AN OVERVIEW OF RISK ALLOCATION IN

RECENT PPP INFRASTRUCTURE PROJECTS IN

AUSTRALIA
ANDREW CHEW
Special Counsel, Mallesons Stephen Jaques,
Sydney
DAVID STORR
Partner, Mallesons Stephen Jaques, Sydney
AND GEOFF WOOD
Partner, Mallesons Stephen Jaques, Sydney
1. INTRODUCTION
1.1 Types of PPP infrastructure projects
Australia has been at the forefront of delivering public private partnerships (PPP) projects. 1 PPP projects
in Australia to date have been generally based on Build-Operate-Transfer (BOT) model and have been
essentially project financed by the private sector. The first of such PPP projects was the Sydney Harbour
Tunnel which was completed in 1992. Since then, PPPs have been used to deliver infrastructure projects
and services over a range of sectors including transport (road and rail), power stations, prisons,
hospitals, schools, defence facilities and equipment, sporting facilities, court facilities, waste handling
plants, water and waste-water treatment plants, etc. A list of recent Australian PPP projects is set out in
Appendix 1.

1 The United Kingdom has been leading the world in delivering PPP projects. In mid-2000, the government embarked
on a rebadged Public Partnerships programme named “Public Private Partnerships: the Government’s Approach”.

A recent survey by PriceWaterhouseCoopers (Developing Public Private Partnerships in Europe, 2004) showed that
while most Member States of the European Union showed interest in PPPs, there is varied experience in developing
PPPs.

Most East Asian countries have been delivering projects on a BOT basis for a number of years. Although a number of
these countries have introduced laws or policy on delivery of BOT projects or PFI—see e.g. Anukret on Build-Operate-
Transfer (BOT) Contract (1998) (Cambodia); Private Finance Initiative Promotion Act 1999 (Japan); Federal Roads
(Private Management) Act 1984 (Malaysia); Republic Act 7718 Amended BOT Law (1994) (Philippines); Act on Private
Investment in Social Overhead Capital Facilities 1999 (South Korea); Decree on providing investment regulations on
BOT (build-operate-transfer), BTO (build-transfer-operate) and BOT (build-operate-transfer) contracts involving foreign
investment in Vietnam (1998)—they (with the exception of Hong Kong) do not have any formal PPP policy.

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The PPP infrastructure facilities can generally be divided into two categories:

 (a) those facilities where users are charged

directly for use of the asset such as tollroads,
railways, power stations, water treatment plants,
etc. (also commonly known as “economic
infrastructure”); and
 (b) those facilities (such as schools, prisons,
hospitals, etc.) where the use of the facilities is
funded through payments from the government
to the private sector entity (also commonly
known as “social infrastructure”).
 In the economic infrastructure class of projects, the concession company is totally responsible for the
design, construction, operation and maintenance of the infrastructure facility for the whole concession
period.

In the social infrastructure class of projects, the concession company will be responsible for designing,
constructing and commissioning the facility. During the operational phase, the government will generally
provide the “core services” such as clinical services, teaching, etc., while the concession company will
provide the “non-core services” such as operation and maintenance of the facilities (building services,
waste management services, grounds maintenances and the like). In prison projects, the private sector
proponent may be asked to provide security services.

1.2 Structure of paper

This paper provides an overview of the risk allocation patterns adopted in recent Australian PPP
infrastructure projects. Section 2 sets out an overview of some of the governments’ preferred risk
allocation under their own PPP policies and the emphasis on value for money and risk transfer. Section 3
sets out an overview of risk allocation adopted in recent Australian PPP projects and observations on
some of the influences on the choice of risk allocation. Section 4 sets out a case study of a recent PPP
project, Spencer Street Station Redevelopment in Melbourne.

2. PREFERRED RISK ALLOCATION UNDER PPP

POLICIES
2.1 PPP policies
The Commonwealth and each state and territory government in Australia now each have their own PPP
policy. They are:

 Commonwealth—Commonwealth Policy Principles

for the Use of Private Financing, 2002;
 New South Wales—Working with Government:
Guidelines for Privately Financed Projects, 2001;
 Victoria—Partnerships Victoria, 2000;
 Queensland—Public Private Partnership Guidance
Materials, 2002;
 Western Australia—Partnerships for Growth :
Policies and Guidelines for Public Private
Partnerships in Western Australia, 2002;
 South Australia—Partnerships SA: Private Sector
Participation in the Provision of Public Services,
2002;
 Northern Territory —Territory Partnerships Policy
Framework, 2003;
 ACT—Statement of the Objective and Principles
for the Private Provision of Public Infrastructure,
2002; and
 Tasmania—Private Sector Participation in Public
Sector Infrastructure Provision—Policy Statement
and Guiding Principles, 2000.
2.2 Value for money principle
The underlying rationale for PPPs is that they must offer value for money. This is the thrust of the criteria
that governments have used to assess proposed projects using PPPs. Value for Money (VfM) is an
expression of the economy, efficiency and the effectiveness in which the public sector bodies operate.
There are many management approaches to evaluating the VfM objective. Generally, the major factors
considered when assessing value for money in PPP programmes are:

 risk transfer—relieving the government of the

substantial, but often undervalued, cost of asset-
based risks;
 whole of life costing—integrating up-front design
and construction costs with on-going service
delivery, and operational, maintenance and
refurbishment costs;
 innovation—providing wider opportunity and
incentive for innovative service delivery solutions;
 asset utilisation—providing greater opportunities
to generate revenue from use of the asset by
third parties (which may reduce the cost that
government would otherwise have to pay as sole
user);
 output based specification—linking payment to
the quality and timing of service delivery;
 performance measurement and incentives—
securing the delivery of the services to the
required standards, and encouraging continuous
improvement;
 private sector management skills—delivering
management and operational efficiencies by
using private sector management skills.
The value for money of a project is easier to demonstrate where there has been an effective price-led
competition.2,3 For this reason, in all recent Australian PPP tendering processes the government parties
have sought to
2 Arthur Andersen and Enterprise LSW, Value for Money Drivers in the Private Finance Initiative, a Report
commissioned by the Treasury Taskforce, 17 January 2000, pp. 5–6.

3 National Audit Office, Examining the Value for Money of Deals under the Private Finance Initiative, August 1999.

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procure a high level of competition during the bidding stage. The previous approach of appointing a
“preferred bidder” once the key risk principles and pricing have been determined and negotiating the
legal and commercial details later, has been largely replaced by a process designed to maintain
competitive tension amongst a reducing number of bidders for as long as possible.

This “two to the wire” approach, as it is called, maintains competitive tension for as long as possible,
and ensures that the government maximises its bargaining power, but it has been criticised by some
bidders as adding to the bid costs by prolonging the assessment process and requiring each bidder to
prepare substantial design, scoping and legal documentation.

2.3 Focus on risk transfer

Whilst theoretical risk allocation has been reflected in the PPP policy frameworks issued by the state and
territory governments, a large component of the evaluation of the value for money concept is based on
risk transfer to the private sector. There is a very strong focus on risk transfer by the state and territory
governments:

“Improved risk management—more rigorous risk evaluation and transfer to the private sector of those
risks it is best able to manage …”4

“Risk transfer and mitigation—relieving the Government of substantial, and often undervalued, costs of
risks associated with asset ownership and management and the provision of specified services.” 5

“Value for money is maximised by allocating risk optimally. In very general terms, this means allocating
each risk to the party best able to manage that risk. In theory, this reduces individual risk premiums and
the overall cost of the project, because the party in the best position to manage a particular risk should
be able to do so at the lowest cost.”6

“Under this policy, the governing principle of a project’s risk allocation is that risk will be allocated to
whichever party is best able to manage that risk, taking into account the public interest considerations. It
is not the Government’s intention under this policy to necessarily attempt to transfer all project risk to
the private sector, as it fully recognises that the inappropriate transfer of risk will generate and carry a
significant premium.

Government recognises that it is inappropriate to seek private sector involvement in public infrastructure
provision unless all significant project risks are identified and the Government has quantified what risks
and costs, if any, it is prepared to retain and what risks and costs it expects can be justifiably transferred
to the private sector.”7

An overview of the some of the state and territory governments’ preferred allocation of risk for PPP
projects is set out in Appendix 2. The PPP policies of New South Wales, Victoria and Queensland are more
detailed than the
4 Working with Government Guidelines for Privately Financed Projects, New South Wales Government.

5 Territory Partnerships—Policy Framework.

6 Partnership Victoria—Risk Allocation and Contractual Issues.

7 Public Private Partnerships Guidance Materials—Policy, Queensland Government

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policies of the other states and territories. Putting aside each state or territory government’s agenda on
funding new projects, it is important to note that the transfer of risk and funding of new projects is only
one aspect of the VfM test.

3. RISK ALLOCATION IN RECENT PPP

INFRASTRUCTURE PROJECTS
3.1 Factors considered by proponents
In a survey of PPP sponsors, government entities and financiers carried out in 1999 by the Victorian
Government,8 respondents ranked three factors as having the most important impact on the actual
(final) risk allocation for PFI PPP projects—they were:

 (a) commercial requirements;

 (b) bargaining power; and
 (c) the financiers’ requirements.
Rational risk allocation and the government’s preferred risk regime were ranked fourth and fifth,
respectively.
 The survey showed, not surprisingly, that sponsors expect a risk premium in return for risk-bearing.
Respondents also indicated that bargaining power was seen as the next most important factor, as the
bargaining power largely rested with the government, at least until the selection of the preferred
proponent.

Whilst the government considers it is essential to retain competitive tension in the bidding process to
gain the best outcomes, the private sector bidders argue that governments need to ensure that they do
not use this bargaining power to transfer risks to the private sector which cannot be reasonably
managed by them. This will result in higher risk premiums or “projects may fail if these risks arise and
cannot be well managed”. There is an on-going debate on this issue, the most recent example being the
Spencer Street Station project in Melbourne, which is discussed below.

Financiers’ requirements are a major influence on final risk allocation in most current PPP projects. The
financiers must be comfortable with the risk to which their funds are exposed. In broad terms, the higher
the level of gearing, the greater the financiers’ level of interest in the details of the risk allocation,
although some key risk issues (such as the statutory powers of government regulators to make decisions
which may affect the project) will always be of material concern to the financiers regardless of the level
of gearing.

8 Department of Treasury and Finance, Private Provision of Public Infrastructure, Risk Identification and Allocation
Project, Survey Report, 1999.

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3.2 Risk allocation adopted in recent PPP

projects
Each project is different and the treatment of risk allocation for each project varies. It is difficult to
generalise about the risks applicable to PPP projects. The nature and extent of a project, and the
circumstances and risk appetite assumed by the government entity and individual project sponsors and
their project financiers will affect how each project risk will be managed and priced.

Risk allocation for the economic infrastructure class of projects will differ from the social infrastructure
class of projects, because of the general perception amongst the sponsors and financiers of economic
infrastructure that they have a more “free hand” to run their business efficiently than is the case in the
social infrastructure projects. The experiences of government (both at a political level as well as the
experience of government bureaucrats and their advisers) will influence the government’s preferred risk
allocation and the approach taken into the bidding process. For example, it is possible that the 12
months negotiation with the preferred bidder in the Melbourne CityLink project (in the mid-1990s),
influenced Victorian Government to change its original approach and take a “fully documented two-to-
the wire” approach in the recent Mitcham–Frankston motorway project, necessitating both bidding
consortia’s preparation of a high level of project documentation.

Appendix 3 sets out below an analysis of the concession agreements from some recent PPP projects. 9

A brief overview of the major risks and approach taken on recent PPP projects is set out below.

(a) Design, construction and commissioning risks

One of the key government objectives in PPP deals is to take advantage of the concession company’s
ability to bring design innovations and construction expertise to the delivery of the projects. In all PPP
deals, the concession company will be required to assume the risk for the design, construction and
commissioning of the infrastructure facilities. The concession company is also obliged to provide a fitness
for purpose warranty to the government entity for the performance of the infrastructure facility during
the operational phase. The government frequently seeks an “output”-based fit-for-purpose warranty,
which is linked to the government’s service needs from time to time during the operational phase. The
concession company, not surprisingly, generally prefers a warranty structured around the original project
brief and the construction and operation specifications, arguing that
9 This analysis is based on the project agreements and contract summaries for those PPP projects that have been
made publicly available by various state governments.

For Victoria:

http://www.tenders.vic.gov.au/CA256AEA00206A7D/webpages/PublicContractsFrameset?Open

For New South Wales: http://www.treasury.nsw.gov.au/wwg/

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it cannot be expected to warrant the on-going adequacy of its services and facilities to meet all future
service needs.

Most concession agreements also contain a mechanism under which the government entity and the
concession company appoint independent technical advisers (with names such as independent verifier,
independent certifier, etc.) to monitor delivery of the project on behalf of the government and to carry
out valuation and certification roles (including for the quality of the construction and services, extensions
of time, variations, audits and the like). The decisions of those independent technical advisers are
generally agreed to be final and binding, with limited dispute rights.

(b) Completion and delay risk

In some recent PPP deals, the concession companies have an absolute obligation to bring the facilities to
operational completion by a pre-determined date for completion, whereas in other PPP deals, the
concession companies only have a best endeavours obligation to do so. In some of these cases, there
was an externally imposed deadline such as the start of the Olympic Games, but in other cases the
government is seeking to recover its additional costs incurred through the delay and even to impose a
sunset date. These clauses also raise potentially complex issues where the government is transferring
control of staff, facilities or equipment to the concession company, as delays by the government (or due
to external but related factors, such as industrial action by government staff) may contribute to the
concession company’s delay in achieving completion.

In at least one recent PPP project, this issue was resolved by leaving the staff still employed by the
government, which arguably may affect the ability of the concession company to meet its service
obligations in the manner it originally intended.

If the concession company is late in achieving completion (or breaches its obligation to use best
endeavours to complete, as the case may be), in some cases it becomes liable to pay the government
entity liquidated or general damages. In other cases, because the overall concession period is only able
to be extended in limited circumstances, the concession company suffers an economic penalty through a
reduced operational period, but no direct damages are payable.

There is no common stance by government entities to seeking liquidated damages for late completion,
although it is more common in the case of social infrastructure projects, such as hospitals, rather than in
economic infrastructure projects.

In the Casey Hospital (Berwick) concession agreement in Victoria, the concession company was liable
to pay liquidated damages if it was late in achieving completion. On the other hand, in the Correctional
Facilities Projects—Remand Centre and Corrections Program Centre, in Victoria, the concession company
was required to indemnify the government entity
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against any costs and damages incurred by the government entity in the event of late completion.

The government entity sometimes prefers an indemnity, because for a liquidated damages clause to be
enforceable, the amount of liquidated damages needs to be a genuine pre-estimate of the damages that
the government entity is likely to suffer, so as to avoid being construed as a penalty (and thus legally
unenforceable). In some cases, it is difficult for the government entity to make that genuine pre-
estimate.

On the tollroad deals, the concession companies are generally not allowed to collect tolls until they
have completed the whole tollroad. In some circumstances, they may be allowed to recover only a
portion of the pre-agreed tolls if parts of the tollroad are opened for early use.

(c) Ground/geotechnical conditions risks

The concession company is generally expected to take the full risk of the condition of the project land
and land requirements, unless it can demonstrate to the government entity that “carving out” a specific
risk would be a “value for money” proposition for the government entity. Typical carve-outs include a
right to negotiate for compensation, once the cost of a particular land issue exceeds a material
threshold. Recent concession deeds proposed by several governments have sought a site condition
indemnity covering not only undiscovered on-site pre-existing contamination, but also contamination
coming on to or from the site, regardless of whether it is attributable to the project. This is sometimes
seen by the concession company as being too wide, particularly where the indemnity would expose the
concession company to a clean-up and third party liability risk which is greater than the normal common
law and statutory liability of a landowner.

(d) Native title risks

Generally, native title risks will be assumed by the government entity. If there is a native title claim
made against the project site, the government entity will generally compensate the concession company
for any delay caused by that claim and reserve a right to terminate the concession agreement (and pay
an early termination amount) if the project is delayed beyond a specified period.

(e) Heritage or artefacts risks

Generally, heritage risks (other than those specifically identified and assumed by the concession
company) will be assumed by the government entity. If there is a heritage claim made against the
concession company over the project site, the government entity will negotiate to compensate the
concession company for any delay caused by that claim and the costs of dealing with that claim.

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However, in almost all cases, the government entity would have carried out a due diligence on each
project site and identified and transferred to the concession company all known heritage risks.

Both Aboriginal and European heritage risks need to be considered, although the issues are always site
specific.

(f) Planning approvals

Generally, the government entity would be responsible for obtaining the planning approval for the
projects. However, it is not uncommon for the concession company to seek variations to the original
project design and thus requiring modifications to the original approved planning instrument. In such
instances, the risk for subsequent approvals is generally assumed by the concession company.

A further issue arises where aspects of the planning approval process have not been completed at the
time of financial close. For example, in a recent toll road/tunnel project, the regulators have not yet
determined whether any treatment will be required for particle emissions from the tunnel air vents. The
parties had to allocate the risk of changes to both the construction and operating cost of the project due
to this future regulatory decision. This issue is often complicated by the fact that the government entity
which is negotiating with the private sector bidders has no role in the environmental decision-making
process, and cannot be seen to be trying to influence that process.

(g) Information technology and intellectual

property
Information technology plays a big part in any infrastructure project—this may include the tolling
technology for the tollroads, the security systems for a prison, the facilities management systems for
buildings, and the like. Intellectual property issues to be considered include:

 (i) ownership of the intellectual property and

licences to use;
 (ii) keeping the source codes in escrow; and
 (iii) attribution of contributors and waiver of moral
rights.
Depending on the type of infrastructure to be constructed, the government entity may require
ownership of, or an irrevocable, perpetual non-exclusive royalty-free licence to use, the intellectual
property associated with the infrastructure (including any associated equipment) during any step-in
period, and also after the concession period has ended. The concession company must obtain the
appropriate rights to the intellectual property so it can meet its obligations under the concession
agreement.

For high-tech equipment (such as telecommunications equipment, electronic tolling equipment and the
like), the originating supplier is unlikely to give the project parties access to the source code except in
limited
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circumstances, and then only after payment of appropriate compensation. In these cases, all interested
parties may be required to enter into escrow agreements under which the source code supplier deposits
the source code with an escrow agent, who will release that source code only in very limited
circumstances, such as insolvency of the supplier or termination of the supply contract.

Increasingly, governments also seek to use that intellectual property for other projects. They also seek
to obtain similar licences for third-party materials that are not owned by the concession company,
subject to payment of commercially reasonable licence fees. For example, in the recent Victorian toll
road project, the government entity has the right to obtain a licence (on commercial terms, to be
negotiated) for it (or its appointed concessionaires) to use the tolling system on other toll road projects
within that state, including both new and existing projects. If the concession company and its technology
suppliers create any innovation or efficiency, the government is no doubt hoping to benefit from those
improvements, by making them available to the bidders for later projects and thereby possibly reduce
the price that the government (or motorists) will pay for the use of the new facility. The private sector’s
protection lies in the “commercial terms” negotiation process.

(h) Probity and security risks

In prisons, court facilities, schools and hospital projects, the concession companies are required to
undertake probity checks on their and their subcontractors’ employees engaged in the delivery and
operation of the facilities. If any of those personnel do not satisfy the probity requirements, the
government entity has the right to require the concession company to remove them from the project.

(i) Force majeure events

In many recent concession agreements, the government entity has offered a particularly narrow and
prescriptive list of force majeure events. The consortium company obtains no performance relief unless
the cause of its problem is one of a clearly defined list of events. The following is an extract from a
recent PPP deal:

 “(i) lightning, hurricane, earthquake, natural

disaster, fire or flood (not caused maliciously
within the Facility after Operational
Commissioning) or epidemics;
 (ii) act of a public enemy, war (declared or
undeclared), revolution or other like hostilities,
radioactive contamination, ionising radiation, riot,
blockade (but excluding riot or blockade within
the Facility), terrorism, act of sabotage or
confiscation by order of any Government Agency;
or
 (iii) the failure of any water, sewerage, drainage
or gas Utility Service (being a total failure of
supply to the boundaries of the Site not a failure
caused by circumstances within the Site),
which … causes a party to be unable to perform any one or more of its obligations
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under the Transaction Documents, where the event or its consequences could not have been prevented
by the exercise of a standard of care and diligence consistent with that of a prudent person undertaking
the obligation (without that prudent person having any expectation of relief from performing that
obligation) including the expenditure of Agreed Reasonable Sums.” 10

The concession company generally seeks a broad description of natural disasters and other major
events beyond its control, with the specific events being mentioned only as illustrations. The concession
companies argue that it will be hard to prove, for example, that the facility was damaged by winds of
“hurricane” force, rather than by a mere “gale”, as a precondition to force majeure protection becoming
available; if the facility was properly designed and built, the fact that it was damaged by forces beyond
its designed capacity to withstand should, in itself, entitle the concession company to receive force
majeure protection. This debate is on-going.

(j) Facility management and upgrade

Generally, the concession companies will be required to operate and maintain the facilities in accordance
with “Operating and Maintenance Best Practices” or the “Project Objectives”. These will generally oblige
the concession company to provide best practices and methods in providing the services, consistent with
the following principles:

 (i) principles of continuous improvement;

 (ii) responding to advances in technology and
incorporating them into the operation and
maintenance of the facilities; and
 (iii) operating and maintaining the facilities to
nationally or internationally accepted practices
(including to standards consistent with law,
safety, reliability, protection of the environment,
maintaining sufficient and adequately trained
personnel and equipment, etc).
These clauses raise potentially difficult issues, if the government party expects the concession
company to respond promptly to all technological developments, regardless of whether other operators
of similar facilities are doing the same, and regardless of the remaining useful life of the current
equipment and systems. The concession company generally seeks to limit its obligation to upgrade its
systems, because any upgrade carried out under the “continuous improvement” banner will not entitle it
to an increase (or a review) of its level of charges, unless specific provision is made for this.

The concession companies are often required to prepare asset registers and asset management plans
and carry out annual review of the assets.

Generally, before the expiry of the concession term or termination of the concession agreement, the
parties will carry out an inspection of the assets to
10 See definition of force majeure in the Remand Centre and Correctional Centre contracts under the Partnerships
Victoria Correctional Facilities Project.

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verify that the assets have been maintained in accordance with the project requirements (including
ensuring that the relevant asset has the specified residual design life).

In addition, the government entity may seek to have additional security from the concession company
during the final years of the concession period, such as requiring the concession company to deposit
funds in an escrow account or put in place a handover bond to secure its obligations to ensure that the
facility when handed back to the government entity is able to satisfy the handover criteria.

(k) Refinancing risks

Any refinancing by the concession company will be subject to approval by the government entity. In
recent deals, the government entity requires a share of any financial benefits arising from the
refinancing undertaken by the concession company. The negotiations on this clause can become quite
detailed; in broad terms, the government entities currently seek 50% of any gain attributable to a
refinancing, unless the refinancing has been expressly contemplated in the original financial model (in
which case the benefit arising from the refinancing has already been factored in to the bid price
accepted by the government, and the refinancing gain realised should therefore belong to the
concession company). The recent tollroad projects show a marked change in the government’s approach
on this issue, compared to projects entered into three or more years ago.
 In the recent Victorian PPP prison deals, the government entity and the concession companies shared
equally the benefits of any cost reduction in debt servicing as a result of any refinancing (compared to
the debt servicing costs that were forecast under the base case financial model).

(l) Insurance risks (including uninsurable events)

Since 9/11, certain types of insurance coverage are either not possible to obtain or have become
increasingly difficult, or very expensive, to obtain. These insurance market issues make it hard for the
concession company to give an absolute undertaking to maintain a specified scope and level of
insurances over the concession term.

In the recent NSW PPP tollroad deals, if during the concession period it becomes not possible to obtain
insurances to cover certain types of risk the concession company may be relieved of that requirement,
until the insurance market changes.

In the recent Victorian PPP prison deal, if a risk which must be insured becomes uninsurable, the
parties shall negotiate for the risk to be managed by self-insurance through one of the parties, or for the
private sector to try to insure that risk through paying higher premiums and recovering that increase
from the government. If those options are not possible, then the
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government entity must indemnify the concession company for any loss or damage arising from that risk
occurring, or it may terminate the concession agreement.

(m) Security for private sector counter-party risk

The concession companies are generally required to provide security to the government entity for the
performance of their obligations under the project documents. These generally include unconditional
bank undertakings to cover obligations during the construction phase, operational phase and handover
of the facilities.

The government entity will also generally take a fixed and floating charge over the concession
company’s assets (subject to any priority of the project financiers). In the recent Victorian tollroad
project, the state’s security ranks first (ahead of the lenders) for step-in costs and certain other costs,
but on other occasions government entities have accepted second ranking security.

In the bidding process, a concession company will seek to minimise its bid costs. For example, it might
require the construction contractor and operator in a bidding consortium to provide the performance
bonds which the concession company is obliged to provide to the government entity, in addition to any
other bonding that the project lenders may require.

The performance bond issued to the government during the construction phase generally covers any
type of pre-completion default by the concession company, not just a default attributable to a
construction matter, and the government entity will require unfettered access to the bond. If the
construction contractor has procured this bond, a common contentious issue is what happens if the
government calls on the pre-completion bond for a non-construction matter. The resolution will depend
on the risk management strategies of the project parties.

One solution might be that the pre-completion bond provided by the construction contractor may only
be called by the government for a construction-contractor-related default. Alternatively, the concession
company (or a guarantor of sufficient financial standing) might indemnify the construction contractor if
the bond is called by the government for a non-construction-contractor default, although the
construction contractor’s claim against the concession company under such an indemnity would usually
rank behind the project lenders’ security.
 (n) Changes in law
The concession companies generally take the risk for changes in law from non-discriminatory or non-
specific legislation, although price change negotiations may be permitted in some cases. However, the
concession companies generally can negotiate to recover from the government costs
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increases arising from discriminatory changes in law or specific changes in law.

In recent NSW PPP tollroad deals, the concession companies have the right to negotiate with the
government entity to achieve an outcome which would restore the private party to its previous economic
position, up to a cap.

In recent Victorian PPP prison deals, the government entity will compensate the concession companies
for general changes in law provided that the financial impact exceeded the relevant amount assumed by
the concession companies in their financial model.

(o) Renegotiation clauses

Most economic infrastructure concession agreements contain a re-negotiation clause, which will apply if
certain specified events occur, such as a discriminatory change in law, force majeure, act of prevention
and other project-specific events. If a “renegotiation event” occurs, the concession company is entitled
to negotiate for compensation to redress the financial impact of that event, above an agreed materiality
threshold. In most cases, the negotiations seek to restore the concession company’s ability to service its
senior debt, and to restore a notional initial investor to their original base case equity return from the
project (or to their actual level of return, if lower). Following those negotiations, the concession company
will be compensated generally by extending the concession term, increasing the tolls or charges that the
concession company can collect, direct monetary compensation or a combination of any of the above.

The benefit of the compensation may flow significantly later than the time at which the delay is
actually suffered. Although that timing delay is taken into account in calculating the compensation, the
concession company (or, often, its subcontractors) must fund their additional costs in the meantime,
leading to a timing mismatch.

There is generally a debate within the bidding consortia as to how this timing risk should be allocated
between the sponsors and the construction contractors. In one recent major PPP project, this was
resolved by the parties agreeing to a mechanism which gives the construction contractor first access to
any cash flow that is received from the renegotiation process. Generally, the project lenders are unwilling
to allow the concession company to be obliged to compensate the construction contractor for its
additional costs arising from a renegotiation event, except out of the actual cash flow received from the
renegotiation.

Renegotiation clauses in economic infrastructure projects invariably work off a “material adverse
effect” threshold. An event which has an effect falling below that threshold must be borne by the
concession company and its contractors, without any right to adjust the pricing, or renegotiate any other
aspects of the project. An event which has an effect greater than the
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303

“materiality” threshold will entitle the concession company to open negotiations.

 There is no definition of “materiality” in these concession agreements, and the concession company
faces the possibility that an impact which might be considered to be “material” today might not
necessarily be considered “material” throughout the life of the concession, particularly if the facility has
become a mature operation, generating consistent profits.

There was some discussion of this issue during 2004, in connection with a proposed renegotiation
under a toll road contract, and it is possible that a renegotiation clause may be “put to the test” during
2005.

Renegotiation clauses should therefore be viewed as a “safety valve” mechanism, entitling the
concession company to embark on a process of political and commercial negotiations, rather than as a
guarantee of full redress.

Renegotiation clauses, once invoked, require the parties to negotiate in good faith to achieve an
outcome which restores the concession company to its previous economic position, up to an agreed cap
(such as, for example, the base case equity return predicted by the financial model). If the project is
operating below that level, then the renegotiation process must seek to restore the concession company
to that lower level; it is not a source of any “windfall gain”. If the project is operating above the specified
benchmark, then either no renegotiation is available or, in most recent cases, the renegotiation will only
seek to restore the benchmark position. This means, in practical terms, that a renegotiation event may
remove any “blue sky” rate of return from a PPP project (above the predicted benchmark rate of return)
without the concession company having any right to negotiate with the government entity. Some older
toll road projects provide for a separate target for the renegotiation process (such as “base case plus a
specified percentage”) where the renegotiation results from direct government action, such as a
discriminatory change in law. However, more recent projects have not taken that approach.

(p) Step-in and termination

Generally, the concession agreements will contain a mechanism for the government entity to terminate
the concession agreement following a failure by the concession company to rectify a default under the
concession agreement. The government entity’s termination rights are also subject to any right for the
project financiers to step in and cure that default.

The government entity also reserves a right to “step-in” and take over the construction contracts and
operation contracts if the concession company defaults. The principal contractors are required to enter
into direct agreements with the government agreeing to their contracts being novated upon termination
of the concession agreement. There has been at least one
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recent example of a government entity also seeking direct agreements with secondary subcontractors.

In some recent social infrastructure PPP deals, the government entity reserved to itself the right to
terminate the concession agreement for its own convenience. 11 A termination for convenience clause
allows a party to terminate at its discretion and is not limited to any circumstance (e.g. whether or not
there is a breach of the contract by the other party). The clause invariably includes a compensation
regime under which the contractor is paid up to the point of termination for work carried out, but does
not normally include an amount in respect of loss of anticipated profits.

(q) Performance risks (interruption to operations,

prisoner escapes, etc.)
The concession company will generally be required to meet specified performance requirements.
Payments to the concession company will usually be linked to the quality, amount and frequency of the
services, and the availability of the infrastructure facility. Performance measurement may be linked to
key performance indicators or an agreed set of performance standards. If the concession company fails
to meet the performance requirements, then its revenue stream (e.g. the tolls it is able to collect from
the tollroad users, or the output or availability charges for use of a facility such as a hospital, prison,
school, etc.), will be reduced to reflect the level of achieved output performance.

4. RECENT CASE STUDY—SPENCER STREET

STATION REDEVELOPMENT
Recent events regarding the Spencer Street Station redevelopment indicate how the “partnership” can
potentially go off its rails. In that project, the Victorian Government has granted a concession to the Civic
Nexus Consortium (“Consortium”) to carry out a redevelopment of Spencer Street Station, which is a
major commuter and regional rail station in Melbourne.

The project involves the development of a transport interchange, modification and upgrading of certain
existing rail infrastructure and signalling systems and building a commercial development adjacent to
the interchange facility. The key stakeholders included the Victorian Government, existing private sector
and government transport operators and users/consumers. The project is not a “green fields project”. It
involves the construction of an imposing wave-form roof structure over existing operational rail lines.

It is a key requirement for the project that the existing station remain operational at all times as the
interests of Victoria’s private sector rail
11 See Remand Centre and Correctional Centre projects under Partnerships Victoria Correctional Facilities Project.

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Risk Allocation in PPP Projects in Australia
305

operators are paramount to the Victorian Government. This means that construction work over the tracks
can only be carried out in very limited time gaps at night when the trains are not running. Another
challenge for the parties is to complete the interchange facility before the 2006 Commonwealth Games
in Melbourne.

The construction contract was awarded to Leighton Contractors (“Builder”) (which is part of the
Consortium). Under the concession agreement, the majority of the construction risks associated with the
transport interchange (including negotiating hours of access) are allocated to the Consortium which in
turn transferred those risks to the Builder. The Builder was not able to negotiate track access beyond
very limited late night hours, which delayed construction and caused cost blow-outs.

Whilst it is widely accepted that the Victorian Government has successfully managed to transfer
substantial risks to the private sector, if the private sector parties are unable to deliver the project,
questions are raised regarding the approach taken by the Victorian Government in working
collaboratively with the private sector in solving problems on the project and the nature of the
“partnership”. As the chief executive of the Builder’s parent company put it:

“If you take a high-level perspective of PPPs … they have not necessarily been embraced by bureaucrats
because they see implementation of these facilities as encroaching in their traditional domain. … In
terms of the construction of the model, in terms of the risk-sharing and equity and reasonableness of it,
it’s completely skewed towards the government or the government agency. There’s a huge embedded
bias in the issue. The bias is against the provider.”

On the other side of the coin, one could argue that the government had achieved its objectives in
managing clear risk transfer and any potential for unplanned cost blow-outs.
 Following weeks of “media warfare”, the parties negotiated a compromise on the access issue where
the government undertook to provide greater access for the Consortium to carry out the works (including
providing additional platforms and rerouting trains).

The Spencer Street Station debate has focused the attention of private sector parties on ensuring there
is a clear understanding of the challenges facing project delivery, and ensuring there is a proper
assessment of project delivery methods and risks.12

Private sector parties that have suggested that government agencies need to put in place a better
process to identify properly and manage risks before embarking on the procurement process (instead of
taking the simple approach of getting the private sector parties to price and assume that risk regardless
of whether it can be managed properly).

A question to pose is whether the drivers behind the use of PPPs are to deliver large capital projects
with the aim of ensuring that there is no risk for
12 “Capital projects hit a brick wall”, The Weekend Australian, 10 July 2004; “Station Fiasco heading to court”, The
Age newspaper, 15 July 2004; “Nightmare on Spencer Street”, The Age newspaper, 17 July 2004; “Leighton’s Spencer
St gravy train”, Australian Financial Review, 6 August 2004.

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budget overruns and minimising the political risks associated with any perceived failure or delay in
delivering the projects, rather than proper assessment and optimal allocation (including sharing of risks
where appropriate) of risks and responsibilities.

5. WHERE TO NOW?
The Victorian Department of Treasury and Finance (VDTF) in late 2004 circulated a draft paper entitled
Standardisation of Contractual Terms, outlining its preferred risk allocation in a wide range of
circumstances. This paper was the subject of a series of workshops conducted in Sydney and Melbourne
with a wide range of industry participants. Following that consultation with industry participants and
various state and federal counterparts the VDTF in June 2005 issued the Victorian Government’s
Standard Commercial Principles document which will apply to all Partnership Victoria projects. The VDTF
will also be preparing draft standard contractual clauses for consultation with industry and other state
governments with the aim of completing this exercise in early 2006.

The Victorian initiative may lead to a template which is adopted by a number of states. That outcome
would certainly be encouraged by both the private sector parties and government entities, as a means of
reducing the time and cost of the PPP bidding process. The level of consultation which has arisen to date
from the Victorian initiative is encouraging.

Some states (particularly Queensland) are currently holding back from bringing a series of potential
PPP projects to the market. The reasons for this are a combination of financial, industrial relations and
political concerns, but one issue that is probably receiving government attention is the time and cost of
negotiating PPPs. The Victorian initiative is off to a good start, and there will be many market participants
hoping that it will lead to an English-style streamlining of the PPP negotiation process during 2005.

APPENDIX 1: LIST OF RECENT PPP PROJECTS

IN AUSTRALIA

Numerous PPP projects have been awarded or are to be awarded under the existing PPP and PFP policies.
They include13:
13 There have been a number of other privately financed public infrastructure projects that have been delivered in
Victoria, New South Wales and South Australia before the PPP policies were released. They include the Mildura Base
Hospital, Sydney Harbour Tunnel, M2 Motorway, Eastern Distributor toll roads, Prospect, McArthur and Wyuna water
treatment plants, Riverland Water project in South Australia, Yan Yean water treatment plant in Victoria, Brisbane
Airtrain CityLink in Queensland.

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Risk Allocation in PPP Projects in Australia
307

PPP Projects by Government

Government Completed or under construction Starting 2004 Expected to start in 2005

Commonwealth
 Defence  Accommodation
Headquarters Joint for Defence
Operation Personnel Without
Command Facility Dependants
 Customs Coast  Rotary Wing
Watch Aerial Training/
Surveillance Equipment
New South
Wales  NSW New Schools  Forensic Hospital  Rail Corp Rolling
Project—9 schools  Mater Hospital, Stock
 Eastern Creek Urban Newcastle  Social Housing,
Resource—  Newcastle Port NSW
Reduction, Recovery Multi-purpose  Parramatta
and Recycling Container Terminal Hospital Site
 Cross City Tunnel,  Chatswood Redevelopment
NSW Transport  Redevelopment of
 Westlink M7 Interchange Bus Depots
Motorway, NSW  Parramatta  M4 East Extension
 Lane Cove Tunnel, Transport (possibly later)
NSW Interchange
(unsolicited
proposal)
 Newcastle Polyclinic
 Electric trains
Queensland
 Southbank  Brisbane North-
Education and South Tunnel
Training Precinct  Boggo Rd Mixed
 Townsville Industrial Use Precinct
Recycling  Wetalla
Wastewater Project
 ICT Projects—New
Queensland
Drivers Licence
 Townsville
Passenger
Terminal
 Gold Coast Cruise
 Government Completed or under construction Starting 2004 Expected to start in 2005
Terminal
 Smart Classrooms
 North-South
Bypass Tunnel
(possibly later)
 Lockyer Water
Reliability (possibly
later)
 Gold Coast Public
Transport (possibly
later)
Victoria
 Correctional Program  Ballarat/Creswick  Affordable Housing
Centre (300 bed) and Reclaimed Water  Aged Care
the Remand Centre (Central Highlands Facilities/Sub
(600 bed) under the Water) Acute Facilities
Correctional Projects  Emergency Alerting  Relocatable
 Victorian County System Classrooms
Court  Mitcham–Frankston (possibly later)
 Casey Hospital, Freeway  Werribee Plains
Berwick—229 bed  Royal Melbourne Vision
hospital Showgrounds  Eastern Treatment
 Spencer Street Redevelopment Plan
Station  Royal Women’s  Metropolitan Food
Redevelopment, Hospital Services Project
Melbourne Redevelopment  Melbourne
 Mobile Date Network Wholesale Fruit,
 Docklands Film and Vegetable, Flower
Television Studio and Fishmarkets
Complex (possibly later)
 Echuca/Rochester  Barwon Water—
Wastewater Bio-solids Black
Treatment Plant Rock Treatment
 Enviro Altona Plant
 Melbourne
Convention Centre
South Australia
 State Aquatic  Supreme Court
Centre Redevelopment
 Regional Police (possibly later)
Stations and Courts  Affordable Housing
Administration
Authority Facilities
Tasmania Risdon Prison Redevelopment Affordable Housing
Western CBD Courts Complex Office Accommodation Health
Australia Infrastructure
Northern Convention Centre/Water Front
Territory Redevelopment
APPENDIX 2: OVERVIEW OF SOME STATE
AND TERRITORY GOVERNMENTS’ LIKELY
PREFERRED RISK ALLOCATION14
 Risk category
Existing structure (refurbishment/extensions)
Victoria—Private party.

New South Wales—Private party.

Queensland—Private party.

Western Australia—Private party.*

Northern Territory—Private party.

Site conditions
Victoria—Private party.

New South Wales—Private party.

Queensland—Private party.

Western Australia—Private party.*

Northern Territory—Private party.

Approvals
Victoria—Private party possibly up to a specific cost amount unless government assumes because of
complexity or sensitivity.

New South Wales—Private party possibly up to a specific cost amount unless government assumes
because of complexity or sensitivity.

Queensland—Private party unless government assumes some or all of risk due to complexity or
sensitivity of particular project.

Western Australia—Private party.*

Northern Territory—Private party.*

Additional approvals during the course of project

cannot be obtained
Victoria—Private party.*

New South Wales—Private party unless government has initiated the change requiring approval.

14 Victoria—Partnerships Victoria, Risk Allocation and Contractual Issues, June 2001; New South Wales—Working with
Government—Guidelines For Privately Financed Projects, November 2001; Queensland—Public Private Partnerships
Guidance Materials, Supporting Documents—Risk Management, August 2002; Western Australia—Partnerships for
Growth, Policies and Guidelines for Public Private Partnerships in Western Australia, December 2002; Northern Territory
—Territory Partnerships, Policy Framework, February 2003: please note that the summary is based on a diagrammatic
allocation of risk set out in this policy.

* Not specified but assumed to be private party’s risk.

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Risk Allocation in PPP Projects in Australia
309

Queensland—Private party unless government has initiated the change requiring approval.

Western Australia—Private party.*

Northern Territory—Private party.*

Environmental (contamination risk)

 Victoria—Private party will generally assume the risk although because of the time and cost
implications of full due diligence for each bidder, some risk sharing may be a cost effective solution
particularly using a regime for allocation of cost consequences such as a Material Adverse Effect regime.

New South Wales—Private party will generally assume the risk. Where knowledge about contamination
on a site is insufficient to quantify the risk and the time and cost implications of full contamination
investigation and due diligence for each bidder are excessive, some risk sharing may be a cost-effective
solution particularly using a regime for allocation of cost consequences such as Material Adverse Effect
regime.

Queensland—Private party will generally assume the risk although because of the time and cost
implications of due diligence for bidders, some risk sharing may be a cost effective solution.

Western Australia—Private party.

Northern Territory—Private party.*

Environmental (risk of offsite pollution has been

caused from a government site to adjacent land)
Victoria—Government may assume responsibility by way of indemnity or obligation to compensate for
unidentified offsite pollution pre-financial close where the site is a government site.

New South Wales—Government may assume responsibility by way of indemnity or obligation to

compensate for unidentified offsite pollution pre-financial close where the site is a government site.

Queensland—Government may assume responsibility by way of indemnity or obligation to compensate

for unidentified off-site pollution pre-financial close.

Western Australia—Private party.*

Northern Territory—Private party.*

Environmental (risk of offsite pollution is caused

to adjacent land)
Victoria—Private party will be in control of activities on the site post financial close and will be required
to assume risk of offsite pollution caused by those activities. Also it will take risk of offsite pollution from
any site which is not a government site (even if it occurs pre-completion).

New South Wales—Private party will be in control of activities on the site post financial close and will be
required to assume risk of offsite pollution caused by those activities. Also it will take risk of offsite
pollution from any site which is not a government site (even if it occurs pre-completion).

Queensland—Private party will be in control of activities on the site post financial close and will be
required to assume risk of offsite pollution caused by those activities. Also it will take risk of offsite
pollution from any site which is not a government site.

Western Australia—Private party.*

Northern Territory—Private party.*

Clean up and rehabilitation

Victoria—Private party to take risk (whether government is to resume or not) and must demonstrate
financial capacity or support to deliver the site in the state required by the government.

* Not specified but assumed to be private party’s risk.

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 New South Wales—Private party to take risk (whether government is to resume or not) and must
demonstrate financial capacity or support to deliver the site in the state required by the government.

Queensland—Private party to take risk (whether government is to resume or not) and must
demonstrate financial capacity or support to deliver the site in the state required by the government.

Western Australia—Private party.*

Northern Territory—Private party.*

Native title
Victoria—Government will generally take risk on government preferred sites as it generally has a better
understanding of procedures, has special powers of acquisition and use of native title for infrastructure
and is usually in best position to manage this risk; government is also in better position to negotiate
where policy discourages use of compulsory acquisition power.

New South Wales—Government will usually take risk on government preferred sites.

Queensland—Government and private party to jointly manage risk.

Western Australia—Government.

Northern Territory—Not specified.

Cultural heritage
Victoria—Government will generally take risk on government preferred site as it generally has a better
understanding of procedures, and is usually in best position to manage the risk otherwise private party
takes responsibility.

New South Wales—Government on a government preferred site, otherwise private party takes
responsibility.

Queensland—Government and private party to jointly manage risk.

Western Australia—Not specified.

Northern Territory—Not specified.

Availability of site (that is not owned by

government or private party, cannot be acquired
by negotiation)
Victoria—Private party, as it makes the decision to bid on a non-preferred site.

New South Wales—Private party, as it makes the decision to bid on a non-preferred site.

Queensland—Private party, as it makes the decision to bid on a non-preferred site.

Western Australia—Not specified.

Northern Territory—Not specified.

Design
Victoria—Private party will be responsible except where an express government mandated change has
caused the design defect.

New South Wales—Private party will be responsible except where an express government mandated
change has caused the design defect.

Queensland—Private party will be responsible except where an express government mandated change
has caused the design defect.

Western Australia—Private party.

Northern Territory—Private party.

 Construction
Victoria—Private party will be liable unless the event is one for which relief as to time or cost or both is
specifically granted under the contract, such as force majeure or government intervention.

* Not specified but assumed to be private party’s risk.

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311

New South Wales—Private party will be liable unless the event is one for which relief as to time or cost
or both is specifically granted under the contract, such as force majeure or government intervention.

Queensland—Private party will be liable unless the event is one for which relief as to time or cost or
both is specifically granted under the contract, such as force majeure or government intervention. Banks
may provide a letter of credit, which can be drawn upon by equity parties if construction is not
completed.

Western Australia—Private party.

Northern Territory—Private party.

Commissioning
Victoria—Private party, although government will assume an obligation to co-operate and facilitate
prompt public sector attendance on commissioning tests.

New South Wales—Private party, although government will assume an obligation to co-operate and
facilitate prompt public sector attendance on commissioning tests.

Queensland—Private party, although government will assume an obligation to co-operate and facilitate
prompt public sector attendance on commissioning tests.

Western Australia—Private party.

Northern Territory—Private party.

Technical obsolescence or innovation

Victoria—Private party except where contingency is anticipated (such as in certain high technology
projects) and government agrees to share risk possibly by funding a reserve.

New South Wales—Private party except where contingency is anticipated (such as in certain high
technology projects) and government agrees to share risk possibly by funding a reserve.

Queensland—Private party except where contingency is anticipated (such as in certain high technology
projects) and government agrees to share risk possibly by funding a reserve.

Western Australia—Private party.

Northern Territory—Private party.*

Probity
Victoria—Government.†

New South Wales—Government.

Queensland—Not specified.

Western Australia—Government.

Northern Territory—Government.†
 Financial/sponsor risk (private party becomes
insolvent, etc. or is unable to deliver the required
infrastructure and/or operational systems; or
unable to effectively manage the service delivery
operations)
Victoria—Government.

New South Wales—Government.

Queensland—Government.

Western Australia—Government.

Northern Territory—Government.

Change in ownership or control of private party

resulting in weakening in financial standing or
support or other detriment to the project
Victoria—Government risk as to the adverse consequence of a change if it occurs, private party that its
commercial objectives may be inhibited by a restrictive requirement for government consent to a
change.

* Not specified but assumed to be private party’s risk.

† Not specified but presumed to be government entity’s risk.

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New South Wales—Government risk as to the adverse consequence of a change if it occurs, private
party that its commercial objectives may be inhibited by a restrictive requirement for government
consent to a change.

Queensland—Government risk as to the adverse consequence of a change if it occurs, private party

that its commercial objectives may be inhibited by a restrictive requirement for government consent to a
change.

Western Australia—Government.

Northern Territory—Government.†

Interest rates pre-completion (risk that they may

move adversely impacting bid pricing)
Victoria—Not specified.

New South Wales—Government may assume or share.

Queensland—With private party from the date that it is reasonably likely that concession agreements
will be entered into such that a hedging instrument can be used.

Western Australia—Case by case.

Northern Territory—Not specified.

Financing unavailable
Victoria—Private party.

New South Wales—Private party.

Queensland—Private party.
 Western Australia—Private party.

Northern Territory—Private party.*

Further finance required by reason of change in

law or other event outside scope of contract
Victoria—Government takes the risk that private finance is unavailable.

New South Wales—Government takes the risk that private finance is unavailable.

Queensland—Government takes the risk that private finance is unavailable.

Western Australia—Case by case.

Northern Territory—Not specified.

Refinancing benefit
Victoria—Private party to benefit. Government will share in limited circumstances (essentially in
symmetrical risk allocation and super profits).

New South Wales—Private party to benefit. Government will share in limited circumstances (essentially
in symmetrical risk allocation and super profits).

Queensland—Shared.

Western Australia—Case by case.

Northern Territory—Not specified.

Tax changes
Victoria—Private party.

New South Wales—Private party.

Queensland—Private party.

Western Australia—Private party.

Northern Territory—Private party.*

Inputs cost more than anticipated, are of

inadequate quality or are unavailable in required
quantities
Victoria—Private party unless government provides input, e.g. water catchment.

New South Wales—Private party.

* Not specified but assumed to be private party’s risk.

† Not specified but presumed to be government entity’s risk.

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313

Queensland—Private party unless government provides input.

Western Australia—Private party.

Northern Territory—Private party.*

Maintenance and refurbishment

Victoria—Private party.

New South Wales—Private party.

 Queensland—Private party.

Western Australia—Private party.

Northern Territory—Private party.*

Changes in government’s output specification

outside agreed specification range
Victoria—Government.

New South Wales—Government.

Queensland—Government.

Western Australia—Not specified.

Northern Territory—Not specified.

Operator failure (financially or failure to provide

contracted services to specification)
Victoria—Private party is fully and primarily liable for all obligations to government irrespective of
whether it has passed the risk to a subcontractor.

New South Wales—Private party is fully and primarily liable for all obligations to government
irrespective of whether it has passed the risk to a subcontractor.

Queensland—Private party is fully and primarily liable for all obligations to government irrespective of
whether it has passed the risk to a subcontractor.

Western Australia—Private party.

Northern Territory—Private party.

General economic downturn (risk in reduced

demand for the contracted service)
Victoria—Private party except to the extent that government has committed to an availability payment
element or agreed to provide redress for impact of government subsidised competition.

New South Wales—Private party except to the extent that government has committed to an availability
payment element or agreed to provide redress for impact of government subsidised competition.

Queensland—Private party.

Western Australia—Private party.

Northern Territory—Private party.

Competition (risk of alternate suppliers of

contracted service competing for customers)
Victoria—Private party except to the extent that government has committed to an availability payment
element or agreed to provide redress for impact of government subsidised competition.

New South Wales—Private party except to the extent that government has committed to an availability
payment element or agreed to provide redress for impact of government subsidised competition.

Queensland—Private party.

Western Australia—Private party.

Northern Territory—Private party.*

* Not specified but assumed to be private party’s risk.

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Demographic change (affecting demand for

contracted service)
Victoria—Private party except to the extent that government has committed to an availability payment
element.

New South Wales—Private party except to the extent that government has committed to an availability
payment element. Queensland—Private party. Western Australia—Private party. Northern Territory—
Private party.*

Inflation risk
Victoria—Private party takes risk on methodology to maintain value. Government shares to the extent
of agreed indexation.

New South Wales—Private party takes risk on methodology to maintain value. Government shares to
the extent of agreed indexation.

Queensland—Private party takes risk on methodology to maintain value.

Western Australia—Not specified.

Northern Territory—Private party.*

Withdrawal of support network (applies where the

facility relies on a complementary government
network)
Victoria—Government where the change discriminates against the project.

New South Wales—Government where the change discriminates against the project.

Queensland—Private party except where Government initiates changes that discriminate against the
project.

Western Australia—Not specified.

Northern Territory—Not specified.

Changes in competitive network (existing network

is extended/changed/repriced so as to increase
competition for the facility)
Victoria—Private party except to the extent that government provides redress for appropriate
discriminatory changes.

New South Wales—Private party except to the extent that government provides redress for appropriate
discriminatory changes.

Queensland—Private party except to the extent that government provides redress for appropriate
discriminatory changes.

Western Australia—Not specified.

Northern Territory—Not specified.

Interface risk that delivery of core services

(managed by government) in a way which is not
specified/anticipated in the contract adversely
affects the delivery of contracted services
Victoria—Private party except to the extent that government provides redress for appropriate
discriminatory changes.
 New South Wales—Private party except to the extent that government provides redress for appropriate
discriminatory changes.

Queensland—Private party except to the extent that government provides redress for appropriate
discriminatory changes.

Western Australia—Not specified.

Northern Territory—Not specified.

* Not specified but assumed to be private party’s risk.

Pt 3]
Risk Allocation in PPP Projects in Australia
315

Interface risk that delivery of contracted services

adversely affects the delivery of core services in a
manner not specified/anticipated in contract
Victoria—Private party.

New South Wales—Private party.

Queensland—Private party.

Western Australia—Not specified.

Northern Territory—Not specified.

Industrial relations
Victoria—Private party.

New South Wales—Private party.

Queensland—Private party.

Western Australia—Private party.

Northern Territory—Private party.

Changes in law of state government which could

not be anticipated at signing and which is
directed specifically and exclusively at the project
and which has adverse capital expenditure or
operating cost consequences for the private party
Victoria—Government: although the parties may share the financial consequences in an agreed way,
e.g. private party meeting a percentage of the cost up to a specific limit and government meeting any
excess.

New South Wales—Government: although the parties may share the financial consequences in an
agreed way, e.g. private party meeting a percentage of the cost up to a specific limit and government
meeting any excess.

Queensland—Government: although the parties may share the financial consequences in an agreed
way, e.g. private party meeting a percentage of the cost up to a specific limit and government meeting
any excess.

Western Australia—Government.

Northern Territory—Government.
 Changes in law which could not have been
anticipated and which are general in their
application and cause a marked increase in
capital costs and/or has substantial operating cost
consequences for the private party
Victoria—Government: although the parties may share the financial consequences in an agreed way,
e.g. private party meeting a percentage of the cost up to a specific limit and government meeting any
excess.

New South Wales—Government: although the parties may share the financial consequences in an
agreed way, e.g. private party meeting a percentage of the cost up to a specific limit and government
meeting any excess.

Queensland—Private party.

Western Australia—Government.

Northern Territory—Government.

Statutory regulation imposing pricing or other

changes
Victoria—Private party.

New South Wales—Private party.

Queensland—Private party.

Western Australia—Not specified.

Northern Territory—Not specified.

Force majeure
Victoria—Private party takes the risk of loss or damage to the asset and loss of revenue, government
takes some risk of service discontinuity both as to contracted service and core
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service subject to insurance availability and will need to arrange alternative service provision the cost of
which will be met from redirected service payments and (if insurable) any shortfall made up from
insurance proceeds.

New South Wales—Private party takes the risk of loss or damage to the asset and loss of revenue,
government takes some risk of service discontinuity both as to contracted service and core service
subject to insurance availability and will need to arrange alternative service provision the cost of which
will be met from redirected service payments and (if insurable) any shortfall made up from insurance
proceeds.

Queensland—Private party takes the risk of loss or damage to the asset and loss of revenue,
government takes some risk of service discontinuity both as to contracted service and core service
subject to insurance availability and will need to arrange alternative service provision the cost of which
will be met from redirected service payments and (if insurable) any shortfall made up from insurance
proceeds.

Western Australia—Shared.

Northern Territory—Potentially shared.

 Default and termination
Victoria—Private party will take the risk of loss of value on termination.

New South Wales—Private party will take the risk of loss of value on termination.

Queensland—Private party will take the risk of loss of value on termination. Government assumes risk
of disruption to service.

Western Australia—Government.

Northern Territory—Not specified.

Residual value on transfer to government at

termination or expiry of concession term
Victoria—Government.

New South Wales—Government.

Queensland—Government.

Western Australia—Case by case.

Northern Territory—Not specified.

APPENDIX 3: OVERVIEW OF RISK

ALLOCATION IN RECENT PPP
INFRASTRUCTURE CONTRACTS

PART A: TOLLROAD PROJECTS

Risks
Concession period (this is period commencing
from contract execution)
Mitcham–Frankston Freeway (2004)—39 years.

Westlink M7 (Western Sydney Orbital) (2003)—34 years.

Cross City Tunnel (2002)—33 years.

Spencer Street Station Redevelopment (2001)—30 years.15

Design, construction and commissioning risks

Mitcham–Frankston Freeway (2004)—The concession company takes all design, construction and
commissioning risks for the project.The concession company is also obliged to comply with obligations
under a number of interface agreements with the owners of railway.

15 The concession company was also given development rights for a lease of 10 years in return for an upfront cash
payment to the government.

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Westlink M7 (Western Sydney Orbital) (2003)—The concession company takes all design, construction
and commissioning risks for the project. The concession company is also obliged to comply with
obligations under a number of interface agreements with the owners of adjoining tollroads and railway.

Cross City Tunnel (2002)—The concession company takes all design, construction and commissioning
risks for the project. The concession company is also obliged to comply with obligations under a number
of interface agreements with the owners of adjoining tollroads, railway and other utilities.
 Spencer Street Station Redevelopment (2001)—The concession company takes all design, construction
and commissioning risks for the project. The concession company is required to ensure that it does not
disrupt existing suburban train operations running through the station.

Delay and completion risks

Mitcham–Frankston Freeway (2004)—The concession company is obliged to use its best endeavours to
achieve the completion dates. The concession company is entitled to extensions of time for certain
events such as acts of prevention, industrial actions resulting from the government authority’s actions,
force-majeure-type events, changes in law that directly affected the project, and delays due to certain
actions taken by third parties under environmental related legislation.

Westlink M7 (Western Sydney Orbital) (2003)—The concession company is obliged to use its best
endeavours to achieve the completion dates. There is no extension of time provision.

Cross City Tunnel (2002)—The concession company is obliged to use its best endeavours to achieve
the completion dates. There is no extension of time provision.

Spencer Street Station Redevelopment (2001)—The concession company is obliged to achieve

completion of specified milestones by specified milestone dates. It is liable to pay liquidated damages to
the government entity at the rate of $10,000 per day for failure to achieve specified milestones and
$25,000 per day to meet the schedule date for final completion. The concession company is entitled to
extensions of time for certain events such as a fraudulent, negligent or intentional act or omission of the
government entity, certain industrial action, rail accidents, native title claims and force majeure events.
It is able to claim delay costs (including any agreed financing costs) associated with those delays. As the
concession company is required to work in an operating environment, it is liable for liquidated damages
that the government entity has to pay to the railway operators if the concession company fails to hand
back the lines on time.

Ground/geotechnical conditions risks

Mitcham–Frankston Freeway (2004)—The concession company takes the risk of all physical conditions
of the land and its surroundings.

Westlink M7 (Western Sydney Orbital) (2003)—The concession company takes the risk of all physical
conditions of the land and its surroundings.

Cross City Tunnel (2002)—The concession company takes the risk of all physical conditions of the land
and its surroundings. In the case of hazardous contamination, those risks are limited to the disturbance
of contaminants caused by the concession company, and the concession company is obliged to remove
that contamination at its own costs.

Spencer Street Station Redevelopment (2001)—The concession company takes the risk of any pre-
existing contamination which was known to the concession company and could reasonably be
anticipated by an experienced contractor having regard to information provided by the government, and
any contamination due to leaching, deterioration or alteration to the above category of pre-existing
contamination. The concession company and the government entity shared equally the cost of dealing
with any pre-existing contamination which falls outside the category of pre-existing contamination
described above.

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Native title risks

 Mitcham–Frankston Freeway (2004)—The government entity will compensate the concession company
for any costs incurred by it in complying with all reasonable directions from the government entity, or
court or compliance with any other legal requirement arising from a native title claim. If the concession
company is prevented from carrying out the works as a result of the existence of a native title
application or native title found to exist on the land, this will trigger the renegotiation process.

Westlink M7 (Western Sydney Orbital) (2003)—The government entity will compensate the concession
company for any costs incurred by it in complying with all reasonable directions from the government
entity, or court or compliance with any other legal requirement arising from a native title claim. In some
circumstances, the concession company may trigger the renegotiation process. If the concession
company is prevented from carrying out the works for more than six months, the government entity has
the right to terminate the concession agreement.

Cross City Tunnel (2002)—The government entity will compensate the concession company for any
costs incurred by it in complying with all reasonable directions from the government entity, or court or
compliance with any other legal requirement arising from a native title claim.

Spencer Street Station Redevelopment (2001)—The government entity will compensate the concession
company for any costs associated with a delay or acceleration of the works due to a native title claim.

Heritage/artefacts issues
Mitcham–Frankston Freeway (2004)—The concession company took this risk.

Westlink M7 (Western Sydney Orbital) (2003)—The government entity will compensate the concession
company for any costs incurred by it in complying with all reasonable directions from the government
entity, or court or compliance with any other legal requirement arising from a heritage claim. In some
circumstances, the concession company may trigger the renegotiation process.

Cross City Tunnel (2002)—The government entity will compensate the concession company for any
costs incurred by it in complying with all reasonable directions from the government entity, or court or
compliance with any other legal requirement arising from a heritage claim. In some circumstances, the
concession company may trigger the renegotiation process.

Spencer Street Station Redevelopment (2001)—The concession company took this risk.

Third party claims

Mitcham–Frankston Freeway (2004)—The concession company must indemnify the government entity
against any claims from third parties arising out of any breach of the concession agreement by the
concession company.

Westlink M7 (Western Sydney Orbital) (2003)—The concession company must indemnify the
government entity against any claims from third parties arising out of any breach of the concession
agreement by the concession company.

Cross City Tunnel (2002)—The concession company must indemnify the government entity against any
claims from third parties arising from any breach by the concession company of the concession
agreement, except for those claims arising from any pre-existing contamination or third party claims for
economic losses arising from the decision by the government to proceed with the project or the
existence or location of the project or local traffic management measures in accordance with the
planning approval.

Planning approval
Mitcham–Frankston Freeway (2004)—The concession company is not required to obtain a planning
approval as it is excepted under the project-specific legislation. It is obliged to obtain
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all approvals contemplated by the project-specific legislation except for those exempted under that
legislation.

Westlink M7 (Western Sydney Orbital) (2003)—The concession company is obliged to comply with all
conditions of the planning approval except those which are specifically identified as belonging to the
government entity to perform. If the planning approval is modified or a new planning approval is issued
resulting in a change to the project (other than resulting from the concession company’s breach), the
government entity must compensate the concession company. In certain circumstances, the concession
company may trigger the renegotiation process.

Cross City Tunnel (2002)—The concession company is obliged to comply with all conditions of the
planning approval except those which are specifically identified as belonging to the government entity to
perform. If there was a legal challenge to the planning approval (including the environmental
assessment), the government entity must indemnify the concession company arising from delay caused
by that challenge.

Spencer Street Station Redevelopment (2001)—The concession company takes this risk.

Operation and maintenance/Facility management

Mitcham–Frankston Freeway (2004)—The concession company is obliged (amongst other
requirements) to operate and maintain the infrastructure with “Operation and Maintenance Best
Practices”. The concession company is obliged to provide security of $5m. during the operation phase
(which may be increased to $20m. if a non-compliance notified to the concession company has not been
fixed).

Westlink M7 (Western Sydney Orbital) (2003)—The concession company is obliged (amongst other
requirements) to operate and maintain the infrastructure with “Operation and Maintenance Best
Practices”. If the concession company fails to comply with its operation and maintenance obligations and
fails to rectify that non-conformance within 12 months, the government entity may require the
concession company to provide security (bank guarantee of $20m.) which will be held until the end of
the concession period.

Cross City Tunnel (2002)—The concession company is obliged (amongst other requirements) to operate
and maintain the infrastructure with “Operation and Maintenance Best Practices”. The concession
company is also obliged to provide security of up to $6m. in respect of any air quality improvements that
the government entity has to implement as a result of a breach by the concession company of the
planning instrument’s requirements for air quality. If the concession company fails to comply with its
operation and maintenance obligations and fails to rectify that non-conformance within 12 months, the
government entity may require the concession company to provide security (bank guarantee of $20m.)
which will be held until the end of the concession period.

Spencer Street Station Redevelopment (2001)—The concession company is obliged (amongst other
requirements) to operate and maintain the infrastructure facility in a manner consistent with the project
objectives (which includes obtaining a world class intermodal transport interchange facility).

Information technology and intellectual property

rights
Mitcham–Frankston Freeway (2004)—The concession company grants the government an irrevocable-
perpetual, non-exclusive, royalty-free licence to use or reproduce the concession company’s intellectual
property for the purposes of, or in connection with, the project. The concession company was also
required to enter into separate IP documents (an IP licence deed and an escrow agreement) dealing with
the government’s rights to use the tolling technology and the concession company’s obligations to put
the tolling technology source codes in escrow.

Westlink M7 (Western Sydney Orbital) (2003)—The concession company is required to assign to

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the government entity all intellectual property rights in any design documentation and to procure an
irrevocable royalty-free licence to use any design documentation that the concession company does not
own.

Cross City Tunnel (2002)—The concession company is required to assign to the government entity all
intellectual property rights in any design documentation and to procure an irrevocable royalty-free
licence to use any design documentation that the concession company does not own.

Spencer Street Station Redevelopment (2001)—The concession company is required to assign to the
government entity all intellectual property rights in any design documentation and to procure an
irrevocable royalty-free licence to use any design documentation that the concession company does not
own.

Private sector counter party risk

Mitcham–Frankston Freeway (2004)—The concession company is obliged to provide the government
entity with security (bank guarantees) for $87.57m. to secure the concession company’s design and
construction obligations. 50% of that security will be released on completion and the remainder will be
released on expiration of the close out period (that is all outstanding defect work having been
completed). In addition, the government entity has a fixed and floating charge over the concession
company’s assets—this is subject to the priorities created in respect of the project financier’s securities.

Westlink M7 (Western Sydney Orbital) (2003)—The concession company is obliged to provide the
government entity with security (bank guarantees) for $70m. to secure the concession company’s design
and construction obligations. $50m. of the security will be released on completion and the remainder will
be released on expiration of the defects correction period. In addition, the government entity has a fixed
and floating charge over the concession company’s assets—this is subject to the priorities created in
respect of the project financier’s securities.

Cross City Tunnel (2002)—The concession company is obliged to provide the government entity with
security (bank guarantees) for $70m. to secure the concession company’s design and construction
obligations. $50m. of the security will be released on completion and the remainder will be released on
expiration of the defects correction period. In addition, the government entity has a fixed and floating
charge over the concession company’s assets—this is subject to the priorities created in respect of the
project financier’s securities.

Spencer Street Station Redevelopment (2001)—The concession company is obliged to provide a bond
of $15m.

Force majeure
Mitcham–Frankston Freeway (2004)—The concession company’s obligations are suspended during a
force majeure event. A force majeure event has been defined to include a specific list of events during
construction, and extended to include other material risk not specifically allocated. If an uninsurable
force majeure risk occurs, this may trigger a renegotiation process.
 Westlink M7 (Western Sydney Orbital) (2003)—The concession company’s obligations are suspended
during a force majeure event. A force majeure event has been defined to include a specific list of events
during construction, and extended to include other material risk not specifically allocated.

Cross City Tunnel (2002)—The concession company’s obligations are suspended during a force majeure
event. A force majeure event has been defined to include a specific list of events during construction,
and extended to include other material risk not specifically allocated.

Spencer Street Station Redevelopment (2001)—The concession company’s obligations are suspended
during a force majeure event but the government entity can reduce the service payments to the
concession company to reflect the reduced operating costs. There was a very limited (four types) list of
events classified as a force majeure event.

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Facility upgrade
Mitcham–Frankston Freeway (2004)—The concession company is required to upgrade the tollroad by
incorporating advances in technology or operation and maintenance practices.

Westlink M7 (Western Sydney Orbital) (2003)—The concession company is required to upgrade the
tollroad by incorporating advances in technology or operation and maintenance practices.

Cross City Tunnel (2002)—The concession company is required to upgrade the tollroad by incorporating
advances in technology or operation and maintenance practices when replacements are made in
accordance with a replacement and refurbishment schedule.

Spencer Street Station Redevelopment (2001)—The concession company is required to carry out
annual surveys to determine whether passenger flow capacity has exceeded the target capacity. If that
occurs, the government entity is required to compensate the concession company (whether by way of
adjustment to the services payment or a one-off payment), modify the service standards, implement a
physical modification of the facility, or a combination of the above.

Uninsurable risks
Mitcham–Frankston Freeway (2004)—The concession company is relieved from its obligations to effect
the prescribed insurances to the extent that, and only of so long as, it becomes unavailable (including
from the government) in respect of similar projects.

Westlink M7 (Western Sydney Orbital) (2003)—An uninsurable force majeure event will be considered
as a material adverse event and trigger renegotiations between the parties.

Cross City Tunnel (2002)—If there is an uninsurable event, the concession company’s obligations to
reinstate the project are suspended until the parties have reached agreement under the renegotiation
provisions, or failing that, a final and binding determination by an independent expert, arbitrator or
court.

Spencer Street Station Redevelopment (2001)—The concession company can seek an adjustment to
the service payments if the cost of obtaining certain mandated insurances varies by more than 30% for a
quarter (from the previous quarter), and if the concession company can demonstrate that certain
mandated insurances cannot be obtained on commercially reasonable terms in the commercial
insurance market, the parties must seek to agree on changes to the requirements for those insurances.

Material adverse effect events

 Mitcham–Frankston Freeway (2004)—The key risk events which trigger negotiation between the parties
include breaches by the government entity, discriminatory changes in law, uninsurable force majeure
events, change in government policies dealing with enforcement of toll evaders, and certain
environmental related issues.

Westlink M7 (Western Sydney Orbital) (2003)—The MAE events which trigger renegotiation between
the parties include changes to the original planning approval for the project, changes to certain traffic
assumptions (such as traffic connections to the motorway, competing road project, etc.), discriminatory
changes in law, additional requirements arising from artefacts, challenges to the planning approval and
native title issues, or new state or Commonwealth government taxes.

Cross City Tunnel (2002)—The MAE events which trigger renegotiation between the parties include
changes to the original planning approval for the project, changes to certain traffic assumptions (such as
traffic connections to the motorway, competing road project, etc.), discriminatory changes in law,
additional requirements arising from artefacts, challenges to the planning approval and native title
issues, or new state or Commonwealth government taxes.

Spencer Street Station Redevelopment (2001)—The concession agreement does not incorporate a
renegotiation clause in the event of certain material events.

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Changes in law
Mitcham–Frankston Freeway (2004)—Changes in law will be considered as key risk events entitling the
concession company to commence renegotiation in certain circumstances.

Westlink M7 (Western Sydney Orbital) (2003)—The concession company does not take the risk for
discriminatory changes in state law, or new state or Commonwealth taxes. Those exceptions will be
considered as MAE events.

Cross City Tunnel (2002)—The concession company does not take the risk for discriminatory changes in
state law, or new state or Commonwealth taxes. Those exceptions will be considered as MAE events.

Spencer Street Station Redevelopment (2001)—The concession company bears the risk of all changes
in law at a Commonwealth and state level up to $50,000 per year and the government entity bears the
risk of any amount in excess of that. The concession company does not take the risk for discriminatory
changes in state law which are directly and specifically directed at the project.

Termination
Mitcham–Frankston Freeway (2004)—The government entity has the right to terminate the concession
agreement in certain events: they include a failure by the concession company to rectify certain events
of default following a cure period (including delay by the concession company in achieving the
completion of the freeway, cancellation of funding, insolvency and change in control related events,
etc.), and a failure to open the freeway to traffic after completion. The government entity does not have
a right to terminate the concession agreement for its own convenience.

The concession company may terminate the concession agreement in certain events: they include a
court making a final ruling or there is a discriminatory change in state law or an act of the government
entity which prohibits or prevents the concession company from undertaking the project in the manner
contemplated by the concession agreement in all material aspects. The government entity also has the
right to terminate the concession agreement if it directs a variation to the project and the concession
company notifies the government that it is not willing or unable to proceed (following an expert
determination process).

If the concession agreement is terminated by the two situations described in the preceding paragraph,
the government is obliged to pay the concession company an early termination amount which is
calculated to enable the repayment of the debt and an agreed rate of equity return to that date.

Westlink M7 (Western Sydney Orbital) (2003)—The government entity has the right to terminate the
concession agreement in certain events: they are delays arising from native title or a failure by the
concession company to rectify a default following a cure period. The government entity does not have a
right to terminate the concession agreement for its own convenience.

The concession company may terminate the concession agreement in certain events: they include
events such as court determination, new laws, breach by the government entity, which prevents the
concession company from undertaking the project substantially in accordance with the concession
agreement, or delays arising from native title actions. If this occurs, the government is obliged to pay the
concession company an early termination amount which is equivalent to the project debt and an amount
sufficient to give the concession company an agreed rate of return.

Cross City Tunnel (2002)—The government entity has the right to terminate the concession agreement
in certain events: they are delays arising from native title or a failure by the concession company to
rectify a default following a cure period.

The government entity does not have a right to terminate the concession agreement for its own
convenience.

The concession company may terminate the concession agreement in certain events: they include
events such as court determination, new laws, breach by the government entity, which prevents the
concession company from undertaking the project substantially in accordance
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Risk Allocation in PPP Projects in Australia
323

with the concession agreement, or delays arising from native title actions. If this occurs, the government
is obliged to pay the concession an early termination amount which is equivalent to the project debt and
an amount sufficient to give the concession company an agreed rate of return.

Spencer Street Station Redevelopment (2001)—The government entity has the right to terminate the
concession agreement in certain events: they are a failure by the concession company to rectify a
default (which includes a failure by the concession company to achieve a high service category KPI)
following a cure period, insolvency, continued force majeure event, and abandonment by the concession
company.

The concession company may terminate the concession agreement in certain events: they include
events such as court determination, new laws, breach by the government entity, which prevents the
concession company from undertaking the project substantially in accordance with the concession
agreement, or delays arising from native title actions. If this occurs, the government is obliged to pay the
concession company an early termination amount being the market value of the project at the time of
termination taking into account the construction costs incurred to date and the reinstatement costs.

Performance risks (interruption to operations,

prisoner escapes, etc.)
Mitcham–Frankston Freeway (2004)—There are various KPIs which sets out performance targets.
Failure to meet those KPIs will result in a reduction in the tolls that the concession company is able to
collect. The total annual reduction in tolls is limited to a fixed monetary amount. There will be quarterly
service audits on the performance of the concession company.

Westlink M7 (Western Sydney Orbital) (2003)—There is no benchmarking (key performance indicators)

set out in the concession agreement.

Cross City Tunnel (2002)—There is no benchmarking (key performance indicators) set out in the
concession agreement.

Spencer Street Station Redevelopment (2001)—The concession company is required to carry out
quarterly audits of its performance against certain key performance indicators. There is potential for
abatement (up to 100%) of services payments to the concession company for poor performance.

PART B: SOCIAL INFRASTRUCTURE PROJECTS

(HOSPITALS, PRISONS, SCHOOLS)

Risks
Design, construction and commissioning risks
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
concession company takes all design, construction and commissioning risks for the project.

NSW Schools Project (2002)—The concession company takes all design, construction and
commissioning risks for the project.

Casey Hospital (Berwick) (2002)—The concession company takes all design, construction and
commissioning risks for the project.

Melbourne County Court Project (2000)—The concession company takes all design, construction and
commissioning risks for the project.

Delay and completion risks

Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
concession company has a fixed time obligation. The concession company is obliged to indemnify the
government entity for its costs as a result of late completion. Extensions of time will be given for delays
caused by an Act of Prevention or an Event of Force Majeure. The concession company is entitled to
delay costs (fixed daily rate for financing costs and actual
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prolongation costs incurred by the concession company) arising from an Act of Prevention by the
government entity.

NSW Schools Project (2002)—The concession company must use all reasonable endeavours to
complete and commission the school facilities by a target availability date for each school (which can be
extended for certain events including variations directed by the government entity, force majeure events
(called Relief Events), etc.).

Casey Hospital (Berwick) (2002)—The concession company has a fixed time obligation. It will be liable
to pay liquidated damages if it fails to achieve completion by the pre-agreed dates. The concession
company is entitled to extensions of time for various events. It is not entitled to any delay costs except
for delays arising from a limited list of events (which includes a breach by the government entity, native
title, artefacts, failure by the government entity to procure the relevant land, and delays caused by the
hospital operator and variations for additional equipment).
 Melbourne County Court Project (2000)—The concession company has fixed time obligations to
complete the facility and to achieve IT related milestones. Extensions of time will be granted for Acts of
Prevention (which covers certain defined force majeure events, breach by the government entity, native
title claim and contamination). The concession company is entitled to delay costs for any extensions of
time granted due to a breach by the government entity, native title claim and contamination. The
concession company is liable to pay liquidated damages if it fails to achieve completion of the facility by
the pre-agreed date, and also other liquidated damages if certain commercial development is not
completed to the agreed level of completion. The concession company is required to replace the IT
contractor if the IT milestones are not met.

Ground/geotechnical conditions risks

Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
concession company takes the risk for site conditions except for any pre-existing contamination which
has not been disclosed to the concession company. The compensation for carrying out the remediation is
either through increasing the service charge, extending the term, increasing the residual value payment
or a combination of any of the above.

NSW Schools Project (2002)—The concession company takes the risk for all site conditions including
land contamination.

Casey Hospital (Berwick) (2002)—The concession company takes the risk for all site conditions other
than for complying with a clean up notice given in respect of contamination caused by the hospital
operator in delivering the hospital operations.

Melbourne County Court Project (2000)—The concession company takes the risk for all site conditions
except for any contamination of the site. The government entity will compensate the concession
company for any costs of remedial works (including any costs relating to contamination migrating from
the site to other land where such migration occurred before the execution of the concession agreement).

Native title risks

Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
concession company is entitled to recover costs reasonably incurred by it in complying with its
obligations arising from a native title claim.

NSW Schools Project (2002)—The concession company takes the risk for the sites.

Casey Hospital (Berwick) (2002)—The concession company is entitled to extensions of time and
recover costs reasonably incurred by it in complying with its obligations arising from a native title claim

Melbourne County Court Project (2000)—The government entity is responsible for payment of
compensation and other monies payable to the native title holders or native title claimants on any of the
sites.

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Heritage issues
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
concession company is entitled to recover costs reasonably incurred by it in complying with its
obligations arising from dealing with artefacts on the site.

NSW Schools Project (2002)—The concession company takes the risk for the sites.
 Casey Hospital (Berwick) (2002)—The concession company is entitled to extensions of time and
recovery of costs reasonably incurred by it in complying with its obligations arising from dealing with
artefacts on the site.

Melbourne County Court Project (2000)—There is no specific provision dealing with this issue. As such,
the concession company takes that risk as part of the site conditions.

Planning approval
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
concession company is responsible for obtaining and complying with the Correctional Facilities
Development Plan issued by the Minister for Planning.

NSW Schools Project (2002)—The concession company is responsible for obtaining the planning
approvals for the project by the target dates. If the concession company fails to obtain the planning
approvals by a date three months after the target dates, the concession agreement will terminate
automatically from that date unless the concession company has been granted an extension of time or
the delay has not been caused by the concession company.

Casey Hospital (Berwick) (2002)—The concession company is responsible for obtaining all planning
approvals for the construction of the facility and the provision of the facility services.

Melbourne County Court Project (2000)—The concession company is responsible for obtaining the
project approvals.

Facility management
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
concession company is obliged to provide the operation and maintenance services so that at all times
the facility remains fit for its intended purposes, in accordance with best operational practices and at
least to the specified performance standards. If any part of the facility is damaged or destroyed as the
result of an act of prisoners or state employees, the government entity will bear the costs of repair.

NSW Schools Project (2002)—The concession company is obliged to comply with the government
entity’s requirements including facility availability and performance requirements and minimum
maintenance and performance standards.

Casey Hospital (Berwick) (2002)—The concession company is obliged to operate and maintain the
facility in good condition and in accordance with the approved asset management plan, in a manner
consistent with the project objectives and not to conflict with or be inconsistent with any government
health policy. In addition to the facilities management services, the concession company is obliged to
provide security services for the facility for a five-year term (which can be renewed by the government
entity).

Melbourne County Court Project (2000)—The concession company is obliged to provide the operation
and maintenance services (which includes facility maintenance services, court user management and
security services, IT services, etc.).

Pricing
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
pricing for the soft FM (facilities management) services is to be repriced every seven years.

NSW Schools Project (2002)—The concession company will carry out a benchmarking exercise every
five years to determine the relative quality and competitiveness of its soft facilities
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management services. The concession company is entitled to an adjustment if the benchmarking
exercise shows that the concession company’s costs are more or less than 5% above or below the
market costs of providing those services.

Casey Hospital (Berwick) (2002)—Payments will be adjusted quarterly for inflation and also repriced
based on the modification compensation principles for modifications, and changes in law.

Melbourne County Court Project (2000)—The pricing for the court services is to be repriced every five
years.

Refinancing
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)— The
government entity will share (50% of reduction of financing costs) in any refinancing gains that the
concession company achieves when refinancing the project or amending or varying the terms of the
funding documentation so as to change the debt and debt servicing profile for the project from that
which has been incorporated into the financial model such that the project IRR would be increased.

NSW Schools Project (2002)—The government entity will be entitled to 50% of any resultant financial
gains that the concession company achieves from any refinancing that increases or accelerates
distribution to the concession company’s shareholders or related bodies corporate.

Casey Hospital (Berwick) (2002)—The government entity will be entitled to 50% of any refinancing gain
arising as a result of lower margins than those provided in the financing agreements immediately before
the refinancing becoming available as a result of a systematic change in the finance markets ratings of
the project risk.

Melbourne County Court Project (2000)—There is no specific provision dealing with sharing of
refinancing gains.

Information technology and intellectual property

rights
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)— The
concession company grants to the government entity an irrevocable, royalty-free, non-exclusive licence
to use the project’s design documentation and other materials developed for the project.

NSW Schools Project (2002)—The concession company grants to the government entity an irrevocable,
royalty-free, non-exclusive licence to use the project’s design documentation and other materials
developed for the project.

Casey Hospital (Berwick) (2002)—The concession company grants to the government entity an
irrevocable, royalty-free, non-exclusive licence to use the project’s design documentation and other
materials developed for the project.

Melbourne County Court Project (2000)—The concession company is required to, and must procure the
IT operator, to place the source code for the software for IT services provided by the concession
company in escrow with an approved escrow agent. The government entity can have access to the
source code if the concession agreement is terminated as a result of the concession company’s
(including the IT operator’s) default. The concession company is also obliged to provide a technology
refresh fund to be used for the acquisition and installation of up to date equipment and products, such
fund is to be held on trust for the government entity and the concession company.

Force majeure
 Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)— The
concession company’s obligations are suspended during the force majeure event (this only includes a
limited list of events).

NSW Schools Project (2002)—The concession company’s obligations are suspended during the force
majeure event (this only includes a limited list of events).

Pt 3]
Risk Allocation in PPP Projects in Australia
327

Casey Hospital (Berwick) (2002)—The concession company’s obligations are suspended during the
force majeure event (this only includes a limited list of events). During the period of suspension, the
government entity will continue making payments to the concession company if it can demonstrate that
there is reasonable prospect of the project company being paid under the business interruption
insurance and sufficient amounts to repay the government entity.

Melbourne County Court Project (2000)—The concession company’s obligations are suspended during
the force majeure event (this only includes a limited list of events).

Facility upgrade
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
concession company is required to refurbish the facilities in accordance with the agreed Asset
Management Plan.

Casey Hospital (Berwick) (2002)—During the operating phase, the concession company is obliged to
carry out refurbishment of the facility in accordance with the agreed refurbishment plan so that the
facility achieves the project objectives.

Melbourne County Court Project (2000)—The concession company is obliged to refurbish the facility
during the accommodation services term based on a forecast refurbishment programme which will be
reviewed annually by a committee so that the facility can satisfy the building services standards.

Insurance risks (including uninsurable events)

Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)— The
government entity will indemnify the concession company against any loss or damage suffered by the
concession company as a result of any risk becoming uninsurable (following a period of negotiations
including consideration of paying higher premiums to take out insurance to cover that risk).

NSW Schools Project (2002)—If a risk is or becomes uninsurable (including as a result of the premiums
becoming so high that the risk is not generally being insured against by experienced providers), the
government entity may pay the concession company additional amounts to cover the amount equal to
the insurance proceeds that would have previously been available, propose a force majeure contract
variation or if all the school sites have been affected, terminate the concession agreement for force
majeure and pay the concession company compensation.

Casey Hospital (Berwick) (2002)—The concession company is entitled to seek recovery for substantial
increases ?20% from those agreed at time of signing). If any insurance becomes uninsurable during the
operating phase period and the relevant risk event occurs, the government entity is obliged to pay the
concession company an amount representing the insurance proceeds that would have been payable but
for the unavailability of insurance or terminate the concession agreement.

Melbourne County Court Project (2000)—There is no specific provision dealing with uninsurable risks.

Private sector counter-party risks (bank

undertakings, parent company guarantee, etc.)
 Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)— The
concession company is obliged to provide various unconditional bank undertakings to secure its
performance under the concession agreement. The amounts ($7m. during the construction period, $2m.
and $1m. up to two years and one year after completion, and $250,000 (escalated) during the
operational phase) and duration of these securities vary over the concession period. The concession
company is also required to provide a parent company guarantee in favour of the government entity.

NSW Schools Project (2002)—During the last 36 months of the concession term, the government entity
will deduct 10% of the monthly payments (which can be replaced by a security from the concession
company in lieu of this retention fund) as security for any
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prevention of life cycle failures/expirations and the rectification of breaches, as determined by the
independent surveyor, is higher than the amount of money reasonably expected to be placed into the
“retention fund account” under this “10% retention” arrangement.

Casey Hospital (Berwick) (2002)—The concession company is obliged to provide various unconditional
bank undertakings to secure its performance under the concession agreement (including a construction
bond for an amount equal to 5% of the construction price, and a bond to cover completion of outstanding
defects and omissions).

Melbourne County Court Project (2000)—The concession company is obliged to provide unconditional
bank undertakings and other security (including construction bonds for ($6.2m.) and deposit funds
($200,000) for construction related obligations, a maintenance guarantee for an amount equal to 10% of
the fees payable for the first full year of maintenance services, and an operating guarantee for an
amount equal to 10% of the fees payable for the first full year of operating services) with the
government entity to secure its performance under the concession agreement.

Changes in law
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)— The
government entity will compensate the concession company for any adverse net financial effects to the
concession company arising from a change in law in accordance with a pre-agreed structure. If there is
any beneficial financial effect to the Contract arising from a change in law, the government entity is
entitled to 90% of the net beneficial effect.

NSW Schools Project (2002)—The government entity will compensate the concession company in
relation to any change of law as a result of a change in NSW or Commonwealth tax law and which is
discriminatory in relation to the project; changes in law coming into effect during the operational phase
which causes the concession company to incur more than $20,000 on capital works; or changes in NSW
legislation or NSW court decision that specifically refers to services provided during the operational
phase or to shareholding in companies whose main business is to provide these services.

Casey Hospital (Berwick) (2002)—The government entity will compensate the concession company in
relation to any change in law resulting in the concession company incurring capital expenditure
(including for structural improvements and providing additional equipment) or annual recurrent costs in
providing the facility services.

Melbourne County Court Project (2000)—The government entity will compensate the concession
company for any costs exceeding a pre-agreed monetary threshold arising from a change in policy by
the government entity.
 Termination
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
government entity reserves its right to terminate the concession agreement in the following situations:

 following a default and the concession company

failed to remedy the default within a cure period;
 a force majeure termination event (which
includes certain pre-agreed events arising from a
force majeure event); and
 terminate for its own convenience where the
government entity is required to pay the
concession company a pre-agreed termination
payment.
NSW Schools Project (2002)—The government entity reserves its right to terminate the concession
agreement in the following situations:

 following a default and the concession company

failed to remedy the default within a cure period;
 a force majeure termination event or following
specified uninsurable events; and
 terminate for its own convenience where the
government entity is required to pay the
concession a pre-agreed termination payment.
The concession company has the right to terminate the concession agreement if:

 the government entity fails to rectify a default

within two months of being notified;
 there is an expropriation or requisition of material
part of the concession company’s assets by the
NSW government; or
 the government entity fails to pay the concession
company its monthly invoice totalling more than
$50,000 (indexed) which is due.
Casey Hospital (Berwick) (2002)—The government entity reserves its right to terminate the concession
agreement in the following situations:

 following a default and the concession company

failed to remedy the default within a cure period;
 a force majeure termination event (which
includes certain pre-agreed events arising from a
force majeure event); and
 terminate for its own convenience where the
government entity is required to pay the
concession a pre-agreed termination payment.
Melbourne County Court Project (2000)—The government entity reserves its right to terminate the
concession agreement in the following situations:

 if the facility is not completed by the facility

sunset date; and
 following a default and the concession company
failed to remedy the default within a cure period.
 Performance risks (interruption to operations,
prisoner escapes, etc.)
Victorian Correctional Facilities Project (Correctional Program Centre and Remand Centre) (2003)—The
services charges payable to the concession company will be reduced if there is any failure to meet the
specified performance standards or if there is an escape by a prisoner.

NSW Schools Project (2002)—The monthly fees payable to the concession company will be reduced if
there is any failure by the concession company to comply with the availability standards, operational
service standards or repetition of an availability or performance failure leading to three or more
occurrences in any three-month period. The concession company’s performance is audited by an
independent auditor annually.

Casey Hospital (Berwick) (2002)—The services charges payable to the concession company will be
reduced if there is any failure to meet the availability service standards.

Melbourne County Court Project (2000)—The services charges payable to the concession company will
be reduced if any of the facilities is not available for use.