How to better Partner the Public with the Private

Published on LinkedIn on 14 November 2019

IPA, APLMA and DLA Piper put on a terrific event yesterday on the Australian PPP model.  

The event comprised 4 moderated panel discussions, presenting the different perspectives of government, D&C contractors, capital (debt, institutional equity and sponsor equity), the SPV and O&M contractors – a great way to illustrate the differing interests of these participants.

There was broad consensus that the PPP model is serving Australia and NZ well, but many areas for potential improvement were discussed, including:

  • recognising that there is no single PPP model – it is a broad church and government is better served by exploring how the model can best be tailored to the needs and objectives of each specific project
  • the tension between government’s desire for a SPV of substance that acts like an owner and proactively manages the issues and its contractors, and government’s desire for a low weighted average cost of capital (i.e maximise use of limited recourse debt)
  • government’s role in tempering deal fever and contractor regret, while getting the best value for money outcome for taxpayers
  • exploring the use of alternative payment models that supplement the fixed price model at the heart of a PPP, and encourage a more collaborative approach to solving the difficult ‘third party’ risks that no one is well equipped to solve by themselves
  • how slow decision making by government agencies during the construction phase can dramatically affect the contractor’s risk profile 
  • the emergence of mega-projects – with capital costs in the billions – and the consequent evolution of contracting models whereby governments seek to de-risk these projects and tender contract packages of a size and risk profile that is attractive to the current capacity constrained market. But these new models also create new risks and issues that didn’t feature under the more traditional single ‘bundled’ PPP contract model 
  • the tension between sourcing capital from long term investors who invest for the full duration of a project, and sourcing it from shorter term investors that specialise in managing risks associated with the more risky development phase of a project. And how the project’s governance arrangements can address conflicts of interest that can arise when an equity investor is also a contractor to the project
  • the importance of having the right people on the board of the SPV, who are appropriately incentivised and active
  • the benefits of having a SPV (equity investors) that retains a slice of various risks, rather than passing 100% through to its contractors
  • the governance benefits that can be obtained by giving the debt financiers greater visibility of project issues as they emerge
  • how greater participation by the O&M contractor in the design phase can be encouraged

Lots of good ideas. I look forward to working with project participants on how these ideas can be developed and baked into the contractual arrangements for future PPPs.

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