Commercial models summary
Exhibit 1 sets out commercial models that entities can consider when designing and evaluating ownership and partnership options with private sector. These commercial models are to provide illustrative examples and potential options and are not exhaustive lists.
Exhibit 1: Summary of commercial models
Conceptual ownership categories from fully public to fully private
As a high-level conceptual map, entities can consider 5 ownership models on a spectrum from fully public to fully private, refer Exhibit 2.
The summary on the advantages and limitations for each model can be used as a guide to assess the most suitable models for the project or investment being evaluated.
The key principles and design considerations in each step of the Commonwealth Investment Framework will further guide selection of the most appropriate model, noting there are many levers available to adapt each of these high-level models.
Exhibit 2: Conceptual ownership categories from fully public to fully private
Structure types across different ownership options
Within the conceptual ownership categories introduced in Exhibit 2, there are a number of more detailed models that define the responsibility of Government and its potential partners.
The ownership model must allocate responsibility for creating and sustaining revenues from the asset and meeting costs for financing and operations. The allocation of these responsibilities is interdependent with the ownership and financing of the asset. Ownership typically affects the bundle of rights and obligations a party will have and thus the balance of incentives that must be defined contractually.
Owner-like behaviour can be incentivised via a contract, even where the private party has no underlying property interest in the asset. Therefore, the operating model and financing approach must be considered in an integrated design exercise, which will often benefit from structured market testing and engagement to steer these choices.
There are 5 structures that projects typically adopt, refer Exhibit 3, noting that this list is not necessarily exhaustive.
This overview may assist entities in identifying potential options as they begin design of the partnership model.
Exhibit 3: Non-exhaustive list of structure types across different ownership options. Governments can invest in ‘private’ through investment instruments including convertibles or debt and/or equity (the latter of which gives Government an ownership stake).
Roles for Government in investment
At a high-level, there are 4 roles Government can play to encourage appropriate, efficient and effective investment in public policy priorities, refer Exhibit 4.
These roles vary the balance between the use of policy levers, funding, forms of capital contribution, and the level of direct government control of the asset. These roles can be combined for different elements of an investment.
Policy and regulatory levers involve the least amount of direct public financing. However, there can be operational costs for Government entities to design and implement these changes, and the changes themselves may have financial impacts on stakeholders, and indirectly on Government finances as a result.
Amongst the options that involve a financial commitment, the degree of Government investment will generally be proportionate to the ongoing control it seeks in the asset created. Acting as a funder, often a more simple and common option, provides the least control after the funding is delivered. Whereas, when Government takes on some or all of the ownership rights in the investment, or provides an appropriate form of debt financing it will typically have the types of control or oversight that a commercial investor would have over the asset.
Entities should consider how the Government’s role in a particular investment would achieve specific objectives. When presenting options that involve funding or investment, there should be a clear link to the additional benefits Government obtains by making those financial commitments.
Exhibit 4: Roles for Government in investment
Opportunities for private sector investment to add value
To be capable of investment by the private sector, the asset or project needs a viable commercial model and source of revenue that can be allocated to the investor.
For the allocation of that revenue stream to be efficient and effective, it must be based on policy and/or financial value creation that offsets the private sectors, direct costs, costs of capital, and their expectation for an acceptable risk-adjusted return on the invested capital.
Specifically, where Government is the sole or primary source of revenue for the asset, the investment will need to generate some other benefit to government that offsets the incremental cost of private capital and margin that the private investor will expect. Private partners face a higher cost of capital and their investors expect a return commensurate with the risk. In order to fund this cost of capital and return expectation, the private sector's involvement must generate sufficient value that can be shared and/or used to offset the cost to Government of meeting the private party's return expectations.
'Opportunities for private sector investment to add value' in Exhibit 5 describes the potential sources of this value that a private sector partner can provide. When considering private sector involvement, test whether any of the ways the private sector can add value apply to the subject matter and overall context of the investment.
Exhibit 5: Opportunities for private sector to add value