This Toolkit item relates to Part 2 - Investment Governance, Funding and Financing and Part 3 – Investment Implementation of the Commonwealth Investments Resource Management Guide.
What is a public–private partnership?
Public–private partnerships (PPPs) are a delivery model where the Commonwealth contracts the private sector to (some combination of) design, build, finance, operate and maintain infrastructure or other projects in return for performance linked payments over the long operating term in support of the Australian Government’s policy priorities. PPPs can be a mechanism to allocate appropriate risks between the parties, maximise value for money and bring private investment, innovation and expertise into public infrastructure or other projects.
When should I use a public–private partnership?
Entities should consider the following when determining if a PPP is an appropriate model for project delivery:
- Is there an element/s of the project that would be suitable to involve private sector capital, capability, and expertise?
- Is the opportunity likely to attract sufficient private sector bidders for a competitive process?
- If appropriate, is the project sufficiently complex to encourage innovative private sector approaches?
- Are there risks that are appropriate to be shared between the public and private sectors? And are there risks that are appropriate to sit with government?
- Is the long term service provision well known and unlikely to materially change?
Entities may use the below table, which summarises the advantages and disadvantages of PPPs, to assess the appropriateness of a PPP for project delivery. Potential advantages and disadvantages may vary depending on the design of the PPP.
| Advantages of PPPs | Disadvantages of PPPs |
|---|---|
|
|
The three-step commercial assessment can help assess which projects are appropriate for private involvement. There are several considerations to be balanced in determining the most appropriate financing option (or blend of options) for PPPs. Where private sector involvement in project delivery is appropriate, there are a number of delivery vehicles that can be considered.
Models of public–private partnership
The following table presents non exhaustive examples of potential PPP models.
Note that concession periods refer to a fixed period in which government defines and hands over specific responsibilities and rights to the private sector to build and operate. The Commonwealth maintains ownership of the asset. The private sector pays government for the concession rights and government pays the private entity for meeting contractual conditions.
| Delivery Model | Details |
|---|---|
| Operation and Maintenance contract (O&M) | Private sector operates and maintains a publicly owned asset, under contract, with ownership remaining with the government. |
| Build-Finance (BF) | Private sector builds the asset and finances construction. After construction, the government will gain responsibility for asset. |
| Build-operate-transfer (BOT) | Private sector constructs the asset and has operating rights for a predetermined period. After this period, the asset operating rights are returned to government. |
| Build-own-operate-transfer (BOOT) | Similar to BOT; however, the private entity owns the asset during the concession period. |
| Build-own-operate (BOO) | The ownership and operation of the asset remains with a private sector company and any residual value is retained by the private entity. This model usually involves large finance and a long payback period. |
| Build-lease-transfer (BLT) | Private sector builds an asset and leases it to the government. During the lease period, control and operations of the project is transferred to the government, while ownership remains with the private entity. After the lease period, ownership and operation is transferred to the government. |
| Design-build-finance-maintain (DBFM) | Private sector designs, builds, finances and provides management and maintenance services for the asset under a long-term contract. The government operates the facility. |
| Design-build-finance-maintain-operate (DBFMO) | Private sector is responsible for design, construction, maintenance and operation of the project for the government. Under this model, the private entity assumes the risk of financing during construction and operation. There is no transfer of ownership under this model. |
| Design-build-operate-transfer (DBOT) | Private sector is responsible for the design, construction and operation of the asset. At the end of the concession period, it is transferred to the government. This model is often used when the government has little expertise in the area. |
Structuring a public–private partnership
PPPs should be structured to balance project risks based on the government’s objectives. Risks should be allocated to the party that is best able to manage the likelihood of risks occurring and manage the impact of risks (including financial), should they eventuate. The PPP model does not transfer all risks to the private sector as there will be risks that are best managed wholly or partially by government. The government should bear those risks that cannot be properly assessed or managed or are too big to be solely taken by the private party, or that can be managed more efficiently by the government. PPP projects that share risk appropriately are more likely to achieve value for money by reducing project costs and contingencies.
PPP projects should have outputs that can be clearly defined and measured, allowing payment arrangements to be structured around outputs and KPIs to incentives for achieving key performance indicators. PPPs can also provide an opportunity to bundle services into a single long-term contract to attract the private sector and incentivise innovation. The three-step commercial assessment provides more information on bundling elements of contracts.
The National PPP Guidelines provide further guidance on suitability criteria and drivers of value for PPPs.
Furthermore, PPPs can deliver greater value because private sector provides a whole-of-life view in the design of the infrastructure or other projects.
Delivering a public–private partnership
The decision-making process for major government projects, including PPPs, is set out in the Commonwealth Investment Framework Roadmap. Material investment proposals are required to complete a first-pass and second-pass process. Following a government investment decision that a project is to be delivered as a PPP, the procuring agency is responsible for delivering and managing the project. As a part of this process, entities should address the following considerations to deliver and manage a PPP.
- Project planning and specification to clarify the government’s objectives, including clearly defining the requirements and outputs of the project.
- Selecting a project team with appropriate skills to ensure the project runs efficiently, including appointing specialised advisers, where appropriate.
- Developing a probity plan.
- Developing high quality process and tender documents.
- Maintaining a competitive value-for-money tender process.
- Contract management, including monitoring project outputs and delivery.
The National PPP Guidelines provide further guidance on all considerations for managing and delivering PPPs. Applicable public works PPPs must go through the Public Works Committee.
Accounting and budget classification and reporting of PPPs
PPPs can cover a wide range of service-delivery arrangements between the public and private sectors. Those involving the use of individual assets are service concessions or leases, which can be complex. The accounting will depend on the specific arrangement. However, generally an asset and a liability will be recognised by the grantor/lessee at contract commencement, which will be amortised and repaid respectively over the contract term.
