A major driver of value for money on Australian PPPs has been the transfer of risk to the private sector.
Australian governments have long realised that transferring as much risk as possible to the private sector doesn't provide the best value for money outcome to government, at times when private sector bidders are fully pricing the risks. Rather, when risks are being fully priced by bidders, the government achieves a better value for money outcome if it retains those risks that it can manage for a lower cost than the price the private sector will charge for taking the risk. There have been times, however, when the private sector's desire to win a project has resulted in government paying very little to transfer risks that would ordinarily be allocated to government. Change of law risk is perhaps a good example. Provided the private party has the capacity to absorb the consequences of such risks, this can represent a fortunate outcome for government.
Australian governments have long had a preference for the high level of cost certainty that fixed price contracts provide. PPPs fulfil this preference by obliging the SPV to deliver the infrastructure facility and associated services to agreed standards in return for a fixed service payment and/or capital contribution from the government. This protects government from most risks that could increase the cost of providing the required infrastructure and services. Consequently, however, Australian PPPs also provide government with little opportunity to share in the rewards that the private sector participants realise when they manage these risks well.
For PPPs that create businesses by charging users, or enabling the development of surrounding property, an opportunity exists for government to 'partner' in a more entrepreneurial way with the private sector in the development of these businesses, and to share in the rewards associated with them. But the private sector will only invest in developing these businesses if the risk/reward equation makes sense. Accordingly, government's preparedness to share in the risks of such businesses will determine the extent to which it can also share in the rewards. The recent trend of Australian transport and other infrastructure projects being seen by government as a catalyst for precinct regeneration will create more opportunities of this nature.
In recent years, Australia's federal government has shown increasing interest in sharing project risks in order to obtain a return on its financial contribution to a project. Traditionally, Commonwealth funding has been provided in the form of a grant to the state undertaking the project. Once the grant was paid, the federal government had no further exposure to, or interest in, the project. In more recent times, the federal government's preference has been to structure its financial contribution as a subordinated loan to the SPV (or to the relevant state), which generates interests and must be repaid. The federal government has also expressed interest in taking equity positions in projects, and guaranteeing the repayment of the project's debt in return for a fee. So it seems there is appetite, at least at the federal level, for more risk sharing by government. |
| "Opportunities exists for government to 'partner' in a more entrepreneurial way with the private sector." |