1. PPPs: Understanding their procurement option context Paul O’Connor Sessional Lecturer/Doctoral Candidate School of Property, Construction and Project Management

2. RMIT University © 2011 Paul O'Connor 2 Scope of this presentation Where did PPPs come from? What were the key drivers in Victoria? What has been achieved in a decade? The alphabet soup of procurement options… Why choose PPPs for infrastructure? Practical considerations for PPPs Benefits of a long-term funding model Are PPPs the future or a passing fad? PPPs in action: sector case studies

3. 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 RMIT University © 2011 Paul O'Connor 3

4. 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) RMIT University © 2011 Paul O'Connor 4

5. 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 RMIT University © 2011 Paul O'Connor 5

6. 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 RMIT University © 2011 Paul O'Connor 6

7. 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 RMIT University © 2011 Paul O'Connor 7

8. 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 RMIT University © 2011 Paul O'Connor 8

10. Technical complexity/novelty

11. Risk allocation profile (especially demand risk)

12. Scope for design/technical innovation

13. Maturity of the public sector project owner

14. Private sector interest/public sector need

15. Complementary projects to go with the PPP?RMIT University © 2011 Paul O'Connor 9

16. Practical considerations for PPPs For… Against… 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 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 RMIT University © 2011 Paul O'Connor 10

18. Promotes inter-generational equity

19. Embeds whole-of-life asset costing

20. Technology obsolescence better managed

21. Maintenance funding no longer discretionary

22. Operations can be kept contestable via regular market benchmarking or resets

23. Funding profile matches long-term institutional investors like pension or sovereign fundsRMIT University © 2011 Paul O'Connor 11

24. 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) RMIT University © 2011 Paul O'Connor 12

25. SECTOR case studies PPPs in Action: RMIT University © 2011 Paul O'Connor 13

26. 17-21 May 2010 14 PPPs in Action – Sector case studies Health Transport Education

27. 15 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?)

28. 17-21 May 2010 16

29. 17-21 May 2010 17 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

30. Transport PPPs 17-21 May 2010 18

31. 17-21 May 2010 19 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

32. Rail PPPs Infrastructure London Underground (refer to NAO reports) Rolling stock (NSW) Facilities/interchange Southern Cross Station (refer to VAGO report)

33. 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)

34. 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)

35. 17-21 May 2010 23 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)

36. 24 Other sectors? Prisons Facilities only (DBFM) Integrated correctional services (DBFOM) Electricity Independent power producers Water Town supply or desalination plants

37. RMIT University © 2011 Paul O'Connor 25 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: <paul.oconnor@rmit.edu.au>