Thank you for providing me with a copy of the final draft of the Performance Audit New Schools Privately Financed Project and inviting me to comment on the report.
I note that your findings are very positive and recognise the rigorous processes that have been established for privately financed projects in the areas of project development, tendering and performance monitoring of the contractor. These processes have maximised the potential for these new schools, and other privately financed projects, to provide value for money for the public.
The recommendations you make are generally consistent with our own findings from the New Schools Privately Financed Project Post Implementation Review and the Premier's Department recent Review of Future Provision of Motorways in NSW. As such Treasury has already implemented or is in the process of implementing changes to address these recommendations.
In particular, your recommendation that Treasury publicly disclose more complete contract documents for privately financed projects is being implemented by revising Ministerial Memorandum 2000-11 Disclosure on Information on Government Contracts with the Private Sector. Consistent with this forthcoming Memorandum, the full contract deed (excluding confidential information) for the recently signed Newcastle Mater Hospital Redevelopment Privately Financed Project has been posted on the NSW Government Tenders website.
Also, consistent with your recommendations, Treasury will be updating and revising the Working With Government Guidelines for Privately Financed Projects to take into account the findings of all recent reviews of privately financed projects. This will be undertaken after the Public Accounts Committee has released their findings for their Inquiry into Public Private Partnerships, expected by April 2006.
Treasury and the Department of Education and Training have also agreed to form a cross-agency Project Management Steering Committee to oversight the ongoing management of the contract.
I would also like to take the opportunity to clarify and elaborate on a few areas that you mentioned in your report.
There are a number of reasons why governments privately finance social infrastructure. These include: to lower infrastructure costs, transfer appropriate risks to the private sector, incentivise adequate contractor performance, single point of contract for a range of services, focus on whole-of-life costs and ensuring Government assets are adequately maintained. The Government does not privately finance social infrastructure to smooth out lumpy capital payments to spreading payments over the long-term (refer Section 2.2) or to achieve off-balance sheet financing. In fact, these transactions are usually on-balance sheet.
In the case of the New Schools Privately Financed Project, the Government repayments of the capital cost of the facility are deemed to be a finance lease. In addition, the Government is deemed to be the owner of the schools because the Government primarily retains demand and residual value risk. Therefore a liability offset by an asset of equivalent value is recorded on the Government's Statement of Financial Position, once the facilities are operational. The fees for maintenance and other services are expensed. Therefore, the accounting treatment for a social infrastructure project is similar irrespective of whether it is privately financed or financed using Government debt.
Your report indicates (Section 3.5) that unless the public sector comparator (PSC) assumes that schools can be bundled under traditional procurement, the PSC is unlikely to ever be less than the private sector's bid. The PSC is based on the most efficient, likely and currently available method of providing the defined infrastructure and services.
The PSC reasonably assumes that bundling was not likely in the case of traditionally procuring schools given DET had never previously bundled schools. In addition, there is evidence to suggest that, even after the first Privately Financed New Schools Project, DET would not have bundled schools if traditional procurement had been pursued. Furthermore, given DET has never bundled schools, it is unlikely that the efficiencies achieved under PFP procurement would be fully realised if they were bundled under traditional procurement.
In this context, it should also be noted that the PSC assumes that DET would meet the service specifications and standards and adequately fund the life-cycle maintenance program. These assumptions are necessary to ensure the PSC is comparable with private sector bids but they are untested in practice and hence may be favourable to public sector procurement.
Finally, I would like to thank you and your staff for the co-operative approach taken during the course of the audit and the opportunity to comment on the report.
(signed)
J Pierce
Secretary
Dated: 1 March 2006