Various submissions to the inquiry from the private sector have indicated support for the current 'value for money' approach and the PSC framework.278 Some of the companies that made submissions to the inquiry had also worked closely with the Department of Treasury and Finance in developing the Public Sector Comparator Technical Note document and were keen to see the framework applied.
The Australian Council for Infrastructure Development (AusCID) supported the view that in most cases the government should make the PSC, or aspects of it, available to bidders, because this would indicate to bidders the type of solutions the government is seeking and affirm that the government is committed to delivering the project if the PSC is bettered.279 The Queensland Government has recently announced that it intends to release a broad outline of the comparator to prospective tenderers.
Support for the current approach adopted in Victoria has been bolstered by other submissions. A submission by a Director of PricewaterhouseCoopers, which outlined a number of common 'misconceptions' regarding PPP projects, for example, argued that: 280
• concerns over governments being locked into long term contracts was misplaced, because investments in infrastructure have always inherently involved making long term spending decisions;
• PPPs need not reduce government flexibility to change its requirements in response to policy needs, with contract 'flexibility';
• PPPs can deliver value for money in spite of the private sector's greater cost of funds; and
• PPP contracts are not traditional adversarial contracts, but create a long term relationship based on aligned objectives between parties.
According to the IPPR (in the United Kingdom), there has been pressure on government agencies to opt for private investment. And in many cases, the cost of private bids has been very close to the comparator.281 But, in nearly all of these cases, the private project has gone ahead. According to an article in The Age, the United Kingdom Treasury reportedly treats PPP projects more favourably than traditional projects, offering revenue support for a PPP project to go ahead. If the public authority chooses the traditional option, the same revenue support is not made available, therefore the PPP process in the United Kingdom is not being driven by value for money alone. There have also been some instances where a PSC has not been constructed in the United Kingdom (for example, in relation to the National Air Traffic System) and instances where the PSC had been manufactured to ensure a pre-determined answer was reached.
The Public Accounts Committee and National Audit Office in the United Kingdom have reported extensively on the mixed results of PFI projects including the PSC and value of money components and their application. They have raised a number of issues about inaccuracies associated with the comparator. The Committee is aware that the risk adjusted PSC is no longer being used in the United Kingdom, and the initial value for money decision is now based on a qualitative assessment that gives a greater emphasis on assessing the likely value for money of PFI based on evidence from past projects.282
Judging whether value for money is being achieved through private financing of public infrastructure is difficult due to the lack of independent evaluation work undertaken to date in both the United Kingdom and in Australia. The Committee concurs with the view of Fitzgerald and other commentators283 that this needs to be addressed.
While even a short search will produce literally thousands of pages written on PPPs, there is a surprising shortage of what we might call objective research on the topic or independent evaluations of the successes and failures. Most of what is available comes from firms which earn their incomes from P3s or government agencies charged with promoting and implementing such projects. While some of this is enormously helpful, there can be no doubt that independent analyses of the strengths and weaknesses of PPPs are warranted.
HM Treasury (United Kingdom) found in its review in early 2006 that 70 per cent of non-PFI projects were delivered late compared with only 20 per cent of PFI projects; and 73 per cent of non-PFI contracts were over budget compared with 20 per cent of PFI projects (and these were due to the public sector changing its specifications).284 This was not the case for small information technology projects, however, where the bid costs and the inflexibility provided for in the contracts meant that they were not suitable as PFI projects.
Evidence from overseas witnesses suggested that the financial incentives provided through the contracts strongly encouraged the provision of on time infrastructure works.
The Victorian Auditor-General advised the Committee that the adequacy of the cost-benefit analysis and the public interest assessments, the development of the PSC, and appropriate risk allocations are key determinants of the outcomes ultimately received by the state from PPPs. Furthermore, based on discussions with counterparts in the United Kingdom, the Victorian Auditor-General made the following observations regarding the applications of PSCs: 285
• the comparator analysis should not be seen as only a means of supporting decisions on whether to proceed or not to proceed with PPPs. Rather they could be used to drive better value from private sector bids, by focusing on individual elements of bids that could be improved;
• data and assumptions incorporated into the comparator analysis are subject to substantial uncertainties and volatility, and care needs to be taken when assessing the results from the comparator;
• a single comparator can provide a narrow view, compared with the determination of multiple comparator values, based on various scenarios; and
• limitations associated with certain costing systems within the public sector may restrict the availability of suitable data and, therefore, the results of the analysis.
The Auditor-General also noted the importance of the decision to proceed with a PPP being driven by value for money considerations and not by whether the arrangement will be recognised 'off-balance sheet'.
A further issue in assessing overall value for money to the public is the question of high bidding costs with private financing projects. Allen looked at the tender costs as a proportion of project costs for both PFI and traditional projects.286 He noted that PFI tendering costs in the United Kingdom are far greater than the average tendering costs of other procurement methods, no matter what the project size, varying from a factor of three to ten times greater. For works schemes to be sustainable and cost effective in an economic sense, these higher transaction costs would need to be fully recouped.
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278 For example, Deutsche Bank AG, submission no.19, p.4
279 Australian Council for Infrastructure Development (AusCID), submission no.18, p.21
280 Mr D Grimsey, Director, PricewaterhouseCoopers, (seconded to the Office of the Victorian Treasurer) Partnerships Victoria Seminar Series, 5 June 2002, Melbourne University Private
281 R Millar, 'Preserving the myth of public inefficiency', The Age newspaper, 6 August 2001
282 HM Treasury (UK), PFI: Strengthening long term partnerships, p.35
283 J E de Bettignies and T W Ross, The Economics of Public-Private Partnerships, draft report, Vancouver: Sauder School of Business, University of British Columbia, 2003
284 H M Treasury (UK), PFI Strengthening long term relationships, 2006, p.16
285 Mr W Cameron, (then) Victorian Auditor-General, submission no.13, p.7
286 G Allen, The Private Finance Initiative (PFI), Research Paper, House of Commons Library UK, p.33