Panel discussion | Do PPPs need a rebrand?

► Jason Loos, Deputy Secretary, Victorian Department of Treasury and Finance ► Sonya Campbell, Deputy Secretary Commercial, New South Wales Treasury ► Malcolm Macintyre, Managing Director, Capella Capital ► Iain Melhuish, Executive Director, Head of Debt Capital Markets ANZ, Macquarie Capital

► Kim Curtain, Partner, Deloitte

Kim Curtain (KC): Thanks to the panel for joining us. Our topic, Do PPPs need a rebrand?, is definitely an appropriate topic for a Partnerships conference. I still have conversations with people who say, ‘Oh, Public Private Partnerships are too expensive,’ and even if the people in this room understand, there are a lot of people out there who have a very basic understanding of Public Private Partnerships, so I am really keen to explore this topic. To kick off, in the past we’ve recast privatisations as asset recycling and long-term leases, so is it time, do you think, for a rebrand of Public Private Partnerships?

Jason Loos (JL): I’m going to start by saying I don’t think that’s the right question, and I’ll say why. There is $18 billion of infrastructure that Victoria is getting out the door, and New South Wales is doing exactly the same. We’ve got a whole lot of delivery models, alliances, dual target out-turn cost, single target out-turn cost, engineering procurement and construction management contracts, design and construct (D&C), collaborative design and constructs – you name it! Every one of you will have a different definition of what a particular risk allocation is and you call it a name. There’s only one delivery model that involves private finance, and that brings debt and equity as an active player in the delivery of public infrastructure, and that’s the Public Private Partnership model.

So, I think all models play a role and it really gets back to the characteristics of the projects. We’ve been saying this for a very long time. The messages are exactly the same. You’ve got to look at the risk allocation and the characteristics of the projects, break the projects up into sections that make sense, and apply the right procurement model.

So, what’s changed? The environment has changed in terms of where we’re delivering projects. We no longer have A-teams on every project because we’ve got mega projects across the eastern seaboard, in particular. So, it’s about getting the right skills, the right culture, the right people and the right project managers in. That’s really what the discussion needs to be. There’s always private debt and equity that wants to invest in our projects. That’s not the challenge, either. The challenge is when it comes to public infrastructure, how do governments pay? Someone has to pay. So, super funds want to invest, absolutely, but they also want a return. Someone has to pay that return, and that’s the challenge of the funding versus financing debate. Again, it’s been a very similar theme for 20 years, but the scale of the projects has got so much greater now, and more complicated.

So, it’s really a question about risk allocation and how do we change. And we have changed. Look at projects like North East Link, where we’ve changed the way we’ve gone about that project, with an incentivised targeted cost embedded in a Public Private Partnerships. That’s an acknowledgement that with the way we run tenders for big tunnel contracts, you can no longer put out a tender for 16 weeks and get a fixed price. So, there are learnings we’ve taken and things we’ve had to change.

KC: We’ll let Sonya give the Government view, then we’ll give Iain and Malcolm their right to reply.

Sonya Campbell (SC): Thanks, Kim. So, not surprisingly, I’m with Jason. I don’t think it needs a rebrand, but I do think it needs redefinition because it has evolved. The Public Private Partnership model has evolved. Jason’s right, there is a place for all sorts of different delivery models; it’s about picking the right project. With the Public Private Partnership model, it’s about being able to advocate for the benefit of what private finance brings to that project, and we can do a better job of that. The typical criticisms have been around the inflexibility of the model. And Jason’s right, we have responded to the feedback from the market that we can’t necessarily have a ‘price unknown’ scope. However, the model has the flexibility for dealing with that and we are doing that at the moment, so that’s not a reason to avoid the model.

And then we have to talk about the value that the private sector brings. Government doesn’t have all of the capability. There is a certain set of projects where we do have that capability, and we can and do deliver. So, where does the private sector value come from, and how do we educate and articulate that so people understand the benefits of the Public Private Partnership model.

Malcolm Macintyre (MM): I am agreeing with everything that’s been said. I like the way this session was introduced; it’s really private capital. I think that today, Public Private Partnership refers to a narrower subset of the use of private capital, there’s a range of other procurements and projects out there that have private capital in there with state procurements. They’re not called Public Private Partnerships and they reflect an evolution of the model. Renewable energy zones and housing are examples of that at the moment. Sometimes the discussion about the Public Private Partnership rebrand is

caught too narrowly in the challenges faced in the construction phase. These projects are not delivered just to transfer the risk that arises in the construction phase; they’re procured in this way to drive innovation and whole-of-life costs. Rather than ‘risk transfer’, maybe a better term today is ‘risk management’. Understanding risk is less about binary risk and winner takes all, and much more about actually working together collaboratively on risk. The incentivised target cost (ITC) on North East Link is a great example of that. The other thing is that, as an industry, I don’t think we do a very good job of marketing those other elements and projects that run 99.9 per cent on time – projects like North East Link, and Sydney Light Rail, which is only just behind Sydney Ferries, but obviously everyone loves getting the ferry.

I remember, many years ago, taking a touring group from Canada around New South Wales schools. You think of schools as a very simple Public Private Partnership. I remember the lady from Canada asked the head mistress, ‘What does the Public Private Partnership mean for you?’ She said, ‘Well, it means my staff and I have actually been able to get back to teaching. We’re not dealing with facilities management issues through the school. If something goes wrong, we dial the 1800 number and it’s fixed within 30 minutes or we know somebody incurs a penalty.’ Those are the real advantages the Public Private Partnership actually delivers.

In the analysis that Infrastructure Partnerships Australia did a couple of years ago on operational Public Private Partnerships, 95 per cent of people said the contracts were delivering the performance that was sought over time, and 95 per cent of people said they’d rather work in a facility that was procured as a Public Private Partnership than a traditional government-run facility. So, there’s some fabulous stories there, which do a very good job of selling the model.

Iain Melhuish (IM): Part of the issue is we always look backwards from projects that perhaps have not gone well and, when it comes to model selection, we wonder whether projects should go down this path. What is the right risk allocation? To Jason’s point, and when you look backwards, it may not always have been the right choice, but when we’re going into them, I think that there’s always the best of intentions. If the Public Private Partnerships model is selected, we shouldn’t be harsh on ourselves once we’ve actually worked through it and decided it wasn’t the right project. We’re not always going to get that right, but it still is a valuable tool for the reasons the rest of the panel have gone through.

KC: Sonya, what do you think is the next iteration of the Public Private Partnership model. I know Jason’s talked through some of the things that we’re doing differently already. What do you see as a Public Private Partnership in the modern day?

SC: It’s a good question because we’ve seen an evolution of different variations of the model from those early schools projects Malcolm was talking about, where it was quite a simple scope and a defined service delivery. Yet, even with those projects, we’ve learnt over time that when we want to augment those schools and we don’t have the flexibility built into the long-term contract, it becomes problematic. So, we need to respond to where the model needs flexibility to continue to deliver high-quality services over time. We need to look at the capability that does sit with Government to do it, rather than looking for capability in the public sector. The way that Government funding works is that we put the capital in and deliver an infrastructure project, but we haven’t actually thought about the service delivery and the recurrent funding required to deliver a high-quality service over time. That’s one of the key benefits the Public Private Partnership model brings. Additionally, there’s a whole lot of opportunity in the regulated asset base and how we integrate it within the Public Private Partnership model. We’re moving towards renewable energy assets, where you can have a pricing regulator that gives a lot more certainty in when you do need to upgrade the asset or adjust to changes in cost due to different market conditions. That’s something we’re certainly interested in, particularly as we have an enormous task ahead of us in the transition to renewable energy.

KC: And the technology and methodologies are changing so fast now.

SC: We’ve come a long way from the early Public Private Partnerships, where that technical obsolescence concept was something we all struggled with, and the private sector said, ‘Well, we can’t take the risk for what the technology might be in 20 years.’ So, the model needs to find a way to address that.

KC: Jason, anything to add?

JL: Oh, I definitely think the whole-of-life aspect is the key differentiator between the different models. I bring it back to simple things; there’s absolutely room in the infrastructure pipeline for a single-source alliance where risks are very tricky to identify and allocate. We’re better off having the one contractor in the room with us working up the solution, and trying to get it as efficient and as effective as possible, but that’s not the case across the board. There are times when you want the discipline of an independent financier questioning a D&C contractor with the maintainer in the room, and going through that process with a view on how the asset will perform over 25 years. You’re just not going to get that discussion and trade-off in those other models, and it’s not because the model’s right or wrong. So, it gets back to the characteristics of the project and you want that type of discipline conversation trade-off to actually happen.

It gets back to your project selection, so Infrastructure Australia and Infrastructure Victoria priorities have to happen.

But then how do you deliver those projects most effectively? That needs to be a very fulsome discussion. It’s very easy now, with the range of procurement models, for a delivery agency to pick the one that’s really quick. We’re a big fan, at the Victorian Treasury, of the early works package because that allows you to do some things that actually de-risk the main game, and that makes sense to me.

KC: Iain, a traditional part of Public Private Partnerships has been a very sharp pencil and a fixed price. The market and the world is a bit different now than it was 20 years ago. How do you deal with that?

IM: It’s different from three years ago, actually.

KC: True. How do you deal with that now?

IM: It’s a really good question – a really difficult question. There’s obviously still a lot of inertia around the view that we should be going all towards fixed-price contracts. We should be focusing on making sure we understand all of the risks, and then we allocate those risks efficiently; however, as the market has shown us, this is not always the most efficient way to allocate those risks. And so, people are taking different approaches. The market today is not what it was three years ago, and it wasn’t what it was 20 years ago. Three years from now it’ll be different again. So, it’s making sure we’re always flexible, because the fixed prices we’ve all seen are all fixed priced until they’re not fixed price, and then if you’ve got a contract on the other side that is in difficulty or having problems, it’s not a fixed-price contract anymore.

MM: I think the Public Private Partnership model does have a reputation for needing a sharp price, but in more recent years, the discussion’s been much more about value for money. What are you actually delivering? My experience more recently is it’s not necessarily the cheapest price that wins. So, there’s price and there’s value, and I think the discussion is perhaps more about value. Notwithstanding that, I think we’ve obviously had a long period with inflation of two to three per cent and escalation not being much different to that, but obviously we’re in a very different world today. I think there’s benefit within the Public Private Partnership model of still having tension on the price, because it’s not just about the price, it’s about how you design to mitigate it. What are the replacement alternatives for particular products? Ultimately, what we’re seeing is Government responding with, ‘Well, we need mechanisms to deal with uncertain risk.’

If you look at North East Link, it’s a seven-year construction period. Taking that risk and putting a price on that is uneconomic. So, under theITCregime, the risk of significant escalation is sort of dealt with. It doesn’t mean all risk is passed back to the state – it is still a risk that needs to be managed between the public and private sectors. So, I think there is a sensible conversation that’s happening, and I think it’s part of that broader discussion around these big, complex mega projects. Coming back to the opening question about whether Public Private Partnerships need a rebrand, it’s often the more complex and bigger projects that get done as Public Private Partnerships, and therefore, by definition, they’re more challenging. If you come back to looking at those very large projects, it’s about coming up with risk-sharing mechanisms that are less binary in outcome and align the parties to work collaboratively together to solve issues that are inevitably going to arise.

KC: A few of you mentioned thinking about the whole-of-life cost and the risks across the entire project. Do you think we’ve got the balance and the way projects are assessed right to consider not just the upfront capital cost, but lifecycle costs, services, outcomes and innovation? Maybe we’ll go to Jason first.

JL: That’s an interesting question, Kim. How does any government run their budget? It comes from service delivery. So, if you’re the health minister and the secretary of health, you look at where the system’s demand pressure is, build up a case for that, and then come with a capital solution to fix it. That’s where the team of treasury people spend a lot of time trying to influence what the analysis should be in terms of the upfront. Does it make sense to be a Public Private Parthership? Should it be something different? You really need a bit of time before any announcement is made and any timeline is set by the Government to actually do that analysis. Are the trade-offs here important for whole of life? There’s no one answer for that.

SC: Look, historically there probably has been an imbalance. I’ve worked in multiple Public Private Parthership bids over my career and now I’m seeing it from the Government’s side.There’s always been that focus on the D&C, and the price and the risk, because that’s where a majority of the risk is. In my experience, you’re sometimes dragging the operator and maintainer to the table to really get that best whole-of-life outcome. Equally on the Government side, we’ve been on a journey now for a few years to really increase our asset management capability within government. That’s the thing that the private sector, the equity and the sponsors have always offered from a Public Private Parthership perspective; they are looking at the asset from a whole-of-life perspective. I think part of the challenge for us in Government is how we evaluate that. I’ve certainly seen a shift in procurements that I’ve been involved in more recently that as Government we are thinking about this as a long-term partnership. So, who do we want to partner with? Yes, we need some certainty around delivery, and where’s the innovation, and a lot of the sustainability criteria that we’re now introducing, but at the end of the day, it is a long-term service delivery, and do we have confidence in the quality of that service delivery? So, I do think that is definitely the benefit of the Public Private Partnership model, as Malcolm was saying, and I think we are definitely maturing in that way.

IM: How you balance that with the long-term partnership, obviously with the points discussed earlier around the need for flexibility and contracts that need to change, and perhaps some of these projects should be shorter. They should be able to bring those back to Government management earlier to drive some of that innovation, and drive better risk allocation than the 25- or 30-year projects.

SC: Yes, and the flexibility for dealing with changes in technology and innovation from an operational perspective.

KC: That’s interesting. I wonder how much of the long-term contract term is an assumption of Government that that’s what the private sector wants. Maybe it’s not as big an issue as some think it is. I don’t know. Malcolm, what do you think?

MM: There have been examples, such as Darling Harbour, which has an operating phase in there that is subject to reset. So, I think anything’s possible with a Public Private Partnership. I was at a luncheon recently with Jason where you gave the example of the reference design that you put in for. Do you want to take it from there Jason?

JL: After the 37 Public Private Partnerships that we’ve done, I always look back at the business case design that we funded the project on. It was based on a more traditional style of delivery agency: going out and getting a designer to come up with a solution for the need they’re trying to fix. And then I look at things after we run the Public Private Parthership, and I look at what we actually ended up going with in terms of the winning consortium and what got actually delivered on the ground. It’s chalk and cheese. You talk about innovation and different ways of thinking. Carbon reduction was the big theme of today. I guarantee you that if we set that competition right in the Public Private Parthership, we’ll get some pretty good responses to how to reduce the carbon footprint at the infrastructure level, and at the ongoing whole-of-life level. I mean, time will tell, but I’m not saying this is the only delivery model. I’m the first one to say you’ve got to look at the project and pick it right. So, we work on all projects. We’ve become experts in alliances, as well.

SC: Part of that transitional shift is this perception that as a Public Private Partnership, you had to fix the scope and you had to have all this certainty. The improvement we should be making is more outcomes focused and not actually specifying, so that we do allow the market to innovate. To Jason’s point, what we assumed in the business case might not be what we buy, and it might not be what we get, but we need to allow that flexibility to meet those performance outcomes. This allows us, in Government, to do a better job of being able to articulate those, so that the market knows what to expect and where to apply that innovation.

JL: The other one I’ll just mention is that we talk about value capture a lot. If we set the brief in a particular way and allow for a set of commercial opportunities within the delivery of the core infrastructure, that’s the way to offset the cost to the Government, and bring value capture through the process. Value capture is a very hard concept; it’s very hard for governments to go and actually implement. We’re seeing that in the precinct work that we are doing on a number of projects at the moment. It’s very tricky. So, you need to contain it to a particular project outcome and give the market the opportunity to come up with the innovation. We’ve got to be specific in terms of a master plan, and strategically what we want a precinct to actually look like. We need to have that clear; but then once you do that, you let the market come up with the good ideas and offset the cost.

MM: Not too clear, hopefully?

JL: Not too clear, but at a very high level you need to know what you want done in a particular precinct and what the themes need to be, so you can guide a little bit of that.

KC: A final question so you can all wrap up on a more positive note: What could we be doing better to really get the benefits of the Public Private Partnerships out there to balance out where people are perceiving challenges?

MM: I think discussions like this are helpful. I think the work Infrastructure Partnerships Australia has done – putting material out that actually provides data that supports how successful the approach is – has been great. I think, as an industry, we recognise that it’s only one procurement model, but it’s a pretty good one when it works well, and I think it does work well. Another project I was thinking about was Reliance Rail. It was a project that had real difficulties during the delivery phase, and that train today is one of the most reliable trains in the world. It’s because of the work that was done during the delivery phase up front and the contract ongoing. I think there are fabulous examples out there; we’ve just got to elevate them in the conversation.

SC: Yes, even just on the Reliance Rail point, recently the refinancing is green based. Those are still good stories and we don’t talk about that at all.

IM: It’s a very good point, because these projects and assets are actually doing some of the most important things in our lives. Our children are born in these hospitals. This is how we get to work safely. Our children are taught in these projects. These are the really important things in all of our lives that actually happen, and these are delivered through this method and they’re delivered in a really fantastic way.

There does need to be more of a conversation around the fact that they are such an important part of our lives and there is a lot of value that’s delivered through them.

KC: Any final words, Jason?

JL: I think the discussion throughout the whole day today has been very topical. In terms of Public Private Partnerships, I think there’s opportunity to talk about them a bit more simply. Malcolm’s point is right; in Victoria, the big tunnel projects are Public Private Partnerships. They run into some problems and they get branded in a particular way, but there’s a lot of good things that have happened in a lot of the social infrastructure projects, as well. So, I think we need to continue to innovate in that social infrastructure space and get the risk allocation in some of the more trickier transport-type projects. But there’s a place for all different procurement models. That’s my big message.

MM: I’ve got one more that is slightly off-piece, but we talked this morning about the huge infrastructure requirement we have – this massive pool of savings – and I think there’s a problem at the moment in actually marrying those two things in Australia. We speak regularly to superannuation investors who talk about the Public Private Partnerships as being too small or just too difficult, generally. And I’m not necessarily advocating for change there, but one area where I think there is an opportunity is we sometimes see the Commonwealth, in particular, throwing money at a lot of the projects that get delivered – grant money, in particular. Whether there’s another way to actually harness super money locally in these projects, and whether it guarantees credit enhancement, I don’t know, but actually looking is of value. I think the risk is that some of that federal money replaces money that would otherwise come from local investors, and there’s a lot of brain power in the room thinking about how we can make that linkage more strong between those investors and the projects we’re all delivering.

KC: Thank you, Iain, Sonya, Jason and Malcolm for joining us.

Sonya Campbell is the Deputy Secretary, Commercial, at the New South Wales Treasury. Prior to this role, Campbell was the Executive Director and Head of the Infrastructure and Structured Finance Unit at New South Wales Treasury. Campbell joined New South Wales Treasury in September 2018 following an extensive career in the private sector, specialising in Public Private Partherships and major project procurement.

Campbell joined the New South Wales Government with a passion for improving the efficiency of infrastructure procurement and delivery. She is a member of the Infrastructure and Project Financing Agency Australia Branch Council, the New South Wales Construction Leadership Group (CLG) and the Construction Industry Leadership Forum. Campbell is at the forefront of work being done by the CLG to implement a program of specific measures to improve collaboration and risk allocation across the construction sector.

Campbell has worked on projects across multiple sectors, jurisdictions and contract models (including roads, rail, tunnels, hospitals, schools, telco, water and energy projects), and has advised both Government and the private sector on commercial and financial structuring, governance, and risk management on complex infrastructure projects for the past 20 years.

A commercial and finance professional with more than 25 years of experience across both public and private sectors, Kim Curtain is a Partner in the Deloitte Infrastructure and Capital Projects team. She is passionate about the public and private sectors working effectively together, with a particular interest in social infrastructure and human services.

During her time at New South Wales Treasury, Curtain held a number of roles, including Chief Operating Officer, responsible for legal, finance, IT, HR, communications and banking. Curtain was also Deputy Secretary of Trade, Tourism, Investment and Precincts, where she led the implementation of the Global NSW strategy and $250-million Jobs Plus investment program in New South Wales. Curtain also led the Infrastructure and Structured Finance Unit, where she was responsible for providing specialist advice to agencies and Government on the procurement and delivery of New South Wales’s $89.7-billion infrastructure agenda. Having worked in both the public and private sectors, Curtain is passionate about maximising efficiency and outcomes, while balancing risk and financial impact.

Jason Loos is Deputy Secretary, Victorian Department of Treasury and Finance, where he is responsible for providing strategic commercial, financial and risk management advice to the Victorian Government. Activities include managing the state’s balance sheet, prudential supervision of the public financial corporations, Public Private Partnerships, infrastructure procurement and investment, commercial and property transactions, and the monitoring and governance of the state’s major Government Business Enterprises.

Prior to this role, Loos was Executive Director Infrastructure Delivery (Partnerships Victoria) where he was responsible for providing strategic commercial, financial and structuring advice to the Victorian Government on major infrastructure projects. Loos has been with the Department of Treasury and Finance for 20 years.

Malcolm Macintyre is Managing Director of Capella Capital, one of Australia’s leading infrastructure developers and financiers, having financed over $20 billion of projects over the past 10 years. Macintyre brings nearly 30 years’ experience in infrastructure development in both Australia and North America. Recent projects that he has led or been heavily involved with include the Melbourne Metro Tunnel and Stations Public Private Parthership, Sydney Light Rail, Public Private Parthership and the Sydney International Convention Centre.

Macintyre manages a team of approximately 50 infrastructure professionals delivering progress in communities across Australia. Prior to joining Capella Capital four years ago, he headed Babcock & Brown’s North American Transport and Social Infrastructure Group in New York. Previously, he was Local Managing Director in ABN AMRO’s highly regarded Infrastructure Capital Group in Sydney, where he was a member of the team for 12 years.

Iain Melhuish was appointed Executive Director and Head of Debit Capital Markets, Australia and New Zealand at Macquarie Group in July 2019. Iain started his career with Macquarie Group in February 2001 and has previously served as a Division Director.

Western Sydney University (WSU) is continuing to deliver on its large-scale transformative program, Western Growth, to revitalise its campus network. A number of key accomplishments have been achieved this year. The first was the practical completion of the new Parramatta Engineering Innovation Hub (EIH), on Hassall St in Parramatta. Delivered with a core focus on the streams of engineering, architecture and entrepreneurship, the building is designed to enhance public engagement with work and university life whilst responding positively to its heritage and commercial context. EIH was also announced the winner of the Innovation Development Award for the Urban Taskforce Australia Development Excellence Awards for 2022. Practical completion has also been reached for Stage 1 of the Westmead Innovation Quarter (WiQ), located directly opposite Westmead Hospital in the heart of the Westmead Health Precinct. WiQ stands as a tangible reflection of positive collaboration and innovation, where strong links between the Precinct and complementary commercial partners result in stronger and healthier communities, economies and environments across several floors of commercial and education space. WiQ features retail, childcare, and end-of-trip facilities, as well as private roof terraces. “The University is extremely proud of the achievements that they have reached this year.” says Peter Pickering, Vice-President (Finance and Resources) at WSU. “In addition to this, we are also on track to deliver on the new Bankstown City Campus at the end of this year, which will provide approximately $140m per year in economic uplift to the Bankstown community. It will be home to over 10,000 students, and 1,000 staff across the health, aging and healthy living, advanced manufacturing and education disciplines.” says Pickering. This year, WSU has been placed 1st overall worldwide and 1st in Australia for its social, ecological and economic impact in the latest Times Higher Education (THE) University Impact Rankings. The prestigious annual rankings assess universities on their commitment to the United Nations’ Sustainable Development Goals. The rankings are based on universities’ teaching, research, outreach and stewardship. Also contributing to the ranking success is the University’s decadal strategy, Sustainability and Resilience 2030, which sets out an ambitious roadmap to address climate adaptation and mitigation, and social inequality.“The University is on track with our ‘Race to Zero’ commitment of becoming Climate Neutral by 2023, and Climate Positive by 2029. The Office of Estate and Commercial’s Environmental Sustainability team is engaging with our partners across the University to drive further commitment to action.” says Pickering. Supporting initiatives also include rooftop solar generation, planning towards solar carparks and installation of electric vehicle charging stations.

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