The Department of Treasury and Finance released 477 pages of practitioner technical and risk allocation contractual information in June 2001, with included 44 tasks and three points for Cabinet approval. A further 372 pages of guidance notes including the Contract Management Policy, Contract Management Guide and various technical notes were added to the guidance material in June 2003. Since then other documentation has been released. Total guidance material for private financing of public infrastructure projects totals 849 pages.
Four governance concerns have been evident in past private funding of public infrastructure projects. These concerns covered high level program governance (covering multiple projects) and governance arrangements for individual projects.
1. The concern first was the strong sense that partnership deals can essentially be a two way affair rather than also including the community's interests, directly and explicitly. The Russell review of government contracts identified that the CityLink enabling legislation, for example, provided scope to override any potential delays from the normal complications of due process.183 The review stated that 'the corollary is that there appears to have been less emphasis on due process, given the desire for rapid implementation. This highlights the need for government to balance the risks of extremes on a continuum between 'paralysis by analysis' and 'action with diminished accountability'.
2. Secondly, several submissions184 raised concerns about the 'lock in' effect of long term contractual arrangements. 185 Despite advice from the Department of Treasury and Finance that such arrangements gave governments 'strategic flexibility', the concern was that not only the current government but a dozen or so future governments were locked into the agreement signed, with the consequence that future governments had reduced capacity to govern and implement policies in the public interest. The Russell review recommended that the government should avoid contractual obligations that affect its discretion to develop alternative policy settings.186 The Committee recognises that while such a 'lock in' effect has always existed in funding major infrastructure, it may be exacerbated where complex service contracts and long term financing arrangements were involved.
3. The third governance concern involved the partnerships where consumers or users were essentially to pay for the facility, for example, by tolling roads, and there has not always been provision for the protection of such consumers in balancing commercial and social interests. This is an oversight given the magnitude of the financial deals being initially endorsed and the essential nature of the services. The Committee noted that the current policy and guidance material have taken into account lessons learned from past projects and this is highlighted when comparing two recent toll road projects.
Exhibit 5.1: Comparison of toll road projects in Victoria
| CityLink | EastLink |
| Signed 1995, IIPV policy | Signed 2004, Partnerships Victoria policy |
| No discounts for weekend usage for cars | Discounts for weekend usage for cars |
| Road traffic volume reduction measures on associated roads | No associated road closures (apart from short term construction closures) or diversions |
| Penalties for public transport and competing road improvement projects | No penalties for public transport improvements or road improvements |
| Infringement regime includes administrative fees | Lower infringement regime |
| No direct share in refinancing benefits | Share in specified refinancing benefit |
| Limited community consultation | Extensive community consultation |
Source: Department of Treasury and Finance, email, received 2 October 2006
4. The fourth concern was the lack of clarity of contractual obligations in partnership deals.187
These governance issues point to the potential for conflicts of interest. The Committee considers it important to be able to separate the functions of governing in the public interest (for example infrastructure planning, policy advocacy, interest groups, long term regulatory functions of monopoly contractual arrangements) and rigorous monitoring and evaluation.
The trend for government to increasingly rely on external advisors and professional experts to support or even help make decisions on PPPs strengthens these direct concerns around conflicting interests. Together with the project transactions, there can be large fees associated with this advice - the development of the public sector comparator, for instance, can attract a fee of up to one million dollars.188 Commercial firms usually wish to protect their intellectual capital and future business prospects, and inevitably argue that high level commercial transactions require high levels of financial sophistication and expertise. Nonetheless, the degree to which the public observes future governments relying on this advisory industry 189 instead of its own intelligence, leaves government open to the criticism that decisions are not being made in the public interest. It is possible that the industry now providing PPP advice may not be regarded as independent. At a minimum, the government needs to have expertise and capacity to underpin and strengthen decision making in the public interest and it is essential that there is sufficient expertise in Department of Treasury and Finance to manage PPP projects.
The magnitude of expenditures devoted to large infrastructure projects, in line with the above governance concerns, suggests that there is now a need to clearly separate these functions.
An allied governance concern is the degree to which the comprehensive and rational processes presented in the governance guidelines are followed in practice. The Department of Treasury and Finance did not provide the Committee with any specific information on this question.
Significant roads projects have been successfully delivered in the past by private contract arrangements under public funding. The government must seriously consider whether overseeing major infrastructure contracts for the state needs to be centralised, rather than responsibility being spread across various portfolios.
The Committee noted with interest the following comments:190
Deutsche Bank welcomes the central involvement of the Department of Treasury and Finance on all PPP projects as this is helping to develop a highly specialised and informed skill base within government.
The Committee noted that the decentralised project governance arrangements for some major projects, for example within the Department of Justice for running private prison projects; within the Department of Human Services for running private hospital projects; and within the Department of Infrastructure for Southern Cross Station, have all encountered problems.191 At the current time, the desire to pursue decentralised arrangements seems to be in conflict with the need for high level expertise to manage these complex infrastructure arrangements. This issue is further discussed in Chapter 6.
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183 E W Russell, E Waterman, and N Seddon, Audit Review of Government Contracts: Contracting, Privatisation, Probity and Disclosure in Victoria 1992-1999, An independent report to Government, Vol.2, May 2000, p.99
184 For example, Deacons law firm, submission no.14, p.2 and Professor G Hodge, submission no.31, p.3
186 ibid. p.84
187 Professor G Hodge, submission no.31, p.3
188 P Fitzgerald, Review of Partnerships Victoria Provided Infrastructure - Final Report to the Treasurer, January 2004, p.31
189 D Guttman, The Shadow Pentagon, Centre for Public Integrity, 2003 see: www.publicintegrity.org
190 Deutsche Bank AG, submission no.19, p.3
191 Department of Treasury and Finance, submission no.35, p.33