TPP15-02 Budgeting For Availability Based Public Private Partnerships

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February2015

tpp
15-02

Budgeting for Availability based


Public Private Partnerships

Policy & Guidelines Paper


Budgeting for Availability based Public Private Partnerships tpp
15-02

Preface

Availability based Public Private Partnerships (Availability PPPs) are a unique


partnership arrangement made between the private sector and Government to
deliver specified assets and services (including the initial financing of these
assets) under a performance based contract.

Successful delivery of infrastructure through this model is a key part of the


NSW Government’s State Infrastructure Strategy which has and continues to
establish a portfolio of PPP assets under the control of various State entities.

This Budgeting for Availability based Public Private Partnerships Policy and
Guidelines Paper reflects the Government’s objective of a consistent, strategic
and systematic approach to recognising the present and future liabilities
associated with Availability PPPs across the whole of Government.

This policy applies to all General Government agencies and Public Trading
Enterprises (PTEs) for financial years beginning on or after 1 July 2014 for all
Availability PPPs.

Philip Gaetjens
Secretary
NSW Treasury
February 2015

Treasury Ref: TPP 15-02


ISBN: 978-0-7313-3671-5

Note
General inquiries concerning this document should be initially directed to:
The Infrastructure & Structured Finance Unit, NSW Treasury
Tel: 9228 3944, or email: [email protected].

This publication can be accessed from the Treasury’s website


http://www.treasury.nsw.gov.au/.

New South Wales Treasury page i


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Contents:

Page

Preface i

Executive Summary 1

Budgeting for Availability PPPs 2

Introduction 2

Compliance 3

Policy Overview 3

Purpose and use of Availability PPP Budgeting Information 3

Budgeting and Reporting Process 4

Overview 4

Reporting Requirements 4

Budget Appropriations and Allocations 5

Submission Requirements 6

Reporting Frequency 8

Sign Off 9

Further Information 10

Guidance material 10

Treasury Contacts 10

Associated Instruments 10

Acronyms and Glossary 11

New South Wales Treasury page ii


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Executive Summary

Budgeting for Availability PPPs policy reflects the Government’s objective to


achieve a systematic, consistent and comprehensive approach to budgeting for
assets and services that are delivered under Availability PPP contracts.

Budgeting for Availability PPPs policy requires General Government agencies


and PTEs (Relevant Entities) to budget for the liabilities that arise in relation to
projects that are delivered under Availability PPP contracts. This includes
budgeting for the capital, operational and financing elements of the Service
Payment. In addition, it requires Relevant Entities to budget for the relevant
projects at all stages, from investment decision through to the operational period
of the Availability PPP project and provides guidance on reporting requirements.

The key requirements of this policy are outlined below:

 All Relevant Entities that are in the process of procuring or are bound by an
Availability PPP contract must comply with this policy.

 Relevant Entities must develop and maintain data submissions in


accordance with this policy.

 Submissions comprise completed Availability PPP Budgeting Data Tables


(PPP Data Tables) and completed quarterly Construction Progress Reports
and annual Operational Progress Reports.

 PPP Data Table submissions should be made as part of the budget returns
process.

 Any relevant templates and associated guidance will regularly be reviewed


and updated by Treasury.

New South Wales Treasury page 1


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Budgeting for Availability PPPs

Introduction

Availability PPPs have unique implications for capital and recurrent budgetary
frameworks for major projects.

Availability PPP contracts will typically involve a General Government agency or


Public Trading Enterprise (Relevant Entities) entering into a design, build,
finance, maintain and operate (DBFMO) contract with a private sector Special
Purpose Vehicle (SPV) for an extended operating term (e.g. 15 to 30 years).

Availability PPPs are typically structured with the private sector SPV being
responsible for raising private finance to fund the capital expenditure required to
construct the asset during a project’s Construction Phase. Construction
completion and commencement of the Operational Phase is usually the key
trigger for the Relevant Entity to start making monthly or quarterly Service
Payments to the private sector SPV until the end of the Operational Phase.
Abatements to the Service Payment are typically made for unavailability of the
asset or poor performance, in accordance with the agreed contractual
arrangements. Under an Availability PPP, Government retains demand risk and
the main form of revenue for the SPV is therefore the Service Payment for
making the asset available and providing the required services to the required
performance standard.

Availability PPPs differ to demand based PPPs whereby the private sector SPV
bears demand risk and derives revenue from third parties (for example user
charges) instead of receiving a Service Payment from Government.

At a high level, Service Payments for Availability PPPs comprise three key
components:

 Capital element associated with the cost of constructing the asset


 Financing costs associated with the debt and equity raised to finance the
project
 Ongoing operating, maintenance and lifecycle costs.

Procurement of Availability PPP projects is governed by the NSW Government’s


Public Private Partnerships Guidelines (August 2012) and National PPP
Guidelines. The Policy should be read in conjunction with these guidelines,
relevant accounting standards and other NSW Treasury Policy and Guidelines
related to major capital projects, Total Asset Management and Public Private
Partnerships.

The Policy is not intended to provide details concerning accounting treatment


and financial disclosure requirements for PPP projects. Yet the budgeting
should be consistent with the relevant accounting treatment, which varies from
Project to Project. Prior to contract execution the Relevant Entities should seek
confirmation of the accounting treatment with NSW Treasury and advise the
Auditor General per the NSW PPP Guidelines.

Compliance

All General Government agencies and PTEs (Relevant Entities) that are in the
process of procuring or bound by an Availability PPP contract are required to
comply with this policy.

New South Wales Treasury page 2


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Policy Overview

Relevant Entities are required to develop and maintain data submissions in


accordance with this policy comprising completed PPP Data Tables and
completed quarterly Construction Progress Reports and annual Operational
Progress Reports.

PPP Data Table submissions should be made as part of the budget returns
process.

Purpose and Use of the Availability PPP Budgeting Information

Budgeting for Availability PPPs policy reflects the Government’s objective to


achieve a systematic, consistent and comprehensive approach to budgeting for
assets and services that are delivered under Availability PPP contracts.

This policy requires Relevant Entities to budget for the liabilities that arise in
relation to projects that are delivered under Availability PPP contracts. This
includes budgeting for the capital, operational and financing elements of the
Service Payment. In addition, it requires Relevant Entities to budget for the
relevant projects at all stages, from investment decision through to the
operational period of the Availability PPP project, and provides guidance on
reporting requirements.

For the avoidance of doubt, this policy does not replace any existing
government policies or circulars concerning budgeting for capital projects. The
guidance is to be used in conjunction with relevant policies that relate to
planning for and managing major capital works.

Use by the Agency

Budgeting for Availability PPPs is a valuable planning tool at the individual


agency level. It allows agencies to consider all costs associated with Availability
PPPs and budget for them accordingly. It provides a reporting framework for
agencies to follow throughout the life of the project. It allows agencies to
consider how they should provision for potential future liabilities and reflect
these in Risks and Pressures reports submitted to Treasury analysts.

Use by NSW Treasury

Treasury uses the Budgeting for Availability PPPs data to assist consideration of
the:

 Financial impact of Availability PPPs on the State budget over the PPP
lifecycle (i.e. project procurement, development, construction and
operations).

 Impact of Availability PPPs on State Budget Aggregates (e.g. the impact to


State Gross Debt, State Net Debt and impacts to the Fiscal Balance).

 Financial implications of Availability PPPs and ensure that they are


appropriately captured for longer term fiscal planning purposes.

 Impact on the State’s credit rating.

New South Wales Treasury page 3


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Budgeting and Reporting Process

Overview

Availability PPPs follow the approval and procurement stages per the diagram
below (sourced from Figure 3.1 of the existing NSW Public Private Partnerships
Guidelines) Each reporting stage of Budgeting for Availability PPPs has been
identified alongside this diagram.

Cabinet/Ministerial Procurement
Approval Milestones

Identify
Budget Funding Infrastructure
Approval Needs Reporting Stage 1

Procurement
Strategy
Approval to
Procure via PPP

Project
Development
Approval to invite
Expression of
Interest (EOI)

EOI Phase
Approval to issue Reporting Stage 2
Request for
Proposal (RFP)
RFP Phase

Approval of
Preferred Bidder
Negotiate and
Contract
Finalisation

Treasurer’s Approval to enter into “Joint


Financing Arrangement” under PAFA Act

Reporting Stage 3
Approval for
Project Execution, Disclosure
Contract
and Implementation
Execution

Reporting Requirements

Relevant Entities are required to follow the approach below when budgeting for
Availability PPPs.

Reporting Stage 1: Investment Decision made to Procurement


Decision

At this stage there has been no decision made with regard to the procurement
process to be followed for the major project. Planning should follow the Total
Asset Management (TAM) policy (TPP 13-03) and there is no requirement for
any additional data or reporting. The major project is budgeted for as a
traditional project per the approved business case with the capital expenditure
profile budgeted for in the relevant years.

New South Wales Treasury page 4


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Reporting Stage 2: Procurement Decision to Contractual and


Financial Close

At this stage, if a decision has been made to procure the major project (i.e. go to
market) as an Availability PPP, then the PPP Data Tables will need to be
provided by the Relevant Entities to Treasury analysts as part of their
submission for budget and contract approval.. These tables will be used to
estimate the budgetary and fiscal impact of the Availability PPP, including any
provisions. In particular this will help compare the budget for PPP procurement
against the Public Sector Comparator and budget for traditional procurement.

Relevant Entities should continue to follow the TAM process for the major
project. The major project is budgeted for as a traditional project with the capital
expenditure profile budgeted for in the relevant years.

Reporting Stage 3: Financial Close to End of Availability PPP Contract

At financial close of the major project, the Relevant Entities will work with their
Treasury Analysts to amend their TAM submissions, Capital Expenditure
Authorisation Limits (CEALs) and other Budget Controls as part of the budget
process (in accordance with NSWTC 12/20). The capital reallocation will
involve:

 Removal of the traditional capital expenditure profile for the major project
from the relevant years resulting in reduced CEALs
 Reallocation, resulting in an increased CEAL to coincide with when the
completed asset is recognised in the accounts of the Relevant Entity to
reflect the timing and value stipulated by the relevant accounting policy

In addition, Relevant Entities will provide the PPP Data Tables, as per the
reporting frequency requirements of this policy, showing the impact of the
Availability PPP to the budget and forward estimates.

Appropriations, Grants and Budget Controls

Following the submission of the PPP Data Tables and inclusion in the annual
Budget Process each Availability PPP will be granted an annual capital
appropriation budget reflecting the capital element of the forecast Service
Payment liabilities. This capital appropriation is provided to make Principal
repayments on the PPP and is not included in the CEAL of the ‘Relevant Entity’.

For any grant funded Relevant Entities, the principal agency will be granted an
annual recurrent appropriation reflecting the capital element of the forecast
Service Payment, which will then be provided to the grant funded Relevant
Entity as a capital grant.

As mentioned in Reporting Stage 3, the traditional project’s CEAL will be


replaced by a new CEAL for the PPP, coinciding with when the completed asset
is recognised on the Relevant entity’s accounts. This revised CEAL will include
any interest capitalised by the SPV during the Construction Phase only if there
are no capital savings (relative to the traditional project’s CEAL) to draw upon.

The global recurrent element of the Service Payment may be met through the
Relevant Entity’s existing budget or through an additional recurrent
appropriation if approved through the Budget process as a Measure or
Parameter and Technical Adjustment (PTA).

Appropriations and budget controls may be adjusted for supplementary


recurrent elements of the Service Payment as a Measure or PTA. Additional
funding will be provided to the Relevant Entity for any interest expense element.

New South Wales Treasury page 5


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A standing government approval (for the project term) should be sought for
changes in interest and other liabilities and payments assumed by Treasury, to
avoid seeking government approval each year.

Funding of other (original and additional) supplementary recurrent elements will


be decided and approved on a case by case basis through the Budget process.
The contingency should be reflected in the total PPP project’s budget, just like it
is for a traditional project, and managed in accordance with TC 14-29
(Management of Contingency Provisions for Major Projects)

Submission Requirements

Availability PPP cash flows and their call on budgets are materially different to
those under traditional procurement. Availability PPP Service Payments need
to be factored into forward budgets and considered as part of the State’s
broader financial management framework. To support this reporting
requirement, at financial close, an Availability PPP should no longer be reported
on a traditional basis but on the basis of the anticipated future liabilities of the
Relevant Entities as set out in the diagram below.

Service Payments

Capital Global Recurrent Supplementary


Recurrent

To cover the capital To cover the recurrent To cover the


element of the Service element of the Service supplementary recurrent
Payment Payment element of the Service
Payment which may
comprise interest and
SPV costs.

Relevant Entities are required to submit PPP Data Tables in accordance with
the budget process timeline. The PPP Data Tables provide information on the
anticipated future liabilities of the Relevant Entities in relation to a specific
Availability PPP.

PPP Data Tables should capture, at relevant stages of the project lifecycle, the
following information:

 Initial TAM expenditure profile: As agreed at investment decision


 Asset recognition profile as at financial close
 Forecast PPP Service Payments pre and post financial close: Provision of
the forecast total service payment expenditure broken down into:
- Capital element
- Interest element and Interest Rate Adjustments
- Recurrent service payment element
- SPV costs
- Any other cost categories agreed with the Treasury analyst
(e.g. insurance)
 Capital Contributions: Where these have been committed to be made during
the Construction Phase

New South Wales Treasury page 6


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 Conditional Debt Pay Down (CDPD) amounts: Where these have been
committed to be made during the Operational Phase subject to agreed
conditions being met
 Actual PPP Service Payments: Reflecting actual payments made by the
Agency including any market adjusted amounts

PPP Data Tables should provide all information available for the project over the
entire life of the PPP (including that beyond the normal 10 year capital project
budgeting cycle). It is noted that the PPP Data Tables are intended to be output
schedules and can be tailored to each Project. Any calculations required to
inform the PPP Data Tables should be carried out separately.

It is noted that the Forecast PPP Service Payments and the related accounting
entries for the Availability PPP will be informed by the Budget and Accounting
Model (B&A Model). The B&A model is intended for budgeting purposes and
may also be used for other annual reporting purposes. It will be developed and
updated in accordance with the following steps:

 The Infrastructure and Structured Finance Unit (ISFU) within Treasury will
work with the Relevant Entity during procurement to develop a tailored B&A
Model. If the Relevant Entity has an existing model that is consistent with the
B&A Model, then this may be used instead.
 At financial close the model is updated to reflect the financial close model
and protocols are agreed for annual updates.
 Throughout delivery and operations:
- If using the B&A Model, ISFU updates the model and provides the
model’s forecasts to the relevant Agency, Budget and Policy (ABP)
analyst within Treasury for review in line with existing budget
approvals.
- If using the Relevant Entity’s own model, ISFU reviews this model and
its forecasts for consistency.
 Relevant Entities complete the Data Tables. Treasury reviews these before
being reflected in the Budget and Forward Estimates for the final Allocation
Schedule prior to the annual State Budget.

Relevant Entities are required to submit quarterly Construction Progress


Reports and annual Operational Progress Reports to the relevant ABP and
ISFU analysts. If Treasury is represented on the relevant Project Steering
Committees than this reporting requirement is optional. The reports provide
information on the progress and performance of the Availability PPP project. To
avoid duplication the Relevant Entities may draw upon information used in other
reports that are consistent and for similar purposes. There is no prescribed
template for the reports, however all information must be presented as a single
document.

Quarterly Construction Progress Reports should capture:

 Progress of the construction of the asset against the planned program


including reporting against milestones
 Any cost variances that have an impact on the cost of the project to the
agency (It is noted that all changes and variations must go through formal
approval processes)
 Key issues and risks associated with the project
 Expected completion date
 Expected date/timeframe for asset recognition

New South Wales Treasury page 7


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Annual Operational Progress Reports should capture:

 Summary of the SPV’s performance in relation to the asset


 Summary of abatements for availability and performance
 Operational issues and performance against KPIs
 Major lifecycle work undertaken
 Description of any variations, refinancing or any other changes (note these
may require formal approval by the relevant authority)
 Any significant issues raised in relation to the contract by the Relevant Entity
or the SPV in that year

The Data Tables, Budget & Accounting Model and associated guidance will be
regularly reviewed and updated by Treasury.

Note: The information should be sourced from the most accurate source
possible, typically proxy financial models developed during the procurement
phase by the agency and bidders and the financial close model described in the
PPP Project Agreement and/or that used for calculation of service abatements.
Performance information is typically sourced from the SPV reporting documents
as stipulated in the Project Deed.

Reporting Frequency

The PPP Data Tables should be prepared as part of the NSW Treasury’s
Budget Process and consequently prepared in accordance with the following
indicative timeframes:

Indicative Timeframe Budget Process Submission


requirements
October - November Annual Budget Process
 Half Year Review
 Capital proposals, Business Cases
and Gateway Review Reports, as
required

TAM Submissions (as per TPP 13-03)


 Asset Strategy
 TAM data tables

December / January Annual Budget Process


 Revised Forecasts
 Recommendation of projects for
approval
 INSW recommendation of 5 year
infrastructure plan for endorsement
(projects >$100m)

February -May Annual Budget Process Submit completed


 Budget Forward Estimates PPP Data Tables
 Approve Projects
 Approve Budget – year works

June Budget
 Publish Budget Papers
 Finalise the NSW 5 year
infrastructure plan

New South Wales Treasury page 8


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Construction Progress Reports are to be prepared and provided to Treasury


quarterly throughout the relevant period, 30 days after the end of each of the
quarters ending September, December, March, June.

Operational Progress Reports are to be prepared and provided to Treasury


annually throughout the relevant period no later than 30 September after the
end of the financial year.

Sign off

Project Director or Chief Financial Officer of the relevant entity.

New South Wales Treasury page 9


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Further information
Guidance material

Budgeting for Availability PPPs policy and guidelines are accessible at NSW
Treasury website:
http://www.treasury.nsw.gov.au/Treasury_Policy_Papers_Index_Page

Treasury contacts

Budgeting for Availability PPPs


ISFU, NSW Treasury
9228 3944, [email protected]

Associated instruments

 NSW Treasury Circular NSWTC 14-29 – Management of Contingency


Provisions for Major Projects
 NSW Treasury Circular NSWTC 14-28 – Parameter and Technical
Adjustments and Measures (New Policy)
 NSW Treasury Circular NSWTC 12/20, Budget Controls – Capital
Expenditure Authorisation Limits
 NSW Treasury Circular NSWTC12/08, Budget Controls - Net Cost of
Services
 NSW Treasury and Guidelines Paper TPP 13-03 Total Asset Management
(TAM) submission Requirements
 NSW Treasury and Guidelines Paper TPP 08-05 Guidelines for Capital
Business Cases
 NSW Treasury and Guidelines Paper TPP 06-08 Accounting for Privately
Financed Projects
 NSW Public Private Partnerships Guidelines, August 2012

Please note that the above list outlines the primary instruments for
consideration. It is not intended to be exhaustive.

Acronyms and Glossary

Acronyms
CDPD Conditional Debt Pay Down
CEAL Capital Expenditure Authorisation Limit
DBFMO Design, Build, Finance, Maintain and Operate
EOI Expression of Interest
INSW Infrastructure NSW
ISFU Infrastructure and Structured Finance Unit
KPI Key Performance Indicator
MTFM Medium Term Fiscal Model
PAFA Public Authorities Financial Arrangements
PPP Public Private Partnership
PTA Parameter and Technical Adjustment
PTE Public Trading Enterprise
RFP Request for Proposal
SPV Special Purpose Vehicle
TAM Total Asset Management

New South Wales Treasury page 10


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Glossary

Term Meaning

Abatement Deductions to the Service Payment for unavailability of the


asset or poor performance

Availability A PPP project where the government pays the private party a
PPP Service Payment for the availability of an asset. The Service
Payment also covers the provision of ongoing maintenance
and operational services to the asset for the duration of the
PPP contract. Typically, the private party will be responsible for
designing, building, financing, maintaining and operating the
asset.

Budget and A model developed and maintained by Treasury’s ISFU to


Accounting reflect the accounting treatment of the Availability PPP
Model

Construction The period of time during which the asset is built


Phase

Financial The final step in the procurement process when all conditions
Close precedent have been met, all contracts are signed and the
financing for the project is locked in

Key A performance requirement set to define the level of service


Performance the SPV is required to adhere to in accordance with the PPP
Indicator contract

Operational The period of time during which the completed asset is


Phase operated by the SPV

Public Private A contract entered into between Government and a private


Partnership sector party for the provision of assets and/or services.
(PPP)

Relevant All General Government agencies and Public Trading


Entities Enterprises

Service The monthly or quarterly payment made to the SPV for making
Payment the facility available and providing the required services

Special An entity created for the sole purpose of delivering the asset
Purpose and services that are the subject of the PPP
Vehicle (SPV)

New South Wales Treasury page 11

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