Are Badly Managed PPPs Costing Billions? 1

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Thursday, June 9th, 2016
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Back in 2002, the Spencer Street (now known as Southern Cross) Station Authority (SCSA) in Melbourne entered into a public private partnership (PPP) with the Civic Nexus private consortium to transform and subsequently operate what had been a run-down terminal at which commuters would spend as little time as possible into a transport and retail hub which would serve as a showcase development for the city.

Whilst the new and improved facility was certainly welcome, the project suffered major setbacks during delivery. Delays, disputes and unexpected costs associated with a need to maintain 24-hour operational capacity for the station during construction saw building time frames blow out by 15 months, costs blow out and the launching of significant compensation claims primarily against the state by developer Leighton Contractors.

After construction, despite the SCSA making an assessment of underperformance with regard to operations in three out of four quarters within the first year of operation, it applied abatement measures in relation to only one such breach (relating to the first quarter), with the authority believing that the longer term benefits of maintaining the relationship with the private consortium outweighed those of enforcing the abatement measures.

A 2007 report into management of the project by the Victorian Auditor General’s Office talked of a number of KPIs used in the assessment of the consortium’s operational performance being difficult to measure and cases of performance measurement being hindered by inaccurate data being entered into the system.

Whilst the attractions of PPPs are understandable, the aforementioned case provides an example of some of the problems and challenges which can arise in terms of the management of some of these projects. This is becoming increasingly important as the scale and amount of money going in to these types of arrangements grows; as of May last year, data from Infrastructure Australia indicated that 136 such arrangements were in operation around the country with a combined contract value of more than $77 billion.

Accordingly, concern surrounding some of these issues is growing. In a recent article in The Conversation, for example, RMIT Research Associate Steven McCann suggested that hundreds of millions of dollars or even billions of dollars’ worth of taxpayer money around the world was being paid to private PPP partners either for services which did not fully address social needs or with regard to assets which were not being well managed.

According to McCann, a critical area of challenge revolves around government management and oversight of the PPP process after the agreement has been reached – an area which he says can be affected by a number of factors, including a change in the power dynamics between the public and private partners and risks that contract management teams employed by government could lack experience or that governance structures and reporting mechanisms could be inadequate. Indeed, he pointed out, the extent to which contracts were being effectively managed during the concession period in which services are being delivered is often ‘largely unknown beyond tiny cables of government insiders’ as a result of contractual confidentiality and a lack of transparency.

Monash University associate professor and economist Vivek Chaudhri agrees. Whilst acknowledging the attractions of PPPs, Chaudhri says sentiments such as those expressed by McCann reflect an increasingly widely held view in academic literature around the world.

“PPPs as a mechanism sound great,” Chaudhri said. “(However,) the practice around the world has tended to align with what Steven is saying. A lot of the time, the governance mechanisms are incomplete, there is a lack of transparency and it enables politicians to take large infrastructure spending off budget and basically say ‘this is value for money but we can’t tell you what the dollars and cents look like because it’s commercial in-confidence’ when the contracts are written up. So I think there are some systemic and structural problems with the way PPPs are configured.”

According to Chaudhri, there are a number of areas of concern. Courtesy of confidentiality considerations, how some PPP arrangements actually deliver value for money is often not clear, he said, and the general public is often left to rely on assurances from government in this area. Whilst contracts are typically drawn up by government, meanwhile, an ‘information asymmetry’ between government clients and the private sector means that ‘rules of the game’ in fact are often dictated by the latter.

Finally, there is an issue with regard to the expanding scope of a number of PPPs beyond physical asset maintenance and delivery toward health and social service provision. The PPP awarded in late 2014 to build the Northern Beaches Hospital in New South Wales, for example, involves the Healthscope led consortium not just financing, constructing and maintaining the new building but also delivering public health services over a 20-year period. The contract to build Victoria’s Ravenhall Prison, meanwhile, incorporates correctional and post-release services in addition to delivering the actual facility.

Whilst Chaudhri is not opposed to private sector participation in these areas per se, he says this should occur only in the context of a broader debate about public service provision and exactly what the role if any of private sector for-profit providers should be.

Infrastructure Partnerships Australia chief executive officer Brendan Lyon disagrees. He says the value proposition surrounding PPPs against other forms of project financing has been amply demonstrated in a number of reports from the Commonwealth Treasury as well as other bodi, adding that the contestable nature of the PPP process within the initial selection procedures serves to foster competition with regard to how new buildings, infrastructure and services are delivered. The nature of PPPs, meanwhile, allows for innovative methods by which incentives could be tied to outcomes. In the Ravenhall project, for example, incentive based payments are being tied to reductions in recidivism rates.

Lyon says the public sector in Australia is adept at setting out clear expectations to be delivered in detail the contract whilst many PPPs are heavily scrutinised by investors (where listed companies are involved) and the media, and places such as Victoria publish either full contracts or extracts of all PPP contracts online.

Nevertheless, the sheer volume of these types of arrangements coming on to the market underscores a need for sequencing to ensure that both government clients and their private sector partners can have their best teams available when working through the details of the contract, Lyon says.

In addition, he says, transparency is often lacking with regard to smaller and less visible projects. Publishing details of these along with an analysis of whether or not performance was delivered against the business case, he noted, would foster greater discipline amongst government agencies to ensure their business cases were sound and would facilitate greater levels of analysis as to what type of project delivery method (PPPs, fixed price contracts and so on) was in fact delivering the best outcomes.

“PPPs are a very sophisticated way of aligning private profit motive toward managing the public sector’s risk in delivering and operating the infrastructure,” Lyon said. “The experience of Australia with PPPs has been very strong.”

Around Australia, the push to leverage private sector money and involvement in public sector asset and service delivery through mechanisms such as PPPs continues to gather momentum.

Should challenges associated with transparency and ongoing oversight be overcome, the future for PPPs looks brighter yet.

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  1. Barry b.

    PPP's are potentially a great financing mechanism, but like anything their usage must be attended by caution and thorough consideration.