Australian governments face an ever growing tension between demand for more and better public infrastructure and increasing fiscal constraints. The resulting ‘infrastructure gap’ means governments must look for new ways to deliver priority infrastructure which will maximise value for money outcomes.
To date, public private partnerships (PPPs) have predominantly been used to deliver single-asset major infrastructure projects, such as a tollroad or hospital.
However, by ‘bundling’ multiple assets into a single project, governments can also use the PPP model to deliver smaller-scale assets which, on their own, have traditionally been considered too small to provide value for money as a PPP.
THE DEMAND FOR SMALL-SCALE INFRASTRUCTURE
Discussion on the infrastructure gap has focussed on the need for large-scale projects such as roads, rail and ports.
However, governments are also under pressure to deliver smaller, but no less important, local infrastructure such as schools, police and fire stations, libraries and leisure facilities.
In addition, governments need to fund the ongoing cost of maintaining and upgrading existing assets such as local roads, bridges, water, sewage and lighting infrastructure.
The benefits of delivering (and maintaining) infrastructure as a PPP, including access to private sector funding and the increased efficiencies provided by private sector involvement in project delivery, are well documented.
However, a PPP also carries considerable transaction and financing costs. Critically, those costs do not necessarily decrease simply because the asset being delivered is smaller in size or value.
Individually, small-scale assets are therefore unlikely to achieve sufficient value for money outcomes if delivered as a PPP. However, the use of multi-asset or ‘bundled’ PPPs provides a potential means of overcoming this.
A POTENTIAL SOLUTION
‘Bundling’ essentially involves the consolidation of a number of smaller assets into a single PPP project.
A private sector entity may be engaged by government to design, construct, operate and/or maintain those assets under a single contract.
The concept of bundling is not new. Both in Australia and internationally, for example, the use of multi-asset PPPs to deliver new schools projects is relatively well established. However, with limited exceptions, the use of multi-asset PPPs has not yet been expanded to encompass other small-scale asset classes.
THE BENEFITS OF BUNDLING
Innovation and efficiency – The delivery of small-scale assets as a single PPP project will enable governments to access the benefits traditionally associated with PPPs, including:
- innovative design solutions which include input from the private sector entity that will be responsible for operating the completed asset;
- a focus on whole-of-life asset cost and performance;
- greater incentives to deliver the project on time and within budget; and
- more efficient service delivery, by linking the private sector’s payment entitlement to the achievement of specified performance criteria.
The economies of scale gained by engaging a single private sector entity to deliver multiple assets may also provide cost savings to government.
More efficient procurement and contract administration – Delivering multiple assets as a single project will enable governments to:
- procure a number of smaller assets through a single, large-scale procurement process, thus minimising transaction costs; and
- deliver multiple assets under a single contract with a consistent risk allocation, enabling more efficient contract administration and allocation of resources.
Access to broader markets – A single, large-scale project is also more likely to attract interest from experienced market participants than a series of smaller projects to deliver individual assets.
The potential applications of the multi-asset PPP model are significant.
Multi-asset PPPs are now being used in the UK and United States to upgrade, replace and maintain existing civil infrastructure such as street lighting and bridges.
Under this approach, a private sector party is engaged under a single contract to upgrade or replace a large number of assets within a geographical area, and is then paid to maintain and repair that upgraded infrastructure over a concession period.
By ‘bundling’ multiple assets into a single project, governments may also potentially use the PPP model to deliver new classes of asset, such as local road and water infrastructure and community facilities such as libraries, which have not traditionally been considered suitable for PPP delivery.