PPPs can still be a perfect infrastructure match

Nick Greiner

The shrill response of some commentators to the plight of the Reliance Rail public-private partnership, which was appointed to deliver new rolling stock for NSW railways, has revived a debate about the proper role of the private sector in delivering Australia’s infrastructure backlog.

While diversity in public debate is healthy and proper, the views of some commentators have been misleading and appear driven by ideology, rather than fact.

When I was the premier of NSW, my government pioneered the use of PPPs to deliver infrastructure. The build, own operate, transfer, or BOOT model, as PPPs were then known, successfully delivered a range of projects in the water and transport sectors.

Transformational motorway projects such as the M2 and M5 in Sydney experimented with new ways to harness private investment in productive infrastructure, at no cost to taxpayers. The BOOTs in the water sector saw public projects, estimated at hundreds of millions of dollars, delivered at 40 per cent of the cost by the private sector.

The use of PPPs was continued by the Carr Labor government that followed mine, with PPPs used on projects such as the M7 and other motorways and, more recently, for hospitals and schools.

Labor continued what my government started, because PPPs are an excellent model to deliver better infrastructure, at better value for taxpayers and consumers.

The first comparative study on the outcomes of PPP versus traditionally delivered projects was released by Infrastructure Partnerships Australia in 2007. It found Australia’s governments could expect on average to save 31 per cent when they used a PPP over traditional government procurement, because of the competitive tension and risk transfer imparted by the PPP process.

The reason why PPPs deliver cost savings and better projects is simple: when the private sector bids for a PPP, it is putting its money on the line. Because its investment is at risk, it has a powerful incentive to properly scope out the risks.

Another benefit accrues through competition in the private sector to win the bid process, using cutting-edge technology, design and engineering innovations to keep down the construction and operational costs of a project.

And because the private operator, with its investment on the line, has to operate the asset for its entire life, there is a clear incentive to make sure the project is well constructed, efficient and fit for purpose. These same incentives just don’t exist under traditional government delivery.

While some of the ideological opponents of PPPs have used Reliance Rail, the Cross City Tunnel and the Lane Cove Tunnel as examples of why PPPs don’t work, in fact the opposite is true. There are scores of successful PPPs around the country, meaning Reliance Rail and others are the exception that proves the rule.

On the latter, the private sector got its numbers wrong and it wore the loss as a result. While it’s clearly in the public interest for both the public and private sectors to achieve value for money from major projects, when PPPs go wrong, it’s the private sector that suffers the loss, not taxpayers.

Far from the model being broken, the scale of infrastructure investment required in the coming decades means Australia’s governments will need to bring more PPPs to the market, not fewer.

If you consider Sydney, there are at least three motorway projects that need to be funded, financed and delivered. And then there are all the new hospitals, schools, jails and utility infrastructure needed to support economic growth and social outcomes. And that story is replicated across the country.

Through the 1990s, PPPs evolved as significant skills were developed in government and industry. Increased skill and understanding saw experimentation, with new ways to contract for infrastructure projects and related services.

But in the last decade, that experimentation stagnated, with established models routinely applied to deliver social and economic infrastructure.

Australia’s pressing productivity challenge, high levels of public sector debt and spiralling growth in government operating expenses demand a new period of experimentation with the PPP model.

Clearly, toll roads are an area for reform. Although the model works well, the scale of the next round of projects will be well beyond what can be paid for by tolls alone.

The private sector will continue to take tolling risk, albeit with much more modest assumptions, but public contributions are likely to be required to make road tunnels in Australia’s capital cities economically viable.

While PPPs are a proven model to deliver major hospitals, such as Sydney’s Royal North Shore, Melbourne’s Royal Women’s, Royal Children’s and the new Bendigo hospitals, these projects have limited private operators to the delivery of cleaning, maintenance and hotel services. With spiralling health costs one of the major policy challenges facing Australia’s governments, this is a clear area where the established PPP model can be enhanced.

Western Australia delivered its Joondalup hospital through a PPP in the 1990s. That contract included the delivery of clinical services, meaning the private operator employs the doctors and nurses, as well as providing ancillary services. Joondalup has operated extremely well in terms of health outcomes and cost efficiencies, and it’s a model the WA government is keen to use for other health projects.

My government undertook a similar experiment with the mid-north coast Port Macquarie hospital but the outcomes were not as positive and it was returned to the public sector. But lessons can be learned from good and bad outcomes – and Joondalup shows sound outcomes can be achieved.

Queensland is taking a similar approach to core services with its Gold Coast light rail project, where the long-term operation is built into the PPP.

Through organisations such as Infrastructure Australia, Infrastructure NSW (of which I am chairman) and the Council of Australian Governments, it’s time for our politicians to retake the initiative in the funding, financing and delivery of infrastructure. Finding the perfect match between private finance and public infrastructure will require experimentation. Some projects will go well and others will go badly.

But Australia simply cannot fill the infrastructure void without a period of experimentation on more private investment in public infrastructure, not less.

And the public debate is better served by thoughtful contributions on the options and pitfalls, rather than blind ideological opposition.

Nick Greiner was NSW premier between 1988 and 1992. He is a patron of Infrastructure Partnerships Australia and the chairman of Infrastructure NSW.

The Australian Financial Review