Public-Private Partnerships (PPPs)

In Whose Interests?

by Frank Stilwell

Infrastructure has usually been provided by government and funded through public investment. This collective provision of infrastructure, so central throughout Australian economic history, has been severed in recent decades by privatisation of public assets and by the proliferation of public-private partnerships (PPPs).

PPPs can take many forms. The best known are BOOT schemes (build, own, operate, transfer) where a company is responsible for design, construction, finance maintenance and commercial risks, and owns the asset for a set period (usually 20-30 years), during which time it operates it and collects user charges. When profits and costs have been recouped, ownership is transferred back to the government. BOO schemes are similar to BOOTs, except that the company retains ownership of the asset in perpetuity. A third variation is DBO schemes (design, build operate) where a company finances construction, the government purchases the asset for an agreed price and takes all ownership risks, and the company retains the management function and related risks.

PPPs have been implemented by various governments throughout Australia, particularly the NSW and Victorian State governments. PPPs in NSW have been implemented or approved in a wide range of services and infrastructure, including schools, hospitals, prisons, housing and aged care facilities, as well as in construction, maintenance and operation of infrastructure assets in transport and utilities. Specific examples include Sydney’s Cross City Tunnel, Western Sydney Orbital, Lane Cove Tunnel and Eastern Creek Alternative Waste Treatment Facility, as well as the Port Macquarie Base Hospital and nine new schools in Sydney and the Central Coast. Still more projects are in the pipeline, including the Mater Hospital in Newcastle, a number of correctional centres, and a social housing project.

Proponents of public-private partnerships claim that PPPs provide significant social and economic benefits. It is argued that PPPs reduce government borrowing, freeing up public money for essential services. PPPs are also said to shift investment risks to the private sector, to provide better value for money and quicker project completion times, and to provide more competition in service delivery, increasing efficiency and customer focus.

Underlying these arguments one may also discern an ideological aversion to government borrowing, taxation and public debt, and the presumption that public provision of infrastructure and services is inherently inefficient.

A careful look at the evidence on PPPs casts serious doubt over their supposed benefits and paints a much more worrying picture.

In practice much of the risk with these projects is still carried by the public sector. The nature of the infrastructure being provided means that the ultimate responsibility must lie with the government. The viability of hospitals, schools and water supplies, for example, is too important to let the ‘logic of the marketplace’ prevail. If a private company fails to provide and maintain an adequate service, the government ultimately must do so.

In practice PPPs tend to privatise the profits of infrastructure development but socialise the risks.

The Sydney Airport Rail Link is a classic example. It was developed as a PPP between the NSW Government and a private consortium. The Government claimed that all of the financial costs would by borne by the private sector. But, in practice, it has had to bail the project out with about $800 million of public funds as the consortium defaulted on its loan.

Clauses are often written into PPP contracts that actually shift the burden of risk towards the government. These contracts often provide for an extension of the original hand-over deadline if the operator has not received an agreed cumulative minimum rate of return. Contracts may also preclude the government from doing other things (like transport improvements) that may reduce the income of the private partner, unless compensation is paid.

Another concern relates to the cost-effectiveness of PPPs. Governments can borrow at a cheaper rate of interest than private firms. So private companies require a greater return on their investments in order to recoup costs and make a profit, usually recovered either through higher user fees (such as road tolls) or direct government payments.

Whether the quality of service suffers is another concern. Private operators are primarily responsible to

their shareholders rather than to the community, which often puts the emphasis on cost-cutting.

PPPs also tend to have problems of accountability to the community. Access to the details of contractual arrangements is often denied on ‘commercial in confidence’ grounds.

The above concerns indicate that PPPs are a hazardous road to travel further along. We should be seeking alternatives.

Taxation revenue is the most obvious means of financing infrastructure. The other alternative is public borrowing through the issue of government bonds. During the last Federal election campaign the Australian Greens advocated specifically earmarked

‘Green Bonds’ as the key part of a plan to invest $35 billion over 10 years to boost public investment in social, environmental and economic infrastructure. This would have increased public infrastructure spending in line with the current rate of GDP growth.

The key question is how we are to fund and manage the provision of the infrastructure needed for a good quality of life. The role of the public sector is of paramount importance.

If there is any ‘upside’ to the empty and collapsing tunnels in Sydney, perhaps it is in ending the fad for PPPs.

Frank Stilwell is Professor of Economics, Sydney University.