Key Points:
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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