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Focus: Infrastructure – April 2004

Partnerships Victoria review: final report released

In brief: Victoria's policy on public-private partnerships has been favourably assessed by an independent review, although some policy changes have been recommended. Senior Associate Emma Warren and Articled Clerk Paul Bernath examine the report's recommendations and the State Government's response.

Overview

The Victorian Treasurer John Brumby has now released the final report of an independent review of the State's public-private partnership (PPP) policy. The five-month review by lawyer and management consultant Peter Fitzgerald, entitled Review of Partnerships Victoria Provided Infrastructure (the review), was commissioned in August 2003.

Mr Fitzgerald favourably assessed Victoria's PPP policy; however, he has also recommended some policy changes. The Treasurer indicated support for a number of these recommendations, but said that substantial changes will not be made to the policy in response to the review.

In this article, we summarise Mr Fitzgerald's major findings and recommendations, and briefly examine the State Government's response.

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Review process

The review examined the operation of the Partnerships Victoria policy, focusing on the first eight Victorian PPP projects that have been signed to date: the Victorian County Court Project, the Mobile Data Network Project, the Docklands Film and Television Studio Complex Project, the Berwick Community Hospital Project, the Wodonga Wastewater Treatment Plant Project, the Echuca/Rochester Wastewater Treatment Plant Project, the Enviro Altona Project, and the Spencer Street Station Redevelopment Project.

In addition to analysing processes surrounding project and bid evaluation, project economics and contract documentation, Mr Fitzgerald spoke to more than 30 public and private PPP participants and consulted more widely by releasing a draft report for public comment in December 2003. In response to this draft report, 38 written submissions were received from PPP participants, legal and financial advisers, academics, and other interested parties. All but four of the 20 draft recommendations were reported by Mr Fitzgerald to have received general support from the written submissions.

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Review findings and recommendations
Victorian PPP Policy showing benefits

Importantly, Mr Fitzgerald found that the first eight projects provide examples of the potential benefits of Victorian PPPs. These benefits include design innovation (eg the Spencer Street Station Redevelopment), technical innovation (eg the plans for the Altona wastewater treatment plant), and timely delivery and cost certainty (as experienced with the County Court project and the commissioning of the Wodonga Wastewater Treatment Plant). Mr Fitzgerald also observed that each of the eight projects was calculated to give equal to or better than value-for-money when compared with public sector provision.

Streamlining of bidding and contractual processes

The State Government has indicated support for Mr Fitzgerald's recommendation that the streamlining of bidding and contractual processes be a continuing priority, with the expectation that bid costs will be reduced and bid competition improved. The need for this action is evidenced by Mr Fitzgerald's observations that current bid costs can exceed 10 per cent of the capital cost of projects valued below $100 million and can exceed 20 per cent of the capital cost of projects valued at $50 million. These numbers are based on feedback from Victorian PPP participants, who stated that the bid costs of the final three bidders for most major building facility projects have exceeded $2-3 million.

Strategic focusing of policy application

Mr Fitzgerald has recommended that the application of the Partnerships Victoria policy be strategically focused on projects where the private sector can best add value, such as large, complex, one-off or non-standard projects involving a capital expenditure of more than $100 million. Exceptions were noted, such as smaller but value-for-money projects.

Notwithstanding concern expressed in some written submissions that this change of focus would negatively impact on deal flow, the State Government has supported this recommendation.

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Monitoring market of potential private partners

The State Government has also supported Mr Fitzgerald's suggestion that the size and activity base of actual and potential private partners be monitored to ensure a level sufficient to deliver up to 10 per cent of Victoria's infrastructure investment (described as a 'critical mass'). This target of 10 per cent is an increase from the current 7 per cent. Mr Fitzgerald has warned the State Government not to assume that the present size and structure of the Australian PPP market is sufficient to be fully competitive.

Recommended changes to discount rates and project evaluation methodology rejected

The recommendations to revise risk evaluation and adjustment methods attracted the most contention during the public consultation period. Mr Fitzgerald concluded that these methods should be improved by basing the calculations on better evidence and employing a more selective pricing of transferred risk. For example, where no market risk is transferred, he advocated the use of a discount rate that does not incorporate a premium for risk. In addition, Mr Fitzgerald recommended reforming the Public Sector Comparator, as well as discontinuing its use where public provision would not be a realistic option, since in those circumstances it is not a valid comparison. The State Government, citing concerns raised in written submissions, has rejected this group of recommendations. However, the Treasurer flagged the issues as appropriate for discussion at a national level.

National PPP Council

The Victorian Government's proposal to establish a National PPP Council received a positive response in Mr Fitzgerald's report. Following Mr Fitzgerald's recommendations for a uniform national approach to PPP research and policy development, Victoria's Treasurer will suggest to other Australian governments that the national taskforce consider streamlining and aligning PPP processes and documentation. The State Government has commented on the national body's potential to foster a national PPP market, ensuring cross-territorial consistency in PPP delivery, reducing transaction costs and generally increasing competition. The Treasurer has stated that a more uniform approach is 'imperative to help grow the market and reduce inefficiencies'.

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Empirical data

Mr Fitzgerald emphasised the importance of using empirical data to inform policy direction and focus, and suggested that a state or nationally funded Review of Major Projects should gather this data. He recommended mirroring a recent UK study (the Mott MacDonald Report, Review of Large Public Procurement in the UK, July 2002) and reviewing at least 20 projects worth more than $20 million in a variety of sectors. The empirical data gathered could also be used in performing risk adjustments and using the Public Sector Comparator. The State Government has responded favourably to this recommendation, indicating that such a project should be considered by the national taskforce.

New financial and partnership structures

Addressing potential new approaches, Mr Fitzgerald recommended that the State seek to develop new financial and partnership structures for PPP projects that 'combine the benefits of private sector risk taking with the State Government's comparative advantage in securing funds.' 

Transparency

Mr Fitzgerald advocated an increase in overall transparency. In particular, he recommended that the State Government publish a five and 10-year forward pipeline of major projects under consideration, as well as a list of target sectors. In addition, he recommended the publication of details of the forecast payment schedules under PPP contracts. The State Government's view on these recommendations was not stated by the Treasurer.

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Comment

Following the Treasurer's response to the review, significant policy changes are not anticipated. However, the review has generated interest and debate among a number of stakeholders, including industry participants and their legal and financial advisers. The ongoing evolution of Victoria's PPP policy and the progression of the projects currently under development will be observed with interest.

The final report, the draft report, and the 38 written submissions received in response to the draft report are available on the Partnerships Victoria website.

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