PPPs – A Legal Perspective

Subject: Advanced Construction Management RMIT, 3 May 2012 Ken Gray & Alison Ashford Baker & McKenzie, Lawyers

2

Ken Gray

–  Corporate – Partner

–  Practice areas

–  Major Projects | Infrastructure | Project Finance

–  Practice description

Ken is based in Melbourne and has been a partner since 1988. He has also lived in Sydney, Hong Kong and Taipei, working in the firm's Corporate, Major Projects and Banking and Finance practices in those cities and on client assignments in the People's Republic of China, Vietnam, Thailand, the Philippines and Indonesia.

Ken has wide ranging commercial experience gained in 29 years with the firm in Australia and Asia. Ken is a partner in the firm's Major Projects practice, focusing on the representation of owners, sponsors and banks in the development, acquisition, financing, operation, regulation and sale of infrastructure assets, particularly in regulated industries.

Ken practice encompasses transactional assignments (including trade sale processes for buyers and sellers), commercial legal advice in relation to infrastructure, financing and commercial transactions, dealings with regulators and litigation in connection with infrastructure assets.

Ken was lead partner on the development of Baker & McKenzie's recent report "Public Private Partnerships – evolution or revolution".

3

–  Construction – Senior Associate

–  Practice areas

–  Major Projects | Construction

–  Practice description

–  Alison joined Baker & McKenzie in 2005, prior to which she was with the Clayton Utz major projects practice. Over the past ten years, Alison has had significant roles in drafting project documentation, as well as acting for both contractors and principals in resolving international and domestic disputes through mediation, arbitration, litigation and adjudication.

Alison Ashford

4

What is a PPP?

– Definition – Public Private Partnership – PPP = PFI (Private finance initiative) (UK) = P3 (US/Canada) –  Involves the private sector delivery of a public project or

service over a long term period, and eventual return of the asset to public ownership

5

What is a PPP?

– Characteristics – Project delivery model which is typically used for

infrastructure/social service projects – Model involves private sector funding, design and

construction and operation and maintenance of the project – Project is developed under a long term contract (known as a “concession”) with the Government

– At the end of the “concession period” there is generally a reversion of the physical asset (i.e. the project) to the Government.

6

What is a PPP? –  Differentiation between PPPs and alternative project delivery models

–  Contract between Government and a design and construct contractor –  Alliance/relationship contracting –  Under these models, the Government outrightly owns the project or asset –  PPPs allow for partial or limited privatisation whereby the project or asset is

owned and operated by the private sector for the duration of the concession period

–  Based largely on contract law, not statutes: refer to http://www.infrastructureaustralia.gov.au/public_private/ppp_policy_guidelines.aspx for the National PPP Policy and Guidelines.

7

What is the structure of a PPP?

– Key parties: – Government – Sponsor – Equity provider – Debt provider – Design and construct contractor – Subcontractors – Operator

8

What is the structure of a PPP?

–  Note: Diagram courtesy of the National Public Private Partnership Guidelines – Volume 1: Procurement Options Analysis, December 2008, page 8

9

Why use the PPP delivery model? –  Advantages for Government

–  Creation of value for money –  Transfer of risk to private sector –  Performance measures (KPIs) –  Increased competition (through bid process) –  Private sector management (i.e. public sector resources not heavily

involved once project is under way) –  Whole of life innovation and efficiency which private sector can provide

in the design, construction and operating phases as well as from a funding perspective

–  Generally faster delivery of projects (e.g. EastLink Project) –  Not about avoiding State debt

10

Why use the PPP delivery model?

– Disadvantages for Government – Heavy involvement of resources in tender period – May not achieve intended risk allocation; value for money

may not be achieved (e.g. Southern Cross Station Redevelopment)

– Note the use of the “public sector comparator” (controversial tool) see: www.partnerships.vic.gov.au

11

What is involved in the PPP delivery model? – Tender Process

–  Government invites private sector participants to deliver their ‘expression of interest’ (“EOI”) in an upcoming project

–  Upon evaluation of EOIs, Government prepares a shortlist of bidders, to whom a request for proposal (or request for tender) is issued

–  Submitted proposals are evaluated by Government and a preferred bidder is appointed

–  Contract execution –  Refer to Partnerships Victoria Requirements January 2012 (Version

2)

12

What is involved in the PPP delivery model?

– Funding arrangements – One off capital contribution by Government – Taxpayer funded (e.g. Royal Children's Hospital Project,

Parkville) – User funded (e.g. EastLink Project – via payment of tolls) – Taxpayer funded via availability charge (eg Peninsula link) – State balance sheet impact

13

What is involved in the PPP delivery model? – Design and construction period

–  Covers a number of years –  Usually the most risky part of the Project –  E.g. Southern Cross Station Project

– Operation and maintenance period –  Makes up the majority of the concession period –  Performance standards during term (KPIs) –  Often Government will require asset to be returned to it in a good and

operable condition –  For example, CityLink Project

–  Design and construct period – 1995 – 2000 –  Concession (operation and maintenance period) – 2000 to 2034

14

What is the future of PPPs? –  Private sector funding, expertise and innovation will continue to be required for

the delivery of infrastructure projects –  Baker & McKenzie industry analysis (

www.bakermckenzie.com//BakerMcKenziePPPReport2012) shows that participants require there to be:

–  greater legal certainty –  consistency –  predictability

–  Likely outcome is that the PPP model will continue to develop in line with the relevant financial ad procedural constraints

–  Major constraint (or basis for growth) will be the Government pipeline of projects

Thank you

© 2011 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.