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Focus: Infrastructure – July 2007

Victorian Government clarifies approach to PPPs

In brief: The Victorian Government has released two publications that further clarify its approach to public private partnerships (PPPs). The Government is continuing to develop policy in this area with a focus on providing transparency and value for money. Partner Emma Warren (view CV) and Articled Clerk Kate Austin summarise the main issues in the publications.

How does it affect you?

  • These publications reflect the current thinking of the Victorian Government regarding the use of PPPs, including commercial frameworks and procurement options. 
  • Industry should be aware of Victorian Government accountability measures for PPPs, particularly the introduction of project summaries to be tabled in Parliament for all Partnerships Victoria projects.  
Government response to the PAEC report

In 2002, the Public Accounts and Estimates Committee (PAEC) examined private investment in public infrastructure, focusing on major infrastructure projects in Victoria involving private-sector funding since 1990 and evaluating the mechanisms used to assess the value for money of these projects. The inquiry also reviewed comparative jurisdictional approaches to PPPs.

The PAEC report was tabled in Parliament on 4 October 2006 and proposed 20 recommendations covering a range of matters, including:

  • Government transparency;
  • the need for further research and guidance material;
  • resourcing and training of public officials involved in PPPs; and
  • procurement options and various commercial issues, including 'peppercorn' leases, concession periods and accounting standards.

The Government's response was released on 10 April 2007. Overall, it was both positive and constructive, evidencing in particular a commitment to transparency, research and development, and strong commercial principles for PPPs. The Government indicated that 11 of the 20 recommendations are currently either fully or partially implemented, five are either fully or partially agreed upon, and only four are not agreed upon. The table below is a summary of the specific Government response to each recommendation.

Recommendation Response Reasoning
Independent post-project review of all major infrastructure projects including PPPs, with periodic reporting to Parliament (No. 1). Agreed in part The Government has committed to produce an annual review of key State infrastructure projects, including a description of the nature, strategic importance and progress of the project. Other accountability mechanisms, including performance audits by the Auditor-General, the Gateway Review Process and public access to Government contracts, are already in place.
Before proceeding with any further Build, Own and Operate (BOO) projects, public benefits must be maximised (No. 2). Agreed and in place Widespread use of the BOO model is not envisaged. It will only be used on the rare occasion that it offers superior value-for-money and satisfies the public interest test. The Mildura Hospital and County Court projects discussed by PAEC in relation to the BOO model were not recent projects, and do not necessarily reflect the ongoing refinement of PPPs in Victoria.
Long-term peppercorn leases extending beyond the concession period should not be given to a private consortium unless it can be demonstrated that there is a public benefit (No. 3). Agreed and in place In the context of commercial development opportunities and proposals, the Government will consider whether peppercorn rentals offer a public benefit when viewed in the context of the project as a whole.

For leases in relation to complementary commercial developments, the public benefit of peppercorn leases must be considered in the context of all the terms of the leases, including any requirement for payment of an up-front premium. This was the case in relation to the commercial development at Southern Cross Station, i.e. the private consortium, through the up front premium for commercial development, reduced the overall cost of the project to taxpayers.

In relation to the core project site, widespread use of peppercorn leases extending beyond the concession term is not envisaged.
Existing PPPs involving operating leases should be reviewed to determine whether they should be reclassified to finance leases under current accounting standards (No. 4). Agreed and in place The majority of Partnerships Victoria (PV ) projects have been classified as finance leases in accordance with accounting standards of the day. Projects are regularly reviewed to ensure compliance with such standards. However, as there is no dedicated PPP standard, differences may occur.

In 2006, the Auditor-General undertook a selective review of PPPs and reclassified certain operating leases as finance leases. It is at the discretion of the Auditor-General to determine if further reviews are undertaken.

For the 2008-09 annual reporting period, a new AASB standard on PPPs will apply to private sector operators only. The status of accounting by public sector grantors is being reviewed by the AASB. 
PPP contracts should include the total amount of payments outlining the total government commitment and the impact on State debt. This information should be published on the PV website, with summary information included in the State budget papers (No. 5). Agreed in part PV's Public Disclosure Policy requires preparation of project summaries. These summaries detail project cost and value-for-money information, but will not include disclosure of payment schedules. This information may be misleading to the public, as it can vary throughout the project. Additional information on project costs and State debt is already disclosed in budget papers in aggregate terms.
Further guidance material should be developed dealing with situations where risk reverts back to the Government during a PPP (No. 6). Not agreed This would be inappropriate. Risk transfer that occurs in PV projects is a transfer of the financial consequences of risk occurring, not a transfer of the state's ultimate responsibility for the delivery of public services. The Government will continue to develop guidance on appropriate risk allocation at the outset of a project, as well as the maintenance of this allocation over the life of the project.
A policy should be developed to maximise benefits to the State from commercial opportunities arising from PPPs (No. 7). Agreed and partly in place Benefits are primarily assessed via the principles of value for money and public interest, as provided for in the PV Practitioners' Guide. However, moving forward, these principles may be supplemented to reflect current practices and thinking. Consideration will be given to updating the Practioners' Guide in this area.
Timeframes should be reduced for the period of concession agreements to limit the impact of debt repayment for future governments (No. 8). Not agreed Concession terms need to be long enough to effectively transfer whole-of-life risk and increase opportunities for value-for-money outcomes. This generally requires a concession term of 25 years or more.
The Government should pursue reform of section 51AD of the Income Tax Assessment Act 1936 (Cth) to ensure facilitation of PPPs while protecting the public interest (No. 9). Agreed and in place The State Government is working with the Commonwealth in relation to PPP taxation issues. Victoria and the other states agree that s51AD should be repealed.
PV policy and guidelines should be updated on an ongoing basis to reflect recent PPP experiences, particularly in relation to the public sector comparator (PSC), valuing risk and the discount rate (No. 10). Agreed and in place PV policy continues to be updated. Experiences from past projects are continually embedded into new projects. Further policy updates will consider the financing issues identified as part of this recommendation.
The Government should:
  • improve opportunities for parliamentary oversight of PPPs, including financial arrangements;
  • brief PAEC on the details of PPP contractual arrangements after they have been finalised; and
  • advise Parliament when significant variations are made to a PPP contract (No. 11).
 Agreed in part PV's Public Disclosure Policy requires preparation of project summaries that are to be tabled in Parliament three months after financial close and made available on the PV website. In addition:
• PAEC has the opportunity to discuss project specifics with the responsible Minister as part of the budget estimates inquiry process; and
• departments are required to publish contracts worth over $10 million on the Government's contract website.
Clarify the scope of commercial confidentiality in relation to the tender process for PPPs (No. 12) Agreed and in place PV tender documentation and PV Standard Commercial principles provide clear guidance to tenderers on the scope of their confidentiality obligations. In particular, these documents clarify that the confidentiality of all information relating to the project is subject to the Government's legislative/public sector disclosure obligations. However, an exemption exists where the information is commercially sensitive. In this situation, the onus is on the tenderer to prove the commercially sensitive nature of the information that should remain undisclosed.
That:
  • PPP contracts be published on the PV website after signing;
  • summaries of the contract and a value-for-money report be prepared;
  • the Auditor-General certify that the summary is an adequate reflection of the contract, with this certification to be published on the PV website; and
  • the Department of Treasury and Finance (DTF) develop a template for the contract summary and value-for-money report (No. 13).
 Agreed in part PV's Public Disclosure Policy requires preparation of project summaries, which are to be tabled in Parliament three months after financial close and made available on the PV website. The Policy includes a template for the project summary.

The Auditor-General may review project summaries as part of a normal review process. However, the scope of the audit is at the discretion of the Auditor-General.

The Government will consider the timeframe for the public release of PV contracts.
State Government to make representations to the National PPP Council to jointly fund a study on the potential financing options available to governments to fund public infrastructure projects, including the economic and social impacts of each option, and to release the report for public comment (No. 14). Not agreed The options available to fund public infrastructure are already clearly established and predominantly include cash operating surpluses.

Each department considers alternative funding options during the preparation of a business case. PV policy provides that all projects approved in principle for delivery under PV must initially be budgeted as though delivery will be via traditional procurement.
A secondment model, resourcing mechanisms, formal qualification training, and performance criteria be put in place for public officials working on PPPs (No. 15). Agreed and in place The Government will not take further steps on these issues until the State Services Authority's review of infrastructure project management capability is finalised.

It is noted that formal training for some procurement processes already exists, as does performance criteria for senior public officials in relation to the delivery of infrastructure on time and within budget.
Auditor-General to periodically undertake performance audits of all major PPPs to determine if value for money is being maintained over the life of a project (No. 16). Agreed and in place The Auditor-General undertakes a number of performance audits each year within the public sector. The scope of such audits is at the discretion of the Auditor-General. PAEC has statutory responsibilities under the Audit Act 1994 (Vic), including reviewing the Auditor-General's draft annual work plan. This provides an opportunity for input.
PV's value-for-money tools be revised to include:
  • benchmarked comparisons;
  • a range of alternative funding options;
    a definition of the traditional public sector alternative under consideration;
  • the accuracy of the public sector comparator (PSC); and
  • a publicly available explanation of how the PSC is used to compare tender bids. (No. 17).
 Agreed and in place Comparative data is used to inform the development of project requirements, evaluation and costing. Accordingly, projects are benchmarked against best practice.

Each department considers alternative funding options during the preparation of a business case.

The public sector alternative will vary from project to project as it reflects the most appropriate non-PV delivery method.

The PV Guidance material clearly explains how the PSC is constructed and used in the procurement process.
An independent assessment be made of the relative cost, performance, efficiency and timeliness of all privately funded projects, similar to the Mott MacDonald UK report (No. 18). Agreed and under consideration Negotiations are underway for a further study to be undertaken through the National PPP Forum. This proposal will be considered by the Forum at its next meeting.
State Government to make representations to the National PPP Council to arrange for an independent study into the size, structure and competitiveness of the Australian PPP market (No. 19). Agreed in part and in place A collaborative research project entitled Major Infrastructure Projects in Australia's Public Sector: Advancing Private Sector Capacity, Competition and Investment has been agreed upon by various parties, including the DTF and the Construction Industry Institute of Australia. The parties are awaiting the outcome of an application for Australian Research Councilfunding.
State Government to make representations to the National PPP Council to arrange for independent research on the degree to which discount rates should include a component for risk, and the size of this component (No. 20). Not agreed The Government believes that its discounting methodology should take account of systematic risk. The discount rate is only one component of the different methodologies that can be used. The Government is currently reviewing the available methodologies.

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Partnerships Victoria's Public Disclosure Policy

As mentioned in the Government response to the PAEC report, in order to build upon existing State Government initiatives in openness and transparency for public infrastructure, Partnerships Victoria (PV) released a new Public Disclosure Policy on 23 March 2007. This Policy requires 'project summaries' to be prepared for all PV projects to ensure that the public are better informed about the nature and outcomes of such PPPs.

Under the Policy, a project summary will be organised into two parts. Part One will summarise key project features, such as the rationale for the project, and Part Two will summarise the key commercial features of the project. A template has been set up to assist in preparing the content of the project summary (see below). A project summary will be released within three months of the financial close of all PV projects and subsequently tabled in Parliament by the responsible portfolio minister. Before its release, however, it must be approved by the Treasurer and the responsible portfolio minister. In addition, agencies will be required to update a project summary where significant changes are made to the nature of the project after the summary is released.

The template

The template provides that the following list of matters should be covered in Part One and Part Two of the project summary:

(i) Part One (the project overview)

  • project outcomes, including the State's need for the facility/service and the expected benefits from the project;
  • the rationale for delivering the project as a PPP;
  • an outline of the tender process, including assessment criteria;
  • a value-for-money statement, including a tabulated public sector versus private sector delivery comparison;
  • public interest considerations addressing the eight elements of the public interest test; and
  • the milestone dates for the project.

(ii) Part Two (key commercial features)

  • the key parties to the contract;
  • the key contractual relationships, which may be presented in chart form;
  • an outline of risk allocation, which may be tabulated;
  • the general obligations of both the contractor and the State;
  • government costs and service payments;
  • State contributions such as land;
  • the key performance measures and how the private provider will be accountable for non-performance;
  • the default and termination regime;
  • the financial and security arrangements;
  • the rights of the State at contract expiry; and
  • the processes for the State to seek facility and service modification over the period of the contract.

It is envisaged that the content of summaries will evolve as new areas of public interest emerge.

Implications

There is no doubt that, by requiring the preparation of project summaries, the Government is seeking to increase public confidence in PPPs as a strategic delivery method for public infrastructure. However, the extent to which such summaries will fulfil this goal, as well as how they will impact upon private sector participants, remains to be seen.

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Conclusion

The publications demonstrate that, nationally, Victoria is taking a leading role in the refinement of PPP policy. Moving forward, industry can look forward to further opportunities in this area, as the Government continues to focus attention on the benefits of harnessing private sector expertise for the delivery of public infrastructure.

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