General frameworki Types of public-private partnership
The National Public Private Partnership Policy Framework (National PPP Policy) identifies the core elements of a PPP as the provision of infrastructure and any related services by the private sector; the use of private investment or financing; and complex and lengthy contracts involving long-term obligations and a sharing of risks and rewards between the private and public sectors.2
Further to the above, it is typically the case in Australian PPPs that the government will enter into a project deed with a private sector counterparty, generally a special purpose vehicle incorporated by a consortium (project co),3 and the project co has sole responsibility for procuring the works and services that fall within the scope of the PPP and will subcontract those obligations to relevant subcontractors, for example, design and construction contractors and facilities management or operation and maintenance contractors. Usually, the project co will enter into arrangements with debt financiers and equity investors to fund the design and construction of the project and, upon completion of the relevant infrastructure, the government will pay a service payment covering the repayment of debt, the return to the equity investors and the cost of service provision.
In addition to the core documentation, a variety of side deeds and tripartite deeds will be entered into between the government, financiers and key subcontractors to regulate cure rights, and interface agreements with affected stakeholders such as proximate infrastructure and local authorities. That said, there continue to be variations in the structure and scope of PPPs on a project-by-project basis to reflect the particular requirements of a project.
In recent years, governments have begun to explore service-focused PPP models, particularly in the context of social infrastructure. These structures tend to be operator-led (rather than equity or builder-led) and focus on the underlying services that the government is procuring (e.g., health or housing services) rather than the facility or asset (e.g., the hospital or social housing), which is merely there to facilitate the delivery of those services.ii The authorities
Under the federal system that exists in Australia, the state and territory governments are responsible for the delivery of core services such as transport, health, education, water and corrective services, and the infrastructure required to provide them. Specialist teams have been established within the treasury departments of the state and territory governments to develop and oversee the implementation of PPP policy and guidelines by the relevant governments; for example, Partnerships Victoria has been established by the Victorian government.
While treasury departments and their specialist teams exercise a coordination and supervisory function in respect of PPPs, individual projects are typically procured by the government agency that has responsibility for delivering the service that will be enabled by the infrastructure. For example, the New Grafton Prison was procured by the NSW Department of Justice, with NSW Treasury providing support in relation to PPP policy and financial matters. Similarly, transport-related PPPs are often implemented by transport and infrastructure agencies within each government – for example, Sydney Metro is responsible for the procurement of the Sydney Metro project.
In a recent development, the commonwealth government has established the specialist Infrastructure Project and Financing Agency, which will support the commonwealth in structuring, awarding and implementing infrastructure projects.
States and territories have (to varying degrees) implemented template project documentation to ensure the consistency of key risk allocations across projects within their jurisdiction and reduce bid costs. In 2018, Victoria released an updated suite of project document templates. The creation of template documents has led to significant convergence in the form and risk allocation of the template documentation between the states and territories.iii General requirements for PPP contracts
A government agency that is procuring a PPP must have statutory power to do so and must comply with any applicable legislative requirements, such as planning legislation. The statutory power requirement is typically satisfied by broad statutory powers to procure infrastructure and execute contracts rather than specific references to PPPs.
Beyond this, there are limited express legislative or regulatory constraints on the use of PPP contracts in Australia. Governments generally use policies and guidelines to set out the rules around the use of PPPs.
The most important of these is the National PPP Policy referred to above. The National PPP Policy has been endorsed by all Australian state and territory governments and applies to all PPPs that are released to the market. The National PPP Policy identifies projects with a total capital value exceeding A$50 million as those likely to have potential to provide value for money using a PPP model.
In some states, the National PPP Policy is supplemented by state-specific PPP guidelines, for example, the NSW PPP Guidelines, which set out state-specific requirements of PPPs.
The PPP policies also set out financial thresholds and tests that must be applied in deciding whether to utilise a PPP. Financial thresholds vary between each jurisdiction, but a government will usually be required to consider using a PPP model if the value of a project is between A$50 million and A$100 million or over. In respect of tests, a government must consider whether a PPP is in the best interests of the public and delivers value for money. This determination will typically involve the development and assessment of a business case for the proposed PPP, which will include a cost-benefit analysis as well as a comparison of the cost of procuring the project as a PPP against the government building, operating, financing and maintaining the relevant infrastructure.
Certain pieces of state, territory and federal legislation will also be applicable to PPPs on a case-by-case basis. Two key pieces of federal legislation with common application to PPPs are the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA Act) and the Competition and Consumer Act 2010 (Cth) (Competition Act). The FATA Act regulates investments in Australian companies and infrastructure projects by foreign-owned entities or foreign governments. The FATA Act sets out thresholds for when a foreign entity or government must seek approval of the Foreign Investment Review Board (FIRB) to proceed with an investment. Following the arrival of covid-19, these thresholds were temporarily reduced to zero Australian dollars, meaning that all investments required FIRB approval. However, as of 1 January 2021, the pre-existing thresholds were reinstated. FIRB applies a broad national interest test to determine whether to grant investment approval to a foreign entity or government. Under the recent reforms to the FATA Act effective 1 January 2021, FIRB applies an additional pre-transaction mandatory approval requirement for notifiable national security actions. This new requirement empowers the Treasurer to impose conditions or block investment by foreign persons on national security grounds, regardless of the value of the investment. This new national security test (distinct from the pre-existing, broader national interest test) may be relevant for certain PPPs as it enables greater government scrutiny of foreign investment, particularly in sensitive sectors.4 The Competition Act aims to promote competition, fair trading and consumer protection in Australia. Bidders participating in PPPs in sectors where there are competition concerns may be required to obtain approval from the Australian Competition and Consumer Commission.
Bidding and award procedurei Expressions of interest
PPPs are generally awarded through a competitive tender process that seeks to ensure that the government obtains a proposal that maximises value for money.
The release of an invitation for expression of interest (EOI) is generally the first step in the competitive tender process. The EOI phase serves the purpose of establishing the terms and conditions of the procurement and informing the market about the project and the tender process, including timelines and the criteria that will be used to evaluate proposals. The EOI phase also serves to inform the government as to the level of market interest in the project, the capability, capacity and availability of the market to actually deliver the project, and the market's views on the best means of delivering the project. After receiving EOIs, the government will shortlist a number of parties to proceed to the next stage of the tender process.ii Requests for proposals and unsolicited proposals
In a traditional PPP procurement the government will issue a request for proposal (RFP) to the bidders shortlisted from the EOI phase. The RFP will typically provide bidders with detailed information about the government's technical, commercial and legal requirements, as well as more detailed evaluation criteria against which proposals will be assessed.
The government will also generally release draft versions of the contractual documentation that set out the legal terms and conditions upon which the government wishes to undertake the PPP. Bidders have the opportunity to propose departures to the contractual documentation as part of their response to the RFP.
During the RFP phase the government often holds a series of interactive workshops with shortlisted bidders. At these workshops, representatives of the government and shortlisted bidders meet to discuss key aspects of a project and how the project can best be delivered, including, for example, departures to risk allocation proposed by bidders and technical solutions. Ideally, the use of interactive workshops should facilitate the development of proposals that are mutually acceptable to both the government and the shortlisted bidders.
Finally, following evaluation of the proposals, the government may sometimes require some or all shortlisted bidders to submit a best and final offer (BAFO). The decision to request a BAFO is purely at the government's discretion, and it will often ask shortlisted bidders to improve their pricing and withdraw specific departures during the BAFO stage.
Unsolicited or market-led proposals are increasingly common in the Australian market. Every jurisdiction publishes guidelines that set out the process for submitting an unsolicited proposal and the criteria against which proposals are assessed. Although the exact assessment criteria differ between governments, proposals are generally required to demonstrate, among other criteria, uniqueness and value for money. The requirement of uniqueness is because of the fact that in adopting an unsolicited proposal, the government foregoes a competitive tender process. Accordingly, an unsolicited proposal will only be adopted where the proponent has offered a unique offering or proposal – for example, the ability to contribute land that is proximate to the site of the project.
In 2018, the Martin Place Metro Project achieved financial close. This project involved an unsolicited proposal by Macquarie Group to build a new underground train station at Martin Place in Sydney, as well as to purchase the air rights for two commercial and retail towers above the station. This project is a significant example of unsolicited proposals achieving value for money outcomes, as taxpayers are expected to bear only a 'small portion' of the A$378 million cost of the new station.5iii Evaluation and grant
Following the RFP phase, the government will look to select a preferred bidder. The selection of the preferred bidder is determined through application of the evaluation criteria that accompanied the RFP. The government generally has broad discretion in formulating the evaluation criteria it applies. For example, the government can elect to have a combination of weighted and unweighted criteria, pass/fail criteria or comparative assessment. Notwithstanding this flexibility, government procurement and probity guidelines and policies and the risk of a process contract having been formed dictate that the government must be consistent in its application of evaluation criteria. Consistency in this context refers to both applying the evaluation criteria in accordance with an evaluation plan or protocol and consistently across bidders.
Once a preferred bidder is selected, the government and the preferred bidder negotiate any remaining departures to the contractual documentation so that it can be finalised and executed. This is generally a more intense and shorter phase as the government is motivated to achieve financial close and avoid prolonged negotiations in circumstances where competitive tension has been reduced. In some tenders the government may continue negotiations with two or more preferred bidders in order to maintain competitive tension; however, this is less common.
The government is generally not obliged to select a preferred bidder or award a contract. This is because the terms and conditions of most tenders will preserve the right of the government to elect to abandon the process in its absolute discretion. Situations where tenders have been abandoned include changes of government and changes in economic conditions.