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PPP has never been more necessary

By Brad Vann - posted Tuesday, 18 January 2011


The Public Private Partnership model or, more accurately, private sector participation in infrastructure projects, has been much maligned.

This has been particularly so in these recent times of global financial turmoil.

Much of the criticism of PPPs has been based on false assumptions and, in many cases, the misguided view that the private sector has no business participating in, and generating a return from, infrastructure projects.

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Certainly, the question of exactly how Australia will fund its future infrastructure needs remains a vexed one. In June last year, the Commonwealth government's independent body Infrastructure Australia announced its priority pipeline of infrastructure projects at a capital cost of about $82 billion.

The unfolding devastation being wreaked by the recent floods in northern Australia exacerbates the challenge as governments will also be faced with the massive task of rebuilding damaged infrastructure.

The money is going to have to come from somewhere.

A recent report by the Western Sydney Regional Organisation of Councils (WSROC) suggests that the answer lies with our governments -- and a change in their attitudes towards infrastructure investment.

The report's authors argue that Australian governments have become too interested in lowering their debt levels and maintaining AAA credit ratings, to the detriment of public investment in infrastructure. They argue that governments (in particular the NSW government) should cease to rely so heavily on private investment and instead, must begin to borrow to fund infrastructure albeit in a measured, prudent way, and ideally under the advice of an independent expert statutory body.

To the extent the WSROC report recognises that private investment alone will not be enough to deliver on Australia's ambitious infrastructure program, it is a welcome contribution to the infrastructure debate. But in calling on governments to bear the financial burden of our nation building, the report's authors fail to acknowledge that private sector investment and participation will not only be critical to governments' ability to deliver first-class infrastructure within relatively short timeframes, but also the value that private sector participants bring to infrastructure projects that governments alone cannot.

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One of the major criticisms of PPPs is cost. Critics argue that it is cheaper for governments to go into debt to fund infrastructure because they can borrow at a lower cost than the private sector.

But this doesn't mean infrastructure can be built by governments at a lower cost. In fact, PPPs have proven to be more cost-effective than traditional models in their ability to enable the delivery of infrastructure on time and on budget.

A December 2008 University of Melbourne benchmarking study serves to highlight this. Comparing the performance of 25 PPP projects and 42 government-owned and funded projects throughout Australia since 2000, it found the average cost escalation under PPP contracts during construction was 4.3 per cent compared with 18 per cent for traditional procurement contracts.

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This article was first published on The Australian on January 14, 2011.



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About the Author

Brad Vann is a partner in the major projects practice at Clayton Utz.

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All articles by Brad Vann

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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