Nick Entsch - Macquarie Group

STRICTLY CONFIDENTIAL

PPP availability contracts A silver bullet for mitigating risk?

16 November 2016

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01 Evolution of the

availability model

25 years of PPP development

Development of the PPP

Sydney Harbour

Tunnel (BOOT)

1992 1997 2003

2007 1988 2000

2009 2012 2016

First generation projects Second generation PPP projects – focus on value for money and improved risk transfer for State

Limited Aus Policy Development

Partnerships Victoria policy and structure implemented – approach adopted across Australia

Moving toward ‘outcome’ focused PPPs

PFI program

launched

in UK

UK uses PFI to

for London

Underground

rollingstock

UK introduces ‘Building

Schools for the Future’

PFI program to

standardise school

delivery

Blair Gov.

expands UK

PFIs

East-West Link – First

availability toll road Victorian County

Court – first PPP

under new

framework

Vic Desal – At

time world’s

largest PPP

Ravenhall Prison – introduces

custodial services in Aus

Wiri Prison

– inclusion of

custodial services,

not previously

seen in Aus

Northern Beaches – full clinical

services

Pūhoi to Warkworth –

unique and progressive

performance regime

2014

From ‘asset’ to ‘outcome’

The early experience of ‘full service’ PPPs were mixed,

with private operators returning the facilities to public

operations

However, contestability can bring cost efficiency,

improvements in productivity, service quality and service

flexibility

Recent trends suggest increasing focus on the ‘full

service’ model, which is operator-led and outcome

focused

Traditional PPPs have focused on the design, build,

finance and maintenance of the asset

Private sector involvement helps keep project and

maintenance costs low through competition while

transferring risks away from the public sector

The majority of risks associated with the operation

of the asset are retained by the State

Asset based Outcome based

Asset based Outcome based

Illustrative breakdown of Raw PSC

Operating

Lifecycle

Capital Predominantly

capital costs

Predominantly

operating costs


02 Project certainty

PPPs allow projects to benefit from private sector innovation and funding which can increase certainty of delivery and better value for money

Certainties afforded by availability PPP

Efficient and optimal risk allocation

that enables each party to manage

the risk they control best

Risk allocation

Budgetary certainty given fixed price,

fixed time contracts

Design, construction and

maintenance risks transferred to the

private sector

On-time and on-budget

Whole of life approach to design and

construction taking into account long

term maintenance and lifecycle

requirements

Certainty of asset quality

Performance regimes that incentivise

‘target’ outcomes such as reducing

reoffending in prisons or safety on

roads

Bringing clear social and economic

benefits to the community

Certainty of service quality

Proponents to submit fully developed

and binding proposals with

commitments from the contractors,

operators and investors

Decision making certainty


03 Quantifying the

cost-benefit gains

Cost-benefit gains in the project lifecycle

The estimated economic return depends on the choice of procurement model

‘Core services’

‘Core services plus’

‘Full service’

Bundles D&C, FM and lifecycle in the PPP

Bundles ‘core services’ and support services in the PPP

Bundles ‘core services plus’ and targets service outcomes in the PPP

Healthscope developed the services brief driven by its clinical experience

The operator-led design ‘future proofs’ the expansion of the hospital taking

into future increase in demand for health services

The design and operational innovations will drive significant social and

economic benefits

Case study on the ‘full service’ model: Northern Beaches Hospital PPP

Type 3 Expansion

Type 2 Expansion

Type 1 Expansion

+ demand

+ c

ap

ac

ity

1 2 3

As an outcome-based availability PPP, this project has allowed greater flexibility within the designation to achieve optimised innovative outcomes

In November 2016, the NZ Transport Agency awarded a contract to the Northern Express Group for the

design, finance, construction, maintenance and management of the motorway

The objective is to improve the safety, reliability and resilience of the state highway

These outcome were captured in a performance based contract, which means the PPP consortium will be

paid for making a safe road open and available to traffic

Puhoi to Warkworth project

Health and safety

Environmental performance

Predictable journey Safe travel

Key performance indicators that drive the desired outcome:

Customer satisfaction

1 2

3 4

5


04 Projects delivered via availability payments

Illustrative example based on National PPP guidelines

Choice of delivery models

Category PPP

Alliance,

Managing

Contractor Other

Scale

Project value over [$100] million?

If not, can services be bundled to exceed the threshold? ✖ n/a n/a

Scope and outputs

Can be clearly defined ✖

Likely to change significantly and cannot be satisfactorily defined ✖

Whole-of-life opportunities

Ability to bundle services and maintenance obligations with D&C ✖ ✖

Risk

Material risks can be defined, allocated and potentially transferred to a private party ✖

Unquantifiable risk that could have a material impact on project cost and objectives ✖ ✖

Government is best-placed to manage material risks that are prohibitive to transfer ✖

PPP versus traditional procurement

Project delivery alternatives

Traditional procurement

PPP

Government uses tax revenues and bonding

capacity to finance entirety of project costs

Remain in full control of the asset

No user fee

Very limited capital raising capacity

Credit rating exposure

Government responsible for all project risks

Prone to cost and timing overruns

Upfront expenditure could be deployed elsewhere

State funding requirements minimized

Construction risk assumed by the private sector

Whole of life solution and costing

Innovation

Performance standards driving desired outcome

Relinquish varying degrees of control

Success relies on well-defined functional and

service specification

Requires departmental skills

Ability to make a variation need to be addressed in

the contract

NSW has successfully introduced contestability in the market for public transport services, with one operator to plan and run Newcastle Light Rail, buses, ferries and interchanges

Whole of network cost-benefit gains

Instead of:

Multiple operators running ad hoc services

with mismatched timetables

Minister for Transport and Infrastructure,

Andrew Constance

“In an Australian first, we've put out a call to the best

transport operators around the world to tell us how

they could partner with the city to deliver a modern

network for the city”

An integrated, multi-modal view of the network improves

customer service by focusing on the door-to-door

customer experience:


05 Credit rating and successful PPPs

Within the rated universe, 98% of publicly rated operating PPPs are investment grade per Moody’s, with the majority of ratings in the A category

Operational PPPs have exited the construction phase or have minimal remaining construction risk

Availability payment mechanism lowers the business risk

Long concession life provides availability cash flows to fully amortise the debt

Rating distribution for PPPs

0

2

4

6

8

10

12

14

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3

Rating distribution of publicly rated operating PPPs

Source: Moody’s Investors Service, ratings as of 31 January 2015

However, strong operational track record does not necessarily result in high credit rating

Completed in 2008

State pays availability payments over 25 years and provides

clinical services

Rated Baa2 despite 8 years of operations

Credit strength

— Strong operational track record

— Fixed availability payments from VIC

Credit challenge

— High leverage and limited liquidity constrains

financial flexibility

— A$148m of bonds maturing in Mar 2017

Case study: Royal Women’s Hospital

Other factors to consider

Rating factors by Moody’s

1 Performance regime and obligations

2 Contractual arrangements

3 Performance and quality of subcontractor

4 Leverage and coverage

5 Project track record

6 Refinancing risk

7 Structural features

8 Offtaker considerations

Business

Nick Entsch - Macquarie Group