Summary

On 29 November 2008, COAG endorsed Infrastructure Australia’s draft of the National PPP Guidelines. The Guidelines came into effect on the same day. Click here to view the web site.

Infrastructure Australia says that the Guidelines are ‘designed to ensure nationally consistent PPP guidelines and will apply nationally, with the aim of reducing costs for the private sector and shortening time frames for project delivery’. This is a key part of Minister Albanese’s grand plan for a more efficient national based system for the delivery of infrastructure, and it is a step in the right direction in terms of assisting the States in achieving consistent approaches to PPP project delivery and risk allocation.

However, one key document, the ‘National Commercial Principles for Social Infrastructure’ (“Commercial Principles document”) falls well short of this stated objective. The document does not even attempt to standardise the risk allocation between jurisdictions for many of the key issues on which the States (particularly NSW and Victoria) have adopted markedly different approaches to date.

Instead, it adopts a ‘menu’ approach in a number of key areas, allowing each jurisdiction to decide for itself how to address the issue.

In addition, there appears to be no proposal to prepare a template concession contract for the various types of PPP projects. This is disappointing, because the Commercial Principles, being a statement of general principles, are necessarily open to interpretation and elaboration.

Since each jurisdiction will continue to use its own template documents, based on its own risk allocation decisions in many key areas, it is hard to see how a unified national market has been brought much closer to reality.

Few market participants will expect much streamlining of transaction negotiations to come from this approach except, possibly, in relation to secondary matters. But commonality in the non-contentious boilerplate clauses is not an adequate response to the issues confronting the development of a single ‘national’ PPP market.

Components of the National PPP Guidelines

The Guidelines include:

• the National PPP Policy Framework
• the National PPP Guidelines Overview, and
• the National PPP Detailed Guidance Material, which consists of:

The Government’s infrastructure policy promotes PPPs as a form of delivery

The Government had identified infrastructure as one of five key platforms for Australia’s future productivity growth. The Prime Minister had said that strong partnerships between the Commonwealth, the States and the business community, in terms of PPPs, will be needed to tackle these challenges.

The development of the National PPP Guidelines is intended to be the first reform priority for Infrastructure Australia.

The aim of the Guidelines

The stated aim of the Guidelines is to consolidate and harmonise the PPP guidance material from individual States in order to provide a unified national framework, which is applicable across State and Commonwealth arrangements. Currently, each jurisdiction publishes its own PPP tendering and risk allocation guidance material. Although these documents frequently start from a similar base, they diverge materially in their treatment of some key issues, such as supervening events, default and termination.

Infrastructure Australia invited public submissions on the draft Guidelines for a nominal two week period, before sending the drafts (other than the Commercial Principles) to COAG.

Infrastructure Australia advises that it is progressively publishing the submissions on their website. Currently , the website contains many submissions on how the Government’s $20 billion ‘seed money’ funding should be spent, but a recent check of the website revealed no published submissions on the text of the Commercial Principles document.

That, perhaps, is not surprising since a ‘national policy’ that on numerous key issues leaves each jurisdiction to choose for itself from a ‘menu’ of options, or that acknowledges that each State may choose how to address many of the important issues, leaves little room for productive comment.

It appears that each jurisdiction will still need to publish its own ‘Commercial Principles’ document, at least to set out its policy in those areas which the ‘national’ Guidelines have not tackled. No doubt that will disappoint the Minister.

Industry concerns with the PPP tendering process

The key concerns for the private sector in the PPP market are the lack of consistency amongst the various jurisdictions in the processes of planning and approving projects and the lack of standardisation of the tender documents, project documents and risk allocation.

The Guidelines do not satisfactorily address many of these issues. For example:

• Simplifying the complex tendering processes for PPPs. The tendering rules for PPPs are costly, complex and convoluted. This may continue to deter the private sector from tendering for PPPs.
• The number of ‘shortlisted bidders’ to be considered under the Guidelines remain at three (the same as under the current NSW and Victorian guidelines). The Guidelines do not address the private sector’s call to consider moving to a shortlist of two bidders. A shortlist of three bidders is an inefficient use of scarce engineering and other technical expertise. It is also harder for bidders to obtain equity and debt commitments for big projects, because the pool of available lenders and equity investors is not deep enough to support three bids, particularly after the recent market upheavals.
• The proposed number of bidding stages largely corresponds with the NSW guidelines (for example three to 10 workshops during the interactive tender process). No attempt seems to have been made to simplify this process. There seems to be little recognition of the time and cost that this process imposes both on the States (and their advisers) and on the private sector parties.
• The private sector has called on governments to examine examples in British Columbia and the UK where, for example, the UK Department of Health had produced standard documentation for PPPs and reduced the number of stages in the bidding process in order to speed deals up.
• The timetable for governments to consider the final binding bids should be reduced. In today’s market conditions, committed financing terms from banks may no longer be available by the time the government decides which bid it prefers. Bank and equity funding commitments locked in for six or more months will be hard to come by in the period ahead.

Industry concerns with risk allocation in PPP concession agreements

A major concern is that the Commercial Principles document leaves the sharing of risk between the government and the private sector still an area of uncertainty and divergence. The document concedes this at the outset, where it says, in the introduction, that:

“in a number of areas, a ‘menu’ type methodology has been adopted, where jurisdictions have the flexibility to choose between a number of defined approaches for dealing with a particular risk or contractual issues, while still remaining within the overall risk framework of the principles”.

The list of examples where no consistent approach has been even attempted includes the well known areas of inter-State difference such as:

• Relief Events
• Compensation Events
• Events of Default, and
• Default Termination Events.

Many other examples can be found in the document, where the jurisdictions will continue to make their own policy on material issues. For example, there is no attempt to standardise the basis upon which the parties will share cost savings arising from the periodic benchmarking, or market testing of soft services. Each jurisdiction will continue to make its own decision on what to offer.

Other areas in which risk sharing could be clearer include construction delays and blow-outs, strikes, force majeure and financing problems.

While industry participants have called for standardisation of risk allocation, many areas covered by the National Guidelines remain uncertain and State based, leading to higher deal implementation costs.

The Guidelines do not appear to sufficiently address the following key issues, resolution of which will make PPPs more attractive to the private sector:

• The difficulty of multiple consortia of bidders having to separately raise sufficient finance for large PPP projects, in a difficult finance market.
• The low level of interest from overseas bidders and financiers toward PPPs.
• Whether the Government and/or the State governments are willing to take on more financing while the private sector continues to focus on constructing and operating projects. ‘Co-investment’ from the government will help de-risk projects and make them more attractive to banks. However, nothing addresses when and how this might be done.
• How to reduce bid costs, for example by reducing the need for duplication of detailed design work and documentation.

The National PPP Guidelines across jurisdictions

The National PPP Guidelines came into operation on 29 November 2008 and as stated in the ‘National PPP Framework’ document, are meant to apply nationally. Notwithstanding the Guidelines’ objective of national consistency, individual jurisdictions may have specific requirements that are different from or in addition to the Guidelines.

Jurisdictional concerns are addressed through the ‘National PPP Policy Framework’ document and ‘Jurisdictional Requirements’ document.

To be beneficial, these documents should properly reconcile the differences between the PPP frameworks of different States in order to avoid the private sector from having to engage in the costly process of negotiating and re-negotiating contractual issues time after time depending on in which State the PPP is going to be delivered.

However, these documents say little more than reinforcing the understanding that ‘application of the Guidelines to the provision of infrastructure shall be determined by individual jurisdictions’ and that in ‘some areas’ they retain flexibility to ‘apply their own requirements and principles’.

Each jurisdiction remains free to apply their own requirements and principles on a majority of the material PPP issues.

Current market developments

The PPP market will face some big challenges in 2009. These include:

• The current shortage of construction capacity, and now the even greater shortage of long term equity and debt funding for infrastructure, may swing the balance of negotiating power away from the jurisdictions into the hands of the builders and financiers. Bidders will be more likely to amend the draft concession documents to re-allocate risks, and more consortia, or their members, may drop out of bids if the risk allocation is not to their satisfaction.
• As bid cost budgets get tighter, market participants may well be more careful in 2009 about spending their time and money on bids that do not offer a risk/reward balance that reflects the current market realities.
• Various existing infrastructure assets that do not have any construction or start up risk will be available for sale in the Australian market in 2009. Those investors and lenders who are still in the market may well find those second hand assets are easier to evaluate and negotiate, compared to the twelve month saga of bidding for a new project.

If these predictions are right, and if all the current industry talk of trying to shift the allocation of risk in PPP concession documents back to a perceived ‘balance’ comes to pass, then 2009 may well be a challenging year in which to bring PPPs to a financial close. Where that will leave the new National Guidelines remains to be seen.

Conclusion

The Commonwealth Government wants the new National PPP Guidelines to play a significant role in Australia’s infrastructure delivery. Minister Albanese’s proposals are certainly good for the PPP sector, and he is to be congratulated for promoting a single national market.

However, until the jurisdictions make a better effort to achieve a common approach, it is difficult to see how the National PPP Guidelines can achieve the Government’s aim of reducing the cost of tendering or increasing the level of interest from the private sector to invest in infrastructure.