Transparency

Critics have complained about the lack of transparency regarding returns made by investors and future liabilities of taxpayers. Much of this criticism has been directed at UK PPPs, rather than Australian PPPs.

'Excessive profits' and 'windfall gains' to equity investors on Australian PPPs are rare. Refinancing gains are typically shared 50:50. And user-charge PPPs typically require revenues in excess of those forecast in the base case financial model to be shared with government. Windfall gains from unused major maintenance reserves are also uncommon in Australia.

In 2012, the UK Government announced a number of changes to its PPP policy aimed at improving transparency and reining-in excessive returns to the private sector, including:

•  government taking a minority equity interest in the SPV and thereby getting a seat on the SPV's board of directors;

•  requiring the private sector equity investors to provide forecast and actual equity return information, for publication;

•  government having the right to attend SPV board meetings as "an observer"; and

•  an open book approach to major maintenance reserves.

But were these reforms wise? When government takes an equity interest in the SPV, it becomes exposed to the risks that it has transferred to the SPV under the PPP contract. Government's equity interest also creates conflicts of interest for the government. For example, the termination of the PPP contract by the procuring agency because of poor performance of the SPV would be contrary to the government's interest as an equity investor. It also exposes the private sector equity investors to the risk that government will exercise its rights as an equity investor in a way that advances government's broader interests, such as its re-election prospects, rather than the profitability of the SPV.

The UK PPP deal flow has approximately halved since 2011 and very few PF2 PPPs have been brokered. Requiring private sector investors to disclose their forecast and actual equity returns is a major disincentive to investing in PPPs, as private sector businesses are not normally required to disclose this commercially sensitive information. The main reasons for the decline of the UK PPP market are probably the negative public perception of PPPs in the UK and strong political opposition to privately-financed PPPs in both major parties. However, the PF2 reforms have not helped. Other nations should be cautious about incorporating PF2 conditions in their PPPs.

There is, however, room for improvement in the transparency of government decision making surrounding Australian PPPs.

Australian governments have taken many positive steps to improve transparency of government decision making. For instance:

•  the federal government, and a number of state governments, have established specialist advisory bodies to assess project business cases and help government to prioritise the projects that should receive government support. These bodies typically publish briefs or reports on the projects they assess, including high level information on the business case;

•  request for tender documents typically include details of the evaluation criteria government will use to select a winner;

•  the procuring agency will usually conduct interactive meetings to enable bidders to gain a better understanding of government's objectives and requirements

•  debriefings are usually offered to unsuccessful bidders, to help them understand why they lost and how they could do better next time;

•  the contract with the successful tender is often published, or key details including the contract price are disclosed. Any subsequent contract amendments are also usually published; and

•  project summaries are typically published that detail the government's potential liabilities.

 Even so, there is more that Australian governments could do to improve transparency. For example:

•  detailed business cases for major government infrastructure projects are not always published;

•  request for tender documents generally don't reveal the relative importance that government attaches to the evaluation criteria;

•  the information provided to bidders at interactive meetings and debriefs is often constrained by a desire to minimize the risk of the selection process being challenged;

•  claims by contractors for extra money under the contract are often settled out of court on confidential terms that can't be publicly scrutinised; and

•  information on how a project has performed against the cost estimates and anticipated outcomes or benefits is rarely published, at all or in a form that can be easily understood.