Commercial notes No. 16

No. 16
10 June 2005

This issue

Application of State laws to infrastructure projects
New Procurement Guidelines
Private financing – key issues
The precommitment lease
Selecting a method for infrastructure funding

Robert Orr

Robert Orr QC Deputy General Counsel
T 02 6253 7585 F 02 6253 7445
robert.orr@ags.gov.au

A question that frequently arises in relation to Commonwealth
property and infrastructure projects is whether State laws
apply to the development of those projects. Although this
is a simple question, unfortunately it does not have a
simple answer. This is because the question raises some
deep issues about our federal system.

Where the Commonwealth
is merely providing funding for a project through a grant
or funding agreement, the application
of State laws will not often be an issue. Where the Commonwealth
is directly involved in the project, the application of
State environmental, planning and building laws in particular
will need to be considered quite frequently.

At a practical
level, three basic questions need to be asked to resolve
this issue. (Further questions arise where
the development is on a Commonwealth place (s 52(i) of
the Constitution and the Commonwealth Places (Application
of Laws) Act 1970), or issues arise in relation to proceedings
against the Commonwealth (see s 64 of the Judiciary
Act 1903)). These questions often need to be asked in relation
to various types of provisions in a State law; there may
be different answers for different sections of the one
Act.

Does the State law seek to apply to the Commonwealth?

In
order to determine whether a particular State law binds
the Commonwealth it is necessary to determine whether,
as a matter of statutory construction, the State law is
intended to have that effect.

There is the presumption
that the Crown is not bound by the general words of a statute.
The presumption extends
beyond the Crown in right of the enacting legislature,
to the Crown in right of the other body politics forming
the Australian federation.

Some State Acts say that they
bind the Crown of the other body politics. For example,
some NSW laws say they bind
the Crown 'not only in right of New South Wales but
also, so far as the legislative power of Parliament permits,
the Crown in all its other capacities'. This is an
indication of an intent to bind the Commonwealth, but is
not always conclusive.

Is the State law inconsistent with
a law of the Commonwealth?

Section 109 of the Australian
Constitution provides that where a law of a State is inconsistent
with a law of the
Commonwealth, the law of the Commonwealth prevails. Therefore
a State law which seeks to bind the Commonwealth will not
do so if it is inconsistent with a Commonwealth law.

Does
the Commonwealth have a general immunity from the State
law?

This is in practice the most difficult question. In
a 1997 decision of the High Court of Australia, Re Residential
Tenancies Tribunal of New South Wales and Henderson; Ex
parte Defence Housing Authority (1997) 190 CLR 410 (Henderson),
the Court rejected a proposition that the Commonwealth
cannot be bound by State legislation because of a broad
immunity. However, the Court held that the Commonwealth
did have a limited immunity.

Capacities v activities

In Henderson, some members of the
High Court drew a distinction between 'the capacities
of the Crown on the one hand, by which we mean its rights,
powers, privileges and immunities,
and the exercise of those capacities on the other' (at
438). The purpose in drawing this distinction was 'to
draw a further distinction between legislation which purports
to modify the nature of the executive power vested in the
Crown – its capacities – and legislation which
assumes those capacities and merely seeks to regulate activities
in which the Crown may choose to engage in the exercise
of those capacities' (at 439). The conclusion was
that a State law cannot restrict or modify the executive
capacities of the Commonwealth, but a State law of general
application can operate to regulate activities which the
Commonwealth chooses to undertake, for example, entering
into contracts.

On the basis of the discussion in Henderson,
the Commonwealth will generally be subject to a State law
which merely seeks
to regulate activities or govern transactions in relation
to a property or infrastructure project in which the Commonwealth
chooses to engage in the exercise of its executive capacities.

Some Justices in Henderson also held that it would be
rare for the Commonwealth's implied constitutional
immunity from State law to be shared by bodies established
by legislation.

Licences

However, the principle in Henderson is often a
difficult one to apply in practice, for example where the
Commonwealth
is required by State law to obtain a licence or approval
before undertaking an activity. The effect of such a requirement
may be to prohibit the Commonwealth from undertaking the
activity, and thus restrict or modify its executive capacity,
not just regulate its activities. For example, it is likely
that the Commonwealth is entitled to assert immunity from
State laws that would prevent it from erecting a building
or using land for a particular project.

On the other hand,
an obligation arising under a State building law on the
owner of land to observe safety standards
in constructing a building on that land would probably
be capable of binding the Commonwealth. Similarly, general
State laws imposing safety or pollution controls on the
conduct of a project are probably capable of binding the
Commonwealth. This will be possible subject to the issues
we have noted in the first and second questions, that is
where the law intends to bind the Commonwealth, and is
not inconsistent with a Commonwealth law.

See also AGS Legal
Briefing No.
36 (30 August 1997) 'The
Commonwealth's Implied Constitutional Immunity from
State Law'
and Legal Briefing No.
47 (29 June 1999) 'Application
of State Laws to the Commonwealth'
.

Robert Orr leads
our Government Practice Group. He is a specialist adviser
and advocate in public law, with particular
expertise in constitutional law, statutory interpretation,
native title and the legal aspects of policy development.

Simon Konecny

Simon Konecny Senior Executive Lawyer
T 02 9581 7585 F 02 9581 7445
simon.konecny@ags.gov.au

On 1 January 2005, new Commonwealth Procurement Guidelines
(CPGs) came into effect. These guidelines apply to all
FMA agencies under the Financial Management and Accountability
Act 1997 and to some agencies under the Commonwealth
Authorities and Companies Act 1997.1 The
new guidelines implement Australia's obligations under the Australia – United
States Free Trade Agreement and introduce some changes
to procurement of property and infrastructure. The Department
of Finance and Administration (Finance) is expected to
issue guidelines about specific implementation issues for
real property2 and construction transactions.

How do the
CPGs apply to real property and infrastructure transactions?

The
new CPGs establish some new requirements that are applicable
to all procurements and some mandatory procedures
that
are only applicable to certain higher value transactions.
For real property/infrastructure transactions, the
position is shown in the table below.

New requirements applicable
to all procurements

As the table indicates, grants are
not subject to the CPGs. In some cases it may not be
entirely clear
whether a transaction
is a procurement or a grant. You may need to take
particular advice on this issue. Assuming that the
transaction is a procurement, the following aspects of
the general
provisions
of the CPGs will be applicable in each case.

Value
for money remains the core principle for government procurement.
The CPGs indicate that
value for money
is enhanced by encouraging competition, promoting
the use
of resources in an efficient, effective and ethical
manner and making decisions in an accountable
and transparent manner. Chapters 5, 6 and 7 of the
CPGs expand on these
principles.

Many of the general requirements
remain as in the previous CPGs. Some changes that are
of particular
interest
for real property and infrastructure projects
are
highlighted below.

Missing media item.

Competition

The CPGs indicate that procurement processes
should be commensurate with the size and risk profile of
the project.
It is not always necessary to run a tender process for
procurements that are not covered by the mandatory procedures.

It is not permissible to discriminate between tenderers
on the basis of foreign affiliation or ownership, location
or size (for example, it is not acceptable to indicate
that only Australian-owned construction companies will
be considered). Goods and services must be assessed on
the basis of their suitability for their intended purpose,
and not on the basis of their origin. (CPGs 5.2) Processes
must not unfairly discriminate against SMEs.

Efficiency,
effectiveness and ethics

Risk management must be built into
agency processes – particular
attention is needed in relation to indemnities and capped
liability.

  • In many cases it will be necessary to consider
    matters of liability, risk management and indemnities
    in evaluating tenders – this will require
    agencies to consider these matters before their requests for tender are issued.
  • Finance Circular 2003/02 Guidelines for Issuing
    and Managing Indemnities, Guarantees, Warranties and
    Letters
    of Comfort should be consulted.
  • Many real property transactions contain
    indemnities. For example, when an agency leases premises
    it will often be required to provide an indemnity in
    favour of the landlord. Such indemnities will often require an approval under
    the delegations provided to agencies in relation to Regulation 10 of the
    Financial Management and Accountability Regulations 1997
    in which case Finance Circular
    2004/10 Using the Financial Management and Accountability Regulation 10
    Delegation will be relevant.

There is also a continuing focus on probity considerations
such as conflicts of interest (see more generally AGS Commercial
notes No. 15 'Managing probity and process issues
in procurement'
, 14 March 2005). Regard should also
be had to the Department of Finance and Administration's
Guidance on Ethics and Probity in Government Procurement,
January 2005.

Accountability and transparency

Agencies must ensure that
they comply with applicable government legislation and
policy. Finance has issued the Guidance
on Complying with Legislation and Government Policy in
Procurement, January 2005. Policies and legislation that
have particular application to real property and infrastructure
transactions include:

  • the National Code of Practice for
    the Construction Industry
  • the Public Works Committee Act
    1969
  • Lands Acquisition Act 1989 requirements in relation
    to acquisition and
    disposal of interests in land
  • the Environment Protection and Biodiversity Act
    1999 and various environmental
    policies including 'green office' considerations.

Agencies are required
to maintain documentation sufficient to provide an understanding of the decision-making
processes.
In addition to other requirements to retain the documents,
the CPGs require that they be retained for at least 3
years. (7.11) Outsourced service providers should also
be required
to maintain appropriate systems for recording decisions.

Agencies
are now required to have an Annual Procurement Plan which
would include procurement of leased premises,
construction services etc. In addition the CPGs contain
specific reporting requirements.

Austender is now to
be used to publish annual procurement plans and any open
tenders.

The CPGs also indicate that agencies need to have
fair, equitable and non discriminatory complaints handling
procedures. (7.36)

New requirements – Mandatory
Procurement Procedures

Neither grants, real property
leases nor sale and purchase of real property are covered
by the mandatory procedures.
However construction contracts, potentially some precommitment
leasing, private finance arrangements and real property
related agreements such as management and consultancy
contracts, contracts with utilities, fitout and cleaning
etc. will
generally be subject to the mandatory procedures if they
exceed the financial thresholds.

What are the major changes
for transactions that are subject to the mandatory procedures?

  • Most procurements will need to go to open tender.
  • Evaluation
    criteria must be published (8.22) and tenders must
    be evaluated in accordance with those criteria.
  • Specifications should generally be based
    on performance and functional requirements and rely on
    international standards. (8.25) Trade name or similar
    descriptions are to be avoided or at the very least expressed as 'or
    equivalent'.
    (8.26)
  • Agencies may specify conditions for participation
    (i.e. requirements which if not met mean that a tenderer
    will
    be excluded from consideration)
    but those requirements must relate to legal, commercial, technical and
    financial abilities which may include relevant experience.
    (8.16, 8.17)
    • Conditions
      for participation that are likely to be acceptable
      include: a requirement to sign a confidentiality deed,
      being solvent, experience
      relevant to the job.
    • Conditions for participation that would generally
      not be acceptable include a requirement of previous experience
      with the particular agency or the
      Australian Government, and place of origin of goods.
  • Agencies will generally
    have to allow 25 days or more for tender responses
    for tender documents issued electronically or 30 days
    or more
    for hard
    copy (there are some circumstances where a shorter period is allowed, for
    example where goods
    are commercially available). The tender period must allow sufficient
    time to prepare and lodge submissions. (8.32, 8.33)
  • Late tenders can no longer be
    accepted unless due to agency mishandling. (8.38)
  • There
    is an obligation to award a contract to the best 'value
    for money' tender that meets all relevant requirements
    unless it is not in the public interest.

Submissions that
do not meet the minimum form and content requirements at
the time of opening can not be further
considered (subject to correction of unintentional
errors of form at the agency's discretion). (8.39/8.40)

What should
you do to comply with the mandatory procurement requirements?

  • Check that
    your tender documents have been updated to take account
    of the new CPGs – they should ideally reflect
    the language used in the CPGs, such as conditions for
    participation
    and minimum form and content requirements.
  • Procurements
    need to be valued to determine whether they are covered
    procurements. Where a procurement is to be conducted in multiple
    parts with contracts awarded either at the same time
    or over a period of time, with
    one or more suppliers,
    the estimated value of the real property or services being procured
    must include the estimated total maximum value of all
    of the contracts. (8.7/8.10)
  • Consider carefully what, if any, requirements will
    be mandatory requirements that will be expressed to be
    conditions
    for
    participation or essential
    requirements – if
    a tenderer does not satisfy these requirements you will not be able
    to consider their tender.
  • Review your 'reserved rights' provisions – some
    rights may no longer be consistent with the new CPGs. Check your evaluation
    processes
    to ensure you have:
    • correctly stated the basis on which you propose
      to evaluate
    • asked for information that is relevant to the
      evaluation
    • stages in the evaluation that deal with the
      assessment of 'form
      and content requirements' and 'conditions for participation'.
  • Make sure you record the reasons for your decisions,
    including any view you take about the application or
    otherwise of the CPGs generally
    or
    the mandatory procurement procedures.
  • Review the Guidance on the Mandatory
    Procurement Procedures, Department of Finance and
    Administration, January 2005.

Simon Konecny has extensive knowledge and experience in
property and contracting matters including acquisitions
and disposals, leasing and advice on leasing obligations,
fitouts, building and construction matters, tenders and
advice in relation to tender processes and strategies,
outsourcing and consultancy arrangements, indemnities and
licence arrangements.

Notes

1 Agencies declared for the purposes of section 47A(2)
of the Commonwealth Authorities and Companies Act
1997.
For those agencies the CPGs only apply for procurements
which exceed $400,000 including GST or $6m for construction
services.

2 The CPGs use the term property to refer to 'every
type of right, interest or thing which is legally capable
of being owned. This includes, but is not restricted to,
physical goods and real property as well as intangibles
such as intellectual property, contract options and goodwill.' (CPGs
2.2)

3 'Construction Services' are procurements
related to the construction of buildings and all procurements
covered by the Public Works Committee Act 1969. (CPGs App
E)

4 While the CPGs generally do not apply, larger grants
that take the form of contracts rather than conditional
gifts are required to be notified on the Internet. (CPGs
7.27)

John Scala

John Scala Chief Counsel, Commercial
T 03 9242 1321 F 03 9242 1481
john.scala@ags.gov.au

This note gives a 'snapshot' of some of
the key issues to be considered in conducting a private
financing
(PF) project. Value adds which can be derived from a PF
proposal include innovation (based on output specifications),
risk transfer, improved asset utilisation, ownership and
management synergies and improved project management.

The
core principle underpinning the Commonwealth Policy Principles
for the use of private financing is value for
money, which is to be tested by comparing the outputs and
costs of a private financing proposal against the Public
Sector Comparator or Project Cost Benchmark (PCB). The
PCB is designed to reflect the most efficient public sector
delivery option assessed on a whole-of-life risk-adjusted
basis which is likely to be achieved for the relevant project.

Some key issues to be considered in a PF transaction

Risk
events

How each risk event is dealt with depends on the
nature of the project, the likelihood of the event occurring
and
the value for money obtainable if the contractor prices
the risk of the event occurring into its bid price. For
example, it would probably be most cost effective for government
to accept native title risk (i.e. make it a compensation
event) than to require the contractor to assume and price
this risk. Similarly, government should probably assume
planning approval risk since the obtaining of approval
under the EPBC Act and from the Public Works Committee
is best managed by government.

Three typical types of risk
event in a PF project are:

  • compensation events
  • relief events
  • force majeure.

Compensation events are designed to cater
for those risks carried by government which cause delay
or increased
costs to the contractor. They would typically include a breach
of an obligation by government or those for whom it
is responsible or a change to the scope of the government's
requirements.

The types of events usually dealt with
as relief events include:

  • insurable risks such as damage by fire, explosion,
    storm, flood, earthquake, riot and civil commotion etc.
  • failure by a statutory authority to carry out works
    or provide necessary services
  • accidental loss or damage to
    the development or roads servicing it
  • failure or shortage
    of power, fuel or transport
  • strikes or other industry action
    generally affecting the relevant industry.

No compensation
should be paid by government to the contractor for the
occurrence of a relief event.

Force majeure events are
designed to give the affected party relief from liability
and, if the event continues
for a certain period, to give the parties a right
to terminate the contract. These events are treated
differently
from
relief events as neither government nor the contractor
is in a better position than the other to manage
the risk or effects of the occurrence.

Typically,
force majeure events would include:

  • war, armed conflict
    or terrorism
  • nuclear, chemical or biological contamination,
    or
  • supersonic pressure waves.

Price and payment

The key features of the payment mechanism
for a PF project generally include:

  • no payment being made
    until the infrastructure and services are available
  • a single
    unitary charge (i.e. payment is not made up of separate,
    independent elements)
  • the single unitary charge should
    only be paid to the extent that the infrastructure
    and service are available (i.e. proportionate number
    of
    units).

Deductions should be made from the unitary charge reflecting
the seriousness of performance failure (i.e. no service,
no payment – use of performance points).

Care
should also be exercised not to effectively accept
the risk of the financing of the project by
guaranteeing
the contractor's finance charges through the
agreed payment mechanism.

Service requirements and
availability

The key issue is what constitutes 'availability'.
Agreement with the contractor will be more easily
reached where the definition is objective and measurable.
Examples
of appropriate objective criteria may include:

  • non-provision
    of a specific level of access
  • non-provision of specified
    physical and environmental conditions
  • a failure in services
    and other utilities
  • non-provision of a specified level
    of ambient temperature
  • non-provision of a specified level
    of lighting
  • non-provision of a fully functioning communications
    or information services infrastructure.

Change in service

There is an inevitable tension between
cost and flexibility in a PF contract. The cheapest unitary
charge may
provide government with the least flexibility in managing the
contract, as the ability to absorb unforeseen changes and risks inevitably
comes at a price. To preserve flexibility, government
will need to consider carefully whether it requires:

  • pre-priced options
    to vary scope
  • pre-priced unit rates for additional capacity
  • comprehensive
    rights to insist on benchmarking market costs
  • open book
    accounting
  • cost transparency linked to prescribed margins
    for pre-agreed risk profiles.

The change procedure in a
PF contract is not dissimilar to that for directing variations
in traditional
procurement. However, under a PF contract the contractor's financiers
are unlikely to agree to any change which increases
the project risk, financing risk or reduces the rate of return
on the project. On the other hand, if the contractor
is fully protected against the consequences of a government-initiated
change and how it is to be paid for, there should
be no objection by the financiers.

Treatment of assets on expiry of service
period

It will often be the case that best value for money
will determine that the Commonwealth takes control
of assets
on expiry of the contract. This may be because
there is a long-term public sector demand for
the use of
the facility
(i.e. beyond 20 years) and there is no clear
practical alternative use due to its location and the specialist
nature of the facility.

Accordingly, the facility
should automatically transfer to the Commonwealth on expiry
of the
contract, or
at least an option to purchase the asset at a
nominal cost should
be sought. Options for the Commonwealth include:

  • taking possession of the asset at no cost
  • re-tendering
    provision of the service.

Contractual provisions covering
the following should be considered:

  • the condition of the
    facility, any rectification works, their cost and how
    they are paid for
  • any design life requirement after the expiry
    date
  • inspection prior to handover
  • provision for assignment
    of warranties, contracts and other rights relating
    to the project.

Lender step-in rights – tripartite agreement

A feature
of PF transactions is generally a requirement for a form
of tripartite agreement to be
entered into between government, the contractor and the financiers.
The tripartite
agreement will usually give senior lenders
an opportunity to rectify breaches or to transfer the contract.
Senior
lenders are usually incentivised to take
control of the project, as any failure to do so will lead to
termination of the contract and allow the government
to
re-tender the contract.

If the senior lenders decide not to step
in then the government should also have the right to
elect whether to re-tender
the unexpired term of the contract or
to have the contract valued on the basis of there being
no re-tendering.

John Scala leads our Commercial Practice Group. He has
high-level experience in all aspects of commercial and
contract law within a government environment including
competitive tendering and contracting, complex procurement,
outsourcing, legislation development and regulatory issues,
privatisation, corporate and securities law, financing
and probity.

Robert Claybourn

Robert Claybourn Senior Executive Lawyer
T 07 3360 5767 F 07 3360 5797
robert.claybourn@ags.gov.au

The precommitment lease (the PL) provides agencies
(the tenant) with a possible procurement solution for
the
development of infrastructure 'off budget' through
the use of private finance. The PL permits the tenant
to achieve purpose-designed and built infrastructure
without the risks associated with land acquisition, design,
construction and long-term ownership.

What is a precommitment
lease?

The essential elements of the PL are that:

  • the developer
    designs and constructs to the tenant's design
    requirements and warrants the suitability of the land,
    and that when completed, the project
    will satisfy those requirements
  • the lease, the conditions of which are agreed
    at the inception of the project, commences following
    compliance by the developer with the tenant's
    design requirements (practical completion).

Risks and benefits for the tenant

The tenant's principal
risk is to manage its project design and specification
requirements to ensure they are
comprehensively addressed in a design brief which drives
the developer's obligations to document, construct
and lease to satisfy those requirements. The tenant's
design brief records the technical specifications in
terms of performance and functional requirements and
references
those specifications to recognised standards. The tenant's
other risks, which include managing variations, design
and construction of fitout and delays, can be reduced
by engaging a project manager. If the tenant chooses,
the
risk associated with the design and construction of fitout
can be transferred to the developer.

The benefits for
the tenant in adopting the PL as a procurement method
are that:

  • with the exception of funding the fitout component
    (usually assumed by the tenant), the developer is responsible
    for project funding which is recovered
    as rent and outgoings under the lease – if the developer funds the
    fitout component, that cost can be amortised over the term of the lease
    or reflected
    in additional rent
  • the delivery of the infrastructure is accelerated
    because the project can commence prior to the completion
    of design documentation
    and without the
    need for land acquisition by the tenant
  • the tenant's costs are capped
    because rent, outgoings and all other obligations of the tenant under
    the lease are fixed prior to the commencement
    of the project
  • the developer assumes the risks associated with land
    acquisition, securing development and building approvals
    and effecting
    design and construction
  • the lease provides the tenant with
    greater flexibility than ownership and assures the
    level of building performance specified in the tenant's
    design brief.

Who should have responsibility for fitout?

All infrastructure
requires some degree of fitout and the tenant must decide
whether to retain responsibility
for its design and construction or place that responsibility
with the developer. Irrespective of which party takes
responsibility, it is usual for the tenant to document the fitout to the
stage of drawings and specifications suitable for
construction, based on drawings and specifications for the building
structure prepared by the developer.

If the developer is responsible for
design and construction of fitout, it assumes responsibility
for the tenant's
fitout drawings and specifications and is paid a
fitout management fee expressed as a percentage of the
total fitout
construction cost. In that event, the tenant controls
the fitout cost by requiring the developer to divide the
fitout
drawings and specifications into trade packages and
to enter into trade package contracts approved by the tenant
following a competitive tender process. If the tenant
agrees
to fund the cost of fitout rather than amortise that
cost over the term of the lease or reflect that cost in
additional
rent, the tenant makes progress payments to the developer
based on the value, from time to time, of the fitout
works as certified by the tenant.

The benefits for the tenant
if responsibility for the fitout is placed with the developer
are that:

  • the total project cost is generally reduced as
    savings are achieved through integration of the fitout
    works with the construction of the building structure
  • the
    infrastructure becomes available for use by the tenant
    earlier and immediately following practical completion
    as opposed to a staged process
    of practical completion by the developer of the building structure followed
    by a
    period to permit fitout by the tenant
  • the building performance covenants
    and the warranties on the part of the developer under
    the lease are not compromised as the developer is responsible
    for all work, including fitout
  • the defects liability provisions of the
    PL apply to the building structure and the fitout.

If the
tenant retains responsibility for fitout design and construction,
it must decide whether to commence
construction of fitout before or following practical completion of the
building structure. If fitout construction is commenced
prior to practical completion, the tenant is exposed
to the possibility of claims for delays to the developer's
program and practical completion. Further, it may
not be possible to properly certify practical completion of the
building structure following the commencement of
fitout construction. To avoid these difficulties, the PL may provide
for a timeframe following practical completion during
which the tenant may commence fitout construction prior to the
commencement of the lease. This timeframe, however,
may be viewed by the developer as a 'rent-free' period
which either reduces the level of incentive offered
by the developer or increases the rent rate provided for in
the PL.

Programming, variations, delays and practical
completion

Ensuring compliance with the works program, evaluating
the causes of delay, managing variations and certifying
practical completion are those specialised tenant's
functions which justify the procurement of project
management services. Some of the considerations
relevant to these
issues are:

Works program

A program in the form of a bar chart which
identifies the start and finish dates for each activity
must
be maintained
by the developer and amended at specified intervals
to address delays. The cause of a delay will determine
whether
the date for practical completion should be extended.

Delays

The developer must be entitled to extend the date
for practical completion if it is delayed in effecting
completion as
a result of a breach of the PL by the tenant or
variations required by the tenant. Subject to the
developer
being
obliged to avoid or minimise the consequences of
these delays, the additional cost and expense incurred
by
the developer as a consequence of the delays is
met by the
tenant. The developer should be entitled to extend
the date for practical completion without entitlement
to
additional costs and expenses if practical completion
is delayed by an event which is not caused by the developer,
is not a
breach of
the PL
by the developer, is not caused by inclement weather
or a dispute directed at the works or the developer.

Variations

The PL should permit the tenant to require
variations to the design brief, provide for a method to
cost
those variations
and for payment of that cost by the tenant (if
the variations increase the cost of effecting practical
completion)
or for a reduction in the rent rate under the lease
(if the
variations result in a decrease in the cost of
effecting
practical completion). If variations produce additional
cost, that cost can be amortised or reflected in
rent.

Practical completion

The tenant should be careful to ensure
that the PL defines practical completion to include all
of the
tenant's
requirements in relation to the use of the project
and permits the tenant to certify practical completion,
subject
to the dispute resolution provisions of the PL.

Lease
issues

Some of the more important PL lease issues
to consider are:

  • The commencement date of the lease must
    be defined in a manner which ensures that the tenant
    cannot be required to commence the lease earlier
    than the required date for practical completion. If the tenant takes responsibility
    for fitout design and construction, the lease should not commence
    until the expiration
    of a specified period following the later of the date for practical
    completion provided under the agreement and the actual
    date of practical completion.
    This period will allow the tenant to commence or complete fitout prior to
    the commencement
    of the lease.
  • A balance must be achieved in relation to the term
    of the lease having regard to the fact that the project
    will
    be
    viable only if the developer
    receives an appropriate return, by way of rent, under the lease. An option
    to purchase,
    and multiple short-term options to extend the lease add flexibility,
    and should be considered.
  • An effective way of structuring rent for the first
    rent period of the lease is to agree an annual rate
    per square metre subject to a specified
    maximum area having regard to one of definitions of lettable area in the
    Property Council
    of Australia's Method of Measurement for Lettable Area (March
    1997). The method of determining rent for the second and each subsequent
    rent
    period of
    the lease must be specified in the PL.
  • The lease should contain warranties
    by the developer in relation to the fitness of the structure for
    the required use and that the operation
    of critical building services will satisfy the standards specified in
    the tenant's
    original design brief.
  • Responsibility for the maintenance and repair
    of the structure and the critical building services
    should rest with the developer as this is
    consistent with the developer's design and construction obligations
    under the PL.
  • The tenant must decide whether ownership of its fitout
    should vest in it or in the developer as this will
    impact on the tenant's repair,
    maintenance and make-good obligations.
  • Remedies should be available
    to the tenant in the event of a malfunction or failure
    of a critical building service. The tenant's remedies
    could include a right to abate rent or to rectify the fault
    at the developer's
    cost and to set-off that cost against rent.

Robert Claybourn practices in the areas of property, leasing,
construction and procurement law. He specialises in project
delivery advice and documentation.

Andrew Miles

Andrew Miles Senior Executive Lawyer
T 02 6253 7100 F 02 6252 77316
andrew.miles@ags.gov.au

There are numerous methods for infrastructure funding
and more are continuing to evolve. Two of these are the
funding
agreement and the various forms of more recently developed
private finance (PF).

Funding agreements

Under a funding agreement the government
provides money from appropriated funds to another party
(state or local
government, community group, industry etc.), and the other
party in turn uses those funds (either with or without
its own money) to develop the infrastructure.

The responsibilities
of the parties are regulated by the terms of the funding
agreement. From the government's
perspective, the obligation is often little more than to
provide a set amount of funds on the achievement of certain
milestones by the recipient.

Private finance

Private finance comes in different shapes
and sizes, but generally speaking involves the government
having a long-term
business relationship with a private party and the risks
and returns of the project being shared between the parties.

Key features of private finance are that:

  • control of 'core' services
    is still retained by the government
  • there is a process
    for comparing the cost of the anticipated private finance
    with what it would cost to traditionally procure the
    project
  • private sector capital will be used to develop the
    infrastructure, and
  • the services are provided on a performance-based contract.

Factors
which influence choice of funding method

Some factors in
determining which method to choose are:

Funding objective

Is it a commercial arrangement under
which the government is procuring economic or social infrastructure
for the
public good? Or does it have less of a commercial aspect
to it and more of a policy implementation flavour? Objectives
in these latter cases can go beyond value for money and
may include increasing employment, providing training
opportunities and fostering community and economic development. A funding
agreement may be appropriate if this is the case.

Nature
of the infrastructure

Is it hard economic infrastructure
such as roads, railways, ports, water and sewerage plant,
energy and telecommunications?
Or is it social infrastructure such as schools, hospitals,
child care, aged care accommodation, public security
and the administration of justice? The core social services
are not always suitable for delivery using a private
finance
model and may be better dealt with by direct procurement
or funding agreements.

Duration of the arrangement

Private finance usually requires
a long term to make it financially attractive for investors.
There are high
sunk
costs in the initial years of infrastructure development
and it is only over a longer term that investors may
recoup their capital and take a profit. Funding agreements
are
better suited to relatively short-term arrangements.

Availability
of funding

Scarcity of funding alone cannot be determinative
in selecting a funding method. However, where an infrastructure
project
can demonstrate value for money as against the anticipated
cost to government for the same direct procurement or
funding arrangement, there is every justification for
accessing
private sector funds for the development.

Size of project

Small and simple projects do not lend
themselves well to private finance. The complexity and
cost of private
finance
would outweigh the benefits. Equally, small-scale projects
do not provide the opportunities for innovation or generation
of profits which underpin the justification for private
finance. Accordingly, they are more likely to be suited
to funding agreements or direct procurements.

Experience
and capability of the government and the other party

Another
relevant factor is the experience and capability of the
government and the other party. In areas of economic
infrastructure, the private sector may be best placed
in terms of knowledge and experience. In other circumstances,
however, such as the delivery of some social infrastructure,
the government or another level of government may be
the
party that possesses the most skills and expertise.

Risk
transfer

One of the cornerstones of private finance is
the better efficiency promised by the transfer of risk
from the
government to the private contractor. With the exception
of construction
risk, a private finance arrangement will usually transfer
to the private sector risks customarily borne by the
government in relation to financing, design, operation
and ownership.
With funding agreements, risk transfer is not usually
one of the objectives. However, in more complex funding
arrangements,
the agreement will need to deal in detail with the consequences
should various risks eventuate.

Advantages and disadvantages

Funding agreements

The advantages of the funding agreement
method are that:

  • for simple projects it is relatively
    simple and inexpensive to negotiate and document
  • there
    is a high degree of standardisation.

Disadvantages include:

  • it has limitations in terms of
    the complexity of project for which it is suitable,
    particularly for long-term projects
  • it involves the government yielding
    a large degree of control.

Private finance

Properly employed private finance arrangements
can:

  • uniquely tap into private sector financial and intellectual
    capital
  • provide better services at lower prices to users
  • bring
    delivery of service on-line more quickly.

The two principal
disadvantages of private finance are its complexity and
cost. Private finance arrangements
generally take much longer to negotiate and document than funding
agreements. This additional complexity has cost implications
for both the government and the other parties. Having
said that, a funding agreement that involves project financiers
may well involve similar complexity and cost because
of the need for tripartite arrangements with financiers and
security documentation.

No single approach to infrastructure
funding is objectively right or wrong from a legal perspective.
Much depends
on the objective of the funding, what is being funded,
how
much it costs and who should pay for it, who is going
to use it and who is providing any services in relation
to
the infrastructure.

In very general terms, it can
be said that funding agreements will suit relatively simple
and straightforward
projects
where the government's involvement may cease
upon completion and where there are objectives other
than value
for money involved. Private finance, on the other
hand, can suit projects of higher cost and complexity
and which
offer opportunities to tap into private sector experience
for greater efficiencies.

Andrew Miles has specialist
expertise in the areas of property, construction
and procurement. He regularly
assists clients
to identify and manage public sector risk in commercial
contracts. Andrew frequently advises on guarantees,
indemnities,
performance bonds, limitations of liability, multiple
entity transactions and the most appropriate structuring
for transactions
in the government framework.

AGS contacts

AGS has a national team of lawyers specialising in property
and infrastructure. For further information on the articles
in this issue, or on other property and infrastructure
matters, please contact the authors or any of the lawyers
listed below.

National

John Scala

03 9242 1321

Canberra

Linda Richardson
John Snell

02 6253 7207
02 6253 7025

Sydney

John Berg
Simon Konecny

02 9581 7624
02 9581 7585

Melbourne

Jo Ziino
Paul Lang

03 9242 1312
03 9242 1322

Brisbane

Robert Claybourn

07 3360 5767

Perth

Lee-Sai Choo

08 9268 1137

Adelaide

Vesna Vuksan

08 8205 4512

Hobart

Peter Bowen

03 6220 5474

Darwin

Ashley Heath

08 8943 1408

ISSN 1443-9549 (Print)
ISSN 2204-6550 (Online)

For enquiries regarding supply of issues, change of address
details etc.
T 02 6253 7052 F 02 6253 7313 E ags@ags.gov.au

Electronic versions of AGS newsletters are available for
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contact 02 6253 7052 or email ags@ags.gov.au to
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The material in these notes is provided
to AGS clients for general information only and should
not be relied upon for the purpose of a particular
matter. Please contact AGS before any action or decision
is taken on the basis of any of the material in these
notes.

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