Finance Circular
No. 2009/02

To all agencies subject to the Financial Management and Accountability Act 1997

The National Public Private Partnerships (PPP) Policy Framework and National PPP Guidelines

Purpose

This Finance Circular advises agencies of the National PPP Policy Framework and National PPP Guidelines (the National PPP Policy and Guidelines). In summary, Financial Management and Accountability Act 1997(FMA Act) agencies are required to apply the National PPP Policy and Guidelines as these replace existing Australian Government PPP policy and the majority of PPP guidance material when developing large scale capital projects.

The key changes arising from implementation of the National PPP Policy and Guidelines are:

  • the threshold for the mandatory agency consideration of PPPs as a procurement option has decreased from $100 million capital cost to $50 million capital cost; and
  • the Capital Asset Pricing Model (CAPM) methodology has been adopted for calculating discount rateswhen evaluating PPP proposals.

The National PPP Policy and Guidelines also note that where the Australian Government considers a project involves National Security issues, the National PPP Policy and Guidelines may not apply.

The National PPP Policy and Guidelines are available on the Infrastructure Australia (IA) website at:

This Circular is effective from30May 2009.

Target Audience

This Finance Circular applies to all agencies subject to the FMA Act.

Key Points

  1. On 29 November 2008, the Council of Australian Governments(COAG) endorsed the National PPP Policy and Guidelines and noted the new framework would effectively replace the existing PPP policy and guidance applied by Australian, State and Territory Government agencies.
  1. The National PPP Policy and Guidelines therefore replace Australian Government PPP policy and guidance, with the exception of Financial Management Guidance (FMG) No. 17, Public Private Partnerships: Business Case Development. This guidewill be retained to assist agencies with the process and requirements for obtaining Australian Government approval of PPP projects.
  2. The National PPP Policy and Guidelines aim to facilitate greater consistency in the consideration and application of PPPs across Australian jurisdictions.

The National PPP Policy and Guidelines

  1. The National PPP Policy and Guidelines consist of the following documents:
  • National PPP Policy Framework
  • National PPP Guidelines Overview
  • Volume 1: Procurement Options Analysis
  • Volume 2: Practitioners Guide
  • Volume 3: Commercial Principles for Social infrastructure
  • Volume 4: Public Sector Comparator Guidance
  • Volume 5: Discount Rate Methodology
  • Volume 6: Jurisdictional Requirements
  1. TheCommercial Principles for Economic Infrastructure volume is under development and will complete the suite of National PPP Guidelines.
  2. The National PPP Policy and Guidelines are available only in electronic format from the IA website at:
  3. The following Australian Government PPP policy and guidance publications are replaced by the National PPP Policy and Guidelines:
  • Australian Government Policy Principles for the Use of Public Private Partnerships (FMG 21)
  • Introductory Guide to Public Private Partnerships (FMG 16)
  • Public Private Partnerships: Risk Management (FMG 18)
  • Public Private Partnerships: Contract Management (FMG 19)

Key changes for FMA Act agencies

  1. The key changes arising from implementation of the National PPP Policy and Guidelines are:
  • the threshold for mandatory agency consideration of PPPs as a procurement option for large scale capital projects has decreased from $100 million capital cost to
    $50 million capital cost; and
  • the Capital Asset Pricing Model (CAPM) methodology has been adopted for calculating discount rates when evaluating PPP proposals.

Threshold

  1. The threshold has been reduced to harmonise the monetary level at which PPPs are considered by governments across Australiaand to capture a greater number of potential PPP projects.
  2. Estimates Memorandum 2009/20establishes the new threshold of $50 million capital cost and updates Estimates Memoranda 2008/41:Budget Advice: 2009-10
    Budget – Timetable and Operational Rules; and 2008/18:2008-09 Budget – Public Private Partnership (PPP) Proposals.
  3. Estimates Memorandum 2009/20 should be referred to for information on considering PPPs when seeking funding for large scale capital new policy proposals or advising Government of new spending funded from existing appropriations.
  4. Agencies are required to giveobjective and rigorous consideration to PPP procurement for projects over the threshold. The threshold does not prevent consideration of PPPs for projects with a lower estimated capital cost. This should be undertaken on a
    case-by-case basis.

Discount Rates

  1. In order to align itself with the National PPP Policy and Guidelines, the Australian Government has adopted the CAPM methodology to determine the discount rates for evaluating PPP proposals. The CAPM methodology provides a transparent differentiation between high and low risk procurement options and enables risk assessments to be tailored on a case by case basis.
  2. The CAPM methodology is widely used and established, and enables an evaluation of whether the private sector’s required return on investment is commensurate with the level of associated risk.
  3. Further information on the CAPM methodology is available intheDiscount Rate Methodology volume of the National PPP Guidelines which is available on the IA website at

Departure from the National PPP Policy and Guidelines

  1. The Jurisdictional Requirements volume of the National PPP Guidelines specifies areas where jurisdictions,including the Australian Government, will retain the flexibility to apply their own requirements and principles.
  2. Specifically, where the Australian Government considers a project involves National Security issues, the National PPP Policy and Guidelines may not apply. Agency Chief Executives may put in place measures which allow exemption from the National PPP Policy and Guidelines for projects which involve National Security issues.
  3. Agencies should:

identify the particular issues relating to the project which raise concerns;

determine alternative measures necessary to address those concerns; and

document the reasons for exemption from the National PPP Policy and Guidelines and obtain approval from their Chief Executive to use the alternative measures.

Government approval process

  1. Agencies should note that the approval process for PPP proposals remains unchanged. The requirement to complete the Suitability Checklist if a new policy proposal exceeds the PPP threshold (now $50 million capital cost) to determine if a PPP should be further considered as a procurement option continues.
  2. If the suitability checklist concludes that it is possible the project will be able to achieve value for money via a PPP, further analysis is undertaken with an increasing level of detail through the Scoping Study and Interim Business Case.
  3. At completion of the Interim Business Case, a submission is presented to Government with the recommended procurement option and supporting information. If Government approval for a PPP is obtained, the PPP proceeds to market. If Government approval is not obtained the agency may revert to another procurement process to deliver the project.
  4. Prior to entering into a PPP contract, a Final Business Case is submitted to Government for approval with details of the preferred tenderer and expected terms and conditions of the contract along with the funding requirements including the budget impact, accounting classification and taxation implications. If approved, the contract is finalised and project delivery commences.
  5. Further information on the process and requirements for obtaining Government approval of PPP projects is available in FMG No. 17, Public Private Partnerships: Business Case Development which is available at:

Accounting Treatment

  1. PPPs require a specific accounting treatment in determining Budget impacts of new proposals. For almost all PPPs the capital value of the facilities being acquired reduces the fiscal balance and underlying cash balance at the commencement of the facilities use. Operating costs and imputed interest reduce the fiscal balance and underlying cash balance annually as they are incurred. For further information on Budget impacts, agencies should contact their Agency Advice Unit in the first instance.

Contacts

For further information concerning the National PPP Policy and Guidelinesplease visit the Infrastructure Australia (IA) website at:

For information on the PPP Budget Rule please contact your relevant Agency Advice Unit within Budget Group.

Simone Pensko
Branch Manager
Procurement Implementation Branch
Asset Management Group
27 May2009

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