2.3 Why was the PPP model chosen for each project?

The main reason the PPP model was chosen for each project was a belief that the PPP model would deliver a better value for money outcome compared to any alternative delivery model. In each case, the decision was made at a point in time, based in the information available to the relevant government.

According to the Full Business Case for the Canberra light rail project,1 the PPP model was considered to provide the best value for money outcome because of:

• the heightened degree of risk transfer and cost certainty it offered over other delivery models; and

• the greater scope for innovation it offered, compared to other delivery models.2

The Capital Metro Authority considered these features to be particularly important for its project because of the ACT Government's lack of familiarity with rail projects of that size and complexity.3

But much of the risk that is allocated to the private sector under the PPP contract can also be allocated to the private sector under a publicly funded D&C and O&M contracts, or a Design, Build, Operate and Maintain (DBOM) contract. The additional risk transfer that a privately financed PPP can achieve relative to publicly funded models boils down to the risk of default by or insolvency of the D&C contractor or Operator.4 Under the PPP model, the private finance provided by the SPV's equity investors and debt financiers provides government with a buffer against the risks of contractor insolvency, and default for which the contractor's liability is capped or excluded. In particular, government is partially protected under a PPP, because the equity investors and debt financiers will generally invest additional resources in solving problems caused by contractor default or insolvency if failing to do so would reduce the value of their existing investment or loan. The additional resources provided by investors or financiers may be sufficient to solve the problem, in which event government is shielded from the risk. It is only when the investors or financiers are unable or unwilling to provide further resources to solve the problem that the risk shifts back to government.

The bundling of design, construction, operation and maintenance obligations into a single PPP contract also eliminates the interface risk that government bears when it enters into separate D&C and O&M contracts. However, government can also eliminate this risk by bundling these obligations into a single DBOM contract, or by ensuring that its contractor under each of the D&C and O&M contracts is the same entity.

The heightened cost certainty arises from the bundling of all necessary components of the project into a single contract with a fixed price (service payment). With more traditional contracting methodologies, different components of the project are delivered under separate contracts. The cost of some of these contracts is often not known at the time the government commits to the project by signing the first contract.5

The greater scope for innovation on a PPP is often said to arise from government's focus on outcomes and the use of an output/outcome specification. However, the same outcome focussed approach can be applied to the specifications for a traditional government funded D&C contract. In truth, the greater innovation seen on PPP contracts is probably due to the involvement of the Operator in the bidding process, which could also be achieved under a DBOM contract.

It is not possible to report on exactly why it was thought that the PPP model would provide the best value for money for the Sydney Metro Northwest, Sydney light rail and Gold Coast light rail projects, as the procurement/delivery model strategies for those projects are not publicly available.6

One would reasonably expect that the reasons mentioned above would have also applied to these projects. Additional reasons as to why it was thought that the PPP model would be appropriate might have included:

• improved scoping and risk assessment by government that tends to occur for PPP projects;

• additional rigour that the use of private finance brings, due to due diligence and monitoring from the lenders and equity investors;

• improved service outcomes due to proper planning and allowance for maintenance costs; and

• industrial relations reform, via the private sector provision of operations and maintenance services.

The downsides associated with PPPs would have also been taken into account, including:

• the reduction in flexibility; and

• the cost of using limited recourse private sector finance.

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1 Capital Metro Full Business Case, p14. Available at http://www.tccs.act.gov.au/__data/assets/pdf_file/0010/887 680/Light-rail-Capital-Metro-Business-Case-In-Full.pdf.

2 "a comparison between the project's public sector comparator and PPP proxy" was also given as a reason for recommending the PPP model, but this is simply another way of expressing the risk transfer point. See p16 of the Capital Metro Full Business Case.

3 Capital Metro Full Business Case, p14.

4 PwC, Public Private Partnerships - Improving the Outcomes, 2017, at p11.

5 WestConnex is a good example of this scenario.

6 Whilst a high level summary of the business case for the Sydney light rail project has been published, it doesn't recommend a particular procurement model, as the investment decision was made before the procurement model decision on that project.