The private party is the contracting party responsible for the delivery of the project and is the primary interface with the project director. Throughout the construction phase, the private party will interact frequently with the builder, and as commissioning approaches, typically the facility management subcontractor and other operators will become more involved.
In a Partnerships Victoria project, the builder is subcontracted by the private party, not by the government party. As the builder's contract is with the private party, contractual and commercial issues should not be resolved directly between the government party and the builder. The government party relies on private party employees and representatives of the equity providers (who are independent of the builder) to manage contractual and commercial issues with the builder directly. It is not acceptable for the private party to delegate its management role to its subcontractors, as a subcontractor's decision making and behaviours reflect their shorter time horizons and higher risk profile in projects.
Partnerships Victoria projects are usually financed by the private party through a mix of debt (in the form of bank loans or bond finance) provided by lenders, and equity (also known as risk capital) often provided by project sponsors or other investors. Typically, as in most businesses, equity investors are likely to take a more active role than debt financiers as variations in business performance are felt directly by equity investors, while debt providers are indirectly affected (usually only if the variation is relatively large and results in an inability for the private party to service its debt).
Equity providers may take either an active role in managing the project, or they may take a more passive approach by engaging a specialist management company to manage the project on their behalf. The differing degrees of involvement of active and passive equity providers can influence their behaviour and decision making in a project. Therefore, it is important for the project director to be aware of the approach being taken by a project's equity providers, in order to understand these parties' value drivers.
Equity finance serves an important purpose in providing the private party with adequate capital to absorb any negative financial consequences arising from construction risks or from abatements arising from poor performance in delivering the services specified. In addition, this 'skin in the game' also reduces the debt providers' risk profile, which may reduce the cost of the debt.
As such, the project director should set an expectation that equity providers (or their appointed specialist managers) will need to be involved in project decision making and coordination during construction.