Agenda

This short presentation is intended to expand on two

potentially contradictory statements:

1. That PPP as a model has been effective in

delivering long term value; and

2. That the effectiveness of the model is diminishing

as a function of how PPP has come to be used

If we accept these two statements, the obvious

question is how can we leverage the benefits of PPP

without necessarily undertaking a full PPP process?

The Proposition

• The PPP model is fundamentally strong and

has a role to play in Defence.

• Globally the PPP model is under pressure to

reform as evidenced by the UK PFI and

Victorian PPP Lite

• The PPP model has struggled to get traction in

Defence. Why is this?

• Defence requirements for smart procurement to

delivery efficient assets and capability is not

likely to diminish

Declaring our interests

• South Australia New Prisons &

Secure Facilities PPP

• Ararat Prisons Victoria

• Partnerships Victoria in Schools PPP

• South Australia Schools PPP

• SEQ II Schools Due Diligence

• National Infrastructure Unit NZ

• Ministry of Education NZ

• Victorian Cancer Centre

• UK MOD Red Dragon

• Mexico City University PPP

• Advance Vehicle Training School

• Kiel Proton Therapy PPP

• Papworth NHS Trust PPP

• Corsham Deep Mines Project

• Secure Youth Training Centre PPP

• Glasgow Schools PPP

• Cross River Tram UK

Max

’Contractors Incentive (including innovation). Risk Transfer

Max

Min

Fle

xib

ilit

y t

o C

han

ge (

Co

ntr

ol)

/Tim

e t

o M

ark

et/

Pri

ce/C

ert

ain

ty

Design Construction Finance Maintain (DCFM)

–

Privitisation model inc full

operation and business

ownership risks

Risks

well

understood,

& regulated

Used on social

infrastructure

Performance based payments on availability of accommodation

Concession models including full operations, sometimes franchise arrangements or JV inc subsidy

Performance based payments but often incusage payment

Build – own – operate –transfer (BOOT)

Build – operate –transfer (BOT)

Build – operate –own (BOO)

Market based payment either “free” or “regulated” sometimes incup front payment to Govtor subsidy from Govt

Design Contract Maintain (DCM)

Service infrastructure model including transfer back to the State at the end of the contract for nil consideration. There are the typical model currently used under Govt PPP programme

Full market transfer exists under independent regulator (monopolistic industry such as power transmission or full market risk (e.g. energy retailers). Tends to be used for economic infrastructure like power, telcoms, water and transport

Risk well understood, defined & regulated. Can be used for social infrastructure, but tend to be used for economic infrastructure

Design Build Finance Operate (DBFO)

PPP Procurement Models

The Model

• The PPP model is global and with minor

variations widely adopted

• PPP is in classic economic theory a simple Buy

or Make procurement model

• It is seen as more efficient to “Buy” services and

assets rather than public sector “Making” those

services and assets:

– Better risk allocation allowing clients to concentrate on

Core Competencies

– Quality over the long term by linking asset performance

to financial investment

– Continuity of funding commitment to a defined service

level

When it works

• PPP can and does work in delivering

challenging projects. As a model it has the best

opportunity for success when:

– The nature of the project can be easily replicated in

contractual, commercial and technical scope and

structure

– The relationship between the service, or capability, and

asset design is clear and linear

– The number of parties involved in the transaction, and

impacted by the transaction, is small

– The project isn’t subject to rapid technological change,

significant obsolesce risk or platform evolution

Why is the PPP model under pressure?

• The PPP model has struggled to gain traction.

Why?

– Transaction Costs

– Projects lack flexibility

– Procurement process is to long

– PPP lacks predictability

– The Commercial Framework is challenging

Client

Private Sector Engaged

Private Sector

Client Shared PPP Contractors

Delivery R

esponsib

ility

Tim

e &

Cost

Ris

k

Operation and Maintenance

Concept Design & Statutory

Approvals

Package 1

Package 2

Package 3

Detailed Design

Construction & Commissioning

Feasibility

Is this the whole picture?

• The usual rationale for why PPP is struggling to

gain traction is unconvincing. Why?

– PPP is a procurement model aligned to construction as

shown by the Infrastructure Australia guidance

– A benefit of PPP is the ability to replicate previous

projects but this assumes significant demand for similar

projects

– A legacy of the GFC is a change in emphasis within

Government from what we can afford to build to what

we can afford to maintain. The debate is opex not

capex

What does this mean?

• PPP has a role to play. Capturing the value of

long term asset performance remains a critical

contribution but its application should be

carefully considered

– PPP was intended for reasonably simple asset heavy

projects. Have we distorted the model by using outside

of its design purpose?

– The model works well when simply replicated leading to

reduced transaction costs

– Through repetition, the model becomes less

contentious allowing for delegation of project decisions

The Challenge for PPP in Defence

• Whilst Defence has a large capital requirement,

its asset portfolio is reasonably stable

• Whilst a large entity, the ability for Defence to

develop a pipeline of duplicate projects is

limited

• Nature of capability lead requirement

increasingly divorced from asset design

• Defence is characterised by capability

requirements with an increasing pace of

evolution. Limits the attractiveness of long term

commitments

• Decision making protocols not aligned to wider

industry expectations

So what next?

• Not suggesting we have all the answers, but

some points worth considering:

– Explore use of DBOM contract form to supplement

traditional forms to capture long term performance of

assets

– Apply adapted Managing Contractor within capability

services to achieve risk transfer

– Consider consolidation and/or integration of existing

contractual arrangements to streamline on site

interfaces

– Apply the PPP model but used selectively

– Consider fast track approval protocols for low capital

value projects to generate market confidence and build

in house skills

– Consider how lifecycle and asset renewal investment

can be bundled to help standardise approach and

provide opex flexibility

Conclusion