Introduction

Queensland developed a system of public-private partnerships (PPPs) for infrastructure based on Victoria's arrangements [1]. The latter, Partnerships Victoria, was in turn based on methods developed by the Blair Government in the UK [1]. 

Similar arrangements are being sought in many other jurisdictions [1]. An outline of some public debate concerning PPPs is available (see Infrastructure and Queensland Infrastructure)

Overview of CPDS Comments

The PPP model that several Australian states are copying seems to contain significant defects. The effectiveness of the model's original developer (ie the Government in the UK) has attracted a lot of criticism  - and the Blair Government seems to retain  electoral support mainly because no opposition party has yet identified any alternative. 

The basic PPP model that Australia's states are adopting can be illustrated by Partnerships Victoria (see Section A below). It is intended to promote efficiency in the delivery of public services. While there is a real potential for production cost savings, those savings (and the quality of public services) seem likely to be lost in the difficulties of contract management likely to arise from: 

• the complexity of public goods and services requirements - a complexity which arises from the same characteristics that caused 'public' goods and services to suffer market failures and to be undertaken by government in the first place;
• the difficulty of maintaining enough technical competence in public administration to properly manage contracts; and
• the potential that is introduced for corruptly influencing politics and public administration. 

Furthermore:

• many infrastructure systems need to be managed as a whole, and this can be impossible where parts of those systems are turned into effectively private undertakings and there is no workable market mechanism through which they can be linked;
• Queensland's machinery for planning infrastructure is already seriously defective, and Guidance Material for implementing a PPP model will simply add a further layer of administrative complexity;  
• the complexity is further compounded by the Commonwealth Government's proposal for an (enterprising) PPP process for transport infrastructure which seems inconsistent with the (government-planning) PPP processes being established by the states;
• by 2006 very serious infrastructure problems were perceived to be arising in Victoria.

Moreover the PPP model is concerned only with increasing the efficiency of service delivery, not with raising economic productivity. Thus it is even less appropriate because in Queensland the infrastructure system also needs to promote economic productivity (see Section B below).  

Why? Unlike Victoria and the UK, Queensland did not privatize those types of (economic) infrastructure that are most likely to provide scope for raising economic productivity. Thus Queensland's system needs competitive market-focused arrangements for planning economic infrastructure (in which government enterprises and private firms can take initiatives). Partnerships Victoria assumes a much simpler arrangement (ie infrastructure planned through administrative machinery) which is unsuitable for economic infrastructure in a competitive user-pays environment.

The major motive for experimenting with PPPs is a perceived problem in financing public goods and services. However PPPs do not provide a way to significantly increase the overall rate of infrastructure spending (see Section C). Strengthening the tax base by developing the economy offers greater scope for overcoming this constraint than across-the-board changes to the basis of public service delivery does. 

The most significant problem with PPPs may be that partnerships between the private and public sectors that could offer much greater benefits (ie those in which the private sector leads in developing capabilities within industrial clusters which could raise community incomes and provide a stronger tax base) are being neglected while dubious efforts are made to 'fix' the public sector. 

July 2001 - and substantially revised from February 2002

A. Problems in the Basic PPP Model - Comments Based on Partnerships Victoria (PV) 

Details of Partnerships Victoria (PV) are available on the web.

"Partnerships Victoria is concerned mainly with the establishment of partnerships for public infrastructure and related ancillary services". 

More

Schools may join the growing list of of services gaining private funding (Cornell A. 'Regulators not in the real world',  Financial Review,  25/2/02)

The Goal 

The goals for PV (and the criteria for public benefit tests) were suggested to relate to equity. PV involves a means for private sector contracting for delivery of public infrastructure services.

The intent of PV and PPPs generally is to increasing efficiency in service delivery. 

For example: The ability that PPPs provides to undertake integrated life-cycle planning is likely to deliver real cost savings (Gray J. 'Going private a $20bn shake up', Australian,  11/2/02). 

Transferring risk to the private sector is another way in which costs may be reduced.

For example: NSW, Queensland and Victorian labor governments are pushing PPPs. These are seen as either an expensive attempt to privatize public services or as a way to enhance the quality of social infrastructure that delivers value for money to taxpayers. There are many different PPP models. Often these can deliver improved facilities much faster than the public sector (with its competing capital demands) can do. It is unrealistic to expect the private sector to offer innovations whilst competing against public providers. The advantage of PPPs is risk transfer - because the public sector will always be cheaper if cost of funds is the only criterion. But when cost over-runs, maintenance problems, unavailable facilities are factored in - the balance tips. Though PPPs give value for money, they usually require new government revenue to service the annual costs. PPPs should not be seen in terms of privatization (Wilde M. (Deloitte Touche Ross) 'PPPs are about transferring risk', Financial Review, 12/4/02)

An Overview: Australia has long been a recipient of things British. Now it is the PPP concept. The practice - called private finance initiatives (PFI) in the UK has been used before - but is now becoming widely accepted. PPP can refer to many different things - contractual outsourcing; private financing; or full privatization. Australian's main PPP advocate (Dennis O'Neill of the Australian Council for Infrastructure and Development) says that Australia's experience has been tempered by UK experience - noting Partnerships Victoria and Working with Government NSW. Governments are seeking value for money. Governments have sought to define more specifically what they want in terms of policy and outcomes. The states are taking the lead, because of their primary responsibility for infrastructure delivery. The most important reasons for government to include the private sector are the application of capital, efficiency and speed. Efficiency gains of 15-20% (and similar speed gains) can be achieved. There is more scope for innovation the earlier one comes to the market, and it is possible to go forward with much simpler specifications. There are also maintenance side benefits (and projects tend to involve this). Governments have a fixed division between capital and maintenance, and PPPs allow this to be removed. There is a lot of commonality around Australia, which avoid self-defeating complexity. Politics can be a barrier to PPPs - and even though PPPs are becoming more popular, getting widespread community support is a challenge. There is concern about who supplies the service - and PPP arrangements can be quite complex. Most opposition comes from those with an ideological view that only government should provide infrastructure - and this raises issues as privatization is part of the spectrum. But PPPs are not just are not just back-door privatization. Access to capital is also an issue. Governments do not want to borrow so as to keep their AAA ratings. PPPs are seen as a solution. Integrated schools, public transport and commercial space will bring integrated property opportunities. There is also a need for more integrated transport hubs. There can be an alliance between property and infrastructure developers - given political leadership.  Eventually PPPs will be the preferred method for infrastructure delivery - at present it is only about 15% because community acceptance is the major barrier. This won't make the world perfect, just better, as some projects will always fail. The Australian Council for Infrastructure and Development studied public perceptions - which showed strong acceptance of the PPP concept for new infrastructure - but concern about 'privatization by stealth'. And support is increasing. Another major surge in infrastructure projects around Australia will be needed over the next 5 years - and state governments want private finance for most of this, though there is uncertainty about how much they will fund. Private funding has fallen off - partly due to changes in tax rules. Governments will need to provide greater subsidies. (Hatcher Nigel. 'Setting off on the PPP road', Property Australia,  May 2002)

There is nothing new about the private sector contracting to provide discrete elements of public goods and services.   What seems to be different about PPPs is that they seek private involvement in managing particular services as a whole, and in the provision of finance.

Economic Benefits

Though there is probably a potential for such cost savings, the economic impact of PV may be quite small because:

• the anticipated cost savings may be hard to realize (as discussed below) because of the difficulties of effective contract management; 
• one source of efficiency from private service delivery is likely to be expected from flexible industrial relations. [In fact some might (undesirably) hope that cost savings from private delivery can be associated with simply paying employees less].

• the overview of PV said nothing about industrial relations arrangements, and it is likely that the required flexibility will be prevented by legislation; 
• unions in Queensland and WA have expressed concerns about PPPs, and have sought an extension of time for making submissions in relation to Queensland's PPP proposal. Though business suggested that confidence would be dented if government gave way to unions, and the Premier argued that PPPs are essential to allow Queensland to maintain a high rate of capital spending without raising taxes, union leaders have branded PPPs as 'privatization by stealth' (Emerson S. 'Showdown looms on partnership deadline', Australian,  18-19/5/02)

• cost saving is quite different to raising economic productivity. The latter requires enterprising leadership in the development and operation of services.

Raising economic productivity (ie achieving high economic value-added either in infrastructure operations or related sectors) depends mainly on an operator's market focus and on its flexibility to follow the market - and only to a small degree on production efficiency. This arises because, in a competitive environment, other producers quickly copy any efficiency gains and prices are bid down to the lowered production costs. The economic gains that result from privatizing Brisbane airport (for example) have more to do with the operator's commercial orientation, than with their 'efficiency'. Certainly sustainable competitive advantages may come from a high rate of gain in efficiency (but this is a 'flexibility of work practices' issue - rather than due to static 'efficiency'). 

Under PV, government is responsible for identifying and researching needs, and then tightly specifying and controlling the outputs. Thus a real market focus and flexibility (and significantly raised economic productivity) can not be gained. Similarly where (as under PV) infrastructure decisions are based on governmental benefit / cost analysis it is only possible to 'measure' the obvious benefits, without scope to raise them through building synergy with other interests - which could be a major potential contribution if the private sector can take the initiative. 

Public Financing Benefits?

PPPs are seen by some as a way to increase the financial resources available so as to allow more services to be provided and sooner.

However this is a somewhat doubtful benefit for reasons outlined in Section C.

It has also been suggested that, on some occasions (such as where a private infrastructure element competes directly with a 'free' / publicly funded service, public sector subsidies are the only way to make the the private investment profitable [1]. This creates clear difficulties in an environment in which (a) the PPP process has been seen to result in some cases in large private profits at public expense and (b) non-transparent incentives have been used to encourage public support for particular private infrastructure investments.

Criticism and Defense

PV seems to be based on techniques developed and extensively used by the Blair Government in the UK - which (in contrast to Australia) had a tradition of private involvement in public services until World War II, and a very strong reliance on privately-provided public services until the reforms in the 1850s which created a professional Civil Service.

The UK government is rewriting the text book on social democratic politics - especially through private provision of public services involving PPPs rather than through privatization or outsourcing. In Australia and USA much attention has been given to UK government intervention in Railtrack - but this is a minor issue and the government is pressing ahead in areas such as education, health and many other areas.  Reasons for the lesser involvement by Labor Governments in the Australian states may include: (a) different party composition - where leading liberals are in UK Labor - and differences in the union movement where public sector unions also cover private sector members (b) pragmatic leadership which sees the problem from the viewpoint of consumers rather than producers (c) external pressures such as fiscal stress and EU rules prescribing competition between health systems - say (d) public opinion - where, in health, there is little enthusiasm for the public system (e) a traditional institutional reliance on private institutions in delivering public services until WWII. Even the Northcote Trevelyan report which laid the foundation for the UK civil service was based on a private company - the East India Company. Australia tends to follow the UK's lead - but by the time Australia's systems were established the trend towards municipalisation and nationalization was already well under way. However there also also Australian precedents to draw upon - in private tollways and private schooling (Sturgess G. 'Private Risk, Public Service', Centre for Independent Studies, Autumn 2002)

The effectiveness of those techniques has been subjected to a great deal of criticism.

For example: comments on Third Way politics in the UK (and on the UK model) indicates a general dissatisfaction with government performance in the UK (increasingly in relation to PPPs), and that electoral support seems to be maintained mainly because no opposition party is seen to have any policy proposals that would be better.

And Barry Jones' discussion of the ALP's Knowledge Nation Task Force (Jones B. 'Can we make Australia a Knowledge Nation?', Address at Macquarie University, 27/4/01) suggested that UK public administration was in serious difficulties with crises in privatized rail systems, mad cow disease, foot and mouth disease all seen to be due to the hollowing out of expertise, the increase in simple 'management' and a decline in effective accountability. 

Criticism (and defense) of PPP arrangements has also arisen in Australia. 

Examples of debate:

• PPPs cause concern - especially in NSW. Governments have (a) agreed to un-commercial terms that have imposed high costs on taxpayers (b) turned user fees into general taxes (c) adopted inconsistent policies in different cities regarding tolls or public funding of similar infrastructure (d) and entered into lease arrangements for buildings that make government responsible for upgrading the building (Harris T. 'Infrastructure's hard road', Financial Review,  29/1/02)
• PV's Public Sector comparator (to determine whether it is better to go for private or public sector provision) has been described as complex (Gray J. 'Going private a $20bn shake up', Australian, 11/2/02).  
• Enron was based on 3 principles (a) being asset light - rather than owing assets it used contracts with partners (b) financial innovation based on the view that the private sector would produce better results than public sector (c) shifting debts off-balance-sheet to secure a good credit rating. Australian governments have also been selling public assets (to reduce public debts) and shifting their obligations off-balance-sheet - by renting. Sometimes this provides flexibility - but sometimes government is the only logical user. There would be few problems in Commonwealth sale and lease-back arrangements if these were treated as borrowings - ie capitalized onto the balance sheet. Partnerships Victoria is similar - where concerns exist about the public sector 'comparator'. In UK proposals for private finance for upgrading Underground showed twice the cost - yet 2 of 3 analysts signed off on this as constituting value for money (Quiggin J. 'Enron's Australian cousin'  Financial Review, 28/2/02)
• Following UK examples, many Australian governments are considering 'private financing initiatives' (known in Australia as PPPs) under which private enterprises build, own operate physical infrastructure. Such initiatives have been widely adopted in transport, and are being extended to social infrastructure (eg schools and hospitals) - where often private owner manages the building while public sector provides the services. Many early initiatives have been criticized, and shown to have reduced net worth of public sector. The superficial appeal of reducing public debt has been shown as illusory. Advocates claim that problems have been overcome by appropriate allocation of risk. Before 1980s infrastructure tended to be owned by public sector and constructed by private sector under competitive tendering. As concerns about budget deficits mounted, devises were used to reduce 'debt burden'. BOOT schemes were particularly popular (under which private sector built facility, operated on user-pays basis and then transfers to public sector. This approach has been criticized (eg by EPAC Infrastructure Task Force, Industry Commission) because (a) apparent reduction in debt is illusory (b) risk is misallocated when used for transport because real risk is in planning of network as a whole rather than in constructing project - but private constructor gains the premium return from tolls. Sale and leaseback deals have also been used - most particularly by Commonwealth Department of Finance which has been prepared to pay up to a 15% return - a practice which the Audit Office ascribed to a misunderstanding of the Capital Asset Pricing Model. While these arrangements appear to reduce public debt this is illusory - and there is no reduced risk born by public sector. There is a claim that private providers enjoy a 20% cost advantage, but there is a need here to distinguish between real cost advantages and costs transferred to others in society (eg hidden subsidies, or paying lower wages). In the UK public assets were often sold at substantial discounts in the 1980s. This approach was rejected by Blair Government in 1997 - and adopted a new value-for-money goal, which AG and Parliamentary reports suggest has not yet been demonstrated. Also many PFI infrastructure service providers has performed badly in the UK. There are two problems with the idea that public debt problems can be solved by private infrastructure investment (a) often such deals have government guaranteed payments with identical fiscal and economic effects to repaying public debts (b) public debt should not, in itself, be a policy target - as the key issue is net public sector worth (an issue highlighted by accrual accounting in Australia). In Australia government reduced its debts by selling Telstra shares for less than they were worth - thus also reducing its net worth. Allocation and management of risk is of central importance - which was initially ignored, and now (eg in Partnerships Victoria) gains a lot of attention. Risk should be born where there is only one party involved, by that party. A major problem arises in working out the transfer of financial risk associated with project ownership. Usually the rate of discount applied to public investments has been the bond rate - but PFIs are usually evaluated on the assumption that the cost of risk to government must be as great as for private sector. A straightforward application of risk management principles suggests that infrastructure should be publicly financed, and privately constructed. That PFI analyses reach different conclusions is attributable to unproven ideological assumptions.       (Quiggin J. 'Private financing of public infrastructure',  Dissent,  Autumn / Winter 2002)
• PPPs are popular because governments are bowing to business pressure to get onto the government teat. UK Government policy was recently criticized in Economist - which argued that government can't really transfer risk to the private sector because government can't afford to let projects fail. Also PPPs do not provide more finance - as they merely substitute long term contractual obligations for debt repayment (Sheil C. 'Significant appeal of PPPs falling apart',  FR,  24/5/02)
• PPPs are supposed to allow state planning to be combined with privatization, and better manage risk. Though they are now being widely embraced, one should read the fine print. PPPs allow the logjam of public funds to be broken. PPPs are not new - they have often been used for motorways. 40% of infrastructure in developing countries is built this way. But negotiation of the contract is the key issue. In UK taxpayers have been hit as private companies run rings around government sponsors in negotiations.  In some cases, deal was agreed on basis of one source of funding with private sector then arranging cheaper financing so that government paid too much. Skepticism arises in Queensland from financial failure of proto-PPPs (eg airport rail link) which government rescued. Similarly governments simply can't afford to let hospitals fail. The key to PPPs is that there be a clear transfer of risk to the private sector - without assuming that government will step in when problems arise (Marris S. 'Nice public work - if you can get it',  Australian,  17/6/02)
• The Beattie Government faces a show-down with the unions over PPPs - which the QCU has not treated as a stand-alone issue but as linked to Queensland's 'low tax' mantra. QCU suggested that guidelines throw up unanswerable questions about project failures which leaves risk with government, and budgetary constraints on future governments. Government policy that rejected tax rises was seen as irresponsible. QCU official response says unions are fundamentally opposed to PPPs. Other areas of concern include: risk to public sector wages; low threshold; lack of scrutiny due to commercial confidentiality; escalation of service costs; community inability to appeal PPP decisions. Commitments reduce flexibility of future governments. The public will accept the need for higher taxes if they can see benefits (Owen R 'PPP plan throws fuel on union fire',  CM,  31/7/02)
• The Queensland Government has released draft PPP guidelines. These comments deal with the issue from a QCU viewpoint, without considering all aspects, and have relied on documents provided by government and a few other sources. The QCU is opposed private involvement in infrastructure with a $30m threshold, and believes that much of the evidence about the public benefit of PPPs is negative, and that risks remain with government. The reference material shows that projects subject to PPPs could have been delivered by the public sector - and UK cases suggest they could often have delivered at a lower cost - because government is able to borrow more cheaply. The public may benefit from earlier provision using private funds, but government faces a risk of then having to meet unbudgeted costs if the firms abandon the project. Public benefits can also be reduced where charges are applied to previously free services. The private sector benefits from PPPs though gaining access to new revenue sources. Private involvement in infrastructure makes it harder to assess value-for-money. The $30m threshold indicates that government wants private infrastructure involvement to be much greater than in the past. Various projects have been proposed for PPPs without following the process required by the guidelines, or the application of a Public Sector comparator. The scope that exists for unsolicited project proposals suggests that the private sector could bid for existing work, where it could do so more cheaply. This has implications for job security, increased user-pays regimes and the extent of public ownership of assets. These is a potential conflict of interest between private firms orientation to shareholders, and government's concern with serving the public. Where a private firm walks away from a project, government has all the risk (eg debts and the need to provide services) - which has political consequences. Government may be faced with unfunded liabilities. Private partners have great bargaining power with government once projects have started - and governments have often been forced to pay heavily when problems arise. Where a service is essential, government must continue it even if a private partner is in breach of obligations. Failures can arise even where huge transnational firms are involved. PPPs which require long term commitments, create budget inflexibility. Shifting risk to the private sector is a major part of the rationale for PPPs. However, in reality, government retains all the risk if the private partner fails - and this risk is not mentioned in the documents. The risk to public sector employees of unsolicited project proposals is also not mentioned. In the UK, major savings in prison administration through a PPP followed from reducing wages and conditions. Shifting industrial relations responsibility to the private sector could: transfer secure public sector jobs to the private sector; reduce wages and conditions; end government responsibilities for providing secure employment; result in delays.  ('PPPs: Queensland Council of Unions Response to Draft Framework Document', 2002)
• In the UK, private financing of public facilities is well established - but is not necessarily well accepted. Unions rolled the Government at a Labor Party congress - seeking an audit of the effect of PPPs on pay rates, and on concealment of public debt. Unions have argued that PPPs have higher borrowing costs, higher set up costs and higher running costs.. The Blair Government is however convinced. UK officials argue that PPPs deliver benefits because public sector can define desired outputs and leave it to the private sector to work out how. It is however hard to compare different ways of project delivery. But infrastructure had been crumbling under traditional policies. Australian Council for Infrastructure Development argues that Danish study of conventionally organized road projects showed a 20-40% cost blow-out - because of incentives to give an initial under-estimate. Australian Government views PPPs as some sort of 'Enron' device for concealing profits. In UK investor returns from new PPPs are falling (Taylor L. 'Strange bedfellows', FR, 4/10/02)

• Federal revenue minister has indicated changes in tax treatment of PPPs - by distinguishing between genuine leases and those that are mere tax dodges. Tax laws deny deductions to private firms when assets are leased by state governments. Without this sub-national governments could scam the Commonwealth by contrived leases to transfer to private firms the deductions that states can't use because they do not pay tax. A criticism of PPPs is that they are contrivances to shift public debt off balance sheet. With states notionally committed to demonstrating value-for-money, pro-privatisation groups have attacked this by claiming (a) differences in financing costs are compensated by greater efficiencies - but can't prove this (b) asserting that there is no difference between public and private financing costs. The minister has promised to change the test for whether PPPs are real or contrived. (Sheil C., 'Coonans next can of worms: PPPs', FR, 6/12/02).

• PPPs do not actually increase the amount of money available for infrastructure - but give a false impression that the public does not have a debt. Specific defects in infrastructure guidelines are also suggested (Quiggan J., 'Financing Infrastructure for Queensland', 30/3/03)

• Claims from Macquarie Infrastructure Group officer about its ability to unilaterally set changes for toll road in UK (which users had no alternative to paying) have caused controversy (Shand A and Taylor L 'Road rage', FR, 17-18/5/03)

• PPPs have been criticised by both Allen Consulting Group, and by union backed reform from Strategic Economics, Paying for Private Profit. PPPs are seen as: potentially expensive, inefficient, inflexible and not necessarily in community interest. There is not yet seen to be adequate regime of contestability, accountability and transparency around PPP industry. ACTU argued that PPPs were arrangements to keep projects off budget. Recent report suggested that PPPs are plagued by escalating costs, conflict, high consultancy fees, poor services and secrecy. It refutes 'myths' about PPPs that they: reduce call on public funds; accelerate infrastructure provision; reduce public risk; and enhance accountability. Allen Consulting found that case for most obvious alternative to PPPs (government debt) is strong. (Sheil C 'The shine has come off PPPs', FR, 21/11/03)

• PPPs have only a small niche role to play - because of their complexity [1]

• poorly managed PPPs have been seen to create a 'master-slave' relationship[ between government and private sector [1]

• UK experience shows that PPPs should be avoided as an infrastructure funding model. Problems have emerged for hospitals because it has been impossible to specify required service standards. Also higher costs have been imposed on public sector for roads, transport and hospital services [1]

• Brisbane City Council has proposed that various services be provided through PPPs, while others have warned that this is a cargo cult [1]

• the complexities which contractors face in dealing with PPPs makes the whole exercise so complex, expensive and risky that many may be unwilling to participate in future [1]

• a debate emerged about the appropriateness of the Brisbane City Council's proposal to use a PPP option for a tunnel project [1]

• the use of PPPs for development of Sydney's transport system has given rise to heated public controversy. For example:
  • congestion on one of Sydney's busiest roads might have been improved for $130m - instead of building the $1.1bn Lane Cove tunnel [1] ;
  • surface traffic has been deliberately distorted to force traffic into tunnels to make them profitable [1, 2, 3];
  • Large taxpayer subsidies are provided to make infrastructure projects profitable [1, 2]. Moreover with PPPs private sector can gain large profits, but government must provide subsidies when things go wrong (eg in Melbourne's rail system) [1] ;
  • Sydney drivers are upset about the number of tolls they have to pay (contrary to government promises), and have avoided a contentious new tunnel [1, 2].

• concerns have been expressed that private firms / investment banks are proving too smart for government negotiators - resulting in the transfer of monopoly profits (but no risk) to those firms [1] Alternative is design-construct-maintain arrangement which allows government to borrow at lower rates. User pays proposals should be assessed on user charges - not most payment to government. Projects should not be force fed, and there should be no guarantees. [1]

• PPPs will never account for more than 10-11% of infrastructure spending - and Australia faces substantial need for additional spending (eg using government bonds). [1]

• Pressure has been applied for governments to assume more of the risk that their demand estimates may not be realistic in new PPP regime (Hutton J etal 'King calls for PPP revamp, AFR, 12/3/09)

There are also suggestions that perceived problems are exaggerated. 

For example: In Australia state governments have often lost when PPP infrastructure schemes have failed. But in the UK companies have also been hit. The transfer of risk can lead to private losses - due to robust contracts and payment mechanisms. Both sectors in the UK believe that transfer of risk has been fair.  Public comments on PPPs is generally unfavourable - blaming them for poor service delivery. However stakeholders believe that they deliver high quality facilities on budget. PPPs have brought benefits to the public sector in terms of better procurement disciplines, commercial skill; and help in refinancing (Allen L. 'Contracts blamed for building partnership losses',  Financial Review,  22/2/02)

Openness and candor are needed to make PPPs work - noting the desire to extend this from projects like road into social infrastructure areas (eg schools, hospitals). There have been bad experiences where projects are arranged on the basis of lowest costs, and so there is a negative public attitude. The private sector is not always better paced to deliver projects - and there are many examples which have proven the critics right.  However the negative attitude is often compounded by misunderstanding of culture and motives. The PPP model is about what works - to combine what the public and private sector each do best. Public sector's suspicions about profits creates huge barriers to real partnership. This can be overcome by shared goals (Banks B. 'Openness, candor needed to make PPPs work',  FR,  10/5/02).

Christopher Sheil ('Coonan's next can of worms: PPPs') is no student of tax, and lacks transactional experience. Australia is a large country with a small population that expects modern infrastructure. Australia has a shrinking tax base - due to international competition. Funding for capital expenditure lags, so a shift towards user-pay emerges. States can't maintain services and infrastructure without PPPs. PPPs are quite transparent - and Sheil's knowledge of their balance sheet treatment is years behind policy debate. Rating agencies count state liabilities off balance sheet as if they were state debt. The Assistant Treasurers' proposed amendments have nothing to do with treatment of PPP debt. PPPs are not privatisation. PPPs enhance infrastructure quality - and it is just ignorant to assert that public debt is always cheaper - as state treasuries never factor in cost overruns and slow delivery. Private capital costs more-or-less the true risk-weighted cost of public debt. Government budget processes need overhauling to accommodate modern asset-management practices - whereby PPP projects may be better value for the taxpayer, even if not cheaper. It is nonsense to suggest that states retain all residual risks from these projects (consider Brisbane Airtrain). Current tax provisions related to private infrastructure investment are draconian - and meeting those requirements consumes huge efforts and inhibits investments. Infrastructure investors continue to face uncertainty - and Australia is seen as an investment jurisdiction to be regarded with suspicion. (McBride L. 'Public-private projects are the answer', FR, 13/12/02).

There has been emerging focus on how governments meet the need for investment in economic, social and environmental infrastructure. Christoper Sheil's article (AFR, 21/11/03) incorrectly asserted that Allen Consulting's Funding Urban Infrastructure gave the thumbs down to PPPs in examining the merits of public debts / PPPs in financing infrastructure. This concluded that there were large costs in not meeting infrastructure challenge. The report argued that public debt and PPPs have advantage of spreading infrastructure costs over time. Australia's level of public debt is low (6% of GDP compared with limits set at 30% in UK and 60% in US). Some claim that increases would put credit rating / interest rates at risk - which is invalid. However the argument for greater use of public debt is not an argument against using PPPs. Infrastructure projects can be risky, and there can be gains where these risks are shared with private partners. The key to successful PPPs is that returns accurately reflect risks. All infrastructure funding options should be considered (Fahrer J., 'PPPs have valuable place in funding mix', FR, 8/12/03)

Though the PPPs have been little used and remain controversial, public debate about problems (eg at Sydney's Cross City Tunnel) has helped improve methods [1]

However there are cases in developing countries which suggest that huge costs can be imposed on governments where the latter are forced to take responsibility for outcomes in infrastructure service markets involving private providers.

In 1987 the Philippines power sector was haphazardly liberalized - which resulted in acute electricity shortages in the early 1990s. Then government started to provide incentives for electricity development (eg tax holidays, duty exemptions, take-or-pay provisions; loan guarantees). Now it is committed to paying for power for which there is no demand. As supply increased, power became more expensive (contrary to normal economic principles). Collusion between officials and foreign power companies compounded the problem (Smith P 'High price paid for power deals',  FR,  13/8/02)

By November 2004 an industry view was emerging that the use of PPP's might have stalled in Australia [1] . For example:

• It seems clear that Queensland  [1, 2, 3] and Victoria are backing away from the use of this mechanism, though it continues to be heavily used in NSW [1];
• in NSW government indicated that private operation of public hospitals would not be allowed because of disastrous experience with a PPP [1]

The Commonwealth Government (who is being asked to make taxation and legislative changes to facilitate PPPs) had also shown some hesitancy.

Federal government has few opportunities to use PPPs and doesn't plan to encourage states to do so. Insurance and accounting worries undermined the PPP process for $400m naval patrol boats. Controversy over UK government's plan to let private sector build and run schools and hospitals also causes government concern. Federal Government is being encouraged by industry to clear the way (with legislation and tax changes) for state PPPs (Taylor L. 'Minchen won't commit to PPPs', FR,  11/7/02)

Hopes for a new era of nation-building projects through PPPs have been thrown into doubt by fiasco over funding of navy patrol boat. A three year tending process (in which companies invested millions of dollars) has been turned on its head because federal government did not check how financing of the project would be viewed by the Auditor General. Cabinet decided to scrap the process after the AG decided that many of the costs should be entered in the federal budget in its first year (Wilson P. 'Government stuff-up sinks patrol boat bid', A,  11/7/02)

However in 2005 a more supportive approach to PPPs was announced [1, 2]. And the NSW government [1]; the Brisbane City Council [1] and the Queensland Government [1] all indicated a determination to make use of this model.

However in 2006 attention was being drawn to very severe problems in Victoria's infrastructure system in which the PPP models Queensland copied had been developed. For example:

• rising costs and lengthening delays are suspected to be due to trying to manage record infrastructure programs in the face of loss of specialist skills and intense competition for skills [1]; and
• very large expenditures over 7 years Victoria has achieved little in terms of improving infrastructure / services because of bad management [1].

Intrinsic Problems

Unfortunately there are likely to be intrinsic complexities with PPPs (ones that will not go away because they relate to the character of typical public goods and services) not just 'teething' problems. 

Firstly, Public goods and services tend to be qualitatively different from typical private goods and services.

The goods and services whose production and distribution is traditionally managed through a market involving private providers tend to be individual 'things' which can be treated separately and defined quite clearly.

Public goods and services, by contrast tend to be those which are:

• natural monopolies (eg involve large uneconomic-to-duplicate investments; provide no practical way to collect revenue; or are enjoyed whether or not a particular person chooses to pay);
• subject to large positive or negative 'externalities', ie spill-over effects on other functions; or
• affected by political value judgments about equity or the general community interest relative to private interests.

These characteristics of public goods and services cause them to be intrinsically complex. This has several consequences:

• the basic character of what governments deal with is quite different to that of private firms. The latter's focus is rightly on producing 'things' (outputs / projects), while governments' main focus must be on managing the relationships amongst such 'things'.
• managing this complexity is costly no matter whether they are produced by public sector agencies or through private firms (where the cost of complexity might be reflected in the 'packaging fees' associated with PPPs). If the complexity is ignored in order to reduce costs, then eventually the function will be seen to be failing.
• in particular many types of infrastructure involve networks where the elements are highly interconnected - and there is a need to plan / manage the system as a whole. The focus which PPPs encourage on individual projects, and the introduction of private interest considerations, can make it essentially impossible to deal with the system as a whole.

Example: Melbourne's City Link freeway system, which was developed under a PPP arrangement reportedly had to involve a provision for government to compensate the developer for any other changes in the transport system that might reduce their revenues. Creating a few such links in a region's transport system would ensure that future development of the network became essentially impossible.

Moreover:

• one observer suggested that the provision of infrastructure Australia wide is in disarray because of these problems [1]
• the development of privately funded toll roads on a user pays basis in parallel with 'free' public facilities creates for transport infrastructure complexities in management, pricing and controlling demand exactly like that which affects health and education services [1]
• privatization of Melbourne's public transport is seen to have resulted in 'splintering' of urban systems which has created complexity and dysfunctions;
• surface traffic has been deliberately distorted to force traffic into Sydney tunnels to make them profitable [1, 2, 3];

• for such goods and services, it can be very hard or impossible to define clearly what is required, because some are subject to complex inter-linkages with other functions, or are subject to political value judgments (noting that the political system exists partly as a means for managing the fact that our complex human reality can be interpreted in many different ways). As such goods and services are hard to specify exactly in advance (which is one reason that the classic rule-bound bureaucracy is seen to be rigid), it is correspondingly difficult for contractors to meet the unclear needs that are actually presented in practice; 

Consider: Only 20% of public servants involved in outsourcing consider this a success (in Australia, Canada, NZ, Singapore, South Africa, Spain, UK and US). Savings of 20% were said to be achieved, but hard to measure. Baseline (pre-contracting) costs are often not available and changes in the volume and type of work required under the contract typically eliminated the relevance of such benchmarks after 6 months. Contract management was estimated as about 8-10% of the contract price (Jay C 'Public service no fan of outsourcing',  Financial Review,  15/2/02);

• natural monopolies tend to be large complex undertakings - and this is the reason that PPPs are being sought for integrated design, construction and operation. However because of their complexity it is very costly to duplicate technical knowledge of the undertaking. Thus, in a PPP process, the exclusiveness of the contractor's detailed technical knowledge presents the public sector with great difficulty in defining what is required without simply relying on the contractor (which leads to risks outlined below).
• for such goods and services it tends to be impossible for governments to allow projects to fail - either because they constitute an essential service or because they are an integral part of a large system whose integrity depends on them.  Thus there can seldom be a genuine transfer of risk to the private sector.

Instances have been identified in Victoria where full privatization of some infrastructure has resulted in situation where the process could fail because those services could not be successfully disentangled from public interest considerations [1].

Second, the knowledge and skills in government agencies that is required for contract management may simply not be available when most delivery of goods and services is carried out externally. For example, massive problems appear to be emerging in managing PPPs in Victoria in 2004 [1], and that state's overall infrastructure system appeared subsequently to be in very severe difficulties.

Also: see  'Troubled waters' (Peterson D. Courier Mail, 2/6/01) which deals with competency questions in relation to major cost-blow-outs in Queensland. 

In the 1990s government agencies were 'de-engineered' (eg through outsourcing) in the hope of gaining lower costs, better quality and more flexibility. A leader in this process was Department of Main Roads Western Australia, which has recently studied the results. Overall about 30% of technical staff were lost, with up to 65% in some areas. The Department was then perceived as an uninformed purchaser of services. The process also destroyed the possibility of career opportunities for staff. In some areas all experience resides with one or two individuals, with no succession options. Furthermore technical staff moved into project management - with a resulting loss of technical competence. Traditionally the Department had been the key organization involved in training road engineering practitioners for WA. The Department's engineering capabilities were now believed to be below the critical mass required to be sustainable. (Yates A. 'Bringing engineers back into public service',  Civil Engineering Australia,  May 2002)

In the UK, government appears to have been frequently 'out-negotiated' by private firms (Marris S. 'Nice public work if you can get it', Australian,  17/6/02)  

The loss of professional competencies will be magnified when a Public Service is subjected to manipulation to ensure its uncritical compliance with political directives - as has become normal in the 1990s (see The Growing Case for a Professional Public Service).

A similar, though less fundamental, constraint is that where government agencies lack 'hand's on' involvement it is likely to be harder to identify situations where valid political judgments about equity or the community interest would support CSO payments .

From reports about US experience, where heavy reliance has sometimes been placed on private contracting for public goods and services delivery, it appeared to be concluded (in sources that the author can no longer locate) that all that is achieved is to exchange the problem of trying to achieve efficiency in service delivery in a political environment (ie in a government agency) for the even more difficult problem of effective contract management in what can sometimes be a snouts-in-the-trough political environment.

The result is that it is difficult (a) to turn efficiency gains through private delivery into real costs savings after taking account of problems in contract management and (b) to satisfy public expectations in relation to the quality of services delivered.

None of this implies that PPPs are not appropriate ways of dealing with some infrastructure needs - merely that they are unlikely to be beneficial if applied widely.

Distorting / Corrupting Government?

A difficulty likely to arise from PV in the longer term is the distortion of political and public administration processes.

Priority will tend to be given to infrastructure which is relatively easy to fund - eg that for which user-pays arrangements can be established. It has been suggested that toll-roads have gained priority at the expense of many other types of essential infrastructure [1]

Also where firms are the only ones involved in providing public services, they tend to have the best (or only) information about what is required, and this allows self-interested lobbying and collusion with 'captured' or job-seeking officials to dominate (as in the US 'military industrial complex', and Japan's 'construction state').  How, for example, can anyone outside this 'system' know what is needed or what is a fair price to pay?

In Australia concerns about the need for transparency and accountability to guard against 'funny deals' are already being expressed (Gray J. 'Transparency-accountability keys to success',  Financial review,  11/2/02)

Also: The NSW government says there was no political interference in the tender process for a $100m new transport ticketing system - but, as government can terminate employment contracts without good reason, ministers can readily exert covert pressure on public servants. The law doesn't allow ministers to instruct their deputies regarding decisions or recommendations - but no one complains when they do. No one can now protect senior public servants. Department heads are compromised by their own tenuous employment terms, and Public Service Commissioners are impotent. The Humphrey inquiry into federal IT outsourcing showed that public servants - if given anonymity - provided advice about flaws in the system that wasn't given to an open parliamentary inquiry. The 2000 Clayton inquiry in South Australia showed that some public servants would lie under oath rather than say anything to embarrass ministers.  Anti-corruption bodies (in NSW, Queensland and WA) are supposed to deal with such matters - but waste their time on minor matters. They are nervous about investigating the upper echelons of government. Parliament needs to prod anti-corruption bodies to look at the big end of government and leave small issues to police.  (Harris T. 'Bureaucrats self-protection', Financial Review,  15/1/02)

Brisbane's former Lord Mayor has been appointed chairman of the troubled airport railway operator - Airtrain City Link. This risks criticism over conflict of interest because the council is considering corporate involvement in big infrastructure projects - such as a $1bn tollway tunnel under the city. Cr Soorley forged close links with ABN AMRO (Airtrain bond holders) through his advocacy of public private partnerships. And one of Airtrain's key backers (Transfield) made a $30,000 donation to the Labor party in 2001. (Owen R. 'Soorley to head Airtrain board',  Courier Mail,  21/3/02)

Disputes have emerged with state government over efforts by Brisbane's Lord Mayor to arrange a post-retirement job with Airtrain (Franklin M 'Labor pains', CM, 2/11/02)

NSW premier (whose government made a feature of involving private investors, especially Macquarie Bank, in public infrastructure) resigned unexpectedly, and then took well paid job acting for Macquarie Bank. [1, 2].

There has been concerns about the emergence of a 'tunnel-industry complex' comparable with US military-industrial complex. [1]

Conflict of interest concerns are arising when senior public servants leap directly into private enterprise [1]

In Australia PPPs are seen to have allowed expensive and highly geared private finance for low-cost public borrowing - while what is going on is concealed behind a veil of 'commercial in confidence' provisions [1]

More private profit than public good has been seen to follow from PPPs whose details remain murky. PPPs have proven popular with incompetent state governments [1]

In 2014 there was said to be public concern with: the easy money that political insiders could from participation in ventures which gained a government contract; the extravagant salaries allowances that were being paid to those involved; murky business-political links associated with large 'success' fees; and the payment of large and secretive political donations to gain government support [1]

The fact that some privately funded infrastructure could only be profitable with a government subsidy clearly is a further complication.

Queensland's systems for planning approvals to urban development proposals appears to be at risk of being 'corrupted' by PPPs. The North Bank proposal placed government into the invidious position of being the advocate for a project that would be privately funded and thus inclined to override the role of local authorities in evaluating and controlling such investments (see 'Beattie threatens North Bank takeover').

Accountability difficulties have also been encountered in Queensland related to whether decisions be made to provide exclusive mandates to particular companies to protect their intellectual property or whether a public tender should be required in all cases to ensure accountability [1]?

Conflict of interest problems and a lack of competitive neutrality can be expected because QIC (the state government's investment arm on whose performance the state budget bottom line depends) has launched a $1bn infrastructure investment fund. [1] Government can potentially determine how much infrastructure users would have to pay - which would in turn determine the financial benefits to its own financial subsidiary which is supposed to be operating in a competitive environment.

The escalation of lobbying about the need for massive additional spending and for private financing, by organizations representing private infrastructure interests that was apparent by early 2005 clearly illustrates the way in which public perception and government decisions can be distorted (especially in the absence of a competent independent Public Service). This has also become a matter of public concern:

Australia's ports, railways and water systems have been starved of funds because state governments have been lured into dubious private sector tollway deals that require hundreds of millions of dollars in government subsidies.  [1].

PPPs are seen to get higher priority than better projects because of pressure from private firms [1].

Governments should avoid PPPs led by investment banks, as these would tend to be driven by financial engineering, rather than by concern for the best interests of the community [1].

The potential for private interests to dominate in public policy (at the expense of others) was also illustrated by complaints made about conflict of interest affecting an individual appointed to the Prime Minister's taskforce on removing obstacles to infrastructure development [1]

And in the UK in the mid 19th century it was the conflicts of public and private interests in public services that first led to the creation of a professional Civil Service as a result of the Northcote-Trevellan Report.

B.  Queensland's Infrastructure System is more Complex and Needs Fundamental Renewal

Victoria's situation with respect to infrastructure seems to be a lot simpler than that in Queensland, so that the Partnerships Victoria / UK models are even less appropriate in Queensland.

The Economic Productivity Question

In Victoria most infrastructure services that could contribute to raising economic productivity were privatized, whereas in Queensland they remain part of the public sector under corporatisation and commercialization arrangements. Thus, in Queensland,  much greater emphasis has to be given to competitive enterprising processes in planning infrastructure, if: 

• economic productivity is to be promoted - which would strengthen the tax base and provide the most  realistic way of overcoming the growing problem of infrastructure financing (see Section C below); and 
• the financial viability of government's commercialized and corporatised infrastructure service providers (on which the over-stretched state budget is now critically dependent) are to be ensured. This applies particularly where infrastructure service providers face external competition.

In Victoria this can be neglected, and what remains as public infrastructure can be treated (as PV does) in a very conventional (government determined) way, without significant economic or budgetary cost.  

An aside: In a Comment on the 2001 Infrastructure Report Card (produced by the Institution of Engineers Australia and others), it was suggested that the analysts had overlooked the fact that governments could often not now commit to infrastructure on a policy basis (and that the Report Card, with its recommendations mainly to government, was thus addressed to the wrong audience).

In Victoria's case this constraint is obvious where government is no longer the provider of key infrastructure. In Queensland, on the other hand, government can not commit in cases where market-oriented competitive processes (rather than consultative / political processes) must be allowed in planning economic infrastructure if productivity and the earnings of government enterprises are to be raised and community-service-obligation costs are to be minimized. 

Queensland's Infrastructure Planning Problem

It is also clear that Queensland is not coping with the need to create an effective system for planning infrastructure (see Problems in Infrastructure Planning and Delivery), and that the process for strategic planning of the core functions of government suffers similar weaknesses (see Evaluation of 'Managing for Outcomes').

It is also noteworthy that the definition of infrastructure adopted in 2000 by Queensland's  Department of State Development's Strategic Infrastructure for Queensland's Growth is much broader than that under PV (which was limited to physical assets and IT services) .

Queensland's definition appears to include a lot of 'soft infrastructure' (eg economic organizations). The problem is that, while the latter are important, they can not be effectively provided by government (and certainly not through anything like the process used for 'hard' infrastructure) - see Comments on 'Strategic Infrastructure for Queensland's Growth'

On the other hand Queensland's PPP arrangements do not seem to apply to many non-infrastructure public services, which are covered under PV.

Furthermore Queensland's (draft) Public Private Partnership Guidance Material (DSD, April 2002) and the Commonwealth's AusLink scheme for transport infrastructure simply add further layers of administrative complexity to this already-ineffectual machinery.

Outline of Queensland Guidance Material: Queensland released a PPP policy in September 2001. A partnership approach is intended to apply public and private contributions to best achieve value for money infrastructure services. A critical issue in infrastructure delivery is the risks that Government confronts - and some of these can best be managed by the private sector. The PPP approach thus allows costs to be contained while government maintains effective control over infrastructure to meet community needs. Many different mechanism can be involved (eg DBO, DBFO, BOOT). Government must carefully investigate technical and financial issues, as a PPP may not always be the best option. Principles underpinning the Guidance Material involve: value for money services, and risk sharing; encouraging private innovation; optimizing asset utilization; and integrated whole-of-life infrastructure management. Felicity will be a key requirement, as is: encompassing both 'hard' and 'soft' infrastructure; consistency with State Purchasing Policy guidelines; dealing with specific issues such as risk management, project resourcing and probity / process governance. Other principles include; clarity; competitive processes; consistency with other government requirements; analytical rigor; protection of genuine intellectual property; transparency / accountability; and clear information about project outcomes. The process involves six stages (a) service identification - by departments through their strategic planning processes with projects over $30m being considered for PPP with help of a Taskforce and DSD. Unsolicited proposals will be assessed against existing planning frameworks (b) preliminary assessment of delivery options allowing a CBRC decision (c)  preparation of a business case through a Government project team - including: both a Public Sector Comparator model and a Partnership model; an assessment of all risks, and service performance requirements that will form the basis of contractual conditions; and a cabinet decision (d) calling expressions of interest - which result in a technically and financially qualified short-list (e) seeking binding bids, and proceeding to a formal contract (f) contract management through a specialist team within departments.  Unsolicited proposals will be assessed against agency plans, and processed either under the Guidelines or as an exclusive mandate.  Special attention is given to risk  management and probity within the process. A Government Project team (for technical issues), a Project Steering Committee (to deal with commercial and policy issues) and a Project Director will also be required for a project.  A Probity Auditor will be engaged to ensure that processes are followed fairly.

Progress

The Guidance Material represents progress in that:

• it does outline a possible PPP process - largely derived from Victoria's experiences;
• it finally specifies who (ie various function agencies through their strategic planning processes) is expected to plan infrastructure.

But this leaves significant difficulties.

• The PPP procedure was apparently copied from Victoria, whose situation (and that of the UK from which PV itself was derived) is simpler than Queensland's in that most Victorian economic infrastructure that is capable of contributing to economic productivity was privatized and thus freed to respond to market demands - and does not thus have to be dealt with by the state infrastructure planning system;
• The fact that government agencies are to specify infrastructure requirements in areas subject to direct or indirect competition and to user-pays will place service providers (whether public or private) in a difficult financial predicament - being required to provide facilities that may have political priority but less-than-possible market demand. Thus:
  • while the PPP arrangement may enable private firms to carry risks related to construction, such firms may often find it necessary to insist that government carry all ongoing commercial risks that arise from the original decision about what infrastructure services to provide;
  • the expectation that GOC's will provide dividends and tax equivalent payments to support the state budget is unlikely to be met;
• There is, as noted above, no credible government machinery for planning infrastructure from which projects are to feed into the PPP process. In particular, weakness introduced into agency infrastructure planning in the 1990s were the likely reason that the Department of State Development produced a State Infrastructure Plan in 2001. The latter (defective) Plan has now been ignored in the PPP Guidance Material, leaving agency strategic planning as the way in which projects are to originate. However, as noted above, Managing for Outcomes (supposedly an integrated process for accrual accounting, output budgeting and strategic planning by agencies) is also unrealistic.   
• the PPP process seems to be complex (and thus will become an 'industry' in itself);
• the Guidance Material treats PPP issues as the main consideration, which will make it very difficult to get all technical aspects of projects right. For example:
  • the Guidance Material apparently envisages projects under the control of two parallel project teams with different goals -  an arrangement whose ability to integrate the complex technical requirements with the equally complex legal and commercial requirements remains to be demonstrated; furthermore
  • unless decisions about capital issues are made by those with detailed concern also for ongoing operations, it is possible to achieve the appearance of capital savings whilst worsening the public finance position overall. For example, annual operating costs for hospitals can be 50% of capital costs, and one informed observer [whose assertions the author has not personally confirmed] has suggested that Queensland has suffered considerable long term financial damage (and may be unable to use some hospital facilities that have been constructed) due to a failure to integrate these questions in a $2.3 bn hospital expansion program.
  • probity concerns are (rightly) seen as a critical consideration - yet the emphasis that must be given to this will ensure that (honest) Public Service staff will be more concerned with protecting themselves than with whether the project is 'right';
• if technical specifications are defective, contractors have an easy path to claiming extras;
• choosing between a Public Sector Comparator and a Partnership model will involve heroic (ie arbitrary) assumptions, and involves transforming what (to be fair) really needs to be a dynamic competition between different parties into a committee's deliberation;
• the specialized and separated PPP processing within agencies of investments that involve very large public expenditures will make real accountability difficult, and invite corrupt collusion. A Probity Auditor concerned with whether 'correct processes' are followed, but unaware of detailed technical requirements, will be unable to guard against such abuses.

One observer suggested in 2004 that Queensland agencies seek wherever possible to keep projects away from the PPP process, because those projects otherwise are lost into a 'black hole' for 18 months.

AusLink - Curing or Compounding the Problem?

The Commonwealth Transport Minister has proposed arrangements for transport infrastructure (traditionally the infrastructure area most heavily funded by the Commonwealth) that seek to 'revolutionize infrastructure development allowing the private sector to drive planning and development rather than bureaucrats'

States are concerned that methods to better coordinate development of roads and railways should not result in reduced federal funding. With private firms now heavily involved in owning infrastructure, AusLink will include those firms in the planning, building and ongoing running of roads, railways and ports. The 20 year plan will involve greater use of PPPs. It will end the dominance of roads in thinking about transport - perhaps with more funding for transport hubs involving rail. Shadow tolls would also be considered. ACID suggested that: shadow tolls would require tax changes; that rail networks faced 35 regulatory organizations and 11 different signaling systems. The Victorian Government suggested that the transport system needs overhaul - but not via AusLink. There was concern that federal funds previously given to the states for roads, would now also go for other projects which had been state funded. (Marris S. 'States fear federal road funding cuts', Australian,  23/5/02).

AusLink envisages a national indicative planning process for all forms of transport infrastructure - with any entity able to seek funding to participate in implementation.

AusLink's (private-sector driven) PPP planning and development arrangement is inconsistent with the government driven PPP process that the states have created. Given the problems in the Queensland Guidance Material mentioned above, this may not be a bad thing.

However:

• AusLink does mean that there could be no uniform national PPP system;
• while a constructive indicative planning process might be feasible, there are potential traps such as (a) trying to produce such a plan analytically - because central planners can never gain enough information to do so or (b) relying on project proposals from self interested infrastructure providers seeking competitive advantages - because of the potential for the whole process to become a political dog-fight or to foster corruption;
• the major transport problem which Queensland faces is in SE Queensland - where the key to progress is probably not just more infrastructure investment but rather a fundamental decision about what the philosophy / architecture of the transport system as a whole is to be - so that coherence between the various elements in the system can be gained. This requirement is similar to the need for an agreed architecture which is common to all components on the Internet if they are to interact. The AusLink process would appear to make it hard for anyone other than the Commonwealth Government to decide such an architecture - and also ensure that they did not do so either.

What is not at all clear is that central control of transport strategy is likely to lead to satisfactory outcomes noting that:

• a highly centralized transport planning process would separate transport from other closely related regional issues such as land use;
• the most conspicuous example of total centralization of a previously state function now seems to be in crisis - noting what many observers suggest about universities; and
• federal regulation of telecommunications does not seem to be a major success.

C. Overcoming the Real Problem - The Need to Boost the Tax Base

PPPs are being proposed because a funding problem is perceived in providing infrastructure (and other public services). However the funding problem arises primarily from weaknesses in the tax base due to defective economic management strategy, and PPPs are not the best (or even a credible) solution.

That there is an underlying public funding problem is undoubted.

Considering Queensland for example: About Queensland's Budget illustrates (amongst many other points):

• the general pressure on public finance (prior to the emergence of a presumably-transitory economic / property boom), and the difficulty of recording a surplus;
• the apparent state government intention to reduce public capital formation at one time, despite general expectations that infrastructure investments should increase.

Also: an inquiry that the Queensland Local Government Association is undertaking into mechanisms to Fund Queensland's Road and Transport Infrastructure clearly identifies various studies of funding needs for this sector which suggest a probable funding gap (see LGA website) 

However, while PPPs will presumably be relevant to some infrastructure situations, they are not the best way to try to overcome the funding problem generally, because:

• if government is the ultimate purchaser of of the infrastructure on behalf  of the community then mobilizing private funds in constructing that infrastructure can not actually result in any increase in the amount of infrastructure that can be provided (Quiggin) unless:
  • cost savings are achieved through greater efficiency (eg through life-cycle design). Unfortunately such expected gains may be lost in the contractual difficulties created by: the intrinsic character of 'public' goods and services; reduced public sector technical skills; and by potential corrupting of administration (see Section A above);
  • direct user-charges are applied (eg toll roads) - though it is noted that user charges could be applied without PPPs; 
• a major reason, discussed further below, for the funding shortfall is that defective past economic management tactics have resulted in a weak tax base - though this is not the only cause of the weakness of the tax base;
• the main 'advantage' of PPPs in terms of financing may be that they might deceptively give the impression that governments' debt position is strong - because government does not acquire a debt which has to be serviced (see 'Setting off on the PPP road'). Rather it may incur a roughly-equal ongoing contractual obligation in relation to capital costs (plus a contractual obligation for operational costs).

Accounting complexities: In July 2002 the Commonwealth Auditor General correctly pointed out that (under an accrual accounting system) accrued future expenses through PPPs should be brought into the annual budget in the year in which an obligation is incurred.

There had previously been concern that the proposed shift to Public Private Partnerships for infrastructure could obscure public liabilities. This was because, rather than incurring an explicit debt which needs to be serviced, using PPPs on anything but a user-pays project government enters a long term contract for the purchase of goods and services. The latter will usually involve an even greater commitment that includes both capital and operational costs, but this would not be included as a liability under traditional capital accounting arrangements [see also Quiggin J. 'Enron's Australian cousin'  Financial Review, 28/2/02.  In Enron's case, the company gained notoriety by creating phoney 'partnerships' in which its liabilities were concealed].

Unless a way can be found to capitalize future operating cost commitments, this decision may make it harder for governments to use PPPs widely (especially for services such as health and education that would involve large operating costs for which government was the purchaser). For example, if Queensland enters into PPP arrangements for projects with a capital cost of (say) $1bn in which government is the ultimate customer, this would now no longer provide an effective way to 'conceal' the $1bn debt. Rather the capital and multi-year operating costs of the PPPs could have to be included in the budget (perhaps by including the $1bn in the capital account and all government commitments to future operating costs in the operating account). The net effect could be to increase the state's operating deficit by something like $2-3bn (and to create a non-capital asset - ie the present value of certain future services which would need to be heavily discounted for both time and risk).  Only user-pays projects would seem not to require this sort of accounting treatment.

In the post-Enron environment the 'advantages' of the latter form of creative accounting are likely to be transient. And the Commonwealth Auditor General has reportedly determined that most costs in a PPP contract should be treated as an accrued expense in the first year. None-the-less accounting reforms do not yet cover the situation where ongoing costs are funded on a user-pays basis, and the effect is to shift debts off-balance-sheet into a partnership by privatizing a form of public revenue raising.

That Queensland has a weak tax base by Australian standards is indicated by the Inquiry into Commonwealth Grants Commission Arrangements that 'donor' states (NSW, Victoria and WA) have launched. 

Why? The 'donor' states are concerned that the Grants Commission recommends redistribution of Commonwealth tax revenues to Queensland that it derives from their citizens and businesses - and they can not understand why this should be so if Queensland now has a well-developed economy (see Comments on Inquiry into Commonwealth Grants Commission Arrangements)  

The need for the Grants Commission to recommend such Commonwealth generosity to Queensland arises from the fact that Queensland's tax base (approximated by gross state product / capita) is something like 15% below the national average. This per-capita income gap is due particularly to defective economic strategies that Queensland used in the 1980s and previously (ie the pursuit of low value-added industries such as tourism, and basic commodities exports) (see the above-mentioned Comments).

However Queensland's relatively weak tax base does not account for the fact that many other administrations are now also facing funding challenges that force them (for example) to look more deeply into Commonwealth Grants Commission practices.  The general funding problem has two apparent causes:

• the constraint in a globalised economy on the tax rates that can be applied without seriously risking emigration of industry and skilled individuals; and
• defective economic management tactics that were applied (ie by the UK and Australia) in the face of a challenge requiring economic diversification in the 1980s.  Emphasis was given to:
  • market liberalisation to encourage firms (and others) become more competitive;
  • reducing the cost of government (to increase incentives and reduce some input costs). The latter was achieved by cutting government spending, and by applying 'business-like' methods (sometimes through privatisation) in the expectation that these would lead to cost savings

The problem with the latter response was that:

• it did not adequately boost economic productivity - see Impact of Economic Liberalization in Australia. Australia's 'growth' and 'productivity' performance in the 1990s is widely described as exceptional and 'miraculous'. However, while performance was improved on previous decades, the perception of a 'miracle' depended heavily on constant devaluations to price Australians into jobs, and to lower the real reference point against which some 'growth' (ie in activities feeding into exports) would be measured;
• better options existed  - eg see Defects in Economic Tactics, Strategy and Outcomes. Those options involved creating democratically-endorsed but not-politically-run institutional arrangements to accelerate 'learning' within industrial clusters, and so gain competitiveness and productivity advantages similar to those that innovation can provide to individual firms;
• public spending was sometimes merely deferred, rather than permanently avoided - with the result now a perceived spending backlog.

In part these problems arose because the attempt to reform government on a 'business-like' basis substantially eroded its ability to be 'government-like' - as is well illustrated by the problems in competently managing strategic economic change that were generated in Queensland by the mismanagement of public sector 'reform' (see Towards Good Government in Queensland).

Trying to raise economic performance through lifting the efficiency of the public sector, rather than through developing the economy, appears to be a fundamental mistake that countries like the UK and Australia have been making for more than a decade. 

If emphasis was given to developing the productivity of the economy by methods like those suggested in Defects in Economic Tactics, Strategy and Outcomes, then:

• significant improvements in the tax base could be achieved (see indicative calculation below); and 
• tax rates would be able to be increased (at least marginally) while still attracting industry and skilled individuals (because clusters of integrated productivity-supporting functions would exist). 

Indicative calculation 

The extent to which the tax base for public goods and services in Australia has been sacrificed through defective economic management in the 1990s can be indicated VERY roughly as follows (an estimate that could undoubtedly be significantly improved). 

Assume that during the 1990s Australia's population grew 1.5% pa and the economy grew 3.5%pa in $A. If so, then per capita $A production grew at around 2% pa. If productivity growth was equally attributable to increases in capital and to the growth of knowledge (a fair assumption), then something like a 1% pa growth could be attributed to 'learning' within organizations (eg to innovation). 

If methods such as those suggested were deployed to accelerate 'learning' within economic systems as well then it is likely that this component of productivity growth could be doubled (ie yielding an extra 1% pa growth). It is reasonable to expect this because (a) Australia still has scope for considerable economic catch-up (b) other economies that have achieved economic miracles (by the use of similar methods) have been able to double their rate of growth. 

Over 10 years this would increase GDP (a fair approximation of the tax base) by something like 11% and create strong / integrated industrial clusters in which a 10% increase in taxation rate might be achieved whilst still being very attractive to industry. 

Thus an overall increase in tax revenues of over 20% might now be available - and it appears that this is the order of magnitude of increase in public spending that could overcome the funding gaps that are currently seen to affect infrastructure and other public services.

While many Australian jurisdictions are now copying the UK's PPP approach to coping with a lack of public revenue, protocols for more useful private-public partnership models have apparently been explored in the USA (ie to enhance the productivity of industry clusters) and it might be timely now to take such alternatives more seriously.

However a more general review of options for public financing could also be needed, if the underlying public funding pressures that Queensland is facing requires more than the increase in revenue that can be achieved by accelerating economic development (ie through creating a stronger tax base, and an ability to remain attractive as an industrial location despite higher tax rates)