The policies on the use of private sector financing and PPPs issued by various Australian jurisdictions have in common the core principal that, in order to be successful, a proposed PPP arrangement must be in the public interest and must offer better value for money, or net benefit, when compared with the best public sector delivery model. In respect to the financing decision for a particular project, it is argued that, as it is difficult for the private sector to borrow as cheaply as governments can, the extent to which a PPP offers greater value for money than other forms of procurement will depend upon the terms of the overall deal, including risk transfer (allocation more precisely), innovation and project and contract management skills. Consequently, accountability gaps can occur both in relation to the initial decision and to its successful achievement.
For example, the Guiding Principles for Private Sector Participation in Public Infrastructure Provision issued by the Tasmanian Department of Treasury and Finance state that:
Whilst there can be little argument that the Government can achieve a lower borrowing cost than the private sector, the overall long term cost of entering into a contract with the private sector to design, build, own and/or operate infrastructure (with the possibility of leasing back or transferring the infrastructure to the Government at the expiration of the contract), must be cost effective relative to the public sector benchmark.17
The Commonwealth Policy Principles for the use of Private Financing (the Commonwealth Principles) identify the analysis (and treatment) of risk as being critical to the value for money determination, and note that it is likely to be the deciding factor in many private financing proposals.18 The Commonwealth Principles state that:
The Government recognises that the appropriate use of private financing can provide significant benefits to the public sector, such as access to specialist expertise and innovation, and the opportunity to transfer risk to those better able to manage it. However, it is generally more expensive for the private sector to raise capital through private capital markets, than for the Commonwealth to do so directly. The critical test when assessing a private financing proposal, therefore, is whether the overall features of the private financing proposal provide the Commonwealth with a net benefit when compared with traditional procurement methods.19
The NSW Public Accounts Committee has reported that a key lesson learned in various overseas jurisdictions is that:
…at the government level and for the community as a whole, PPPs can be expensive. Governments as a collective unit have more financing options. They can borrow or increase taxes to finance projects. Further, they are better credit risks than private sector companies and can borrow at cheaper rates than the financiers in a PPP.20
The view has been put that the cost of raising tax revenues should be included in the funding cost-equation, if comparisons with the private sector borrowing rates are to be valid.21 A recent paper on this topic produced by the Department of the Parliamentary Library similarly noted that:
Critics of PPPs claim that public sector finance is cheaper than private sector finance and so the latter should not be used. But critics of this argument claim that the government's ability to borrow cheaply is a function of its capacity to levy taxes. They say that what determines the real cost of finance for a project is its risks. The private sector explicitly prices these risks into the cost of finance. When the public sector finances a project, taxpayers bear the risks and implicitly subsidise the cost of the project because the risks are not factored into the government borrowing rate.22
It should be noted that the determination of the value of proceeding with a project based on the social opportunity cost or, alternatively, social time/cost view is a separate decision from the consideration of how to finance the project.
Another interesting aspect, relevant to this discussion, is the consideration of the potential effects on taxation revenues arising from a PPP arrangement. Access to tax deductions, such as for depreciation, can contribute to lower financing costs for the private sector provider, which may, on the face of it, contribute to a favourable comparison with the projected cost of providing the infrastructure through the public sector. However, when tax revenue effects are taken into account, the overall public cost benefit may be largely neutral. Such tax revenue effects occur mainly at the Commonwealth level, while the use of private sector financing for infrastructure has to date occurred more often at the State level. In that circumstance, there is the potential for tension to arise between the value for money arising from a PPP from a State perspective, and the overall value for money from a whole-of-government perspective if the tax revenue implications of a PPP proposal are considered. The Commonwealth Policy Principles for the use of private financing note that:
There is potential for the Commonwealth to face hidden costs through revenue foregone resulting from the use by the private sector of tax effective arrangements, and this should be accounted for in the final calculation of relative value for money at a whole-of-government level. 23
This issue is likely to become of increased relevance with the introduction of proposed changes to Section 51AD and Division 16D of the Commonwealth Income Tax Assessment Act 1936. In certain circumstances, these sections deny to the private sector owner of an asset certain asset-related tax deductions (predominantly depreciation) where the asset is leased to, or effectively controlled by, a tax-exempt public authority. These provisions have been criticised as unnecessary impediments to private provision of public infrastructure.24 The Government has announced that it expects legislation to be introduced in the Autumn 2003 sittings of the Commonwealth Parliament to replace those sections.25
However, regardless of the disparate views in this area, there is general consensus that, in order for a private financing deal to represent value for money, it needs to provide for the appropriate allocation of risk to the private sector and for the establishment of strong incentives for the private sector entity to achieve time and cost project goals and provide long-term delivery of reliable public services. An important question is whether there are appropriate arrangements in place to ensure that the private sector can be made fully responsible and accountable for these results. Experience to date in Australia and overseas at least suggests a qualified 'no'.
Unless an appropriate level of risk is allocated to the private sector, on the basis that such risk is best managed by that sector, private financing may achieve little other than to provide the private sector with the benefit of a very secure income stream, similar to a government debt security, but with the private sector able to earn returns above those available from investing in government debt securities. In this regard, the Commonwealth Principles explicitly state that:
Arrangements which involve little or no transfer of risk (for example finance leases and quasi-finance leases) are unlikely to provide government with value for money given the relative costs of capital. 26
The Tasmanian government's policy statement on private sector participation in public infrastructure provision goes further in this respect. It includes an explicit requirement that, where the project involves the use of a capital asset under a lease arrangement, any underlying finance transaction must be structured as an operating lease in accordance with relevant Australian Accounting Standards, with agencies prohibited from entering into finance lease arrangements.27 Agencies are required to obtain the Tasmanian Auditor-General's opinion on the lease's status prior to the signing of any leases. The guiding principles accompanying the policy statement further explain that finance leases are incompatible with the Government's desire to reduce debt levels, and would also not generally reflect the preferred risk allocation basis the Government is aiming to achieve through involving private sector participation in public infrastructure.28