What are the Downsides of Public Private Partnerships? 2

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Thursday, August 6th, 2015
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Public Private Partnerships
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As governments throughout Australia battle to fund ongoing infrastructure requirements in an environment of fiscal constraint, the use of mechanisms designed to leverage private sector investment such as through public private partnerships (PPPs) has become increasingly appealing.

NSW State Treasurer (and now Premier) Mike Baird declared that PPPs in his state were ‘back in town’ in 2011, for example. That state has funded a number of projects through this model, including the North West Rail Link and the Sydney Light Rail project, and such momentum shows no immediate sign of stopping. Projects which are currently being put out to tender under this type of arrangement include the redevelopment of the ACT Supreme Court, the Capital Metro Project in Canberra, the Northern Territory Gas Pipeline, the Toowoomba Second Range Crossing in Queensland and works for the delivery of new schools and classrooms in Victoria and Western Australia.

The benefits are straightforward. By leveraging private sector involvement and transferring a substantial portion of risk on to the private project participants, PPPs allow for more projects to be financed with a lower upfront investment of taxpayer dollars and less risk to the taxpayer compared with what would be the case under traditional contracting methods. When well-structured, a PPP-type arrangement provides incentives for private sector partners to complete projects on time and on budget. While traditional procurement models rarely see money put aside to pay for future maintenance, PPP arrangements see maintenance costs over the life of the asset effectively factored into the PPP contract price.

Despite this, the concept is not universally popular. In an editorial published on the Associations of Consulting Architects website in April, Ann Gorey, a senior policy adviser for the Building Management division of the Department of Planning, Transport and Infrastructure in South Australia, argued that such models involve a number of disadvantages. As many PPPs involve a design and construct type contract under which the detailed design is prepared only after the contract has been awarded, opportunities for community consultation beyond early stages where the design brief is under preparation are limited. Unlike a standard procurement process, Gorey argues, opportunities to alter or fine-tune the design are generally not available once sign-off has taken place without a high cost penalty – a particular problem as specifying precisely what is required in such early stages can be difficult.

Moreover, with unsuccessful bidders deriving no form of financial return for their effort and expenses incurred in preparing bids, Gorey questions the fairness associated with this type of model – especially for architects, engineers and designers.

“It is questionable whether PPPs involve fair and equitable processes,” Gorey wrote. “Competing bids take time and effort. This inevitably means that someone has done a lot of work but will not get paid for it.

“Design professionals (architects and engineers) are expected to do considerable work to compete and do not get paid for this work if their bid is unsuccessful. This can be very damaging to the financial viability of a design or building company.”

Others, however, adopt a more favourable view. James Mitchell, a director of project management services at integrated project services outfit Aquenta Consulting, acknowledges challenges and potential drawbacks associated with this type of model. Even when the sum of the procurement costs associated with all three stages (design, construction, maintenance) of traditional procurement are taken into account, costs associated with PPPs are generally higher than what would typically be the case under a conventional contracting model, he says.

While PPP contracts generally allow for design modification, this typically comes at a higher cost under such an arrangement compared with traditional contracting, as the consortium will need to be compensated for financing costs associated with any time delays as a result of the modification. Opportunities for community consultation after the contract has been announced (prior to the finalisation of the detailed design in a design and construct type contract) are indeed limited, Mitchell says.

Furthermore, Mitchell stresses, the PPP model is not suitable for all types of projects, and should only be used where the scale of the project is sufficient to justify the relatively high bid costs and extensive bid selection process and where the scope of the project can be clearly defined.

Still, he argues, some of the criticisms of PPPs are not entirely justified. The famous collapse of Victorian builder St Hilliers during the process of the Ararat Prison project in the state’s west (delivered under a PPP), for example, prompted fears at the time that the project would face delays of up to 18 months and require taxpayers to foot the bill for an extra $100 million in order to get the development completed. However, in contrast to the traditional contracting model – which would have seen taxpayers wear the entire cost associated with getting the project back on track – most of the cost was in fact worn by lenders to the project consortium, with the only costs being worn by the taxpayer consisting of what turned out to be a delay of a matter of months and that of management time associated with the transition period.

Another criticism – that a ‘design and construct’ style contract generally delivers the lowest allowable standard of construction under the Building Code of Australia – potentially ignores the fact that a consortium who will be required to maintain the building or asset post-completion should in theory be incentivised to ensure construction is sound and subsequent maintenance costs are minimised as much as possible.

As for the upfront costs and effort involved, Mitchell says the rigour and discipline PPPs require in this area help to ensure taxpayers end up with the bid which represents the best design and value for money. While the cost to unsuccessful bidders, their designers and consultants is high, market forces would dictate that each party only participated in the process where it was economically viable for them to do so.

“If it (high bid costs) was such a problem, nobody would be bidding for these projects,” he said.

Mitchell says that after 15 years of involvement with PPPs he is has seen first-hand the synergies that are often derived through this process, and adds that he can “absolutely put my hand on my heart and assure the taxpayer that everything is at such competitive levels that they can be sure they are getting the best deal out of it.”

In an environment of tight fiscal constraints and pressing infrastructure needs, PPPs appear to have been well and truly back for several years, as Baird said would be the case in his state.

How they work as a delivery method for everyone, however, remains a subject of debate.

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  1. Adam Shaw

    No wonder South Australia cancel projects at the drop of a hat when they have such ill informed advisers as Ann Gorey.

    If you want to be able to change the design 1) dont use this model and 2) spend the time and money on getting appropriate Principal Project Requirements or a reference design together. The age of dictating what the private sector should design and how they should build it is over.

    Designers, architects and engineers get paid for bid work, yes there may be a discount and success fee component but the only people not getting paid are the Consortium partners.

  2. Margaret

    Both Gorey & Mitchell are right about some aspects of the PPP delivery, but two comments:
    1. D&C doesn't always deliver quality as the Project Co may not manage the builder who leaves the project failings to the FM team member to fix. And they rely on the State not wishing for political reasons to publicise failings!
    2. A number of competent design teams have pulled out of bidding; designing for nothing, or perhaps 10% of the real cost of the bid, is no way to run a business . Tendering costs are very significant for the design teams, and the emotional cost is high; few of the designers I know want to do it again as it involves giving up your life for 6 months and working obscene hours only to lose the project for a reason out of your control.
    The difficulty is that everyone wants one of the Ps in PPP to be "magic pudding". Simplistic statements like' they didn't come up with a commercial proposal' simply identify that the objectives hadn't been thought through properly.
    Good projects need adequate funding, good planning and design followed by considered and competent construction. Is that too hard?