1. TWN CONFERENCE WASHINGTON DC PUBLIC PRIVATE PARTNERSHIPS
Welcome to everybody. As I am saying on a regular basis these days our commitment to communication is real and it is an opportunity to share information formally and informally. It is also a great opportunity for us to learn and for you you to ask questions. So if you would like to ask questions please do so, or if you have any feedback please feel free to provide it during the presentation or later if you choose.
Today is also an opportunity for Jane and I to share some of the key learning from our recent study trip to the USA where we met with some very high profile people, representing organisations with massive scale and complexity.
We weren’t sure what to expect but I think it’s fair to say we were both impressed and excited in what we learned. Impressed in the sense of what people were doing , but also excited that we believe we are on the right track and in some cases ahead of the game.
We would now like to share some of our learning with you
So to today’s agenda
N o r m a n J o h n s t o n 9 May 2005

2. A G E N D A A G E N D A Introduction to PPPs Government and Financing
Financing PPPs
Typical PPP Structure

3. Introduction to PPPs
A Public Private Partnership is a long-term partnership between the public and private sectors for the purposes of delivering an asset and/or a service
The PPP objective is to allocate responsibilities and risks to the partners who are best able to manage and mitigate those risks, thereby offering better value for money and quality of service than traditional public sector procurement methods
Is a ‘win-win’ situation for both the public and private sectors

4. Key Features of a PPP
Risk transfer from the public sector to the private sector (or any other party more suited to the risk)
Output-based specification
Long-term concession periods
Performance measurement
Incentives and penalties
Competition
Utilisation of private sector management skills

5. PPPs offer advantages over the traditional procurement method
PPP Benefits
PPPs offer advantages over the traditional procurement method
Optimal transfer of risk and responsibility to the private sector
Lowers the cost of the project to the public sector
Encourages the private sector to be efficient
Accountability and on-time delivery
Concentration by the public sector on core competencies
Flexibility in structuring and delivery
Improved forecasting and budgetary requirements by the public sector
Reduced public sector capital outlay
Conversion of capital expenditure to annual payments gives intergenerational equity
The government can maintain control through regulation/management

6. PPPs offer additional indirect benefits
PPP Benefits
PPPs offer additional indirect benefits
Increased foreign investment
Increased local investment
Deepening of the banking market
Transfer of ‘best practice’ in infrastructure
The provision of services more rapidly than would otherwise be possible
The excess capital allows for the provision of additional services or infrastructure projects

7. Models used for Infrastructure Delivery
Government
Private Sector
Asset Ownership
Operating Risk
Residual Value Risk
Examples
Delivery
Method
1 Government Provision
Libraries
Community Centres
Energy assets
Airports
Ports
2 Privatisation
3 BOOT
Toll Roads
Water and waste water assets
Prisons and hospitals
Sporting facilities
4 Serviced Infrastructure Model
Courts
Special purpose accommodation

8. Models used for Infrastructure Delivery
RISK TRANSFER
Risk and Government involvement
PPPs
High
Low
GOVERNMENT INVOLVEMENT
Privatisation
BOOT
Serviced Infrastructure Model
Government Provision

9. Typical PPP Structure Government Department Independent Reviewing Body
Private
Sector
Company
Debt
Financier
Private Sector
Consortium
Operator
Construction
Contractor
Concession
Agreement
Capital Project
Services
Equity
Finance
Independent
Reviewing
Body

10. The Debate on Financing
… and have had many delivery failures
Governments are running out of money….
General Government Outlays on
Investments 2 4 6 8 10 12 14 16 18
1970
1980
1990
1997
% of General Government
Outlays
United States
United Kingdom
Germany
Canada
Australia
2000

11. Global Trends in Privatisation
Over the last few decades, there has been a slow trend towards private financing of infrastructure projects
Generally, the first projects delivered using PPPs are the most clear cut in terms of:
Allocation of roles and risks
Simplicity of financing structures
Privatisation of independent, non-core, government-owned infrastructure businesses; then
Private sector delivery of individual infrastructure projects through BOOT-type structures; then
Expansion to include social infrastructure projects – private ownership with public service delivery, etc

12. History of PPPs in Australia
Tollroads
Hospitals
Water
Prisons
Power
Sea Ports
Airports
Rail
Defence
Toll Roads
Schools
Pre 1990s

13. How are PPPs Financed? Projects financed individually
Project companies funded by non-recourse debt and equity
70-90% gearing
Restrictive covenants common, for example:
6 month debt service reserve and capex reserve
BCR: times +
No further senior debt borrowings allowed
Strong credit ratings possible due to long-term contracts and secure cash flows

14. Range of Financing Options
Public listing
Infrastructure Funds
Financial Institutions
Unlisted Funds
Operators and Constructors
Equity
Banks
Capital Markets
Private Placement Sub-ordinated debt
Lease-based Finance
Debt
Australian financial markets sophisticated for Infrastructure projects

15. Bank Debt Traditional primary source of project debt funding
Flexible repayment schedules (compared to Capital Markets)
Historically reluctant to exceed 80% gearing or year terms
Competition from Capital Markets and international banks have seen banks offer more competitive terms
Up to 90% gearing
25+ year term
Margins – basis points
Terms of debt depend on quality of project cash flows

16. Capital Markets Debt
Increasingly used to fund large infrastructure projects
Bond structure chosen to best match project cash flows
Wide variety of capital market debt instruments including
Corporate Bonds
Infrastructure Debt
Inflation Indexed Bonds (CPI Bonds)
Zero Coupon Bonds
Commercial Paper and Medium Term Notes
Subordinated Debt

17. Equity Superannuation funds and specialised infrastructure funds
Growing demand from this sector (MIG, GIF, etc)
May be willing to invest up to 10-20% of project value
Generally, require a post-tax IRR of 10-25% depending on the individual characteristics of the project
Trade Investors
Companies involved in the development or operation of the project
Generally, more interested in the development or operational role
May accept a lower IRR than institutional investors
to win the other roles within the project
added familiarity and comfort with the project

18. Debt Financiers Attracted by the nature of PPP cash flows Good credit
Long term
Predictable
Often CPI linked – attractive to insurance / superannuation funds raising CPI linked bonds
Offering increasingly aggressive terms as competition increases and debt providers become more comfortable with the sector
Capital Markets offering ‘tailor made’ securities
Banks offering longer terms, higher gearing, lower margins

19. Equity Providers
Investment in PPPs well suited for Super/Pension equity funds
Long term
Low risk- predictable / stable returns
Good credit
‘Recession-proof’
Several infrastructure funds or sector-specific funds
Many funds publicly listed
Macquarie leading the way in Australia, but other following
(eg, Plenary/ABN)
Accepting more risk / lower returns as market matures

20. Trade Investors
Construction, engineering, operation and maintenance companies
May take small equity positions in project companies with which they are involved
Generally, more interested in construction / operation role
Stable, long-term income stream
PPPs represent a significant proportion of large contracts in the market
Vital to win large contracts in rationalising markets that are subject to increasing global competition

21. Government Better ‘Value for Money’
Risk transfer - can be tailored to suit project
New technology / innovation
Private sector competes on Whole of Life project cost, creating synergies between construction and operation
Greater range of finance available to Private Sector
Allows Government to ‘steer rather than row’
Encourages foreign investment
User pays (eg, toll roads)
More equitable recovery of capital costs
Encourages commercially viable projects (full cost recovery)

22. Conclusion
PPPs - partnership between the public and private sector using commercial debt
Sharing of risk and responsibilities between public and private sector
Offers several advantages over traditional procurement methods – government not off the hook
Projects financed individually with a mix of debt and equity - government streams its cash flow

23. Department of Commerce
THANK YOU
Norm Johnston
Group General Manager
State Property NSW
Department of Commerce
2-24 Rawson Place
Sydney NSW 2000
Australia
Phone:
Fax: