The state of Australia’s PPP market
Infralegal was recently asked to share its insights on the state of Australia’s privately financed PPP market with an international project finance publication. Below is an edited version of our responses to their questions.
State of Australian market
2022 was another disappointing year for the Australian PPP market given the low volume of PPP deals.
Only two PPP deals achieved financial close in 2022 – both in Victoria. A third PPP contract was awarded by the New South Wales Government in late December and is expected achieve financial close this quarter.
The highlight was the North East Link PPP, both in terms of its value (A$11.1 billion) and, more importantly, its use of an incentivised target cost mechanism within the D&C contract instead of a lump sum price.
The other Victorian deal was the Frankston Hospital PPP (A$605 million)
The NSW PPP awarded in December was for a new Sydney Metro line to service the Western Sydney Airport and new Western Parkland City. This was a welcome development given the dearth of PPP contracts over recent years in what was once Australia’s most active PPP market. This contract is said to be the largest PPP contract ever awarded by the NSW Government.
A sole preferred bidder for the Inland Rail PPP was announced in March 2022, but this deal is yet to achieve financial close. A review of the Inland Rail Program commenced in October 2022 by the new Albanese-led Federal Government has not yet reached its conclusion.
A D&C contract for stage 3 of the Gold Coast Light Rail PPP was awarded in March, but stage 3 is publicly funded.
How does the Australian market differ from other markets, such as the UK and US?
Historically, the Australian PPP market has differed from the UK and US markets in terms of the high proportion of ‘user-charge’ PPPs, and the high value and complexity of Australian PPP deals. ‘Mega’ projects, valued at more than A$ 1 billion, have become commonplace.
The level of risk transfer that Australian governments have historically achieved on PPP deals is also greater than that generally achieved on UK and US PPP deals.
How is the change of Federal government playing out in the PPP market?
It is state and territory governments, not the federal government, that are responsible for delivering most infrastructure in Australia. The main exceptions are defence infrastructure and telecommunications infrastructure, which are federal government responsibilities. The federal government also owns many airports, mostly leased to private sector operators.
The PPP model has bi-partisan support at all levels of government, so changes of government have not resulted in significant changes to the deployment of the PPP model. But sometimes opposition parties promise to abandon specific proposed projects in the lead-up to an election, if they think doing so will improve their electoral prospects (as the Liberals did in the most recent Victorian election – Suburban Rail Loop).
Any regional developments?
The Victorian PPP market has been the most active over recent years.
The low level of PPP activity in NSW and Queensland (being the other states that have traditionally been the biggest users of the PPP model) suggests the PPP model is falling out of favour in these states.
Senior bureaucrats responsible for delivery model decisions seem to be increasingly sceptical about the value for money proposition associated with the use of private finance. They see the project company transferring virtually all risks and responsibilities to its D&C contractor and O&M contractor respectively, and so query the value (risk management) that the project company is providing in return for the cost of its debt and equity finance.
To reinvigorate the market, equity investors in PPPs need to retain and manage more risk, such as the risk associated with integrating D&C packages, and a slice of any cost overruns caused by risks that are currently being shared between government and the D&C contractor (eg unforeseen ground conditions and adjustments to third party infrastructure).
How are global economic headwinds impacting PPPs in Australia?
The Australian economy is performing better than most other economies post COVID.
Global economic headwinds are impacting Australia, but not in a way that significantly influences the use of PPPs.
Australia’s 10 year boom in publicly funded infrastructure has been fuelled by the privatisation of state government owned assets (ports, electricity distribution assets and publicly owned tollroads) and by windfall tax revenue and royalties from mining projects.
But Australian governments are currently running bigger deficits as a result of:
the need for increased debt servicing following COVID;
the progressive conversion of social security expenditure into a series of legislated entitlements, such as the National Disability Scheme;
the propensity of the new federal Labor government to appease public and union expectations; and
a change in public attitudes towards “big infrastructure” among young people, ‘teal’ voters and environmentalists.
The upshot is that the scope for discretionary expenditure has narrowed significantly, leaving the federal government with only two obvious areas to make savings – infrastructure and defence.
In these circumstances, and absent further windfall revenues from another mining boom, the federal and state governments are unlikely to have the same capacity to publicly fund infrastructure that we have seen over the past 10 years.
As such, we should expect to see fewer mega-projects, and greater government interest in the use of private finance to deliver public infrastructure.
Any new trends that have taken place in the last year or two?
Energy: The NSW government has commenced the procurement processes for energy transition infrastructure (transmission lines, renewable generation capacity and storage) using PPP-style delivery models. PPP offers for the transmission line for the first Renewable Energy Zone (Central Orana) are currently being evaluated by the NSW Government. It remains to be seen whether the proposed PPP model will succeed. A wave of renewable energy projects were added to Australia’s infrastructure pipeline during 2022, but most are yet to proceed to the procurement phase and are unlikely to involve private finance.
Collaborative Contracting: Governments are increasingly recognising the need to use contract delivery models that better facilitate the collaboration needed between government and its key contractors and suppliers to successfully deliver infrastructure projects within complex systems environments. Consequently, Australian governments are exploring how more collaborative delivery models (such as incentivised target cost, managing contractor, delivery partner and alliances) can be combined with private finance. The North East Link’s use of an incentivised target cost mechanism is a positive development, but there is much more that can be done to combine contracting techniques that promote collaboration with the use of private finance. The new ‘Partnership Model’ proposed for the new Sydney Metro West line will be one to watch.
Anything else that you feel strongly about in the Australian PPP market?
As above, to reinvigorate the market, equity investors in PPPs need to retain and manage more risk, to better demonstrate the value that private finance adds.
Combining private finance with contract delivery models that are at the most collaborative end of the spectrum.
For more detail, see PPP 2.0 - Towards Greater Collaboration
