5. Developed Economies

5.1 Europe

The most common application of PPP in Europe is in the transport and urban water supply sectors where users are easily identified and revenue streams at least partly support the investments. It has been accepted that PPP is not suitable for meeting all of the infrastructure needs, but needs to be regarded as a flexible model that can be adjusted to suit project circumstances. The Governments involved have seen their role as a facilitator and enabler of the PPP projects, but investments in assets has been taken when the circumstances dictated and the national interest required. No information was found as to the application of PPP to water enhancement in the rural sector in the European experience.

5.2 Ireland

The Irish Republic has followed the European and British developments in supporting the concept of PPP as a matter of policy. The supporting material prepared as part of the Irish studies outlined the reasons for this support:

time to delivery savings;
capacity constraints in the economy, including labour skills and infrastructural deficit;
EU rules as to need to run state surpluses – the Maastricht criteria.

In the Irish situation, skill shortages in the local public and private sector were considered to be a main reason for accessing non-local skills via the PPP model. The Exchequer in Ireland has considerable scope to provide infrastructure from public funds, in contrast to the UK, so that the budget constraint imperatives for PPP adoption are not as strong.

Advice given to the Government in 1998 was to proceed carefully with pilot applications of PPP, in circumstances that indicated lowest ex-ante risks. The Government developed its PPP policy in 2000 – well after Britain and Victoria. A detailed description of the Irish PPP policy is available, but in general terms it mirrors the UK and Victorian material.⁷

One aspect of the approach taken by Ireland, was that the PPP policy and timeframe was influenced by the specific circumstances of the economy and the advantages of the experiences in the UK and elsewhere.

5.3 United Kingdom

As at 1998, there were some 300 ongoing PPP projects in the UK, covering service and asset provision in the health, education, transport and water supply sectors. It is likely that this number would have increased considerably in the interim period. The investments by the private sector was $45 billion in 1998 with a further $30 billion in the pipeline. No projects in the rural water sector have been identified in the UK.

There are clear differences between the NZ situation and that of the UK, not the least of which is the size of the market. As well, the UK experience with PPP is probably greater than in any other country. Consequently, there is a mature PPP industry, to the extent that UK water companies and consultants have exported their experience in the form of PPP offerings and associated consultancy services.

The recent conference on PPP in Auckland⁸ has highlighted several developments from the UK experience that reflect increasing sophistication in handling PPP activities:

early interest from the private sector in PPP was below Government requirements, and did not accelerate until a special PPP task force was set up in Treasury in 1995, involving private sector expertise, and providing a single focus for PPP initiatives;
effectiveness was improved with the development of standard set of contracts, which considerably reduced the transaction costs associated with pre-1995 PPP projects; and
the Treasury task force has since developed further into the PUK⁹ organisation, a stand-alone commercial enterprise.

5.4 USA and Canada

The utilisation of PPP models in the USA is more limited in comparison with the European activity. The most common funding model used for infrastructure development in the USA is by way of bond issues from stakeholder partners.

A recent development in the USA and Canada has been the establishment of a Water Partnership Council (WPC), consisting of large water development companies. This has developed to assist with meeting the needs of the water and waste water sectors for costly refurbishment¹⁰. One company – USFilter – claims to have 329 PPP systems in operation as at 2002 with increasing interest, and a further claim that the number of PPPs managed by Council members in the USA could be in the thousands.

Experience in the USA shows up problems when Federal taxation law and State regulations are not favourable to aspects of PPP implementation, and one objective of the WPC is to seek rationalisation of the legislative and regulatory environment. PPPs have therefore developed without over-arching policies designed to facilitate the model application.

5.5 Australia

The birthplace of PPPs in Australia was in Victoria, which followed closely both variants of the UK model for PPP. Investigations within the professional community in Australia showed that the Victorian experience was most relevant to this study.

5.5.1 IIPV Model

In 1994 the Department of Treasury in the State Government of Victoria issued the Infrastructure Investment Policy (IIPV)¹¹ for Victoria, which contains the following Objectives and Guiding Principles:

Objectives

In seeking private investment in the provision of infrastructure and related facilities, the Government aims to:

procure assets, goods and services in the most efficient, cost-effective and timely manner;
take advantage of new technologies and innovation, private sector management skills and a wide range of financing techniques;
promote the growth of new and existing Victorian businesses and employment; and
strengthen the State’s economy, producing social, cultural or other quality of life benefits.

Guiding Principles

In seeking private sector investment, the Government intends to:

give private participants the scope to exercise flexible management processes, to display innovation and to be rewarded accordingly, within a competitive environment as far as possible;
allocate risk to those parties which the Government considers best positioned to assess and manage it;¹²
maintain its flexibility to respond to changing circumstances by avoiding long-term inflexible undertakings;
encourage forms of private sector involvement which can result in lower costs to Government, taking into account the risks transferred from the Government and other benefits and costs associated with private sector participation; and
secure private sector participation through the application of competitive bidding wherever possible.

The Government undertook to promote private sector investment in the provision of infrastructure only where such involvement will clearly provide the most effective solution for the State.

Forms of Infrastructure Investment

When formulated, the Government policy applied to service provision that was considered to be clearly Public Good and a responsibility of Government – i.e. core public good services such as:

operating and management contracts for hospitals, maintenance of Government assets;
turnkey project delivery for State roads;
BOT, BOO and BOOT¹³ projects for hospitals, port facilities, prisons, toll roads, water treatment facilities, sewerage, drainage (user-pay projects);
privatisation within industries such as energy, health, water and sewerage.

The IIPV policy documents issued at the time included information as to responsibilities within Government for actions and approvals, the project management process, taxation, IP ownership, and contract contents in general terms.

The Victorian experience under IIPV was mixed, with successes and failures. One area of failure was business collapse on the part of the private sector partner, and the need to ensure "step-in" rights for Government.

A clear issue that developed in the implementation phase of some IIPV projects was the problems encountered when the private sector dealt directly with consumers in the provision of services – patients, prisoners, water consumers and so on. The failure of some initiatives and the unpopularity of the direct private sector-consumer relationship created a political climate for change.

5.5.2 PV model

Following a change of Government, the IIPV policy platform was re-visited and a comprehensive review of public private sector partnerships in the international context was undertaken. This resulted in a new policy – Partnerships Victoria (PV) – launched in June 2000.¹⁴

The PV material is a detailed description of the policy, its justification and the procedures and detailed processes to be followed.

The Policy

The PV policy provides a framework for integrating private investment into public infrastructure. In common with the earlier IIPV, it focuses on whole-of-life costing of infrastructure and related services, with full consideration of benefits of transferring risk to the private party.

PV is primarily related to provision of services that are clearly the domain of Government. The prime consideration is to identify the project delivery mechanism that provides best value for money in meeting Government objectives.

Procedures – Implementation of Policy

PV contains some clear differences to IIPV. The first and most fundamental is the concept that government itself should retain direct control of certain core public service for which it has a particular responsibility to service recipients and the community.

The second difference is the use of a Public Sector Comparator (PSC)¹⁵ so that the cost of Government provision of services can be objectively compared to private bids. Development of the PSC requires a rigorous procedure to compute the value (cost) of risk allocated to each party.

The third initiative in PV is a public interest test to ensure that criteria in regard to probity, transparency and other matters are met. This test is designed to protect the interest of the wider community and affected third parties.

It is clear that the current PV aims to exploit the potential advantages of private participation in public-good infrastructure projects and related services, as well as to avoid the problems experienced with IIPV projects.

The full set of Guidance Material for PV is available from the web: www.partnerships.vic.gov.au, and hard copies are to accompany this report. No further details are given in this report.

It is noted that the process of risk identification, allocation and the estimation of the costs of risk, is a valuable contribution to any party involved in large infrastructure projects – regardless of the form of project delivery.

The PPP Conference held in Auckland in August 2002, reported on a changing approach to PPP arrangements in the Australian context. It is now recognised that there are unforeseen risks that cannot be handled effectively under PPP contracts or by insurance instruments. This recognition is changing the PPP paradigm from one that includes a clear split between public and private partners under contracts, to more of a true "partnership" within a special entity set up to execute the PPP activity.

The Deakin Project

One of the drivers for the visit to Victoria was to assess developments in the proposed Deakin Irrigation Project in the Sunraysia areas of Victoria. The Government of Victoria (GV) has invested considerable resources in preparing this area for a PV scheme to deliver Murray River water to new lands adjacent to the areas covered under two existing Water Authorities – First Mildura Irrigation Trust and the Sunraysia Water Authority. The GV has financed detailed feasibility studies and project delivery investigations, and supported developments through the efforts of local and Melbourne-based DNRE staff. Investment of at least A$2 million to date has been involved with more to come.

Observations as to the difficulties observed in the Deakin Project are as follows:

there is confusion created by the activities of the officials and this has pre-disposed the local players to be cautious about PV.
water trading activities has encouraged private developers to take up new land development – the so-called "bypass risk".
The private developments have resulted in sub-optimal resource use and have the potential to introduce environmental negatives that are difficult to manage.
Local community representatives on the two water authorities are threatened by the Deakin proposals, in terms of their own positions and the situation of their farmer members.

It was expected that the Deakin Project under PV would provide valuable lessons for the applicability of PPP in the rural sector of New Zealand. What it showed was that the application of PV in a rural community is less easy than say for an urban water supply development, and the Government of Victoria is still struggling to resolve the issues. Some direct Government intervention is being contemplated:

to create a more receptive local climate for PPP, provision of assistance to address deferred maintenance in the existing water authority areas; and
the possibility of the Government acting as guarantor for services not taken up by farmers in the early stages.

7 Department of Environment and Local Government, A Policy Framework for PPP, PriceWaterhouseCoopers, April 2000.

^{8 Conference on PPP, Auckland
27-28 August, 2002
9 Partnerships United Kingdom
10 The US Environment Protection Agency
estimates that an investment of $150 billion over the next 20 years to
rehabilitate older water and waste water systems in the USA.
11 State Government of Victoria, Department
of Treasury, Infrastructure Investment Policy for Victoria,, June 1994.
12 The PV documentation provides a
comprehensive description of project risks applicable to one or other party in
the following categories: (i) site: (ii) design, construction and commissioning;
(iii) sponsor and financial; (iv) operating; (v) market; (vi) network and
interface; (vii) industrial relations; (viii) legislation and government
relations; (ix) force majeure; (x) and asset ownership.
13 BOT refers to build-operate transfer, BOO
to build-own-operate, and BOOT to build-own-operate-transfer.

14 State Government of Victoria, Department
of Treasury and Finance, Partnership Victoria Guidance Material, 4 volumes:
Vol.1, Overview, Vol.2, Practitioners' Guide, Vol.3, Risk Allocation and
Contractural Issues, Vol.4, Public Sector Comparator - Technical Note, June
2001.

15 The PSC estimates the hypothetical
risk-adjusted cost if a project were to be financed, owned and implemented by
government. It is based on the most efficient form of government delivery. PSC
is comprised of base cost + transferable risk cost + retained risk cost.

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