WHAT’S NEXT FOR PRIVATE FINANCING OF GREENFIELD INFRASTRUCTURE Justin Bailey | Regional Managing Director (APAC), John Laing Andy Haining | Investment Director, John Laing
Until recently, a $1 billion greenfield infrastructure project was considered a “mega-deal”. Now $1 billion is seen as a “modest” sized project, with many early works or secondary packages associated with major projects being much larger than that. Construction cost escalation can explain some of the change, with annual cost increases running well ahead of CPI, but another reason is the number of once in a generation transport projects which the States and Territories are procuring.
• for communities, private finance can allow development of economic infrastructure without placing a burden on government.
Over the last 30 to 40 years, private finance procurement models including Public Private Partnerships, Design, Build, Finance and Operate, and Build, Operate, Own and Transfer and other related forms have been applied in the delivery of a range of infrastructure asset classes. This includes social infrastructure such as schools, hospitals, prisons and stadiums, through to water and utilities, and many road and rail projects. However, the trend in recent years has been to use private financing models almost exclusively for the larger and more complex transport projects.
SOCIAL INFRASTRUCTURE
With the right policy settings, private financing models can be applied across a wide range of sectors. This can accelerate the delivery of new infrastructure, creating work for the construction industry and local jobs.
Industry has been waiting to see more privately financed social infrastructure projects come to market following a relative hiatus in procurements over the past four or five years. The exceptions to this are the current procurement for Footscray Hospital in Victoria and the recent South Australian Schools project, both of which were very well received by the market and have seen a broad range of contractors participating.
Privately financed procurement is not for all situations, but where applied in the right context, they can be an important procurement model and ultimately benefit all parties involved:
So why are governments instead sticking to traditional procurement despite the success record of delivery in education, healthcare and corrections? Some believe that privately financed transactions “take too long to procure” due to the upfront planning work undertaken prior to procurement and the length of the procurement process. However pipeline certainty and early selection of private finance as the procurement model can reduce procurement time frames, as can streamlining bid requirements and further standardisation of commercial documentation.
• for governments, they can provide optimal whole of life outcomes, better risk adjusted cost, a high level of design innovation and importantly, in many cases, allow governments to focus on the services they provide and not the assets that enable such services;
Social infrastructure remains very important from an industry perspective. Such projects are of a scale that allow smaller contractors to participate directly. They also typically represent a risk profile that is more manageable being predominantly single site, with less third party interfaces and shorter timeframes.
• for contractors, given the additional contracting certainty and security required to support private finance, they can contribute a higher construction margin into an overall order book comprising a number of different procurement models; and
The outcomes for users of social infrastructure delivered as privately financed projects is helpful demonstrating the success of this form of procurement model. Infrastructure Partnerships Australia’s research paper Measuring The Value and Service Outcomes of Social Infrastructure PPPs in Australia and New Zealand reported that:
This has left a market where only the Tier 1 contractors are able to participate in many projects, and the models are only applied to projects that come with the highest risks in delivery. Whilst we see a continued role for private finance in the delivery of large transport projects, it is clear that there are benefits to an application of private finance to a broader set of projects.
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