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Australian Government Policy Principles for the Use of Public Private Partnerships - FMG 21

Published December 2006

A Public Private Partnership (PPP) refers to a procurement involving the use of private sector capital to wholly or partly fund an asset that would have otherwise been purchased directly by the public sector and which is used to deliver public sector outcomes.

A PPP arrangement is generally an option to be considered for major asset and infrastructure procurements and is often used to support, or in conjunction with, the delivery of related services.

The Australian Government Policy Principles for the Use of Public Private Partnerships builds on the Australian Government's resource management framework and processes, and establishes policy principles and processes for the use of PPPs by Australian Government agencies subject to the Financial Management and Accountability Act 1997 [External Site] (FMA Act agencies). The principles ensure that PPP proposals meet the high public accountability and transparency requirements of Australian Government procurement.

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Australian Government Policy Principles for the Use of Public Private Partnerships - December 2006 PDF version [PDF Document 342 KB]

Table of Contents

Introduction

1. Increasingly, governments both domestically and internationally have been exploring the potential benefits that can be derived from private sector involvement in the delivery of government outcomes. These partnerships involve a range of different relationships between governments and the private sector, including privatisation, outsourcing and private financing, often referred to as Public Private Partnerships (PPPs).

The Government has a strong record of engaging the private sector

2. The Australian Government has a well established resource management framework covering a range of activities, which sees the government engage the private sector to deliver high quality government outputs more cost-effectively. The framework aims to make the public sector more responsive to the needs of government through the efficient and effective use of resources. Under existing procurement and management reforms managers in Australian Government agencies are required to explore market opportunities for greater efficiency and effectiveness. The impact of these reforms over the past decade is demonstrated by the range of government funded services now delivered by the private sector.

3. This document (‘the PPP Principles') builds on the Australian Government's resource management framework and budgeting processes, and establishes policy principles and processes for the use of PPPs by Australian Government agencies subject to the Financial Management and Accountability Act 1997 [External Site] ('agencies').

4. At the Australian Government level, the term ‘Public Private Partnership' refers to a form of government procurement involving the use of private sector capital to wholly or partly fund an asset—that would have otherwise been purchased directly by the government—which is used to deliver Australian Government outcomes. A PPP arrangement is generally an option to be considered for major asset and infrastructure procurements. PPPs are often used to support, or in conjunction with, the delivery of related services. The procurement arrangements are managed through long-term relationship contracts with private sector financiers and service providers.

A PPP Unit has been established in Finance

5. The government has established a specialist PPP Unit within the Department of Finance and Administration (Finance). The Unit will work collaboratively with agencies and their advisers to assist with assessing the relative merits and viability of PPP proposals.

PPPs offer a range of benefits and costs

6. The government recognises that the appropriate use of PPPs can provide significant benefits to the public sector, such as access to specialist expertise and innovation, and the opportunity to transfer risk to those better able to manage it. However, it is generally more expensive for the private sector to raise capital through private capital markets, than for the Australian Government to do so directly. The critical test when assessing a PPP proposal, therefore, is whether the overall features of the PPP proposal provide the Australian Government with a net benefit when compared with traditional procurement methods.

This document sets out principles to guide evaluation

7. The PPP Principles set out the:

  1. types of arrangements to which the PPP Principles will apply;
  2. relationship between the PPP Principles and existing policy and processes;
  3. policy principles that must be considered when developing procurement proposals which scope the use of PPPs; and
  4. assessment and approval processes for PPP proposals.

8. The Australian Government's objectives in establishing the PPP Principles are to:

  1. provide agencies with guidance, through a policy and process framework, when developing PPP proposals and assessing the relative merits of PPP arrangements in comparison with other procurement methods; and
  2. help ensure the effective and responsible allocation of Australian Government resources and fiscal management.

9. This document also sets out the PPP guidance papers developed by the Australian Government about the use of PPPs.

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Application of the Public Private Partnership Principles (PPPs)

10. The PPP Principles will apply to a relationship or proposed relationship between the Australian Government and the private sector where private sector finance is used to fund an asset or infrastructure (whether or not ultimately owned by the Australian Government) that is used to deliver goods, services or other outputs for or on behalf of an agency. The assets or infrastructure may be used in conjunction with associated services, which may also be delivered by the private sector, to produce an output which contributes to the achievement of government defined outcomes.

11. The key feature distinguishing PPPs from traditional procurement is that the private sector, rather than the Australian Government, acquires the underlying asset or infrastructure, at least initially. In return, the Australian Government makes long-term commitments to pay for the resulting outputs.

12. When agencies are seeking funding for new policy proposals they are required to consider the range of financing and ownership options ranging from Australian Government construction and ownership through to a PPP arrangement.

13. The potential for a PPP procurement approach exists where there is opportunity for:

  1. long-term contracts (eg 15 to 30 years) involving asset based procurement, with a whole-of-life cost in excess of $100 million;
  2. risk transfer, including an optimal level of ownership and operational risk, including residual value risk between the parties;
  3. grouping of a range of individual service and asset provision contracts into a single long-term contractual arrangement; and
  4. implementing a performance based contract.

14. The ability for the private sector project to earn additional revenue, by selling excess capacity associated with the underlying infrastructure to third parties may also be an indicator of a PPP representing value for money.

15. Where an agency finds that a project is likely to have some or all of these characteristics, there is likely to be scope for best value for money using a PPP option. The project's procurement should be considered in accordance with the PPP Principles.

16. Debt issued under authorisation of the Treasurer is specifically excluded from the definition of a PPP.

17. In addition, pre-construction finance is not by itself regarded as a PPP. Pre-construction finance also includes arrangements whereby constructors invest, on their own account, in buildings, plant and equipment to be used in the production of assets for sale to the Commonwealth where there is no specific financial or risk contribution by the government.

18. Projects in the range of $20 million to $100 million can also be considered as PPPs. Where there is uncertainty about the application of the PPP Principles the PPP Unit in Finance should be consulted.

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Relationship with Other Australian Government Policies

A mature framework already exists in the Resource Management Framework

19. The Australian Government has an established procurement policy and resource management framework based on the principles of accountability, transparency and promotion of greater involvement of the private sector in the delivery of government outputs where it delivers better value for money. This has led to the establishment of numerous partnerships between agencies and private enterprises. The PPP Principles build on this established framework by outlining principles and processes for assessing whether agencies should be authorised to use a PPP arrangement in preference to alternative methods of procurement.

Existing policies impact on PPP arrangements

20. As with all forms of procurement, agencies considering using a PPP arrangement must also comply with other relevant legislative and policy requirements, including the:

Further information about legislative and policy requirements is at Appendix A.

21. The above legislation and policies provide, amongst other things, a framework for testing the delivery of government funded services against market benchmarks and explicitly require agencies to actively search out opportunities for increasing value for money for the Australian Government.

22. The objective of the PPP Principles is to supplement and not to change the existing policy framework in respect of private sector participation in the delivery of public services. For example the PPP Principles do not diminish a Chief Executive's responsibility to promote the efficient, effective and ethical use of Commonwealth resources, as defined in the Financial Management and Accountability Act 1997.

23. The PPP Principles add to and reinforce the need for special analysis and appropriate protection of the longer-term interest of the Australian Government, while reflecting the unique features of PPP arrangements.

24. The PPP Principles, which deal with how an output should be procured, do not displace existing policy and budget processes for deciding which outcomes are to be funded.

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Core Principles

Index

25. This section discusses the three core principles for assessing whether a PPP arrangement should be the preferred procurement method used: value for money; transparency; and accountability.

Recognising the need for specialised skills is important for successful development and assessment

26. While a PPP has the potential to deliver net benefits to the Australian Government, the arrangements often involve a more complex set of operational, management and financial risks than traditional approaches. Accordingly, the development and assessment stages of PPP proposals warrant more detailed and specialist analysis. Meeting this challenge will typically require the engagement of specialists in fields such as financial modelling, project financing, risk assessment and tax, to help determine the implications of available options for the relevant agency and the Australian Government as a whole.

Principle 1: Value for Money

Value for money is paramount

27. A core principle that underpins procurement activity, including PPPs, is value for money. In the context of assessing a PPP proposal, value for money is to be tested by comparing the outputs and costs of PPP proposals against a neutral benchmark, called the Public Sector Comparator (PSC), developed by the agency (and its advisers) in consultation with the PPP Unit. The PSC should reflect the most efficient public sector delivery option likely to be achieved for the relevant project.

The PSC should be best practice

28. The PSC may include the cost-effective use of outsourced service delivery and would be prepared on a risk-adjusted basis. An important consideration in this regard is the selection of an appropriate discount rate to compute the net present value of the payment streams under each option. It is also important to ensure consistency with the Commonwealth's Competitive Neutrality policy.

29. Value for money should be assessed on a whole-of-life and whole-of-government basis. Factors which add value to a PPP proposal include: innovation, risk transfer, improved asset utilisation, ownership and management synergies, and improved project management.

Innovation

The private sector's ability to provide innovative solutions to procurement is often a crucial driver in delivering net benefits to government. This innovation may derive from either a service related efficiency, or a unique asset configuration. Agencies will be encouraged to specify deliverables in terms of service outputs rather than on the basis of inputs.

Risk Transfer

The ability to transfer risk is one of the most powerful drivers of PPPs. Access to specialist expertise in the private sector can enable agencies to devolve or shift many key project risks to contracted parties. Allocation of the risks to the party best able to manage risks will usually result in the optimum business outcome.

Improved Asset Utilisation

A PPP arrangement may give the private operator scope to generate third party income (e.g. by leasing assets to third parties when not needed by government). This allows more efficient utilisation of economic assets and hence spreads fixed costs more effectively.

Ownership and Management Synergies

Frequently the ownership of an asset by the same entity that is responsible for the service delivery component of the output can provide significant benefits through synergies. This is often true of complex assets or large infrastructure projects, where management is best applied by parties which have some nexus with the design and construct phase.

Improved Project Management

A PPP arrangement could lead to improved project management, in terms of cost, time and operating efficiency of the end product.

30. Public interest considerations may also impact on the assessment of the value of certain PPP proposals.

Cost and Risk Issues

31. As discussed above, a common component of PPPs at the Australian Government level is the use of capital funds raised by the private sector to make an investment that will ultimately be used to deliver government outputs. The cost of raising capital is generally more expensive for the private sector than for the Australian Government. This is the case even where the Australian Government is, or will be, contractually obliged to pay a revenue stream to the private sector entity. This additional capital raising cost will be reflected in the price offered to the Australian Government.

32. PPP arrangements, through value for money improvements, may facilitate the early development of major infrastructure projects or the procurement of assets, however such initiatives need to be assessed to ensure there is no compromise to the government's overall fiscal strategy.

Analysis of risk is critical

33. Analysis of risk is critical to the value for money determination and is likely to be the deciding factor in many PPP proposals. Evidence of a beneficial risk transfer will be reflected in such factors as:

  1. little dependency on direct or implied Australian Government commitments other than the commercial obligation to pay the agreed price for services, capacity or other output delivered;
  2. asset ownership risks such as equipment suitability for purpose, normal maintenance costs and residual value are effectively passed to the private sector;
  3. the private operator has specialist skills and can be appropriately and equitably encouraged to apply those skills; and
  4. the Australian Government either does not bear or has little exposure to specific risks such as residual value and indemnification.

34. Some other considerations relevant to PPP proposals include:

  1. arrangements which involve little or no transfer of risk are unlikely to provide government with value for money given the relative costs of capital;
  2. risks should be allocated to the party best able to efficiently and effectively manage them at least cost;
  3. if Australian Government guarantees or indemnities are issued, the price should be reduced to reflect the risk assumed through those guarantees or indemnities (see Finance Circular 2003/02 issued by Finance); and
  4. scope should be retained for ongoing and post-implementation monitoring of PPP arrangements to ensure that intended outcomes and key performance indicators are being achieved.

35. An important issue in the whole-of-government assessment of PPP proposals is consideration of the potential implications for tax revenue flowing from the use of PPP arrangements. There is potential for the Australian Government to face hidden costs through revenue forgone resulting from the private sector using tax effective arrangements, and this should be accounted for in the final calculation of relative value for money at a whole-of-government level.

Defining Options

Managers should look to all competitive options

36. For each initiative, all reasonable and competitive procurement options should be scoped. Options involving a PPP arrangement should be assessed to identify those warranting full costing and assessment. Similarly, the best of the non-PPP options should be identified as the PSC for full costing and assessment. This more detailed analysis must include the full extent of whole-of-life acquisition and support costs, regardless of who provides the finance for the project.

37. As part of the process of considering the various options for procurement, agencies should:

  1. develop contract requirements that are clearly specified in flexible outcome and output terms, rather than detailed input specifications;
  2. ensure that service evaluation standards and key performance indicators are clear, achievable and objectively verifiable against delivery;
  3. be able to assess all of the risks, their proposed allocation in the contract framework (including any proposed financial security arrangements), and the consequential impact on the costs and achievement of the overall project objectives;
  4. consider the individual components of a PPP proposal on their own merits, to ensure the accurate assessment of the proposal and to highlight any cross-subsidisation that may not be apparent if the components are assessed collectively; and
  5. be aware that the assessment of the unbundled components comprising the output may indicate that better value is achieved if the Australian Government uses its ability to access cheaper finance to acquire the underlying asset(s).

38. Unbundling is unlikely to be appropriate where it would reduce or eliminate efficiency and/or operational synergies between the components or when it creates additional risk exposure for the Australian Government.

Principle 2: Transparency

39. Transparency and openness are important requirements of all government procurement. The use of PPPs should not diminish the availability of information to Parliament, taxpayers and other stakeholders on the use of government resources. Accordingly, agencies must ensure that appropriate mechanisms are in place to meet established reporting requirements, such as disclosure of information to the Joint Standing Committee on Public Works, which considers and reports on Commonwealth public works projects referred to it (refer to Appendix A).

Disclosure should not be reduced

40. Completed PPP contracts should be disclosed in an agency's annual report in accordance with the Finance Minister's Orders. Financial statements included in an agency's budget documentation should be prepared on a basis consistent with the annual report. PPP contracts may involve risks or possess other features to which provisions of the Charter of Budget Honesty Act 1998 [External Site] (‘Charter') apply. The Charter provides for this by requiring fiscal strategy to be based on principles of sound fiscal management and by facilitating public scrutiny of fiscal policy and performance.

41. PPP arrangements must have regard to the following:

  1. the financial reporting of proposals will need to comply with Australian Accounting Standards (in agency accounts) and Government Finance Statistics standards (in the general government sector accounts);
  2. any proposed classification of information or documents as ‘commercial-in-confidence' will need to be considered on a case by case basis. The principle of accountability suggests that contracting information should not be confidential unless there is a sound reason, informed by legal principles, for confidentiality. Any successful PPP proposal that contains commercial-in-confidence provisions is required to maintain appropriate scope for the Australian Government to disclose general contract information, consistent with the provisions of the Freedom of Information Act 1982 [External Site] and to meet agency accountability obligations. Agencies should refer to Guidance on Confidentiality of Contractors' Commercial Information (Financial Management Guidance No. 3) for specific criteria relating to confidential information. In accordance with the guide, confidentiality issues are to be satisfactorily resolved prior to contract closure;
  3. agencies must comply with the Senate order on the reporting of government agency contracts of 20 June 2001, in accordance with the terms outlined by the government; and
  4. the Auditor-General's authority to access documents, information and premises in accordance with the Auditor-General Act 1997 [External Site].

42. Further, agencies will need to comply with the Australian Government's mandatory reporting requirements for procurement as set out in Guidance on Procurement Publishing Obligations (Financial Management Guidance No. 15).

Principle 3: Accountability

43. Agencies are responsible for the delivery of their outputs including where PPPs are used to deliver those outputs. Agencies are not able to transfer accountability to a private sector entity, irrespective of the procurement method.

44. The potential for PPPs to alter traditional risk allocation also requires close attention to how existing accountability arrangements impact on the relationship between agencies and contractors.

45. Standard best practice clauses on audit access, security, privacy, and parliamentary access should be included in all PPP arrangements.

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Assessment Process

A Business Case should inform on all aspects of a proposal

46. Where PPP arrangements are tested against the principles in this document, and before any government approval can be sought, agencies must prepare a detailed Business Case. This analysis is required to be undertaken on a whole-of-government basis and take into account whole-of-life costing. In particular, the Business Case should:

  1. clearly identify where the risks and responsibilities lie, including the allocation of risks and costs between the Australian Government and other parties under the proposed contractual framework. This will require preliminary costing of the risks proposed to be borne by the Australian Government and the private provider and assessing them in view of the project objectives;
  2. assess the implications of the proposal for broader budget revenue and expenditure impacts from a whole-of-government perspective. This is particularly important for those proposals where access to private capital allows the agency to bring forward major capital expenditure;
  3. identify any tax implications, including any tax advantage that the private sector might access, and contain strategies for managing and/or accounting for this;
  4. include, for comparison purposes, a preliminary PSC (discussed above); and
  5. also consider other issues that may be material to an informed assessment of the proposal (eg intellectual property).

47. A schematic outlining the assessment process to be followed when considering the use of PPPs is at Appendix B.

48. An important role of the PPP Unit is to ensure that analysis of PPP proposals has adequately addressed the policy principles outlined in this document. Agencies are encouraged to work collaboratively with the PPP Unit and to contact the Unit when:

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Approval Process

49. Chief Executives have authority to approve PPP arrangements, where the asset replacement value does not exceed $20 million and the proposal complies with the PPP Principles. However, regardless of the $20 million threshold, proposals are to be submitted for the approval of the Minister for Finance and Administration where they have the potential to significantly limit or impact on an agency's future activity or the Government's fiscal position.

The Minister for Finance and Administration has power of approval

50. All PPP proposals involving assets with a replacement value in excess of $20 million must have been previously approved by the Minister for Finance and Deregulation. In addition, the government is to be consulted in relation to proposals exceeding $50 million. Both the $20 million and $50 million thresholds may be reviewed in the future.

51. The role of the PPP Unit includes overseeing, on behalf of Government, the application and development of the PPP Principles. The Unit will provide advice to Government and agencies on the use of PPP arrangements generally, and the assessment of specific proposals.

52. A key role of the Unit will be to advise on the relative value of a PPP arrangement as an alternative to traditional procurement, in order to choose between PPP and traditional procurement prior to any decision committing the government to a procurement method.

53. Agencies are encouraged to contact the PPP Unit at an early stage in the development of major PPP proposals to ensure a common understanding of options and business case requirements. The Unit will work collaboratively with agencies from the inception of a proposal to determine the prima facie suitability of a PPP.

54. A schematic outlining the process to be followed when considering the use of a PPP option is at Appendix B.

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Further Development

55. The PPP Principles are the first part of a body of documentation aimed at developing an Australian Government framework for considering the use of PPPs.

56. In issuing this document, the government has sought to maintain flexibility in applying best practice methodologies to the development and assessment of PPP proposals. Further guidance has been developed and issued by Finance. These will support the development of a thorough and enduring PPP policy framework commensurate with experience gained from the application of PPPs in the Australian context.

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Appendix A - Overview of the Commonwealth Resource Management Framework

Charter of Budget Honesty

The Charter of Budget Honesty Act 1998 [External Site] puts in place a legislative framework for the conduct and reporting of government fiscal policy. The purpose of the Act is to improve fiscal policy outcomes by requiring the government's fiscal strategy to be based on principles of sound fiscal management and by facilitating public scrutiny of fiscal policy and performance.

Financial Management and Accountability Act

The Financial Management and Accountability Act 1997 [External Site] sets out the financial management, accountability and audit obligations on agencies forming part of the general government sector, in particular:

Auditor-General Act

The Auditor-General Act 1997 [External Site] is a set of greatly streamlined requirements for Australia's Auditor-General, one of our principal assurances of accountability, and focuses on audit goals rather than processes. The aim is to promote unequivocal accountability in the output and outcomes based budgeting system and reporting and knowing the true cost of government. The Act creates the office of the Auditor-General for the Commonwealth and defines the powers and functions of that office to support its functional independence. To augment that functional and professional independence, the Act also establishes the Australian National Audit Office as a statutory authority to assist the Auditor-General in the performance of the audit task.

Freedom of Information Act

The basic purpose of the Freedom of Information Act 1982 [External Site] is to improve the quality of decision-making by government agencies in both policy and administrative matters by removing unnecessary secrecy surrounding the decision-making process, and to enable groups and individuals to be kept informed of the functioning of the decision-making process as it affects them and to know the kinds of criteria that will be applied by Australian Government agencies in making those decisions.

Chief Executive's Instructions

The Chief Executive Instructions are the means by which agencies set out their internal financial policies in accordance with the requirements of the Financial Management and Accountability Act 1997 [External Site]. The Chief Executive Instructions address a range of agency functions and provide clear directions for all staff.

Outcomes and Outputs Framework

All Australian Government agencies are required to report on the basis of an outcomes and outputs framework. The framework has two basic objectives: to improve agencies corporate governance and to enhance public accountability. The framework is best used both as a means of structuring corporate governance and management arrangements and reporting on planned and actual performance. Within the broad parameters of the framework, agencies and their ministers have considerable scope for adopting specific structures and arrangements that suit their circumstances and objectives.

Commonwealth Competitive Neutrality Policy

Commonwealth Competitive Neutrality policy requires that significant Australian Government business activities do not enjoy net competitive advantages over their private sector competitors simply by virtue of public sector ownership. Under the policy, competitive neutrality adjustments are made to the costs of a government business to ensure that relevant costs and margins that apply in the private sector also apply to the relevant Government business. The policy is based on the Competition Principles Agreement signed by the Commonwealth and all States and Territories in 1996.

National Competition Policy

In April 1995, all Australian governments reached agreement on a National Competition Policy for Australia. Related reforms in the electricity, gas, water and road transport industries also form part of the package. Reforms in these areas were agreed at meetings of the Council of Australian Governments and the Heads of Governments. For some areas of reform, agreements reached by inter-jurisdictional bodies such as Ministerial Councils are also relevant.

Public Works Policy Framework

The Department of Finance and Administration develops and co-ordinates policies related to public works undertaken by Australian Government agencies. This includes providing advice and support to the Minister on relevant issues, and representing the Australian Government on the Australian Procurement and Construction Council (APCC). The National Code of Practice for the Construction Industry and the Commonwealth Implementation Guidelines for the National Code of Practice for the Construction Industry provide the framework for the Public Works Policy.

Public Works Committee Act

The Public Works Committee Act 1969 [External Site] empowers the Joint Standing Committee on Public Works to inquire into and report to the Parliament on each public work referred to it, including works that are initially funded and constructed by others but are eventually transferred to the Commonwealth. Such transactions may be described as Build, Own, Operate, Transfer (BOOT) arrangements. The Act requires that all public works for the Commonwealth which are estimated to cost more than $15 million must be referred to the Committee. There are some exceptions to this rule, but essentially all public works sponsored by Australian Government authorities come within the ambit of the Committee's investigatory powers.

Competitive Tendering and Contracting

All Financial Management and Accountability Act agencies are required to systematically review the activities they undertake to identify whether an activity should be retained by the Australian Government, devolved to a more appropriate level of government, such as State/Territory Government or Local Government, privatised or discontinued. Where the decision is made to retain the activity or service, agencies are required to market test relevant activities or services.

Competitive Tendering and Contracting (CTC), enables agencies to explore alternative service delivery options. CTC, also referred as the market testing process, has become an integral part of the way Australian Government agencies manage their resources. Following market testing the agency must make a decision as to who is best suited to provide the service and what form of contract is most suitable for managing the service provision. Managers must be satisfied that any decisions they make represent value for money.

Commonwealth Procurement Guidelines

The Commonwealth Procurement Guidelines clarify what is required and expected in Australian Government procurement activity. They allow agencies to decide how best to handle their affairs, taking account of their own circumstances and the nature of the markets in which they are operating. The guidelines are intended to strike a balance between prescription and empowerment so as to encourage agencies to obtain the best value from procurement, on a whole-of-life basis.

Appendix B

Assessing PPP Arrangements

Copyright Notice

© Commonwealth of Australia 2006
This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. Requests and inquiries concerning reproduction and rights should be addressed to Commonwealth Copyright Administration, Attorney General’s Department, Robert Garran Offices, National Circuit, Barton ACT 2600 or posted at http://www.ag.gov.au/cca [External Site]

Contact for information on this page: Public Private Partnerships Unit

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Last Modified: 3 February, 2009