Funding and delivering infrastructure in a brave new world

The opportunities are there

Engaging with the private sector market as early as possible on key procurements and projects can generate valuable insights on how to make the most of the experience, capability and capital of the private sector and, at the same time, manage the challenges and risks such organisations face.

With competing budgetary demands, a broader concept of ‘public private partnerships’ needs to be explored. Traditionally, PPPs have been utilised for large scale infrastructure works but they are time-intensive and complicated in terms of procuring, structuring and documenting. With complication comes cost. That said, the salient features of the PPP model are capable of being used for smaller scale projects and diversified asset classes. Some examples include:

• Build, own, operate, transfer (or design, build, operation and maintain) type arrangements for projects. These mini-PPP models are useful for greenfield and brownfield projects of a smaller value and scale. Recent examples include greenfield renewable infrastructure utilising existing buildings (including upgrades to those buildings) and development of new public facilities (such as aquatic centres, sports facilities, cultural centres, new administration buildings and the like). Such models can use private capital (debt and/or equity) as well as public funds (including equity contributions ‘in-kind’ in the form of land or other assets) or a combination of both;
• Co-investment opportunities. This typically involves public and private sector parties looking to develop infrastructure and services on land owned by either party, particularly adjoining land, and utilising this opportunity to create a better project outcome for both. There has been a rise of ‘precinct’ or ‘hub’ development, infrastructure sharing arrangements and land swaps, as part of the public sector’s willingness to partner with the private sector. While the scope of the opportunities are broad, some recent examples include agribusiness, transport and logistics hubs, tourism and retail development and digital infrastructure such as data centres;
• Long-term concession arrangements where an existing asset (eg a car park, building, vertical assets such as light poles) are taken over by an operator who will operate them and, where agreed or required, upgrade or expand them. The public sector owner of the asset receives revenue from the operation (eg lease payments or share of user fees) but effectively leaves the private sector to operate them, typically as part of a larger portfolio of similar assets;
• Collaboration with comparable entities to scale up the opportunity with the private sector. Looking for procurement solutions to pool resources, assets or common needs to develop an approach to the private sector and achieve better value through economies of scale. Areas where this has been successful include waste collection and processing, water and waste water infrastructure (eg treatment plants and pipelines) and digital infrastructure (eg fibre optic cable).

With careful planning and due diligence, the utilisation of these approaches can afford public sector organisations real savings on recurrent and capital expenditure, as well as possible diversified income streams. This presents an opportunity to manage constrained budgets and seek to extract value from ‘lazy assets’ that are on government balance sheets and continue to require costly maintenance, upgrades and replacement over their lifecycle.

Future thinking

With the private sector looking abroad to generate revenue streams to support sustainable infrastructure growth and maintenance, technology can play an important role in this endeavour.

Developments in technology, particularly disruptive technology, have the potential to impact on traditional sources of funding and will need new thinking on how to best capitalise on the outcomes. As an example, road funding will require a rethink as electrification, vehicle efficiencies, connectivity, autonomous driving and shifting patterns of vehicle usage (eg mobility as a service) trigger changes in traditional revenue sources such as registration, stamp duties and fuel excises. To give this some context, a recent study by Bloomberg New Energy Finance¹ estimates that by 2040 there could be at least a $5.5 billion reduction in fuel excise resulting from the shift to electric vehicles alone.

So where is the thinking going on such impacts?

There are a number of ideas and solutions all being thrown into the mix. These include:

• User and consumption charges – while this is nothing new globally or locally in Australia (eg toll roads), we can expect to see growth in sectors which support the introduction of this type of revenue platform (largely in economically sustainable infrastructure or services eg digital infrastructure). A good illustration of this is the growing ‘recharging economies’. Governments are keen to introduce ultra-fast charging networks, wireless charging for roads and peer-to-peer charging to not only address electric vehicle usage constraints but also to create revenue opportunities for local governments and economies (eg using technology that connects people and vehicles to businesses);
• Netflix-style infrastructure subscriptions – where a customer will subscribe to an infrastructure solution or service outcome. This is a growing market, particularly for modular style infrastructure and service solutions where ownership of the infrastructure asset is not essential. Recent examples are found in the waste sector (eg food/organics processing) and renewables (eg collocated processing of waste to energy, biofuels or other products);
• Rethinking the use of under-utilised assets. With the public sector having a significant portfolio of assets, including land, vertical infrastructure and air rights, the private sector is seeking long-term opportunities to generate sustainable income streams for itself and investors (such as super funds). Recent examples include using buildings, street and park furniture (eg street lights) and converting them into smart networks (for telecommunications and digital advertising services), with a number of attached ‘barnacles’ (eg small cell 5G wifi networks) that generate new revenue sources for the owners of those assets;
• Data as an asset class that is capable of generating opportunities for local businesses and the public sector. Balancing ‘consumerism’ (being the community’s appetite for choice and value) and concerns regarding privacy and information security will be essential to maximising the value that can be created from data. The continued rise of the Internet of Things and the community’s desire for connectivity will mean that public sector organisations should look to invest in data-based services that serve community needs and are consistent with the regulatory and policy framework.

Be mindful of the challenges and constraints

The lessons learned from large scale projects and procurements apply equally to projects of any size. In fact, the challenges and problems are often exacerbated at the smaller end of the scale, particularly when applied to the unique environment within which statutory bodies operate.

To this end, it is useful to set out some of the key challenges and learnings:

• Traditional thinking. It remains important that opportunities are explored with a mindset that is open to new approaches. A good example will be the approach of looking at your assets as equity to be deployed (and receive a return from) rather than simply as an item to be built or maintained. It remains a ‘horses for courses’ approach but broader thinking will help identify the new courses. The ‘circular economy’ illustrates this where traditional thinking of rubbish collection and disposal has been transformed into ‘reduce, re-use and recycle’, thereby creating new micro-industries and new sources of income income for public and private sectors alike.
• Revisiting the role the public sector needs to play. It is clear that infrastructure in and of itself is only part of solving the puzzle. The public sector needs to deliver both an infrastructure solution (the ‘product’) and a consumer solution (the ‘service’) which can help to unlock new revenue sources and reduce costs (such as insurance, car repairs and road maintenance) and support a transition from traditional income streams. By way of example, a recent McKinsey & Company report² noted that by 2030 the worldwide pool for mobility-based revenue from level 3 connected vehicles (eg mobility-as-a-service and data-enabled services) will be between US$450 billion to $750 billion.
• Planning. Proper planning and due diligence through all phases of a procurement is essential. This can help to ensure that legislation and policy frameworks are adhered to, the service need is adequately identified, the structure of a procurement or project is properly developed and key risks and solutions are identified early. While projects cost money to procure and deliver, they tend to cost more if there has been inadequate planning (including to account for any future-proofing).
• Availability and capability of resourcing. Recognising the fact that internal resources are constantly under pressure, it remains important to have the right team deliver the outcomes under a governance framework that is tailored to the project’s needs. This should include engaging with external resources, to support the outcome and add value to the internal team, including skills development and knowledge transfer.
• Market engagement drives the right partnership outcome. As part of the planning phase, thought needs to be given as to the process (ie the when, how and how often) for engaging with the private sector. Early, meaningful and regular engagement (eg through market soundings, industry briefings, reporting on the pipeline of projects and the like) will raise awareness of key projects, provide the private sector an opportunity to flag key issues to be considered and allow quality bidders to be involved. Equally, having a procurement framework that is able to receive ‘market-led proposals’ (MLPs) will facilitate further interactions with the market, often demonstrating the broader capabilities of the private sector and the opportunities to partner. Given recent examples of MLPs across Australia, this might be an avenue for many sectors, like tourism and aviation, to pursue opportunities to partner with the public sector to support the post-COVID economic recovery.
• Procurement frameworks. An essential feature of any successful procurement is a framework that ensures transparency and accountability are achieved while supporting, in a practical way, the realisation of the benefits and outcomes being sought. Procurement frameworks can be developed in a way that adheres to the regulatory requirements but still provides sufficient flexibility to drive more collaborative outcomes with comparable entities (eg multi-party joint procurements) and partnering with the private sector (eg market-led proposals or ‘reverse’ bidding where the private sector is encouraged to provide proposals for solutions that are aimed at addressing key problems).
• Community and stakeholder management. By looking through the lens of your stakeholders and the broader community, and understanding their concerns and issues, procurements are better positioned to drive the right behaviours of those parties and manage their expectations. With governments looking to ‘fast-track’ procurements and projects, given the economic stimulus it will provide, this should be balanced with the need to allow proper consultation and understanding of the impacts on the affected stakeholders and the community. Through the planning phase of a project, care must be taken to properly identify the key stakeholders and develop an engagement plan to ensure there is appropriate ‘buy-in’ to the process and key outcomes for the procurement.

Moving forward

Times of challenging and changing environments, like COVID-19 has presented, inevitably provides the opportunity to re-think, re-set and re-tool as needed. Infrastructure funding for budget-constrained organisations is a major issue but should not just be about the infrastructure itself. There are broader issues to consider in respect of the services to be delivered and making best use of available resources and funding to ensure sustainable outcomes are achieved.

Statutory bodies may not have all the answers to funding and delivering infrastructure and there is no doubt that traditional sources of funding will continue to be available (but perhaps not to the same extent). However, to be economically sustainable, statutory bodies should look to diversify their revenue streams and seek to utilise the private sector’s capability, innovation and resources, where appropriate, to fund and deliver key infrastructure and service outcomes. Improved partnering beckons.

Thank you to partners Peter Mulligan, Joanne Emerson Taqi and Tom Young for their contribution to this article.

Ren Niemann is a projects lawyer based in Brisbane who, for more than 20 years, has provided strategic advice to government and private sector clients on major projects across construction, infrastructure and procurement, including PPPs, co-investments, outsourcing arrangements, City and Regional Deals, financed projects (e.g. BOOTs) and traditional procurement. He has extensive experience across a number of industries and sectors including transport, telecommunications, energy and renewables, waste, water, resources, social infrastructure, universities, defence and logistics. Ren advises public sector clients across Australia and in the Pacific Region, with clients including government departments and agencies, GOCs/SOCs, councils and universities (including controlled entities), water boards and hospital boards and districts.