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PPPs from Government's Perspective

Presentation to RMIT University PPP Club - 30 July 2013
by

Richard Foster

on 1 August 2014

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Transcript of PPPs from Government's Perspective

PPPs:
The Government Perspective

Richard Foster
Director, Foster Infrastructure

RMIT PPP Club, 31 July 2014
PPPs: What's Important to Government?
The PPP Model
The Institutional Arrangements
Government engages an architect who develops
an input based design
for the facility

Government engages a contractor for
construction

Following construction, the
Government operates and maintains the facility
Traditional Infrastructure Procurement:
Government
engages one private sector party
to
design, build and operate (or maintain)
the facility
to deliver specified outputs / services

Payment is based on the services delivered
and
conditional on meeting the KPIs
specified in the contract
PPP Infrastructure Procurement:
How does government "go about doing" PPPs?

Planning
Budgeting
Implementing
Monitoring
Evaluating
Why use PPPs?
In Theory:
In Practice:
In developing and transition economies, government budgets can only meet a fraction of the community's infrastructure needs
PPPs (particularly in sectors where user charging is possible) can be used to deliver additional infrastructure without calling on government budgets
1. To "expand the fiscal space":
PPPs can deliver better "value for money" compared to traditional infrastructure procurement

But what is "value for money"???
2. To "deliver value for money"
Victorian Government Purchasing Board guidance:

Value for money denotes, broadly, a balanced benefit measure covering quality levels, performance standards, risk exposure, other policy or special interest measures (e.g. environment impacts), as well as price. Generally, value for money is assessed on a ‘whole of life’ or ‘total cost of ownership’ basis, which includes the transitioning in, contract period and transitioning out phases of a contractual relationship. It is often used in the sense of the ‘long term sustainability of value for money’, denoting that the State focuses on choices that ensure value for money outcomes are promoted and protected in successive anticipated contracts.

In Europe:
PPPs have often been used to shift debt off government balance sheets
This has been driven by European Union accounting rules
Different accounting rules apply in Australia, and prevent Australian governments hiding debt in this way
In the US:
PPPs are often seen as a way to "monetise" existing assets
That is, governments sell the right to operate infrastructure and charge users, in return for large up front payments
In Developing and Transition Economies:
PPPs are sometimes seen as a way to overcome a lack of infrastructure delivery capacity or capability within government
But if government can't deliver infrastructure successfully, how can it successfully tender a PPP?
In Victoria:
Scale: $50-100m + (some water/wastewater projects can be smaller)
Measurable service outputs
Non-core services
Risk transfer
Long term
Innovation
Market appetite
Characteristics of Likely PPP Candidates
Whole of life planning and costing
Output specification and scope for innovation
Efficient risk allocation
Asset utilisation and third party revenues
Rigorous process
Value for Money Drivers
What is "Value for Money"?
Melbourne - Hobart Flights, evening of 16 October 2012
Value for money cannot be judged on the price of one input!

Data collected 15 July 2012. Sources:
Prices and arrival times: www.wotflight.com.au
Extras: Foster Infrastructure estimate
On time / cancellation performance: www.bitre.gov.au
Policy and Guidance Applicable to PPPs in Victoria
How PPPs Originate
Projects are not an end in themselves
- They are needed to deliver service outcomes
Selecting a Delivery Model
Objectives
Risks
Unique project characteristics
Agency and market capability
Consider suitability of:
PPP
Alliance
D&C etc
What precedents exist for the project?
What does the market think?
Which model best achieves requirements and objectives and reduces risks?
Structure preferred model
Consider risks and mitigants
Consider approval, QA and monitoring requirements
Hypothetical waste treatment project
- Should PPP be a short-listed delivery model?
Is it large-scale and long-term?
($100m plus, long-life asset)
Are there measurable outputs?
(Treatment of waste to comply with environmental regulations etc)
Are there opportunities for risk transfer?
(Design, construction, operation, incoming waste(?), energy cost(?))
Is there scope for innovation?
(Significant scope in design, construction and operation)
Is there market capability and appetite?
(Market testing; Private sector delivery and operation of waste treatment plants has occurred elsewhere)
Are there non-core services?
(Operation of the plant)
Hypothetical waste treatment project
- Delivery model options analysis
Delivery models are qualitatively assessed against project/procurement objectives

The objectives may be weighted

If the analysis has identified specific weaknesses of the preferred model, mitigants are considered

Business Case – Outcomes
The Business Case enables government to answer three key questions:
1.Should the project be funded?
This is the Investment Decision
2.How should the project be delivered?
This is the Procurement Decision
3.What governance arrangements should be put in place?
This is the Governance Decision
Funding Approval – “User Pays” Projects
A project undertaken on a “user pays” basis must still be considered in the context of the State’s overall infrastructure programme
Interface issues must be considered – e.g. impact of a user pays toll road on the surrounding network
Government contributions (e.g. land), contingent liabilities (e.g. on contract termination) and potential benefits must be considered
Measuring the Cost Side of the Value for Money Equation
PPP bids have very different cashflow profiles for government compared to traditional delivery
In order to compare the cost of PPP bids to each other and to the cost of traditional delivery, the risk adjusted costs are discounted back to today's dollars
The hypothetical risk adjusted cost of traditional delivery (known as the Public Sector Comparator or PSC) can be used as either a value for money price benchmark, or as an affordability hurdle
Governance Issues
Projects are a result of an asset requirement identified by a line agency/department
This “Client Agency” may engage a separate team within the same agency, or in another Department (for example, Major Projects Victoria) to manage the project delivery process
All Ministers have power to enter into PPP contracts
The Treasurer is responsible for PPP policy
Therefore, a Partnerships Victoria Unit exists within the Department of Treasury and Finance, managing the implementation of this policy
Partnerships Victoria Unit Roles
A Typical Project Governance Structure
Summary
Success for government in PPPs depends upon having both the right PPP model and the right institutional arrangements
Problems most often arise as a result of flawed institutional arrangements
In Victoria, PPPs are used because they can deliver value for money project delivery outcomes
PPP projects arise as part of a solution to an identified service need or problem that government wants to solve
Governance arrangements for PPPs bring together the different areas within government that can help drive a successful outcome
Contact Details
www.fosterinfrastructure.com

richard@fosterinfrastructure.com

@Foster_Infra

www.facebook.com/foster.infrastructure
Richard Foster
Director
Foster Infrastructure
1990s: Belief that increased private sector involvement in infrastructure services could drive growth and efficiency
Economic and financial outcomes from these projects were largely positive.
However, the quest for maximum risk transfer and private sector efficiencies led to some projects being unsustainable

June 2000: Partnerships Victoria policy introduced
Clear aim of achieving value for money in the public interest
No presumption that the private sector is more efficient in building and operating public assets
Focus on whole of life costing
Optimal, rather than maximum, risk transfer to the private sector
Full transcript