The Victorian Desalination Project is being delivered as a Public Private Partnership (PPP) under the Victorian Government’s Partnerships Victoria policy.

PPPs are service-based contracts, where the private sector invests its capital in designing, building, financing, operating and maintaining a facility in return for payment for the delivered service.

In the case of the Victorian Desalination Project, payment will be made for water delivered and for the security of having a facility capable of delivering the required volume of water to the required quality. For more information refer to the project summary on the Partnerships Victoria website.

The desalination project PPP includes design, finance, construction, operation and maintenance of a desalination plant, an 84 kilometre transfer pipeline, delivery of an 87 kilometre power supply for the project and the purchase of renewable energy.

Desalinated water will be delivered from the private sector to the State Government owned water authorities who will deliver this water to households.The Government will retain the ownership of the water. The successful bidder will produce the water.

Delivering the project as a PPP enables the Government to tap into private sector experience in designing, building and maintaining the desalination plant while protecting the public interest and ensuring that water remains publicly owned. Constructing the desalination plant under this funding arrangement has ensured the best deal for water consumers by optimising the transfer of risk to the private sector and encouraging innovative design and solutions – ultimately delivering the best value for money outcome.

The Victorian Government’s experience in delivering complex major projects using the PPP funding model has shown projects are delivered quickly, to a high standard and in a cost effective way. The Government has saved $1 billion by delivering this project as a PPP rather than building and operating the project itself.

The Victorian Desalination Project was the world’s largest PPP undertaken in 2009. It was a landmark transaction conducted in the most adverse financial markets since the Great Depression.

The AquaSure consortium was announced as the successful bidder on 30 July 2009.  The contract with AquaSure allows the Government to order anywhere between 0 and 100 per cent of the plant's capacity, in set block increments, depending on climatic conditions.

Costs

The project capital cost of $3.5 billion will be fully funded by the private sector, with both debt and equity. The maximum cost of the project over the 30 year contract is $5.7 billion (net present cost).
Capital cost and net present cost are two different economic terms and represent different things. The capital cost is the cost of design and construction. It represents the scale of the project and is the best indicator to compare different projects across the spectrum of project delivery methods (e.g. PPPs and state-built projects).

Net present cost is the value, in dollars of the day, of a stream of costs over a long period of time. This term is generally only used for PPP projects, as these identify and allocate all costs associated with the project over a long period (30 years in the case of the Victorian Desalination Project).

Capital cost = $3.5 billion

The capital cost of the project as bid by AquaSure is $3.5 billion ($3.46 billion to be precise) in June 2009 dollars. The cost of the project as announced in the June 2007 Water Plan was $3.1 billion. When this figure is escalated using the relevant Australian Bureau of Statistics (ABS) construction indices for plant, labour and materials (to make it comparable with the date of the AquaSure bid) it amounts to $3.42 billion.

When the additional features of the AquaSure bid are taken into account, such as power being underground rather than overhead, world-class architecture and landscaping for visual amenity improvements, additional road and water supply upgrades and broadband communication cables, this greatly outweighs the $40 million dollar difference.

Maximum cost over 30 years = $5.72 billion net present cost

The total maximum net present cost to the Government over the 30 year contract term of the project is $5.72 billion which equates to a cost of $1.37 per one thousand litres of water in net present cost terms. This includes construction, financing and operating costs, and using 150 billion litres of water every year for the next 27.75 years (the full contract operation period).

As the Government has complete flexibility on how much water can be ordered each year, the total net present cost over the life of the project could be much less. The desalination plant and the pipeline will be handed back to the Government in full operating condition, at no cost, in 2039.

A $1 billion saving

The Victorian Government prepared a Public Sector Comparator which showed that had the Government delivered this project, it was estimated to have cost $6.7 billion in net present cost terms. This means that the cost of delivering the project as a PPP with AquaSure is about $1 billion less than what it would have cost had the project been delivered by the Government.

Fixed price energy

The Government has an agreement in place with AquaSure that requires the company to purchase 100 per cent renewable energy to offset the energy used by the desalination plant and transfer pipeline. The cost of electricity and renewable energy has been fixed for the 30-year contract term, so any general increases in these costs will not affect the project.

Water bills

Water prices in Victoria are set by the Government’s independent economic regulator, the Essential Services Commission. Historically, water prices in Metropolitan Melbourne have been significantly below those charged in other states. All states are expected to see increases in prices in the next regulatory period as new water infrastructure comes online. It is expected that pricing will be comparable going forward.