While in some States of Australia the sale of public assets slated to fund the next wave of public infrastructure is now off the agenda, the demand for high quality public sector services remains and continues to increase.  

The community also still expect governments to create new jobs through the development of new public infrastructure, particularly in transport, health and education. All the time while focusing on lowering debt levels and minimising future borrowing.

A RENEWED NEED FOR PUBLIC PRIVATE PARTNERSHIPS?

Many market participants are bearish about the prospect of new projects in the current fiscal and policy climate. But perhaps PPPs, with some ’retro’ tweaks, are the perfect answer to matching government revenue and spending and getting infrastructure going.

In recent years there has been an increasing move to Government making significant capital contributions during construction or shortly after completion. The driver was to reduce overall financing costs and was a response to a fear of liquidity shortages and the high borrowing costs in wake of the global financing crisis.

Rarely was the capital contribution needed to bridge a private sector financing gap, other than for the largest projects.

With financing costs now approaching more normal levels and the feared liquidity crisis not eventuating, it may be time to wind back the clock to the days where PPPs were fully financed by the private sector.

The model can be further adapted by using longer project terms, anywhere from 25 to 50 years.

The services and infrastructure provided by PPPs ultimately need to be paid for by Government.  But adapting the model in these ways should enable Government to more closely align expenditure with revenue.

This approach involves a PPP model which:

  • focuses on social infrastructure such as schools and hospitals but may also be adapted for public transport projects such as light rail, passenger rail and metro rail;
  • involves new ‘greenfield’ projects;
  • requires minimum or no Government capital contribution;
  • involves longer tenure (anywhere from 25 to 50 years) with lower individual service payments;
  • focuses on periodic market testing of reviewable services to ensure value for money over the longer term and to lower the overall risk and therefore cost of the project; and
  • involves asset renewal obligations and technology upgrade requirements to keep the services and infrastructure modern and relevant.

The extended use of service payments rather than a significant Government capital contribution mitigates the Government’s need to borrow significantly. It also offers increased risk transfer benefits, and long term employment opportunities for constituents.

In an environment where Government Owned Corporations will continue in Government hands, the lower, longer term service payments can be matched with the continuing revenue streams which will be provided by these organisations.

While the contingent financial liability of the Government is not necessarily reduced by the extended use of service payments, this may be counterbalanced by the benefits arising from the better use of cash flow and a reduction in the Government’s need to borrow a large (upfront) amount.