Governments must shoulder more risk with PPPs
May 2009
- With governments everywhere taking a closer, or second look at PPPs to help finance major infrustructure projects, one legal mind with extensive experience in PPPs shares his views on what it will take to overcome a skeptical public and a tight credit market. Geoff Standen leads the construction and engineering group for the Australian legal firm of Colin Biggers & Paisley. He is heavily involved in project structuring, contract documentation, project risk analysis and claims advice and management, as well as conducts a substantial litigation and alternative dispute resolution practice.
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Geoff Standen
- Federal and state governments must change the way they evaluate private-public infrastructure projects (PPP) if they are serious about overcoming the public's distrust of such projects and the effects of a cautious credit market.
- While the bungles that litter the PPP landscape have given taxpayers a jaundiced view of this method of investing their money, there is still a role for them if governments are prepared to shoulder more of the risk.
- In the past, government failure to take a greater role in risk assumption has contributed to the financial collapse of the Sydney Airport rail link, the bankruptcy of the Cross City Tunnel and the cost blow-out in the NSW State Government's toll rebate scheme.
- Infrastructure Australia has released a suite of National PPP Policies and Guidelines, together with Draft Commercial Principles for Economic Infrastructure, which are designed to bring a consistent, best-practice national approach to PPP delivery, with benefits said to include "minimising transaction costs, removal of disincentives to participation, and a stronger pipeline of PPP projects by ensuring only best-suited projects are considered for PPP delivery".
- Although the National Guidelines stress that PPPs do not amount to privatisation and the State will continue to deliver core services, there is an understandable suspicion by the public that PPPs amount to a 'backdoor' privatisation. The suspicion is reinforced when services which the public regards as 'core' - such as medical, education and correctional services - are contracted to the private sector.
- Furthermore, the public's perception is not helped by high profile failures. The key issue is not whether the PPP model should be adopted, but rather how it can be refined to deliver better performance. Given that the State's approach is to find the best return for taxpayers' dollars by sharing the risk for the life of the project, it is critical that both governments and the private sector drill down into each risk affecting a project so that an intelligent assessment can be made as to its priority, allocation and pricing. One particular risk relates to the need to focus, from the early stages of a project, on the role of the service provider or facility operator. While the initial project focus is primarily concentrated on the financing and construction aspects of a deal, productivity gains may well be dependent on a closer involvement by the service provider in the design and bid process.
- The current economic volatility has also reinforced the need for more rigorous project evaluation methodologies to assess individual projects. PPP deals to date have been characterised by equity investment, bank lending and complex financing structures. Bank lending rates for future projects are likely to be considerably higher than those during the 'boom times', assuming there are enough banks that want to lend to a particular project.
- Victoria's planned A$3.2bn desalination plant is reportedly facing a debt shortfall of A$1bn. Apparently banks are labouring to resell the debt, leading to suggestions that the Victorian government will be forced to cover the shortfall as borrowing costs rise. The cost of private finance for significant public projects will thus be considerably higher than in the past, if not prohibitive.
- Already the value of PPPs coming onto the market in the next three years has fallen dramatically to A$12bn from A$25bn a year ago, although the Rudd Government's funding initiatives will lead to a significant increase in infrastructure projects. In this economic environment, the ability to obtain - and maintain - finance facilities will be a critical issue for projects. And, unless governments revise their attitudes to debt, the large stimulatory ones may be difficult to get off the ground.
- Greater attention will also need to be given to the appropriate model for a particular project. Furthermore, by assuming a greater risk profile and paying close attention to the scope, governments can avoid the consequences evident in PPPs that failed to achieve their objectives for taxpayers and reduce the chance, for example, that they get demand estimates wrong on toll road projects.
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LBJ Freeway project, Dallas, Texas - TunnelTalk, Mar 2009
PPP possibilities in the USA - TunnelTalk, Feb 2009
Port of Miami Tunnel, Florida - TunnelTalk, Jan 2009
Brisbane airport highway link - TunnelTalk, May 2008
Lane Cove highway tunnel, Sydney - TunnelTalk, Fed 2007
