Evaluating public private partnerships

Does using a Public Private Partnership to finance the North South Bypass Tunnel provide “value for money” or are taxpayers being taken for an (ideological) ride?

While it's accepted that financing for the North South Bypass Tunnel (NSBT) and other TransApex projects is limited by the extent of state and federal government purse strings and legislative constraints, shouldn’t we, as taxpayers, be concerned that the Brisbane City Council's (BCC) decision to use a Public Private Partnership (PPP) to build the former seems to overlook some inherent problems in that model, both in terms of value for money and the public good?

With this in mind, consider the following questions and caveats:

1) It’s generally recognised that Queensland has the tightest and fairest PPP guidelines in Australia. Unfortunately, this also means that the NSBT project might not receive any PPP-based tenders. Applicants might drop out of a scheme they find too financially onerous, as has already happened with both the NSBT and the South Bank TAFE (when two of three bidders called it quits) or, they might not make it through public sector comparator scrutiny in terms of “value for money”. Should that be the case, what’s the BCC’s fallback option? Is it considering one?

2) While the “Core Panel” recently appointed to scrutinise the two bids before them (one having left) seem reasonably broad-based, and non-ideological in a narrowish public service kind of way, should we remain worried that it doesn't have any representatives from the large and growing community of academics, economists, unionists or the likes of the RACQ, who would argue that PPPs should only be a last resort, not the first cab off the rank, as now appears to be the case? This question should be seen within the context of reports from Audit Scotland and the UK’s Institute for Public Policy Research (IPPR). The first warns, “Value for money assessments are subject to inherent uncertainty and subjectivity”, while the latter concludes, “there is (sic) substantial pressures on managers to ensure that the PPP options appear better than the alternative. Failure to do so will often result in the project being scrapped.”

3) Similarly, what's to keep public servants or politicians involved in PPP negotiations or judging the public sector comparator process from going to work for the winning private consortium immediately after the project contract has been awarded? Couldn't there be a two-year employment moratorium as is commonly imposed in the US Federal sector? This concern was recently driven home by ex-NSW Premier Bob Carr's joining the Macquarie Bank, and by a similar arrangement by ex-Victorian Treasurer Alan Stockdale.

4) Should the NSBT become financed via acceptance of a PPP based on projected tolling numbers, what is to keep the winning consortium from insisting, for example, the BCC not build the rest of TransApex if the competing arteries involved would diminish traffic flow on the NSBT, and therefore, their revenue?

5) Consortia involved in the packaging of PPP projects generally charge government 5-14 percent in fees or, in the case of the $1.3 billion NSBT, between $65 and $182 million. Is this expense factored into the project's announced cost and, if not, where will it be coming from and over what period is it to be paid? Should these fees be paid up front? Because what is to keep the packagers from walking away before the project is finished or during the mid concession period? Will they have to return the fees if, for example, a “strategic insolvency” takes place or prevarications are found in the prospectus used to attract investors?

6) Will agreements cap toll increases or will we be forced to suffer the double digit hikes imposed by PPP concessionaires in the rest of the world ... an average rise of 36 per cent in the last 18 months? Cases in point include the Macquarie Infrastructure Group’s (MIG) M6 Motorway concession in the UK, which saw tolls leap 17 per cent just 10 months after a 50 per cent increase, while its Highway 407 in Ontario, Canada, is about to greet motorists with a 13 per cent rise.

7) To what extent will the PPP have limits to returns on investment, particularly in light of MIG’s 18.5 per cent minimum return combined with no upper limit on its State Route 125 South toll road in San Diego?

8) Will the final PPP contract be made public as in Victoria or will this be a case of protecting a bad deal by imposing “commercial or cabinet in confidence restrictions”?

9) How might the BCC respond to the statement by the author of the Allen Consulting Group in its Property Council commissioned report, “Financing Urban Public Infrastructure”, that concludes “Our view, strongly stated, is that government should stop trying to flick its responsibilities through overly intricate arrangements such as PPPs”.

10) Melbourne's Mitcham-Frankston motorway is expected to cost $2.5 billion to build but may garner the PPP consortium involved between $7 and $10 billion in toll revenue over the lifetime of the contract, around $200 million of that in fees. Will we see an equivalent disparity with the NSBT should it be similarly financed?

9) As to the UK, which is often touted as a PPP model, is the BCC aware that during the last decade 256 projects worth $70 billion were built under this type of scheme, while the private partner received over $262 billion in payments? In other words, the private sector garnered $186 billion in revenues that might, otherwise, have gone into the public purse.

11) Is the BCC also aware that after 20 years of use, PPPs only account for 10 per cent of the UK's capital expenditure financing and this number is getting less all the time as the public becomes increasingly outraged at the abuses inherent in this option - witness the scandal over the Midlands M6 Motorway or the 407 in Ontario, where the provincial government had to take the Macquarie Infrastructure Group to court after “steep, unilateral, and venal toll increases”.

12) The BCC was able to successfully build, for example, the Inner City Bypass and the S1 Sewer ahead of schedule and or under budget via traditional DCM (design, construct and maintain) arrangements. Considering this track record, why isn’t this method being considered first, with PPPs/BOOT schemes only as a last or near last resort?

13) After running the business case for its duplicate Gateway Bridge through the public sector comparator process, the State Government found it wiser to reject the PPP funding option and, instead, rely on borrowing or budget surpluses. It has also chosen to bypass PPPs for 17 other projects once earmarked for this scheme. Why then, has it insisted the BCC use PPPs for a similar project, the NSBT? And even more importantly, when one considers the above, why has the BCC acquiesced?

14) Are Queensland’s PPP guidelines tight enough to allow the State a fair share in windfall profits, for example, to enjoy the benefits of refinancing or where patronage exceeds projection forecasts?

15) At the end of each PPP concession period the debt must have been fully amortised before being handed back to the government. If there’s a shortfall, theoretically the new owner must find the money to repay the lender. For example, one scheme concessionaire in NSW has allegedly increased its original debt from $311 million to $470 million and is repaying only on interest. Should they be in arrears at the end of the contract will the government (or taxpayer) be expensively left holding the bag ... or can it - or should it - bail out or renegotiate beforehand?

16) To what extent are future hikes in insurance charges included in the PPP contract, particularly relating to increasingly expensive terrorism coverage and residual liability?

17) One motorway concessionaire received more than 31 per cent of its total capital amount in public funds and, in this case, was in direct competition with state roads. How is this factored in regarding allocation of risk and value for money?

18) Finally, to support its decision can the BCC name even one PPP funded transport infrastructure, anywhere, that bested its DCM equivalent during the lifetime of a project in regards to innovation, allocation of risk and value for money - doing so without a state bailout or paying investor dividends via a tax offset? We can’t.

Lest the reader be left with the impression that King & Co is against private investment in infrastructure, that couldn’t be further from the truth. Our only concerns are when PPP schemes are used by Government to evade responsibility for infrastructure or when private greed dominates fair and open business arrangements ... with the public the loser in both cases.