16 Mar 2011

Much-maligned PPP has never been more necessary

by Brad Vann

PPPs may have some shortcomings but there have been many more successes than failures.

The Public Private Partnership (PPP) model – or more accurately, private sector participation in infrastructure projects – has been much maligned, particularly in these recent times of global financial turmoil.

Much of the criticism of PPPs has been based on false assumptions and in many cases, the misguided view that the private sector has no business participating in, and generating a return from, infrastructure projects. Criticism has also been levelled at governments around Australia for not digging deep into their own pockets to build much-needed infrastructure around the country.

Certainly the question of exactly how Australia will fund its future infrastructure needs remains a vexed one. In June last year, the Commonwealth Government's independent body Infrastructure Australia announced its priority pipeline of infrastructure projects at a total estimated capital cost of around $82 billion. The devastation wreaked by the recent floods in northern Australia exacerbates the challenge as governments will also be faced with the massive task of rebuilding damaged infrastructure. The money is going to have to come from somewhere.

A recent report by the Western Sydney Regional Organisation of Councils (WSROC) suggests that the answer lies with our governments – and a change in their attitudes towards infrastructure investment. The report's authors argue that Australian governments have become too interested in lowering their debt levels and maintaining AAA credit ratings, to the detriment of public investment in infrastructure. They argue that governments (in particular the NSW Government) should cease to rely so heavily on private investment and instead, must begin to borrow to fund infrastructure – albeit in a measured, prudent way, and ideally under the advice of an independent expert statutory body.

To the extent the WSROC report recognises that private investment alone will not be enough to deliver on Australia's ambitious infrastructure program, it is a welcome contribution to the infrastructure debate. But in calling on governments to bear the financial burden of our nation building, the report's authors fail to acknowledge that private sector investment and participation will not only be critical to governments' ability to deliver first-class infrastructure within relatively short timeframes, but also the value that private sector participants bring to infrastructure projects that governments alone cannot.

One of the major criticisms of PPPs is cost. Critics argue that it is cheaper for governments to go into debt to fund infrastructure because they can borrow at a lower cost than the private sector. But this doesn't mean infrastructure can be built by governments at a lower cost. In fact, PPPs have proven to be more cost-effective than traditional models in their ability to enable the delivery of infrastructure on time and on budget. A December 2008 University of Melbourne benchmarking study serves to highlight this. Comparing the performance of 25 PPP projects and 42 government owned and funded projects throughout Australia since 2000, it found the average cost escalation under PPP contracts during construction was 4.3 percent compared with 18 percent for traditional procurement contracts. The average delay during the same period was 2.6 percent of PPPs compared with 25.9 percent for traditional contracts.

In calculating the cost to government of building infrastructure, it's also important to understand that it includes more than the capital cost. It includes the maintenance and operation of the asset over its useful life – which can account for anywhere up to 90 percent of the total whole of life asset cost. Governments must take these costs into account when measuring the value for money of private sector bids against the costs to government of undertaking an infrastructure project. Any other comparative costs analyses should also do so.

The WSROC report is somewhat dismissive of PPPs, describing them as offering a "boutique" solution to building infrastructure. But the value of PPPs should not be underestimated. Australia is acknowledged as a mature PPP market and the players in it have a wealth of experience in the timely delivery of quality, innovative and technically superior infrastructure over the long term. PPPs may have some shortcomings but the failure of a few recent PPPs to meet the expectations of investors and the private sector operators should not be reason to dismiss them as a failure. There have been many more successes than failures. And, importantly, those which have not delivered the return on investment that investors expected are still providing services to governments and the public as they were intended.

Instead of arguing over the merits of the PPP as a delivery model, the starting point for any discussion on how to meet Australia's infrastructure needs should be this: an acknowledgement that Australia will need large amounts of both public and private investment to rectify our infrastructure deficit. We need to look at ways in which governments can harness the private sector's experience, innovative approach and efficiencies, through infrastructure project models which incentivize the private sector to generate upside returns and allow the public sector to provide capital that can share in those potential returns. Profit-sharing arrangements could allay the concerns of the critics that the private sector is taking excessive profits from infrastructure projects at the expense of the public purse.

Long-term strategic planning is essential if we are to build the infrastructure needed to sustain Australia's economic wellbeing well into the future. At a time when our infrastructure spending needs are so high, the challenges wrought by nature so great, and governments budgets are under pressure as we emerge from the global financial crisis, it is important that this planning process looks critically at the ways to access private sector participation and capital. It is equally important that governments recognise the need to manage public perceptions of the role of the private sector in developing our infrastructure for the future.

This article was first published in the Australian on 14 January 2011


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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.