Public Private Partnerships An overview from the legal perspective

Transcription

1 Public Private Partnerships An overview from the legal perspective Ren Niemann Partner Allens is an independent partnership operating in alliance with Linklaters LLP. 1

2 What is a public private partnership? Private sector company provides a public service or project through a contractual arrangement that bundles design, construction, financing, operations/ maintenance/ facilities management of government assets/services Essentially a contract for services funded by government annuity - design and construction funded by private finance; State pays when asset is built Cost of using the service is either borne by: the user of the service (eg toll road); or Government where private company contracted to provide services (eg hospital) Private financing frees up government balance sheet 2

3 Availability vs Economic PPP Availability PPP (most social infrastructure eg projects, hospitals, schools) Private sector funds D&C phase and government then pays fee for services provided over operating life of the asset Governments can bring forward capital investment to build social infrastructure and then pay for performance over the life of the infrastructure Economic PPP eg toll roads Private sector funds D&C phase and in operations phase asset is funded by user revenue eg tolls Government can shift ownership and market (demand) risk to the private sector 3

4 Types of projects that PPPs have been used for Social Infrastructure Education schools, universities, student accommodation Health hospitals (new and upgrades), research facilities Justice police stations, courts, prisons Defence accommodation, other facilities Housing accommodation, other services Source: ABN AMRO Economic Infrastructure Transport toll roads, tunnels, bridges, light and heavy rail systems, railway rolling stock, station upgrades, automated ticketing systems Electricity generation, transmission and distribution assets, gas pipelines Water wastewater treatment, water desalination, water recycling, pipelines Ports and airports Entertainment - convention centres, stadia 4

5 PPPs in Australia 5

6 Typical PPP Government Project Deed Equity Subscription SPV (Project Co) Debt Facility Banks Design & Construction Contract Operator, Maintenance, Security, Cleaning Contractors 6

7 Project Documents Project Deed D&C Contract O&M Contract Interface Agreement D&C and O&M State Direct Deeds D&C and O&M Finance Direct Deeds Independent Certifier Deed Financiers Tripartite Deed Deed of Charge/State Security Security Parent Company Guarantees (from D&C and O&M to Project Co) Performance Security (ie bank guarantees from D&C and O&M to Project Co) Financing Documents 7

8 Key Benefits to Government of PPP Projects Appropriate Risk Allocation Financial risks are passed to the private sector Construction and operational risks are passed to the private sector Lower risk to the public sector through the use of rigorous project finance due diligence processes Funding Certainty Value for Money Effectiveness and Efficiency Source: ABN AMRO Provide secure long term funding streams, not impacted by political shifts Ability to overcome short term budgetary constraints, by using private sector capital investment and long term service contracts The private sector has access to broader sources of capital Better value for money through benchmarking, whole of life costing, competitive processes and sharing the benefits of third party revenues Ability of private sector to deliver the asset more cheaply and efficiently which offsets higher financing costs Ability to minimise life cycle costs over the life of the project Public sector can focus on core functions Drive innovation projects are specified in terms of outputs, driving design, construction and operational efficiencies Accountability and financial discipline of private sector participants driven by rigorous KPI regime Allows early project delivery rather than delay for government to fund immediately on balance sheet 8

9 PPP Procurement Phases Source: National PPP Guidelines 9

10 Project lifecycle stages and timeline Source: National PPP Guidelines 10

11 Risk pass through D&C Direct Deed Design & Construct, Operate & Maintain State Pass through supported by: Performance security Parent Company Guarantee LDs in D&C phase Abatement in Operation Phase Note: Caps and limits on liability Direct Deeds and Step in Rights Design & Construct Project Co Operate & Maintain D&C Contractor PCG PCG Operator O&M Direct Deed D&C Parent O&M Parent 11

12 Trends and pressures risk generally Equity supported by what D&C / O&M / FM will bear Compare and contrast: decreased demand in construction and engineering sectors should increase risk appetite increased scrutiny and sophistication and project failures making market more risk averse increased cost of bonding/limited bonding lines Projects that have unravelled force everyone to reconsider whether the typical approach is best 12

13 Key project risk categories Development Construction/completion Supply Demand Price risk Performance Technology Force majeure Legal/political Financial Environmental 13

14 Development and supply risks Development/construction/completion risk cost overruns late completion inadequate performance/specification failure Supply risk availability of raw material/components delivery failure cost Generally passed through to D&C Contractor Supported by performance security, liability caps, liquidated damages and parent company guarantees 14

15 Demand risk Demand risk market for product/service protection of market comparative cost of alternative product/service borne by private sector in an economic PPP and by the State in an Availability PPP 15

16 Operating and technology risks Operating/performance risk performance/efficiency of project facilities responsibility for performance Technology risk protection of technology life of technology Generally borne by O&M Contractor and supported by abatement rights, performance security and PCG (subject to caps) 16

17 Force majeure, legal and political risks Force majeure risk definition insurance consequences Legal/political risk natural and other neutral events relief from obligations; debt service change in law/taxation/other legislation (usually shared) revocation/non-availability of consents and permits (risk of party obtaining) 17

18 Financial and environmental risks Financial risk interest rates exchange rates repatriation risks (exchange controls/withholding taxes) inflation Environmental risk liabilities imposed by legislation contamination risk (usually shared) 18

19 Risk Mitigators Contractual pass through (but subject to limitations and caps) Insurance Security (PCGs, bonds) Step In rights Due diligence Strong project management 19

20 What gaps remain? Still some risks even where contracts in place (eg poor performance) Default by project company or other contract counterparties Contracted limits on liability Counterparty credit risk Government action 20

21 Regulatory Framework Foreign Investment Review Board examines proposals by foreign persons to invest in Australia Planning level of government with jurisdiction for approvals, use of CID Licensing and Accreditation eg private health facility, custodial services, rail operators OH&S, WHS Environmental impacts endangered species, emissions, noise, etc EPBC 21

22 Recent Developments Government funding contributions government contributions (both upfront capital funding and buy back of debt after construction completion) reduce borrowing costs Institutional investors (eg Canadian pension funds) Iterative processes early contractor involvement less formal alternatives of interactive bidder engagement Hypothecation value capture Government focus of reducing bid costs still a challenge 22

23 Allens is an independent partnership operating in alliance with Linklaters LLP. 23

24 Allens is an independent partnership operating in alliance with Linklaters LLP. 24