The State Government signed Western Australia’s largest public private partnership two days before Christmas. Mark Beyer dissects the deal.
GLOBAL banking giant ABN Amro will be the owner and operator of Perth’s new district court complex after signing an innovative $195 million development deal with the state government last month.
Judging by interstate trends, the likes of ABN Amro could end up owning a lot more infrastructure in WA.
The Dutch banking group has backed the development of hospitals, schools and court buildings in Melbourne and Sydney, is redeveloping one of Melbourne’s main train stations and is preferred tenderer to develop a TAFE College, a hospital and a court complex in other States.
All of these projects are known as public private partnerships (PPP), a concept that has been around for many years but seems to be gaining traction.
WA’s first PPP was the $55 million ‘DOLA’ building in Midland, which was built by Consolidated Constructions in 1993 and will revert to government ownership after 20 years.
The state’s second PPP was the $15 million Fremantle Justice Complex, built by Multiplex Constructions in 2001.
The Perth Convention Exhibition Centre, built by Multiplex but now owned by Bill Wyllie, is also a form of PPP.
It was built with a mix of private and government funding and reverts to government ownership after 35 years.
The CBD Courts project is the first PPP under the State Government’s Partnerships for Growth policy, released in 2003 to try and ensure transparency and consistency in PPPs.
Multiplex once again is involved, this time as building contractor to ABN Amro, which lodged its bid under the name Western Liberty Group.
The rationale for PPPs has changed over time, not just in WA but nationally.
In their early days, one of the key drivers was a desire to boost government finances by getting the private sector to fund new infrastructure.
The main goals of recent PPPs have been to deliver better infrastructure and better manage risk.
Western Liberty was awarded the CBD Courts project after beating off competition from a rival consortium led by Leighton Contractors and Broad Construction.
Department of Justice acting executive director court services Bob Carter said Western Liberty won on three counts: it offered a better design, the cost to the State was less and it was willing to take more risk.
However, quantifying these elements is a tricky business.
The CBD Courts project involves construction of a new court building on the corner of Hay and Irwin streets and a tunnel linking it with the existing Central Law Courts.
As well as designing and constructing the new building, Western Liberty will have to meet costs such as building maintenance, energy usage and refurbishment for the term of the 27-year contract.
It will also be responsible for a wide range of ancillary services, including building management, security, court recording, court booking and custodial services over the next 27 years.
Technology-related items, such as audio-visual facilities, have a shorter contract term of nine years.
Western Liberty faces financial penalties if it fails to meet defined service standards. For instance, if a courtroom is not operating, the penalty would be about $20,000 a day.
Mr Carter believes the integration of project development and service delivery is a critical aspect.
“As they design and develop, they have to give absolute attention to how those things are going to be ... made to work,” he said.
“They give us a building that delivers an optimum result around those services, rather than the other approach of them giving us a building and then we have to live with that almost as a legacy and work our services into it.”
CBD Courts project director Steve Cary said the final month of negotiations resolved some key aspects of risk transfer.
Industrial relations risk, for instance, has been transferred to Western Liberty, except in the case of State employees.
Pricewaterhouse-Coopers partner Darrin Grimsey, who has advised on several PPPs, said they were an effective way of transferring risk during both the construction phase and the operation of infrastructure assets.
“The real benefit is in the cost certainty and certainty of outcome,” he said.
The issue of risk transfer was highlighted last year by delays and cost blow-outs on the Spencer Street station project in Melbourne.
The Victorian Government has been insulated from the higher costs, as has ABN Amro, which is behind the PPP project. It transferred the construction risk to its contractor, Leighton Holdings, which has been forced to make provisions of $110 million to cover cost increases.
There is always a price to be paid when risk is transferred to another party, but in the case of the CBD Courts project Mr Carter declined to reveal the details, other than saying the risks were carefully evaluated “to ensure the State is receiving value for money”.
Mr Grimsey said other benefits of PPPs included stimulating commercial thinking and innovation in the public sector.
He said governments around Australia were placing more weight on the long-term commitment of private sector proponents when evaluating PPP proposals.
ABN Amro’s managing director infrastructure capital John Bowyer attributed his firm’s national success in PPPs to “the fact that we are prepared to underwrite the entire debt and equity and lead the project”.
He said ABN planned to retain a one-quarter equity stake in its PPP projects and offer the balance to institutional investors.
