A review of the private party's internal operating environment is a crucial step towards understanding the underlying credit-worthiness (or solvency) of the business. By reviewing this environment, the government party can derive an awareness of the private party's financial strengths and weaknesses. A financial health review should be undertaken annually.
The availability of information can also change through the project lifecycle. For example, if a special-purpose vehicle (SPV) (or its parent company) is listed on a stock exchange, it will have public disclosure obligations as a result of that listing, and its stock exchange announcements can be a valuable source of information. If it ceases to be listed on the stock exchange, this source of information will no longer be available. As detailed in Chapter 16, the contract director should monitor such changes, and respond as necessary to ensure the performance reporting and monitoring regime continues to provide adequate information.
Indicators of financial health will vary from project to project. To identify appropriate indicators for a project, the government party should review the private party's organisational structure and financial position, including gearing. It is important to monitor the financial health of not only the private party but also its parent companies. For instance, the voluntary administration in 2012 of the Wodonga Wastewater Treatment Plant PPP private party's parent company led to the early termination of this PPP contract.
The contract director should consider whether to also monitor the business health of key subcontractors. The need to monitor subcontractors will depend on:
• the extent and nature of the obligations subcontracted;
• the ease with which the subcontractor could be replaced by the private party if required; and
• the size, financial standing and experience of the subcontractor.
The government party's personnel responsible for analysing the private party's financial position need a strong understanding of the private party's cash flows. Expert advice may be required from external financial advisers and/or Treasury Corporation of Victoria.