Internationally, PPPs are being used across a wide variety of economic and social infrastructure projects in more than 85 countries. PPPs are a procurement methodology that brings a rigorous risk-weighted approach to major projects using a competitive bid process and private sector expertise and innovation. PPPs are achieving a number of significant improvements in major project procurement and improved public service delivery. A wide body of evidence supports the following findings:
• PPPs are bringing forward the delivery of major projects
• The model is achieving value for money, reducing procurement costs and delivering more projects on time and within budget than traditional methods
• PPPs are improving the science of state procurement and have led to wider application of Gateway Review and alliance contracting methods with significant benefits for state procurement outcomes
• Certainty with lifecycle costing
• High levels of construction and design innovation and new technologies.
PPPs are highly leveraged and a number of major assets are either listed on the Australian Stock Exchange (ASX) or controlled by listed portfolio investment funds. PPPs are highly dependant on capital markets for many services including:
• Raising equity capital through initial public offerings
• Debt finance
• Financial risk management
• Intermediation, credit insurance and related services
• Innovation from financier-led competitive bids.
Conditions in international and domestic capital markets are unstable and volatile. Present conditions exhibit the following characteristics:
• A 50% fall in stock prices since the market peak in 2007 and stock price volatility
• Limited opportunity for on-market equity raisings
• Increased difficulty raising debt and higher debt financing costs
• Limited supply and repricing of credit insurance
• Uncertainty and lack of confidence.
A consequence of these market conditions is limited availability of equity and debt capital and a higher cost of capital. This condition is exacerbated in Australia where projects listed on the ASX make greater use of medium-term corporate debt and periodic refinancing than other countries. Revaluation and refinancing, once revenue maturity is achieved, are key elements of investment economics through increased leverage, a return to equity and a reduction in the cost of debt. Present market conditions would indicate that these opportunities will be considerably reduced over the medium term.
Present market conditions do not close the door on PPPs but do provide an opportunity for both government and industry to develop a more refined model that is more appropriate for the new environment. This may require a more scientific costed approach to risk allocation, state guarantee support, improved underlying credit credentials and a rethinking of patronage risk. It is a shared responsibility.