The Committee has been able to review the findings in the Review of Partnerships Victoria Report and in various Auditor-General reports on certain aspects of public private partnership (PPP) projects. It has also had the opportunity to discuss the merits or otherwise of the provision of infrastructure using PPP arrangements with various financial analysts, lawyers, consultants, public servants, parliamentarians, community groups, academics, industry bodies and construction firms, both in Australia and overseas.
In the absence of public documentation, the Committee cannot conclusively state whether or not PPP policy is generally delivering value for money over the life of projects compared with traditional procurement methods.
The Committee noted the comments contained in the Fitzgerald Report that on the basis of his access to documentation that the eight Partnerships Victoria projects examined had:411
… the potential to demonstrate innovation of design, certainty of timing and cost, and the delivery of a whole-of-life approach to facility maintenance.
Also:
… using the methodology of comparing their cost to a Public Sector Comparator, each of the eight projects has been declared, at the time the contracts were entered into, as being equal to or better value than the option of public sector provision.
The Committee's review identified a range of concerns that need to be addressed by the Victorian Government. It found that certain overseas jurisdictions - notably the United Kingdom and British Columbia - had taken steps to address many of the criticisms about concepts such as the public sector comparators, high discount rates, and the premiums to be paid for the transfers of risk to the private sector that are used in these arrangements.
The Partnerships Victoria policy embraces the concept that the private sector can often deliver public infrastructure services more cost effectively than government and offer short and long term innovation. This concept is yet to be conclusively proven when all factors are taken into account. The Partnerships Victoria policy acknowledges that although the cost of borrowing by government is lower than the private sector, the discount rate used should reflect the risk of the project that is assumed by the private sector, not the government's borrowing rate.
However, current international practices, which reflect improved knowledge about the valuing of risk, have resulted in the United Kingdom reducing discount rates for PPP projects to 3.5 per cent with a risk adjustment to cash flow.
The Committee observed from its review of certain PPP projects that despite paying large premiums for the assumption of risks by private sector consortia, it has been common practice for certain risks to revert back to government without any adjustment to the discount rate.
A build own operate model was applied to the Mildura Hospital and the Melbourne County Court and was based on a concept contained in the Partnerships Victoria policy, whereby the government only needs to purchase services from the private sector and not the infrastructure, despite having paid for the building under the leasing arrangements with the developer. At the expiration of the lease, ownership of the building remains with the developer.
The Committee considers policies that treat multi-million dollar purpose built government funded assets as disposable early in their life span need to be revisited by the government.
There is no question about Victoria's need for new infrastructure. The Committee acknowledges that it is a difficult and challenging task for any government in providing infrastructure to determine the appropriate level of investment to fund the hospitals, schools, roads and other essential infrastructure Victoria will require in the future.
The early PPP arrangements were devised in such a way that in return for the private sector providing the infrastructure, the repayment of construction and maintenance costs was achieved through the government entering into operating leases. With the advent of the Australian equivalent of International Financial Reporting Standards, most of these earlier financial arrangements need to be classified as finance leases, representing long term debt to be met by future governments.
There is substantial evidence to indicate that most PPPs result in infrastructure being delivered on time and within budget, with some exceptions. The Southern Cross Station, for example, ran more than 12 months behind the scheduled completion date and the third party builder incurred a substantial loss.
The Committee acknowledges that the Partnerships Victoria policy in most instances provides for the use of a public sector comparator, where bids from the private sector are compared with the estimated cost of constructing projects within the public sector, after allowing for the allocation of risks between the private and public sectors.
The Committee has reservations about the reliability of the public sector comparator because of its theoretical approach to estimating and comparing costs, particularly in relation to the valuation of risk.
The Treasurer has acknowledged that scope changes and budget and time overruns have occurred in projects procured under traditional means. These problems were primarily attributed by the Treasurer to the failure to identify and manage projects risks at all stages of a project's life cycle.412 The government has recognised these problems and implemented the Gateway Review Process in 2003. This has had some success in resolving issues that delay projects and in ensuring that infrastructure is delivered in a more cost efficient manner.
The biggest barrier to determining the benefits or otherwise of PPPs has been the lack of public information for these projects, although some improvements have occurred. New accounting standards require leases previously recorded as operating leases to now be classified as finance leases, with the corresponding disclosure of both the asset and the debt liability. Nevertheless, the International Accounting Standards Board is still to finalise a new accounting standard for PPPs. Previous efforts have proven unsuitable to governments worldwide because the draft accounting standard focused on disclosure in private sector financial reports.
The Committee considers that public accountability needs to be improved within Victoria in a range of areas such as the prompt disclosure of contracts on the government's website and providing Parliament with a schedule of repayments to consortia. The Committee is concerned about the use of 'commercial in confidence' to prevent full disclosure of details such as the public service comparator, the risks to be transferred, the total amount of payments (often what is included in the lengthy complex contract is a formula rather than actual amounts), and contracts that are only released publicly months after the financial close has been agreed.
The Committee is also concerned that because of the high cost of preparing bids, only a small number of consortia are bidding for major PPP projects, which raises issues whether there is sufficient competition to ensure government gets a good deal.
The Committee has made 20 recommendations to improve the Partnerships Victoria policy and significantly strengthen the governance arrangements for PPP projects. These recommendations are also seen as contributing towards the government ensuring that PPPs provide value for money over the life of the project.
This report was adopted by the Public Accounts and Estimates Committee at its meeting held on 29 September 2006 in Meeting Room 4 at Parliament House, Melbourne.
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411 P Fitzgerald, Review of Partnerships Victoria Provided Infrastructure - Final Report to the Treasurer, Growth Solutions Group, Melbourne, January 2004, p.17
412 Address to the Australian Infrastructure Council by Hon. J Brumby, MP Treasurer, 3 July 2003, p.14