Public Private Partnerships no 'magic pudding'

This difference alone adds around 20 per cent on average to the cost of PPPs. On top of that, as Davidson explains, “the merchant banks who create the financial vehicles for PPPs [expect] … a 25 to 100 per cent return on equity.”

This impost is further exacerbated by the participation of those who ACTU Secretary Sharan Burrow has described as “the 5 per cent club”.

In an article for the Evatt foundation, Burrow lists the institutional investors, lawyers, accountants, merchant bankers and others who “take what could be a public sector infrastructure project and turn it into a private sector commercial venture, in order to both provide the infrastructure and make a quid”.

The end result of all these additional costs is that the public ends up paying more for a PPP than a publicly financed enterprise, whether that takes the form of tolls or regular public payments.

Answering the prevailing orthodoxy

What, then, does the current orthodoxy have going for it, that such arrangements continue to be made?

Many of the claims are dubious at best. Some revolve around essentialist arguments regarding the virtues of the private sector; its capacity for innovation and a supposed propensity to provide projects “on time and on budget”. Private sector innovation can be captured, however, through competitive tendering - without any need for private finance and its consequent inefficiencies.

The most common claim, though, is that Public Private Partnerships involve a transfer of “risk”. Again, despite these claims, the reality is different.

As the examples of the NSW cross-city tunnel and the Victorian Citylink project show, many PPPs still make governments bear the risk that the project will fall short of expected earnings, even to the point where governments are expected to eliminate the “competition” (for example, by closing off publicly financed roads). Should a government break a contract which guarantees the closure of said routes, then it becomes liable for the loss of projected earnings.

The bottom line, however, is that the public expect governments to provide services and infrastructure in health, education, ports, roads, rail: and this responsibility cannot be outsourced to the private sector. If a PPP fails, governments are held responsible, and they inevitably have to pick up the pieces, either by bailing out the private providers or otherwise financing the continued provision of essential infrastructure and services.

As the example of public transport franchisees Connex and Yarra Trams in Victoria shows, governments can be driven to subsidise private providers to the tune of hundreds of millions in order for services to remain viable. In this instance the Victorian State Government, failing to take said services back into public ownership, agreed to subsidise these firms to the tune of $580 million.

Is there a better way?

Earlier this year the Construction, Forestry, Mining and Energy Union (CFMEU) released a report on Public Private Partnerships. Titled Reform of Public Private Partnerships: How to Harness Private Capital To Genuinely Work In Partnership With The Public Sector (PDF 472KB), the report argues the case for a new organisation: a “National Infrastructure Finance Corporation” (NIFC). The idea of such a body, to be financed jointly (on a 50/50 basis) by government through the Future Fund, and by pooled superannuation funds, is to provide a means of funding essential infrastructure while bypassing some of the common pitfalls associated with PPPs.

Certainly there is an urgent and demonstrable need for greater investment in public infrastructure, and the idea of an NIFC is one innovative response to a crisis that has been looming for quite some time now.