2.1 Australian PPP models

In Australia, the PPP model is generally used to describe contracts that incorporate two key features:

• the bundling of design, construction, maintenance and potentially other services into a single contract; and

• the use of private sector finance.

There are two basic PPP models that are applied to infrastructure projects in Australia. The feature that distinguishes one model from the other is the primary source of revenue used to repay the private sector finance. In one case, the primary source of revenue is charges imposed on users of the infrastructure. These PPPs are known as 'user-charge PPPs'. In the other case, the primary source of revenue is a service (or availability) payment from the government, which are known as 'service payment PPPs'.

A key difference between the two models is who bears demand risk. In the case of a user-charge PPP, the private sector typically bears the risk of demand by users (and consequently, revenue from user charges), being less than forecast. In the case of service payment PPPs, demand risk is typically borne by the government.

Of course, there are many variants to these two basic models. Indeed, demand risk can be allocated differently under either model.

There have been periods when user-charge PPPs have dominated the Australian PPP landscape. Most Australian toll roads were delivered under a user-charge PPP model. The user-charge PPP model was also applied to a number of rail infrastructure projects including the Adelaide - Darwin railway, the Brisbane airport rail link, and the Sydney Airport rail link transactions.

However, in more recent years, it has been the service payment PPP model that has dominated, including in relation to road and rail infrastructure. It is the service payment PPP model that is being used on the rail projects mentioned in the introduction.

The service payment PPP model was preferred for each of these projects because private sector investors and lenders had lost their appetite for demand risk on greenfield transport projects, mostly as a result of the failure of numerous toll roads to achieve their patronage forecasts. The service payment PPP model was also preferred over a user-charge model because user charges would only cover a portion of the operating costs in any event. Government also wanted to control fares, service levels, and the development of the surrounding transport network, which was more easily achieved if government bears the demand risk.

The challenges discussed in this paper apply equally to both user-charge PPPs and service payment PPPs.

Before covering the challenges associated with extending a rail project being operated under a PPP contract, we will explain in more detail the PPP model that has been applied to recent rail projects, and the reasons why government may have chosen to use the PPP model for these projects.