheet transactions for Government.
It is through optimal risk allocation that PPPs ultimately provide value for money to Government. Further, PPPs provide potential for capturing efficiency savings, and lead to more stable and predictable expenditure and service levels. Social infrastructure PPPs allow agencies to focus on their core objectives - managing and delivering core services to the community - rather than micro-managing the supporting infrastructure.
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9 NSW Treasury, 2006. Working with Government: Guidelines for Privately Financed Projects page 85. http://www.treasury.nsw.gov.au/wwg
10 NSW Treasury, 2006. Working with Government: Guidelines for Privately Financed Projects, page 54. http://www.treasury.nsw.gov.au/wwg
11 An overview of the report can be found at: http://www.audit.nsw.gov.au/publications/reports/performance/2006/schools_ppp/inbrief-schools.pdf