Date created: 5/4/05
Last modified:5/4/05
Maintained by: John Quiggin
John Quiggin

Hard partnership lessons

Australian Financial Review

16 December 2004

The news that one of the two remaining tenderers for Queensland’s flagship Public-Private Partnership, the Southbank TAFE redevelopment project, has withdrawn provides an opportunity to reconsider the whole idea of PPPs. The evidence so far suggests that PPPs are an appropriate model of infrastructure financing only in relatively rare special cases.

Looking at the predecessors of PPPs, the so-called BOOT (Build, Own, Operate and Transfer) schemes, widely used in the 1980s and 1990s, it’s easy to find examples where the private investors earned handsome returns, and the public did very badly. There are also a few examples where the private investors lost out and the public acquired infrastructure at low cost.

It is hard, however, to find examples of BOOT schemes that yielded both satisfactory returns to investors and value for money for the public sector. In part, this is because of the (often deliberately) obscure accounting surrounding such schemes. In most cases, attention was focused on cosmetic elements, such as the idea that the handover of the asset to the public at the end of the contract period represented ‘something for nothing’.

The introduction of PPP schemes with detailed formal guidelines is supposed to overcome these problems and ensure that only projects yielding genuine value for money to the public sector went ahead. In particular, the underlying principle that risk should be allocated to the party best able to bear it has been applied fairly systematically. Although the process is still far from perfect, there is no doubt that it represents a big improvement on what went before.

At the same time, the private sector has learnt that, in a PPP arrangement, the private partner may indeed bear more risk. The lengthy dispute over the Spencer Street Station project in Melbourne indicates that this discovery has been an unwelcome one for some. In the past, governments routinely bailed out failed BOOT schemes .

If governments insist on value for money, and private investors expect a return that compensates them for the additional risk of a PPP arrangement, PPP projects will outperform the alternatives only in special cases. Where infrastructure services are supplied in a competitive market, as in the case of CBD office space, governments will generally be better off leaving the whole investment process to the private sector and renting the space it needs in the ordinary commercial fashion. On the other hand, where the public sector is the only likely user of special-purpose infrastructure, as in the case of schools and public hospitals, it is normally appropriate for the public to own the infrastructure

The argument for PPP arrangements is strongest in the case of once-off projects with innovative design elements tied to the operational needs of the project. The Victorian County Court project, involving large investments in new reporting and monitoring technology is a good example. Even so, the private partner’s contract to provide court services specified an initial term of only five years, renewable at the government’s option.

Some advocates of the PPP process have compared the successful County Court project with Federation Square, which suffered massive cost overruns. This is silly. Major cultural monuments like Federation Square almost invariable involve public controversy, midcourse redesigns and costly changes in specifications. No system of financing can avoid these costs - the only way to avoid them is not to pursue projects of this kind.

Looking at the case of the Southbank TAFE project, it’s hard to see any merit in a PPP approach. The TAFE college is a collection of fairly old buildings sitting on land which, thanks to the booming development of the Southbank entertainment and cultural precinct, is now very valuable. Arguably, the optimal solution was to sell the site outright and build a new college somewhere else, or to sell part of the site and use the proceeds to fund a redevelopment on the remainder.

The desire to pursue a PPP solution leads inevitably to schemes in which the TAFE college is integrated with a range of commercial activities which would generate profits for the private partner. There’s no obvious reason to suppose that this kind of integration (which is not standard) makes any commercial sense, and the difficulties encountered in the tender process reflect this.

The fact that a rigorous process of assessment will end up rejecting the PPP option in most cases, should be regarded as a success rather than a failure. Local governments and others considering going down the PPP route should learn from this experience.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

Read more articles from John Quiggin's home page

Go to John Quiggin's Weblog