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Are public private partnerships the right mechanism to facilitate economic recovery?

· Julie Buxton,Economy,Infrastructure,Analysis

Australia has a long history of cooperation with the private sector to deliver services and infrastructure to the public. There have been (and continue to be) many models of cooperation utilised by governments to deliver projects and services, such as corporatisation, outsourcing and contracting, however the model that is increasingly becoming the preferred policy option is public private partnerships (‘PPP’). Borne out of a broader range of policies that sought to bring private sector management to public sector service provision, public private partnerships have been enthusiastically embraced by Australian governments who have incorporated them into governance regimes through institutional mechanisms. With the onset of the COVID-19 pandemic impacting economies worldwide, it is logical that governments at both state and federal levels are looking towards economic recovery, but the question remains how this recovery will be funded. Given the widespread use of PPPs and the traditional view that infrastructure building and construction drives economic recovery, is it time to rethink the use of public private partnerships?

The increasing use of PPPs to fund infrastructure and service delivery continues to attract controversy and debate. For advocates, PPPs are mutually beneficial arrangements that provide value for money to deliver projects on time and under budget. PPPs are said to produce significant savings as they enable governments to spread the cost of the project over the life of the asset, as well as harnessing the skills and innovation of the private sector. Opposition to PPPs commonly focus on the complex and long-term nature of contracts, commercial-in-confidence clauses, lack of competition, as well as reduced independent oversight, all resulting in PPPs responding to standards of accountability more aligned with corporate, rather than democratic governance.

No matter where one is situated in the debate, there is no doubt that PPP arrangements provide unique business and political opportunities. For the private sector, PPPs offer businesses the opportunity to increase market share of public services and the potential for considerable financial returns. While there are significant costs associated with tendering for PPP contracts, many businesses avoid this by submitting Market Led Proposals which allow them to be the sole proponent without any competition. In fact, the Australian PPP market offers a relatively small number of private entities the opportunity to dominate service delivery and infrastructure development across many sectors, leading to criticism that the use of PPPs is decreasing competition and creating oligopolistic behaviour.1

Utilising private finance to deliver large scale projects without increasing or creating project specific public sector borrowing provides political flexibility due to the contested nature of public debt in Australian politics. This arguably frees up governments to undertake other activities in areas such as health and education, creating the perception of a ‘can do’ government who is also fiscally responsible. PPPs also allow for risk sharing between the private and public sectors which theoretically leaves the public sector less vulnerable than it would be under more traditional forms of procurement like outsourcing. In many ways, PPPs are a win-win for both the private sector and government, especially in an economic and political environment that, for the last 30 years has called for governments to “steer, rather than row”.2

For governments looking to create ways to drive economic recovery out of COVID-19, the case for continuing to use public private partnerships is strong. However, while economic recovery is a priority, greater consideration needs to be given to the perceived problems that exist within public private partnership arrangements. One of the major criticisms of PPPs is the lack of transparency around the financial arrangements included in contracts. At all stages of the PPP process from idea formulation to contract expiry and beyond, details of publicly acquired money and resources remain secret, and therefore beyond public scrutiny. Even institutions that play a key role in public accountability, such as offices of Auditors-General, have voiced their concerns around not being able to publish, and in some cases, examine financial arrangements in PPPs.3 There are even examples of governments putting pressure on, and using legal action to dissuade or stop an Auditor-General from releasing information to the public, and in some cases, that information has subsequently been withheld.4 Coupled with the long term nature of PPP contracts, this lack of transparency means that current and future generations will be the shareholders of such arrangements, and neither will know the full extent of their financial commitment.

When contracts continue long after projects have been delivered (such as Transurban’s original 1995 Citylink contract that has been extended to 2045) the implications of such arrangements go far beyond the government of the day. Economic and public policy settings are not stagnant, therefore the clauses contained in PPP contracts signed at the time may be inadequate or even irrelevant for future governments, who will be unable to alter them in a completely different policy environment. For example, some PPP contracts contain clauses to compensate concessionaires if governments develop alternative projects the concessionaires may deem as competitive.5 This limits the capacity of future governments to modify policy and practices in a changed future policy environment.

Although each potential PPP project is subject to the Public Sector Comparator (PSC) which tests whether privately financed arrangements provide better Value for Money (VfM) than traditional procurement methods, the PSC has been widely criticised. The two major criticisms are around the economic assumptions that underpin its assessment, and the risk transfer of the project. Two recent projects that were said to provide better VfM if delivered privately were the Cross City Tunnel in Sydney which was a spectacular failure when the proponent went bankrupt and the roadway was not converted to public ownership, and the Clem7 in Brisbane which suffered a similar fate. There have been similar concerns around PSC calculations on several other projects in Australia where it was found that economic evaluations informing PSC were based on figures that were falsified by the proponent.6 When the PSC mechanism fails, it is the taxpayer that ends up paying the price.

While privatisation is generally thought to be ‘on the nose’ with the electorate, the increased use of public private partnerships to fund major projects and services shows an unwillingness to test the electorate’s appetite for public borrowing. There is clearly an appetite for big builds. However, what is not clear is the electorate’s understanding of the funding arrangements that underpin projects delivered via PPPs, and whether genuine public disclosure of funding arrangements would influence the electorate’s preference of funding mechanisms. Most debate around PPPs is situated in academia, in the PPP sector or in the media. However limited transparency surrounding PPP contracts means that positive promotion of PPPs by the businesses invested in them needs to be measured against academic or media scrutiny and analysis that is often reduced to speculation, or is based on theoretical assumptions and limited accessible information. Therefore, the public is largely kept in the dark about PPP arrangements and has very limited opportunities to participate in the PPP process, including whether PPPs should be used to fund certain projects against alternative procurement methods.

Public private partnerships are complex arrangements and cannot be reduced to simple claims. Those who argue for PPPs to be abandoned as a policy tool are ignoring the fact that some projects delivered via PPP arrangements have provided value for money for taxpayers. Furthermore, some projects are more suited to PPP arrangements than traditional procurement. Rather than advocating for PPPs to be abandoned altogether, there should be much greater public access to the information contained in PPP contracts, so that the electorate can understand what their government is signing them up for. Any decision that governments make today to use public private partnerships to drive economic recovery will have wide reaching implications for both citizens and governments long into the future, and these implications should be carefully considered when assessing the best way to achieve that goal.

  1. PAEC. (2006). Report on Private Investment in Public Infrastructure, No 240, Session 2003-06. Parliament of Victoria.
  2. Savoie, D. L. (1995). What is wrong with the new public management? Canadian Public Administration Vol 38 (1), 112-121.
  4. English, L. (2006). Public Private Partnerships in Australia: An Overview of their Nature, Purpose, Incidence and Oversight. UNSW Law Journal, 29 (3), 250-262.
  5. Clayton Utz. (2013). Improving the Outcomes of Public Private Partnerships. Melbourne: Clayton Utz.
  6. Goldberg, J. (2014). The Misallocation of Public Money for both Public and Private Transport Infrastructure. Submission to the Productivity Commission, (p. 1-18).

Julie Buxton is a Policy Intern at FPL Advisory.

FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.