ppps as an infrastructure procurement option
TRANSCRIPT
PPPs: Understanding their procurement option context
Paul O’Connor
Sessional Lecturer/Doctoral Candidate
School of Property, Construction and Project Management
Paul O'Connor 2RMIT University © 2011
Scope of this presentation
1. Where did PPPs come from?
2. What were the key drivers in Victoria?
3. What has been achieved in a decade?
4. The alphabet soup of procurement options…
5. Why choose PPPs for infrastructure?
6. Practical considerations for PPPs
7. Benefits of a long-term funding model
8. Are PPPs the future or a passing fad?
9. PPPs in action: sector case studies
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Where did PPPs come from?
• PPPs have been around for hundreds of years–Perrier Brothers had a drinking water concession in 1700s
• Modern PPPs started with the UK’s Private Financing Initiative launched in 1992:–Policy to extend Thatcher’s near-complete privatisation push–Kept and embraced by ‘New Labour’ when elected in 1997
• Seen as a way to smooth out demands upon the capital account for developed economies with high deficits
• Seen as one of Tony Blair’s “third way” vehicles to engage with the private sector and achieve public goals
• Seen as a way to speed up social and economic infrastructure renewal & promote delivery effectiveness
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What were the key drivers in Victoria?
•Two distinct periods–Pre-2000 – emerging PPP guidelines–Post-2000 – current PPP guidelines
•Pre-2000–Post recession period looking to kick start economy and
find “non-debt” capital methods
•Post-2000–Iconic and one-off complex projects–User pays (i.e. toll roads) and water treatment plants–Social infrastructure replacement and augmentation
(Refer to papers by Linda English and Maguire & Malinovich)
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What has been achieved in a decade?
•UK has 500+ PFI projects with a capital value in excess of £28 billion
•Victoria has A$10.5 billion contracted in 21 projects (www.partnerships.vic.gov.au)
•Detailed policy and guidance suites have been developed in UK and Australia
•World Bank and ADB also promoting PPPs
•PPPs being adopted in emerging economies
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Context: infrastructure & development (1)
•Wide range of public infrastructure demand is forecast for many sectors:–Transport–Education–Health–Government accommodation/facilities–Utilities (water, sewerage, telecoms, power)
• Infrastructure ‘deficits’ making larger calls upon scarce government capital
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Context: infrastructure & development (2)
•Recurrent demands also increasing to fund essential citizen services
•Large and lumpy disbursements
•Debt/surplus funding raises fiscal issues:–Sovereign credit ratings linked to debt–‘Lazy’ balance sheets/inefficient allocations–Inter-generational equity of debt liabilities–Ongoing operations and maintenance liability plus depreciation and replacement funding
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The alphabet soup of options…
•Many options to procure infrastructure available:–Build to design (B)–Design and build (D and B)–Managing contractor (D and B)–Alliance (D and B)–JV (D, B and O) (and maybe F)–PPP/PFI (D,B, F, M) (and maybe O)
•Analysis of the profile of the infrastructure should drive the procurement strategy
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Why choose PPPs for infrastructure?
Value and size of the project
Technical complexity/novelty
Risk allocation profile (especially demand risk)
Scope for design/technical innovation
Maturity of the public sector project owner
Private sector interest/public sector need
Complementary projects to go with the PPP?
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Practical considerations for PPPs
For…
–Fixed capital payments over life of the asset
–Asset will return to public ownership
–Contract ‘locks in’ O and M funding
–Output specification drives service and asset quality
–Value for money
Against…
–Finding a good partner
–Funding availability (esp. due to GFC)
–Transparency of risk transfer premiums
–Up-front and high transaction costs
–Long term monitoring regime to maintain expected standards
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Benefits of a long term funding model
Smooth and predictable budget outlays
Promotes inter-generational equity
Embeds whole-of-life asset costing
Technology obsolescence better managed
Maintenance funding no longer discretionary
Operations can be kept contestable via regular market benchmarking or resets
Funding profile matches long-term institutional investors like pension or sovereign funds
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Are PPPs the future or a passing fad?
• In Australia:–Still only account for about 10% of total public sector
asset investments (approx. $10.5 billion in Victoria in 10 years)
–Most are on balance sheet, so no accounting advantage–User pays model (i.e. toll roads) becoming difficult due to
problems with accuracy of traffic demand forecasting–Some states pursuing Alliances more aggressively–Marginal cost of capital issue – cost and availability of
private finance versus public sector debt raisings–Low hanging fruit exhausted? Iconic/innovative facilities
likely to be overtaken by more boring facilities (such as schools, water and sewerage)
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SECTOR CASE STUDIES
PPPs in Action:
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1417-21 May 2010
PPPs in Action – Sector case studies
•Health
•Transport
•Education
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Health PPPs – some typical models
• DBFM – design, build, finance, maintain–Positive (refer to RWH
report and the RCH project summary)
–Negative (refer to PAC report on Paddington)
• DBFOM – design, build, finance, operate, maintain–(similar to privatisation?)
1617-21 May 2010
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Health PPPs – lessons & observations
•Transfer of design risk to private sector is only effective if State has clearly specified:–Present and future clinical models
–Present and future demand
–Expected functionality of the facility
–Non-negotiable building standards
•UK issues – quality of build in some facilities and fair profit share for refinancing gains
17-21 May 2010 18
Transport PPPs
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Road PPPs
Variety of models to consider
• ‘Toll road’ concession model–Successes: CityLink and EastLink in Melbourne –Failures: Sydney and Brisbane tunnels (over optimistic demand
forecasts and upfront payments to Government)
• HOT lane model–Augment existing corridor with express toll lane
• ‘Availability’ model–Used in UK with ‘shadow tolls’ –New PPP in Victoria – KPI not volume based
Rail PPPs
• Infrastructure–London Underground
(refer to NAO reports)
•Rolling stock–(NSW)
•Facilities/interchange–Southern Cross Station
(refer to VAGO report)
17-21 May 2010
Transport PPPs - observations
•For roads –don’t be greedy and demand upfront payments, as this is
passed on via higher tolls to the public who may then boycott the route. (Refer to NSW AG report on tunnels)
•For rail–Understand the value drivers of the business and focus on
using private sector expertise to increase operational efficiency and reliability, as well as contain costs over the long-term. (Refer NAO reports on the underground)
Education PPPs - Variety of models
• New build–Single site schools–Multiple site schools (refer PV
schools summary)
• Tertiary research precinct–LaTrobe University (refer
Biosciences summary)
• Refurbishment–UK building schools for the
future (refer NAO report)–Southbank TAFE (Brisbane)
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Education PPPs – some observations…
•Specify demand corridors and let private sector take site risk (PV schools)
•Multi-site deal is effective way to achieve quick build-out of many sites over a wide area
•Some risks of a “two class” system, due to poor asset maintenance in the State build sector
•Lock in of service payments reduces future flexibility (c.f. declining revenue base in Scotland)
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Other sectors?
• Prisons–Facilities only (DBFM)–Integrated correctional
services (DBFOM)
• Electricity–Independent power
producers
• Water–Town supply or desalination
plants
Paul O'Connor 25RMIT University © 2011
Any questions?
• My contact details:
Paul O’Connor DipPer&OpsMgt, DipGovMgt, BA(AsianStudies), GradCertPPPs (Melb.), MPubInfra (Melb.)
School of Property, Construction and Project Management
RMIT University
E: <[email protected]>