The Partnerships Victoria Practitioners' Guide states that the policy can potentially deliver significant benefits in the quality of services and the cost of provision. Furthermore:243
Partnerships Victoria shares many of the characteristics of the public private partnerships models adopted by a number of countries around the world including the United Kingdom (where a large number of projects have been completed), South Africa, Ireland, Germany, The Netherlands, Japan, Finland and Denmark. The United Kingdom experience has been the subject of extensive review and projects there have been found to deliver average savings of 17 per cent compared to traditional public sector delivery.
This '17 per cent savings' finding is widely cited in the literature by proponents of PPP projects and is sourced from a report by Arthur Andersen and Enterprise LSE looking at business cases for 29 projects rather than at outcomes.244 As the United Kingdom Institute for Public Policy Research (IPPR) identified:245
We will not know the actual outcomes for many years - hence the headline number quoted by Arthur Andersen of a 17 per cent average efficiency gain is in danger of gaining a reputation for 'settling the issue once and for all' which it does not deserve.
Nonetheless, the Committee noted that this 17 per cent figure has often been referred to in Victoria. The Committee noted that notwithstanding the confidence of reports that value for money had been achieved, these analyses compared PFI signed contracts against PSC calculations rather than comparing performance with realistic public sector benchmark projects. The veracity of such conclusions may be questionable and would be a useful piece of additional work.
The IPPR found that a significant shortcoming of the Arthur Andersen study is that the researchers were unable to break down the projected value for money savings by sector. The National Audit Office reports suggest that the PFI appears to be achieving significant efficiency gains in some prisons and road projects. However in two critical areas - schools and hospitals - the gains appeared marginal. Furthermore, the IPPR stated that the projected efficiency savings in the prisons PFI projects of around 10 per cent appear to result from two significant features: the prison PFI projects are 'full' design, build, finance and operate (DBFO) models where all of the operation and management of the public service is part of the contract. There is no separation out of ancillary and core services. This is in contrast to PPP projects in Victoria where the government has made a commitment to directly deliver core services such as correctional services; and the Prison Service is the sole purchaser and has built up expertise in contracting. Both of these key features are absent in education and in health in the UK. In these cases a very restricted model of DBFO is being used with the operating element encompassing only a narrow range of ancillary services such as maintenance, cleaning and occasionally IT
The Committee recognises that providing accurate and reliable research results assessing value for money is a difficult task. Not surprisingly, there have been numerous findings on value for money. The IPPR states for instance that:
… the economic arguments for PPP and in particular for PFI have been confused from the start. Two rationales have been offered: one serious, one spurious. The potentially serious argument is that in the right circumstances PPPs can offer significant value for money gains and generate improvements in service quality. At the moment the evidence on value for money is variable across sectors, PFI seems to be offering significant gains in roads and prisons but not in hospitals and schools. The spurious argument is that using private finance to pay for capital investment allows government to undertake more projects than would otherwise be the case. All PFI projects are publicly funded and incur future liabilities for the Exchequer.
In their review of international experience, the working group on PPPs in Northern Ireland246 noted that PFI schemes in Scotland had reported estimated cost savings of 20 per cent for the provision of water infrastructure247 and 20 to 30 per cent in Ireland; the first four DBFO (design, build, finance and operate) road projects in England were quoted as experiencing overall savings estimates of 12 per cent;248 for health, the UK National Audit Office suggested smaller savings against the public sector comparator of less than 5 per cent or increased costs;249 savings estimates for education were less than 5 per cent; and for technology projects, mixed success was found. Again, these findings have been made against the PSC, which itself has been controversial.
The Northern Ireland Working Group commented that as well as anomalies within the PSC, there has been wide debate around several matters, including:250
• the discount rate, with higher discount rates favouring PPPs and lower ones favouring traditional procurement;
• the valuation of risk, with early work by Arthur Andersen and the London School of Economics Treasury Taskforce suggesting that 60 per cent of the savings attributed to PPP contracts come from the valuation of risk;
see: www.ppp-ni.gov.uk/publications.htm, accessed 19 September 2006
• transaction costs, where value for money comparisons do not normally take into consideration the high procurement or transaction costs associated with PPPs, and where (for some projects in health and education) these costs have been similar to the projected savings;
• the quality of service, where the temptation is to use the value for the money comparison as simply a pass/fail test;
• value for money versus affordability, where despite the United Kingdom Government's assurances that PPPs should only proceed where they deliver better value for money, evidence from organisations such as the IPPR suggest that some PPP programs are still driven by affordability constraints and the need to secure off-balance infrastructure rather than value for money;
• independent review, where given constraints on public spending, PPPs are perceived to be 'the only show in town' and public sector comparators are developed to guarantee funding rather than as an independent review of viability; and
• value for money assessment being provisional, given the long term contractual nature of the infrastructure, making judgments at this early time weak.
Significantly, the Northern Ireland Working Group acknowledged the questionable nature of much of the evidence around, stating that:
In considering the potential benefits arising from public private partnerships, the Working Group recognised that there is still a widely acknowledged lack of hard, particularly quantitative, evidence. This problem was highlighted in the IPPR report last year and did present the Group with particular difficulty in arriving at definitive or absolute conclusions in this regard.
The Victorian experience of value for money in terms of 'on time' project delivery, is similar to that in the United Kingdom. Mention was made of the on time performance of PFI projects against government procurement in chapter 4. The Committee noted that the evidence for on time project delivery was more available than the evidence for value for money.
The size of the competitive market in the UK and throughout Europe should not be underrated and should be taken into consideration when looking at the Australian context.
There is a paradox here in that privately financed infrastructure in Victoria is unlike the United Kingdom PFI schemes. And some evaluations and assessments of the United Kingdom experience are not applicable here, for example, the role of competition and the preference for negotiating with a single winning bidder based on early expressions of interest differ between the two. The relatively smaller and more recently developed market in Victoria compared with the United Kingdom's more competitive market and experience would seem to be another important factor in interpreting value for money estimates.251
The Department of Treasury and Finance did not quantify for the Committee the value for money results of projects in Victoria; neither relative nor absolute evaluations were presented. The 2004 Fitzgerald review examined the policy in detail by looking at the Partnerships Victoria guidance materials, the literature on PPPs, the process by which the first eight projects have been selected and evaluated, and relevant contractual documents. Because the report aimed to enhance the achievement of value for money outcomes for Victorians through application of the policy, it recommended that a significant realignment of the policy was needed and that the present concept of the PSC needed reform. It found that the weighted average saving was 9 per cent against the risk adjusted PSC using the then prevailing discount rate.252 The Fitzgerald report fell short, however, of presenting clear practical financial comparisons between Partnerships Victoria projects and projects delivered through alternative traditional infrastructure provision methods.
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243 Department of Treasury and Finance, Partnerships Victoria guidance Material, Practitioners' Guide, June 2001, p.6
244 Arthur Andersen and Enterprise LSE, Value for Money Drivers in the Private Finance Initiative, a report commissioned by The Treasury Taskforce January 2000,
245 Institute of Public Policy Research, Building Better Partnerships, The final report of the Commission on Public Private Partnerships, 2001, pp.90-91.
246 Office of the First Minister and the Deputy First Minister, (UK), Review of Opportunities for Public Private Partnerships in Northern Ireland, Working Group Report, 2002, see: www.ppp-ni.gov.uk/publications.htm, accessed 19 September 2006
247 Transport and the Environment Committee, Scottish Parliament, Report on inquiry into Water and the Water Industry, Vol. 1, 9th Report, 2001
248 National Audit Office, (UK) Private Finance Initiative: The First Four Design, Build, Finance and Operate Roads Contracts, January 1998
249 National Audit Office, (UK), The PFI Contract for the New Dartford and Gravesham Hospital, May 1999
250 Office of the First Minister and the Deputy First Minister, (UK), Review of Opportunities for Public Private Partnerships in Northern Ireland, Working Group Report, 2002,
251 P Fitzgerald, Review of Partnerships Victoria Provided Infrastructure - Final Report to the Treasurer, January 2004, p.33 goes even further. After noting the high level of PFI investment and large number of projects undertaken so far in the UK, Fitzgerald states that 'It should not be assumed in an immature market such as Australia, that PPP outcomes will always be competitive'.
252 P Fitzgerald, Review of Partnerships Victoria Provided Infrastructure - Final Report to the Treasurer, January 2004, p.17