The Perception Problem for PPPs 2

Wednesday, January 20th, 2016
liked this article
Engineering Education Australia – 300 x 250 (expire Nov 30 2016)
Perception Problem
FavoriteLoadingsave article

The concept of PPPs in recent years has been lost in transit.

PPPs are essentially a simple agreement for the private sector to provide the infrastructure and services that we, as a society, demand. The difficulty seems to lie in the perception of what citizens and governments believe is within the government’s purview and what services governments should be partnering with private providers to deliver.

In many respects, we taxpayers are to blame. Over the years, our demands of government have far outstripped the tax we pay.

Look no further than local council as a prime example of this resource-expectation gap.

If you own a home, you pay a rate (tax) based on the hypothetical value of your land absent your house, called unimproved land value. This makes one wonder, did local government councillors and bureaucrats of 1952 envisage that in 2016 rates would need to cover the cost of councils running yoga courses, operating kindergartens and providing community housing? A rate based purely on unimproved land value seems ill-suited to cover such a wide array of services.

Additionally, in Australia we have three levels of government that, to some extent, provide services that compete with each other. Health services are an obvious example. Local governments provide health and well-being programs, states deliver hospital care and a wide range of health programs, the Federal Government is responsible for primary care (GPs) and runs population health services and programs.

Despite the noticeable inefficiencies and duplication, we can’t change it. It’s the nature of the beast. Government is complex, big and challenging.

So what are governments best at delivering?

Modern public services demonstrate a commendable desire to solve all of society’s problems through policy-making. The predominant tool bureaucrats have at their disposal is programs delivered by the government of the day.

But let’s face it, there are some things governments rarely do well.

Because governments are huge bureaucracies with a focus on social outcomes rather than profit, their organisational structure and culture usually inhibit them from being agile, highly efficient or innovative.

Take road maintenance contracts. A properly incentivised private provider will fix potholes in the road quicker and in a safer manner due to their profit motive and to the company directors’ liabilities for safety. A government department will be more expensive but will cover more unplanned maintenance, such as replacing a damaged guardrail while they are fixing the potholes. The private provider will only do what they are assured of being paid to do.

While governments can provide high quality services, the difficulty lies in deciding what specific services and infrastructure governments should deliver. These decisions aren’t being made with any clarity or rapidity.

Decisions to enter into partnerships with the private sector can also be unpalatable to citizens who have become accustomed to governments delivering such a wide range of services.

But there is some light at the end of the tunnel (or toll road).

As we face the latter half of this decade and government budgetary constraints and infrastructure gaps worsen, governments will be forced to finally decide what services and their “core business” and which projects and services the private sector are better placed to deliver.

With this change will come a required cultural shift toward partnerships rather than fixed risk allocation contracts.

I have no doubt this will happen, as has been proven by every infrastructure crisis since federation – think drought projects for water supply across Queensland, New South Wales and Victoria between 2006 and 2010.

The cultural shift will begin with governance and a movement toward putting the construction industry closer to the policy makers.

One significant question will be how money will flow into these projects.

The constant pressure on superannuation funds to increase their allocations to infrastructure will continue, but with limited privatisation opportunities due to public perception, the private sector will need to better understand greenfield government projects.

In my opinion, the best PPP delivered in Australia was the Melbourne Convention Centre Development. The proponent and the government liked each other and, importantly, the equity providers were hogtied to the boardroom table with the constructor and government. They had to share and manage their risk together.

There is a lesson for all of us in that.

FavoriteLoadingsave article


 characters available
*Please refer to our comment policy before submitting
  1. Keith Keown

    PPP agreements are not simple agreements and in fact are very complex arrangements often resulting in considerable inefficiency and legal costs. This complexity requires great care and expertise to achieve value for money for government. If you are going to use PPP then do it properly and do not rush into it hoping for quick wins.

  2. David Stewart

    This is a rather quick gloss over PPPs. Mr Paynter is correct in stating that we tax payers have demanded more from OUR government than we are prepared to pay for through OUR taxes. And yes governments of large nations are "huge bureaucracies with a focus on social outcomes rather than profit", but so are the major PPP contractors large bureaucracies.
    However modern corporations including governments recognise that just simple monetary profit is not their only objective. His example of road maintenance as a PPP is just a wrong analysis. A private company is no more efficient than a government road maintenance unit, and requires a very sophisticated government work office to set up and manage the PPP private contractor (I have managed both). Replacing the guard rail whilst also repairing the pot-holes will save having to issue another works order and send out another gang, and may also save a life because the government ganger knows what his authority's policies and objectives are.
    Yes PPP's are a beneficial structure and provide another source off funds for public infrastructure. They require a very experienced government agency with technical, financial and legal capability in-house, to set up and manage the contracts. This is the area where governments fall down; they sack the technical capability they had built up and assume consultants will ben able to just walk in, which they can't.