Huge Deals Of Secrecy Fuel Scepticism

Sydney Morning Herald

Tuesday March 6, 2007

David Humphries

If public-private partnerships are here to stay, the Government must demonstrate their clearcut advantage, writes David Humphries.

IT IS like the dark side of the moon, except there is much more behind the scenes than there is centre stage in public private partnerships, the public infrastructure phenomenon racing towards the $15 billion mark in NSW.

As the state election approaches, in which the glare will be on Labor's provision and management of infrastructure, we know about the Cross City Tunnel debacle and the prospect of a big compensation payout by taxpayers if government contributed to the tunnel's failure by reneging on road closure agreements.

We know about the $25 million already paid to the builder of the Lane Cove Tunnel for the Government's tardiness in narrowing Epping Road to push drivers into that tunnel.

Some of us have been around long enough to remember the $800 million in taxpayers' funds squandered on the airport rail link - a project we were promised would cost taxpayers nothing - and the effective payment twice-over for the Port Macquarie hospital, when the private operator found it could not make a go of it and the state had to pick up the pieces.

What is more worrying, however, is what we do not know.

And we do not know a lot, because cosy relationships between state governments and their private "partners" hold the public contemptuously at arms length, under the need-to-know pretext of commercial-in-confidence.

The result is the public does not trust PPPs, which bear an odium at least as virulent as the old and largely exhausted debt-reduction tool of privatisation (although NSW's retention in public ownership of the electricity industry is a standout exception).

Secrecy serves only to excite suspicion that the Government's "essential rationale" for PPPs - "improved value for money", that is, the "best possible outcome at the lowest price" - conceals a reality that taxpayers are being ripped off and that big-end-of-town nests are being feathered.

Secrecy justifies scepticism; indeed, it fuels it. But it does not mean PPPs - the private financing, construction and long-term ownership and servicing of public infrastructure - are inimical to public interest. It is a case more of who would know, so long as the public is asked to take on trust assurances of that benefit.

Public trust is further difficult to nurture because the goals of government and private partners are so disparate, and the nitty-gritty of the global debate on PPPs so complex, that experts are at loggerheads over its meaning.

Suffice to say, however, that the camps are split ideologically - those convinced that business almost always will do a better job than government, and those who are not.

One of the few certainties is that PPPs are here to stay.

Dragi Kozarovski, senior financial analyst at the NSW Treasury's private projects branch, says PPPs will make up 10 to 15 per cent of the $110 billion the state plans to spend on infrastructure over the next decade.

"Governments all over the world have turned to the innovative PPP model," he says.

His departmental boss, John Pierce, says public borrowing for all infrastructure would trash to junk bond status the Government's AAA credit rating. "Why? Because we do not have the tax base to support the level of debt we would have to service."

And Paul Forward, head of the Roads and Traffic Authority until he became the fall guy of the Cross City Tunnel mess, says the three most recent PPP motorways - the M7, and the Cross City and Lane Cove tunnels - would require "a major reduction in other government programs if funded from consolidated revenue".

"Instead, an annual cost of $320 million [interest and maintenance, not including repayments of principal] were transferred to motorists and financial risk transferred to the private sector," Forward says.

Three months ago the Iemma Government announced Australia's biggest PPP yet - a $3.6 billion project to build and maintain 626 rail carriages for Sydney. So what basic equation is used to test value for money for any specific PPP proposal?

The rhetoric here is far simpler than the execution.

If traditional methods of procuring and maintaining a road, a rail line, a hospital, a school, a prison, are cheaper and as equally assured, then the PPP gets the thumbs down. If not, the band starts up the PPP tango.

Simple enough, until it comes to testing the two approaches. That is where the public sector comparator (PSC) comes into play.

Purportedly it is an assessment of the cost of public ownership, taking account of capital and operating costs, the cost of risks otherwise transferred to the private sector, the cost of risks retained by government, including failure, and all adjusted for competitive neutrality; that is, erasing government advantages such as lower borrowing costs and non-tax status. Even the NSW Treasury acknowledges the potential rubberiness of its PSC calculations and the need to include "subjective" assumptions. A quarter of a century after the first NSW PPP - the harbour tunnel, for which government underwrites traffic shortfalls - Treasury is revising its PSC methodology.

Bob Walker, a Sydney University accounting professor and PPP sceptic, argues the PSC is manipulated to advantage the PPP case, because assessment of the cost of public ownership assumes cost overruns, while the private sector bid is not. PPPs, Walker says, require taxpayers to meet the cost of these private sector overruns. "I have never seen a full PSC published," Walker told an inquiry last year into PPPs by the NSW parliamentary Public Accounts Committee.

"I have seen a table of one line without any detail about the calculations. That is not providing any assurance at all."

Jeremy Colman, England's National Audit Office deputy until his damning criticism was followed by a transfer to Wales, is contemptuous of PPPs, which he says are characterised by "spurious precision" and "pseudo-scientific mumbo-jumbo where the financial modelling takes over from thinking". "It becomes so complicated that no-one, not even the experts, really understands what is going on," Colman told a British newspaper.

And this from the birthplace of the PPP global revolution, where the British government in 1992 in effect gave the private sector unfettered access to public infrastructure provision. The then chancellor of the exchequer, Norman Lamont, said: "In future any privately financed project which can be operated profitably will be allowed to proceed."

The Government of Tony Blair subsequently pulled back from such laissez faire-ism. Even so, Britain's circumstances were as remote as its location from Australia. It was compelled by European Union membership to limit its borrowings, an understandable restraint given European debt is still the equivalent of 58 per cent of GDP, compared with Australia's zero. US government debt is equal to half America's GDP, the same ratio as the OECD average, and Japan's is 82 per cent.

But back briefly to the PSC, the threshold price PPP proponents must meet. It is ridiculed, too, by the private sector. David Roseman, of Macquarie Bank, one of the more voracious pursuers of domestic PPPs until it largely divested and turned to greener pastures overseas, says PSCs are not always used because they are too often inaccurate.

Tony Poulter, of PricewaterhouseCoopers, says PSCs are unreliable in assessing long-term operating costs, and Peter Hicks of Leightons complains that PSCs are set by consultants who "have never actually had to deliver a project for a dollar", who "do not have to take the risk of whether they win or lose".

Babcock and Brown, the investment bank, says PSCs are often out of date and do not take account of market conditions and material costs that change in the period from negotiation to project commencement.

Gary Sturgess, a champion of the Greiner government's embrace of PPPs, says PSCs are "so rough" they are prepared less and less in Britain, where he runs the Serco Institute.

"After 600 projects the view has been taken that they [government] should just have the competition and see what the best price is," Sturgess told the parliamentary inquiry.

And Graeme Hodge, a professor at Monash University law school, told the inquiry the PSC framework was "a hugely complex black box" weighted against the case for publicly owned projects.

Hardly reassuring stuff, given the PSC is meant to be the benchmark against which value for taxpayer money is tested. But does it demonstrate conclusively that taxpayers are being short changed? Again, who would know?

The PPP barrackers, of course, are unbowed.

Sturgess says beating up on early failures is a waste of time. "Some have gone well and there has been difficulties with others." Lessons, he says, must be learned.

Gary Bowditch, executive director of Infrastructure Partnerships Australia, cites a Victorian review by Peter Fitzgerald, who found "credible evidence of benefits, including innovation, timeliness, certainty of price and a whole-of-life approach to maintenance".

Indeed, the maintenance issue is one of the more compelling arguments in favour of PPPs. Traditionally governments contract construction, then assume responsibility for servicing that asset.

Placing the maintenance burden on PPP partners, advocates argue, discourages sloppiness and corner cutting construction in the first place.

Bowditch says: "Thousands of traditional government projects have run over budget, and over time, leaving taxpayers with the final bill. The independent assessments of PPPs in states such as Victoria and NSW show they have been overwhelmingly successful."

But he could hardly say anything different. The test here, however, is not one of cynicism. If PPPs are here to stay, it is beholden on government to demonstrate their clearcut advantage. And no argument will penetrate the shield of public resistance and suspicion so long as the public is kept in the dark. Trust alone won't cut the mustard with taxpayers too frequently burnt already.

Hand In Hand

A report Card

What is a PPP?

Typically, the private sector designs, builds, finances, operates and then transfers infrastructure to the government after a specified period, in exchange for an income

stream.

Cross City Tunnel

Prospect of a big compensation payout by taxpayers after the Government reneged on road closure agreements intended to funnel traffic into the tunnel.

Airport rail link

$800 million in public money squandered on a project they were promised would cost

taxpayers nothing.

Port Macquarie Hospital

In effect taxpayers paid twice for the hospital when the private operator could not make a go of it and the government had to pick up the pieces.

M7

Embraced by the public. It provided a much-needed north-south link through western Sydney and encouraged the development of industrial and employment centres.

Lane Cove Tunnel

Success untested (due to open this month) but $25 million already paid to the operators for the Government's tardiness in narrowing Epping Road to push drivers into the tunnel.

Eastern Distributor

Let the public reclaim roads such as Crown Street in Surry Hills. But has not met traffic forecasts of 60,000 vehicles a day by 2006, with usage a little over 40,000.

© 2007 Sydney Morning Herald

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