Post on 19-Jan-2017
STRICTLY CONFIDENTIAL
PPP availability contracts A silver bullet for mitigating risk?
16 November 2016
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STRICTLY CONFIDENTIAL
01 Evolution of the
availability model
25 years of PPP development
Development of the PPP
Sydney Harbour
Tunnel (BOOT)
1992 1997 2003
2007 1988 2000
2009 2012 2016
First generation projects Second generation PPP projects – focus on value for money and improved risk transfer for State
Limited Aus Policy Development
Partnerships Victoria policy and structure implemented – approach adopted across Australia
Moving toward ‘outcome’ focused PPPs
PFI program
launched
in UK
UK uses PFI to
for London
Underground
rollingstock
UK introduces ‘Building
Schools for the Future’
PFI program to
standardise school
delivery
Blair Gov.
expands UK
PFIs
East-West Link – First
availability toll road Victorian County
Court – first PPP
under new
framework
Vic Desal – At
time world’s
largest PPP
Ravenhall Prison – introduces
custodial services in Aus
Wiri Prison
– inclusion of
custodial services,
not previously
seen in Aus
Northern Beaches – full clinical
services
Pūhoi to Warkworth –
unique and progressive
performance regime
2014
From ‘asset’ to ‘outcome’
The early experience of ‘full service’ PPPs were mixed,
with private operators returning the facilities to public
operations
However, contestability can bring cost efficiency,
improvements in productivity, service quality and service
flexibility
Recent trends suggest increasing focus on the ‘full
service’ model, which is operator-led and outcome
focused
Traditional PPPs have focused on the design, build,
finance and maintenance of the asset
Private sector involvement helps keep project and
maintenance costs low through competition while
transferring risks away from the public sector
The majority of risks associated with the operation
of the asset are retained by the State
Asset based Outcome based
Asset based Outcome based
Illustrative breakdown of Raw PSC
Operating
Lifecycle
Capital Predominantly
capital costs
Predominantly
operating costs
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02 Project certainty
PPPs allow projects to benefit from private sector innovation and funding which can increase certainty of delivery and better value for money
Certainties afforded by availability PPP
Efficient and optimal risk allocation
that enables each party to manage
the risk they control best
Risk allocation
Budgetary certainty given fixed price,
fixed time contracts
Design, construction and
maintenance risks transferred to the
private sector
On-time and on-budget
Whole of life approach to design and
construction taking into account long
term maintenance and lifecycle
requirements
Certainty of asset quality
Performance regimes that incentivise
‘target’ outcomes such as reducing
reoffending in prisons or safety on
roads
Bringing clear social and economic
benefits to the community
Certainty of service quality
Proponents to submit fully developed
and binding proposals with
commitments from the contractors,
operators and investors
Decision making certainty
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03 Quantifying the
cost-benefit gains
Cost-benefit gains in the project lifecycle
The estimated economic return depends on the choice of procurement model
‘Core services’
‘Core services plus’
‘Full service’
Bundles D&C, FM and lifecycle in the PPP
Bundles ‘core services’ and support services in the PPP
Bundles ‘core services plus’ and targets service outcomes in the PPP
Healthscope developed the services brief driven by its clinical experience
The operator-led design ‘future proofs’ the expansion of the hospital taking
into future increase in demand for health services
The design and operational innovations will drive significant social and
economic benefits
Case study on the ‘full service’ model: Northern Beaches Hospital PPP
Type 3 Expansion
Type 2 Expansion
Type 1 Expansion
+ demand
+ c
ap
ac
ity
1 2 3
As an outcome-based availability PPP, this project has allowed greater flexibility within the designation to achieve optimised innovative outcomes
In November 2016, the NZ Transport Agency awarded a contract to the Northern Express Group for the
design, finance, construction, maintenance and management of the motorway
The objective is to improve the safety, reliability and resilience of the state highway
These outcome were captured in a performance based contract, which means the PPP consortium will be
paid for making a safe road open and available to traffic
Puhoi to Warkworth project
Health and safety
Environmental performance
Predictable journey Safe travel
Key performance indicators that drive the desired outcome:
Customer satisfaction
1 2
3 4
5
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04 Projects delivered via availability payments
Illustrative example based on National PPP guidelines
Choice of delivery models
Category PPP
Alliance,
Managing
Contractor Other
Scale
Project value over [$100] million?
If not, can services be bundled to exceed the threshold? ✖ n/a n/a
Scope and outputs
Can be clearly defined ✖
Likely to change significantly and cannot be satisfactorily defined ✖
Whole-of-life opportunities
Ability to bundle services and maintenance obligations with D&C ✖ ✖
Risk
Material risks can be defined, allocated and potentially transferred to a private party ✖
Unquantifiable risk that could have a material impact on project cost and objectives ✖ ✖
Government is best-placed to manage material risks that are prohibitive to transfer ✖
PPP versus traditional procurement
Project delivery alternatives
Traditional procurement
PPP
Government uses tax revenues and bonding
capacity to finance entirety of project costs
Remain in full control of the asset
No user fee
Very limited capital raising capacity
Credit rating exposure
Government responsible for all project risks
Prone to cost and timing overruns
Upfront expenditure could be deployed elsewhere
State funding requirements minimized
Construction risk assumed by the private sector
Whole of life solution and costing
Innovation
Performance standards driving desired outcome
Relinquish varying degrees of control
Success relies on well-defined functional and
service specification
Requires departmental skills
Ability to make a variation need to be addressed in
the contract
NSW has successfully introduced contestability in the market for public transport services, with one operator to plan and run Newcastle Light Rail, buses, ferries and interchanges
Whole of network cost-benefit gains
Instead of:
Multiple operators running ad hoc services
with mismatched timetables
Minister for Transport and Infrastructure,
Andrew Constance
“In an Australian first, we've put out a call to the best
transport operators around the world to tell us how
they could partner with the city to deliver a modern
network for the city”
An integrated, multi-modal view of the network improves
customer service by focusing on the door-to-door
customer experience:
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05 Credit rating and successful PPPs
Within the rated universe, 98% of publicly rated operating PPPs are investment grade per Moody’s, with the majority of ratings in the A category
Operational PPPs have exited the construction phase or have minimal remaining construction risk
Availability payment mechanism lowers the business risk
Long concession life provides availability cash flows to fully amortise the debt
Rating distribution for PPPs
0
2
4
6
8
10
12
14
Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3
Rating distribution of publicly rated operating PPPs
Source: Moody’s Investors Service, ratings as of 31 January 2015
However, strong operational track record does not necessarily result in high credit rating
Completed in 2008
State pays availability payments over 25 years and provides
clinical services
Rated Baa2 despite 8 years of operations
Credit strength
— Strong operational track record
— Fixed availability payments from VIC
Credit challenge
— High leverage and limited liquidity constrains
financial flexibility
— A$148m of bonds maturing in Mar 2017
Case study: Royal Women’s Hospital
Other factors to consider
Rating factors by Moody’s
1 Performance regime and obligations
2 Contractual arrangements
3 Performance and quality of subcontractor
4 Leverage and coverage
5 Project track record
6 Refinancing risk
7 Structural features
8 Offtaker considerations