13 May 2013

Victorian Government announces PPP reforms

Following a consultation paper released in November 2012, the Victorian Treasurer has announced a set of reforms to PPP policy and practice. The new Partnerships Victoria Requirements are aimed at responding to changed market conditions, specifically, the Government’s fiscal challenges, the private sector’s financial constraints and the public’s increasing demand for infrastructure. There are five key areas of reform.

1. Reducing bid costs

The Government will start reimbursing specified bid costs for large PPP projects. Decisions about reimbursement will be made on a project-by-project basis, and the Government will clarify its approach to bidders at the time of releasing an Expression of Interest. Reimbursements will be paid to losing bidders in exchange for intellectual property in the unsuccessful bid, and will be funded by an increased transaction budget in a project’s business case. At this stage, reimbursement of specified bid costs will proceed as a pilot trial. The purpose of reimbursement is to increase competition, by ensuring that industry participants remain engaged while new entrants are able to compete.

In addition, the Government has committed to further refining the bidding process by minimising information submission requirements, short listing only two bidders where appropriate and avoiding “best and final offer” processes where possible.

2. Modifying finance structures

The Government will consider making partial capital contributions for some PPP projects. The benefit of this modified financing structure—as opposed to the normal PPP structure of full private financing—will be assessed against criteria including the maintenance of competitive tension and the alignment of debt tenor with a project’s risk profile. Partial capital contributions will be made either as milestone payments during construction (for large PPP projects where full private financing is impossible) or as a lump sum payment post-construction. Already, partial capital contributions have been trialled for the NSW Convention Centre PPP, the Gold Coast Rapid Transit PPP and the Victorian Comprehensive Cancer Centre PPP, and have also been proposed for the New Bendigo Hospital PPP. It is hoped that contributions will go some way to addressing liquidity constraints and will also improve value for money by reducing reliance on private capital during the operations period.

3. Assessing value for money

The Government will continue to rely on the Public Sector Comparator to assess value for money on PPP projects.

However, projects will no longer revert to traditional delivery methods if the procurement process fails to outstrip the Public Sector Comparator. Once the Government has decided at the business case stage that a PPP is the preferred procurement method, a failure by bidders to meet the cost expectations of the Public Sector Comparator will not automatically undermine the model.

Also, there will now be a scope ladder accompanying each Public Sector Comparator. The scope ladder will identify scope items that bidders can either add or remove if bids are under or over the Public Sector Comparator. The Government will release its scope ladder to short listed bidders at the time of releasing the Public Sector Comparator with a Request for Proposal. It is hoped that scope ladders will streamline the procurement process by clarifying the Government’s preferences and priorities before negotiation.

4. Expanding the PPP model

The Government will consider expanding the scope of services delivered under the PPP model. Recently, PPP projects have focused on ancillary services which support operating the infrastructure. Now, the focus will expand to a greater range of ancillary services as well as core services. For example, the Wiri Prison PPP in New Zealand was a full service PPP, and the Ravenhall Prison PPP announced in last year’s Victorian Budget will include custodial services.

5. Streamlining the PPP model for smaller projects

The Government will attempt to deliver smaller scale projects on the PPP model. A streamlined PPP option will be developed for infrastructure like social housing, tailoring key elements such as payments, abatements and design. Individual projects may also be bundled together in order to achieve sufficient capital scale to attract the PPP model.

What does this mean for you?

These reforms should help to boost the level of PPP investment in Victoria. The Government has signaled an increased appetite for PPP activity, and a willingness to address recent market challenges. Particularly in light of the 2013-14 Victorian Budget announcement of funding for the East West Link (Stage 1) project, industry participants should re-evaluate the potential benefits of PPP projects and reassess their own approach to the bidding process.

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