In the 1980s, economies in most developed countries were characterised by high levels of public participation in the economy, high levels of state debt and deficits, stagflation and low levels of economic growth. The response of government was to reduce public debt, downsize government, privatise government business enterprises, improve microeconomic performance and outsource the delivery of public assets and services. Private capital was an appealing substitute to state investment and in the early 1990s, procurement models based around build own operate transfer arrangements became more common for the delivery of networked public assets such as roads, water and sewerage plants, pipelines, ports and public buildings (Grimsey and Lewis, 2004).
These arrangements were generally input-specified stand-alone assets for periods of 15-25 years. In 2001, the United Kingdom introduced its Private Finance Initiative which eventually came to consolidate a number of procurement methods including PPPs (Savas, 2000). The Victorian Government introduced its Partnerships Victoria program about the same time and policy variants of these approaches were eventually adopted by the commonwealth, state and territory governments in the following 6 years. Victoria has employed PPPs for more economic and social infrastructure projects than any other Australian jurisdiction and the Partnerships Victoria policy template is widely used as a best practice template in developing economies in Asia, the Pacific and Africa.
Infrastructure describes the structural framework, systems and networks that facilitate economic and social activity in an economy (Rutherford, 2000 and Regan, 2008b). Infrastructure is also one of Australia's largest asset classes accounting for around $616 billion in assets and around 22.8% of GDP each year (Australian Bureau of Statistics -ABS, 2007). However, economic and social infrastructure plays a much greater role in the economy because of its extensive multiplier effects on most other sectors of the economy. Infrastructure also accounts for 13.6% of private capital investment and around 17% of aggregate gross fixed capital formation, an important driver of domestic demand, output and economic growth (Regan, 2004).
In Australia, around 68% of economic and social infrastructure is provided by the state although in recent years, private infrastructure investment has increased to around 2% of GDP. The average age of infrastructure is increasing and overall net contribution to capital stock accumulation is less than the average for Organisation of Economic Cooperation and Development (OECD) countries.
PPPs have been widely employed in developing economies for over 10 years as a small but significant alternative method of procuring economic and social infrastructure (Mott McDonald, 2002). During calendar year 2008, international capital markets experienced high levels of instability with a sharp fall in the share market prices of listed infrastructure securities, a sudden and acute contraction in structured and project debt markets and institutional restructuring that saw state bailouts or acquisitions of a large number of privately owned financial institutions. These events were quickly felt in Australia and reflected in sharp falls in security prices, a decline in business and asset-based lending and a sharp rise in lender spreads for corporate, project and structured finance. Capital market observers suggest that current market conditions are the worst they have been since the Great Depression and economic forecasters are predicting continued capital market instability in the short to medium term and a long recovery period.