A number of commentators have raised concerns relating to the value for money concept in the Partnerships Victoria policy. Some commentators have argued that the Victorian PSC is biased in favour of the private sector partnership path.268 The Partnerships Victoria overview documentation states that there is no presumption that in providing new public infrastructure and related ancillary services, the private sector is more efficient than the public sector.269
Some commentators have, however, been concerned that the comparator contains assumptions that in effect mean the public sector can never be as efficient as the private sector.270 One concern, for instance, is that the Victorian PPP guidelines mirror the United Kingdom's but disadvantage the public sector through the use of hypothetical adjustments made for matters of 'competitive neutrality'. Under the policy, such competitive neutrality adjustments remove any net advantages (or disadvantages) that accrue to a government business by virtue of being owned by government, and higher than real world costs are calculated. In commenting on a bias in favour of the private sector, one journalist stated:271
… through the comparator process, the government strips the public sector of its natural advantages over the private sector. Governments do not have to pay taxes including land and payroll tax, stamp duty and local government rates ... and, importantly, governments can borrow money at a lower interest rate than the private sector. In the PPP value for money test, these advantages are ruled unfair. So an assortment of costs are added to the public sector's case to achieve 'competitive neutrality' with the private bids. The comparator, therefore, will always be greater than the real world cost of the public sector delivery of the project.
If the roles were reversed, the private sector would not be expected to remove its competitive advantage.
In contrast, both the New South Wales and Victorian Secretaries to Treasury have argued that government access to cheaper finance is a myth. A government's ability to borrow more cheaply is purely a function of its capacity to repay borrowings.272
As documented previously in this report, the Committee considers that there is a need to evaluate both the overall worth of projects (using a cost-benefit ratio) and the relative merit of privately financed infrastructure (through instruments such as the PSC) in a rigorous and neutral manner. It also noted that the higher cost of capital to the private sector was more a reflection of how it implicitly included project riskiness in its capital project assessments, and how the risk of government defaulting on its debt repayments was effectively zero.
The Committee is of the view that expert advice should be sought on the appropriate level and use of discount rates in future infrastructure projects because of its vital significance for project evaluation.
There are different methodologies and current practices should be periodically reviewed. One case worthy of examination is the consequences of the changes made to the public sector comparator in the United Kingdom, specifically:273
• the new discount rate of 3.5 per cent should be based solely on the social time preference rate;
• separate adjustments should now be applied to appraise all calculations for optimism bias and tax;
• appraisal should be conducted with rigour appropriate to the scale of the expenditure involved and the decision making stage that has been reached; and
• greater consideration should be given to the wider impact of proposals across society.
The Fitzgerald report also recommended that the PSC be reformed and acknowledged it as one factor in procurement decisions and conclusions as to value for money:274
The use of the PSC should be discontinued in circumstances where public provision has not been done in the past and is not a reasonable option going forward. In such circumstances the analytic comparison should be against a reference case or a range of benchmarks.
The Committee received evidence from a number of witnesses overseas that although quantitative techniques are used in value for money assessment and accounting decisions, the numbers are in reality, 'soft', with much depending on professional judgment on matters such as the differential risk of construction cost overruns and the robustness of risk transfer to the private sector. In other words, the PSC estimation process is subject to huge uncertainties, and essentially based on multiple judgement calls.
A further issue is that the PSC technique is subjective. This is in part due to the complexity and the professional nature of estimation procedures and also partly due to design. The Committee noted guidance in the Public Sector Comparator, Technical Note that probability valuation techniques can be used to analyse risk outcomes in the PSC, along with sensitivity analyses on cash flow and other assumptions. The PSC appears, therefore, to be a range of values rather than one robust figure characterising the project if government were to fund it. It was unclear to the Committee how this range was compared in the end with Partnerships Victoria financing bids.
The PSC process and subsequent decision making lacks transparency.
The Department of Treasury and Finance has advised the Committee that in Victoria, the value for money test will be applied to all Partnerships Victoria projects:
There is an overriding view that all [infrastructure] projects should be considered as Partnerships Victoria partnerships, and therefore both [the public interest and value for money] tests would apply.275
If we decide, once we have seen the bids process to proceed with the private sector approach we simply convert that capital funding to a recurrent stream over a certain period of time, so they are fully funded before they go to the market. 276
The practice of committing funds to the traditional delivery option prior to the receipt of bids may help avoid the problems and issues that have arisen in the United Kingdom, where PFIs have been labelled as the only option.
In Victoria, funds are committed in the budget prior to calling for expressions of interest in a PPP project.
Also relevant to the philosophy of value for money is the sense that a fair comparison is made using the PSC tool and that it is neutral in its application. The Committee was advised that the government was selective about the use of the Partnerships Victoria method of delivery, and that there were four instances where the policy was considered but not used. Where public private partnerships were not used, nor were traditional funding arrangements.277 The Committee observed that in two of these instances, no project subsequently proceeded; in another, it was easier to fund the works under existing long term lease arrangements; and in the last instance, there was insufficient market interest at the time of bids.
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268 For example, Dr D Hayward, as cited in R Millar, ‘Preserving the myth of public inefficiency’, The Age
newspaper, 6 August 2001; K Davidson
269 Department of Treasury and Finance, Partnerships Victoria Guidance Material Overview , 2006, p.4
270 For example, Dr D Hayward, as cited in R Millar, 'Preserving the myth of public inefficiency', The Age newspaper, 6 August 2001
271 R Millar, 'Preserving the myth of public inefficiency', The Age newspaper, 6 August 2001
272 J Pierce and I Little, Private provision of public infrastructure and services, presentation to the Australian Council for Infrastructure Development (AusCID) luncheon, April 2002
273 HM Treasury (UK), PFI: Meeting the Investment Challenge, July 2003, p.81
274 P Fitzgerald, Review of Partnerships Victoria Provided Infrastructure - Final Report to the Treasurer, January 2004, p.31
275 Mr J Fitzgerald, Director, Commercial and Infrastructure Projects, Department of Treasury and Finance, transcript of evidence, p.8
276 Mr G Maguire, Assistant Director, Commercial Division, Department of Treasury and Finance, transcript of evidence, p.10
277 Department of Treasury and Finance, submission no.36, pp.3-4