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Evaluating public private partnerships

By Tom Richman - posted Monday, 17 October 2005

Does using a Public Private Partnership to finance the North South Bypass Tunnel provide “value for money” or are taxpayers being taken for an (ideological) ride?

While it's accepted that financing for the North South Bypass Tunnel (NSBT) and other TransApex projects is limited by the extent of state and federal government purse strings and legislative constraints, shouldn’t we, as taxpayers, be concerned that the Brisbane City Council's (BCC) decision to use a Public Private Partnership (PPP) to build the former seems to overlook some inherent problems in that model, both in terms of value for money and the public good?

With this in mind, consider the following questions and caveats:


1) It’s generally recognised that Queensland has the tightest and fairest PPP guidelines in Australia. Unfortunately, this also means that the NSBT project might not receive any PPP-based tenders. Applicants might drop out of a scheme they find too financially onerous, as has already happened with both the NSBT and the South Bank TAFE (when two of three bidders called it quits) or, they might not make it through public sector comparator scrutiny in terms of “value for money”. Should that be the case, what’s the BCC’s fallback option? Is it considering one?

2) While the “Core Panel” recently appointed to scrutinise the two bids before them (one having left) seem reasonably broad-based, and non-ideological in a narrowish public service kind of way, should we remain worried that it doesn't have any representatives from the large and growing community of academics, economists, unionists or the likes of the RACQ, who would argue that PPPs should only be a last resort, not the first cab off the rank, as now appears to be the case? This question should be seen within the context of reports from Audit Scotland and the UK’s Institute for Public Policy Research (IPPR). The first warns, “Value for money assessments are subject to inherent uncertainty and subjectivity”, while the latter concludes, “there is (sic) substantial pressures on managers to ensure that the PPP options appear better than the alternative. Failure to do so will often result in the project being scrapped.”

3) Similarly, what's to keep public servants or politicians involved in PPP negotiations or judging the public sector comparator process from going to work for the winning private consortium immediately after the project contract has been awarded? Couldn't there be a two-year employment moratorium as is commonly imposed in the US Federal sector? This concern was recently driven home by ex-NSW Premier Bob Carr's joining the Macquarie Bank, and by a similar arrangement by ex-Victorian Treasurer Alan Stockdale.

4) Should the NSBT become financed via acceptance of a PPP based on projected tolling numbers, what is to keep the winning consortium from insisting, for example, the BCC not build the rest of TransApex if the competing arteries involved would diminish traffic flow on the NSBT, and therefore, their revenue?

5) Consortia involved in the packaging of PPP projects generally charge government 5-14 percent in fees or, in the case of the $1.3 billion NSBT, between $65 and $182 million. Is this expense factored into the project's announced cost and, if not, where will it be coming from and over what period is it to be paid? Should these fees be paid up front? Because what is to keep the packagers from walking away before the project is finished or during the mid concession period? Will they have to return the fees if, for example, a “strategic insolvency” takes place or prevarications are found in the prospectus used to attract investors?

6) Will agreements cap toll increases or will we be forced to suffer the double digit hikes imposed by PPP concessionaires in the rest of the world ... an average rise of 36 per cent in the last 18 months? Cases in point include the Macquarie Infrastructure Group’s (MIG) M6 Motorway concession in the UK, which saw tolls leap 17 per cent just 10 months after a 50 per cent increase, while its Highway 407 in Ontario, Canada, is about to greet motorists with a 13 per cent rise.


7) To what extent will the PPP have limits to returns on investment, particularly in light of MIG’s 18.5 per cent minimum return combined with no upper limit on its State Route 125 South toll road in San Diego?

8) Will the final PPP contract be made public as in Victoria or will this be a case of protecting a bad deal by imposing “commercial or cabinet in confidence restrictions”?

9) How might the BCC respond to the statement by the author of the Allen Consulting Group in its Property Council commissioned report, “Financing Urban Public Infrastructure”, that concludes “Our view, strongly stated, is that government should stop trying to flick its responsibilities through overly intricate arrangements such as PPPs”.

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First published in Brisbane Line and Kings Counsel on September 15, 2005.

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About the Author

Tom Richman, writes and edits the King's Counsel, a biannual newsletter of King & Co Property Consultants. He holds a BA, MA and M. Phil (Oxon) and is a member of the Property Council of Australia (QLD), the Infrastructure Association of Queensland as well as the Brisbane Development Association.

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