Improving the PPP Value Proposition

Australia’s privately financed Public–Private Partnership (PPP) market is in steady decline. The once-touted advantages—risk transfer, whole-of-life integration, and access to new funding sources—are now being delivered through Design–Build–Operate–Maintain (DBOM) contracts without the added cost of private finance. Even the funding benefits of tolls and other user charges can now be replicated on publicly funded projects.

Governments have grown sceptical. They see through the rhetoric and increasingly doubt whether private finance delivers value once its costs, inflexibility, and complexity are accounted for.

This article—the second in a series—examines how equity investors and financiers can revitalise the PPP value proposition.

Why demand risk faded

In theory, user-charge PPPs provided a major source of value by shifting demand risk from government to private investors. In practice, they have all but disappeared.

Service-payment PPPs guarantee the same revenue regardless of usage, leaving government with demand risk. User-charge PPPs, by contrast, expose investors and lenders to revenue swings based on usage—think tolls on motorways.

User-charge PPPs flourished in the 1980s–2000s. They allowed governments to:

• skirt Australian Loan Council borrowing limits,

• deliver infrastructure sooner, and

• shift demand/revenue risk to the private sector.

State governments prioritised projects that could be fully (or mostly) funded from user charges or from the development and subsequent leasing of land and airspace surrounding a public transport interchange.

The model collapsed after several toll roads dramatically underperformed, burning investors and lenders. From 2009 onward, governments turned almost exclusively to service-payment PPPs or publicly financed DBOMs. Unsolicited proposals have been the only exceptions.

The cost of lost flexibility

It isn’t just risk aversion that killed demand-based PPPs. Governments also want freedom to adapt networks and pricing. Sydney’s tolling mess is the best example:

Each motorway PPP contract locked in its own toll formula, typically CPI-linked. The result is a tolling regime that is complex, inequitable, and increasingly unaffordable for some users. The Minns Government wants to overhaul this ‘patchwork’ of tolling regimes, but its hands are tied—unless it agrees on compensation with each concessionaire or legislates away their rights (at high financial or political cost)

Similarly, in public transportation, early PPPs, such as Sydney’s Airport Rail Link, Pyrmont Light Rail and Monorail projects, locked in ticketing arrangements that clashed with integrated ticketing goals. Today, governments prefer models that allow them to retain pricing control, as seen in the Sydney Metro and light rail extension projects.

The lesson is simple: PPPs that lock in financial structures at the expense of network flexibility undermine long-term value.

Minimising costs by minimising finance

State PPP units have already tried to improve value by reducing the quantum of private finance in deals. Common strategies include:

• Capital contributions during construction, and

• Debt paydown payments at or shortly after construction completion.

The aim is to use “just enough” private finance to secure the benefits of financial discipline—while stripping out unnecessary cost. For governments, this makes sense. For private financiers, it erodes lending opportunities.

Where PPPs could add real value

If PPPs are to survive, their backers need to stop overselling generic benefits and focus on where private finance makes a unique difference. Four opportunities stand out.

1. Taking demand/revenue risk (carefully)

Private finance can still add value by sharing demand risk—whether on toll roads, farebox revenues, or property-linked projects. But this must be structured to avoid tying the government’s hands on network development.

Revenue-sharing mechanisms offer a better path: they align government interests with investor returns, reduce political resistance, and foster genuine partnership.

2. Managing integration risk

When projects involve the integration of multiple systems—think Sydney Metro or renewable energy projects—governments face integration risk. Equity investors can add value by managing this risk rather than leaving it with government. Yet few have done so in practice.

3. Providing a risk buffer

The equity and debt structure of a PPP provides a cushion against subcontractor insolvency or capped liabilities. It’s not unlimited, but it’s real.

4. Enforcing financial rigour

Capital at risk drives deeper scrutiny of costs, revenues, and risks. Lender oversight during construction and operations ensures discipline that governments struggle to replicate through consultants alone.

Know when not to use the model

Not every project suits private finance. If a facility is likely to need modification, expansion, or integration with other assets, PPPs are more hindrance than help. Forcing the model onto such projects may benefit investors and project financiers in the short term, but it damages the credibility of the PPP sector over time.

Conclusion

The traditional PPP pitch is broken. Most of its supposed advantages can now be achieved without private finance.

For PPPs to remain relevant, equity investors and financiers must concentrate on the few areas where their involvement genuinely matters:

• taking or sharing demand/revenue risk,

• providing a financial buffer against subcontractor failure,

• bringing rigour through capital at risk, and

• managing integration risk across multiple packages.

Only by sharpening their value proposition can private financiers hope to revive Australia’s PPP market.