One of the potential advantages of PPP arrangements is the transfer of major risks to the private sector which in turn adds to the cost of projects.
The Committee acknowledges that the Partnerships Victoria policy has made a considerable effort to identify the various types of risks and which party is best suited to assuming the risks. Partnerships Victoria released the document Standard Commercial Principles in June 2005 which clearly sets out the range of commercial principles to be applied when entering into PPP contracts and the preferred allocation of risks. The Committee noted that ultimately the government is responsible for the delivery of infrastructure assets and services and, in extreme circumstances, private sector contractors will walk away if the project cannot provide a return on capital or if the companies are facing bankruptcy or being placed in receivership. The government must then reach a compromise or take back the project and complete it, for example, Latrobe Regional Hospital.
The government's key objective of this project was to deliver improved health services to public patients in the Latrobe Valley through a private sector provider. The successful tenderer (Australian Hospital Care Ltd) was awarded the contract to build, own and operate the new Latrobe Regional Hospital from January 1997. In return for the services delivered, the government paid the company a service fee, inclusive of a facilities component to service the debt incurred by the company in building the facility.80 The company incurred large losses and the government was forced to take back the hospital into public ownership. This example illustrates that regardless of efforts being made to transfer major risks to the private sector, the ultimate risk (that is, the impact of public health services on the public) was borne by the government.
Based on the practical experience gained from the 16 partnership contracts executed to date,81 the Committee considers that more definitive guidance is required in circumstances where transferred risk reverts to the government. Where this risk is of a material nature Parliament should be advised. The Committee also suggests that where risk is deemed to be transferred to the private sector, the government needs to be actively involved in monitoring the progress of the project.
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80 Victorian Auditor-General's Office, Report on Public Sector Agencies, June 2002, pp.75-79
81 Partnerships Victoria, website, www.partnerships.vic.gov.au, accessed 1 October 2006