(Australia) Public-private partnerships here to stay but reforms needed
THE flow of disastrous news surrounding the NSW Waratah train project has put the merits of public-private partnerships back in the spotlight, but despite the concerns, experts say the model will continue to be important in providing infrastructure.
PPPs, which account for about 10 per cent of Australia’s infrastructure projects, have made headlines with $440 million worth of major cost blowouts and delays.
However, Infrastructure Partnerships Australia chief executive Brendan Lyon said the PPP model would still be supported.
“There has been a range of studies done, based in Australia and around the world, that have looked at their cost and time performance and every single study has found quite comprehensively that the public-private partnerships have a lot to offer taxpayers and governments,” he said.
The success of PPPs was called into question this week when Downer EDI announced a second cost blowout, of $250m, to its NSW Waratah train project.
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The cost overrun followed a provision of $190m in June, taking total extra costs to $440m.
The agreement, signed with the NSW government in 2006, is a fixed-price $1.9 billion contract that requires Downer — as part of the Reliance Rail consortium — to deliver 78 train sets, the equivalent of about 626 carriages.
The cost delivery of the first train has been delayed by up to 14 months and the scheduled date for full delivery has been pushed out by more than a year.
The market severely punished Downer for the Waratah blowouts, with its shares down 20 per cent on Thursday, but Mr Lyon said the PPP model meant taxpayers were not affected by the overruns.
“Under a traditional model, there would be no accountability for the project running late. Under a PPP, the risk has been transferred away from taxpayers.”
Waratah was the first PPP for rolling stock in Australia, and hard lessons will be learned on the failures of the contract.
“In future PPPs for rolling stock we’ll see a move away from input specifications, which we saw with Waratah, where the government specified the design of the train,” Mr Lyon said.
The ringing endorsement of the partnerships and the benefits to taxpayers is in stark contrast to investor losses on PPPs.
Investors took a bath, for example, on Brisbane’s Clem7 tunnel, Sydney’s Cross City and Lane Cove tunnels and Melbourne’s EastLink.
RiverCity Motorway, owner of the Clem7 tunnel, has run into financial difficulties because of low traffic volumes.
Leighton Holdings has also felt the pinch of overruns on PPP contracts it is involved in, with the Brisbane Airport Link forcing it to order writedowns.
Leighton deputy chief executive Bill Wild said the PPP economic model needed to evolve.
“In particular, there needs to be greater sharing of risk in order to increase the willingness of the private sector to participate in PPP projects,” he said.
Options to reduce risk included larger upfront government contributions, wrapped funding so government underwrote liquidity, partial underwriting at the bid’s close, and sharing of the economic risk.
The model had to evolve, but there was still value in PPPs, he said.
“Where many PPPs have been controversial or have suffered financially, projects built under that model are still valuable additions to the physical infrastructure of our communities,” he said.
“PPPs such as the Alice Springs to Darwin Railway and the Cross City Tunnel in Sydney are just two examples of PPP projects that have greatly contributed to the national infrastructure.”
Even opponents of PPPs note the benefits of the partnerships in Australia, which is seen as a mature PPP market.
In the aftermath of the global financial downturn, when most countries struggled to recover, Australia announced the Victoria desalination plant PPP — the world’s largest contract of that type after the crisis hit.
Brad Vann, a partner in the major projects practice at Clayton Utz, said governments still had to deliver complex infrastructure projects, regardless of opinions about PPPs.
“The private sector, because it is motivated by something other than good public policy, is prepared to make tougher decisions and act more quickly to get outcomes,” he said.
“Even though there might be criticism of PPPs at the political level, at the project level, you still get the project delivered.”
Mr Vann said there had been more successful projects than failures — as in projects not delivering the outcomes the private sector expected.
Allens Arthur Robinson partner Phillip Cornwell said PPPs provided value for money, because the private sector was generally more efficient at delivering projects.
“There is fierce competition among the private sector to win PPP projects, which helps to ensure that the state gets value for money,” he said.
“There have been several studies done that have shown, time and again, that the on-time completion rate of PPPs is way ahead of more conventional government procurement.”
Mr Cornwell said all construction companies had to be sensitive about risk, and the tension with PPPs was that they were a competitive process, so the private sector did not always get it right.
“We have seen some problems in the development phase of some PPPs, but as a general rule the problems have been faced by the private sector builder rather than the government granter of the concession,” he said.
One PPP sector all industry experts agreed was in need of an overhaul was the toll road model, under which the private sector took all the risk concerning traffic volume.
This had led to severely negative impacts on the private companies involved in PPPs when traffic flow had been less than anticipated.
“The toll road model for a PPP, where the private sector is taking a risk on traffic forecasts, is not viable currently,” Mr Vann said.
“We may see situations where the private sector shares the traffic risk with the government on road toll PPPs.”
Infrastructure Australia’s Mr Lyon said there would be reform of the PPP model for toll roads because of the negative experience of several projects.
“Unless we tweak the way that we allocate tolling risk, at least in the early years, then we won’t see a sufficient level of competition,” he said.
The model needed to change to allow new toll roads to be built in Sydney, Brisbane and Melbourne, he said.
With a few tweaks to some models and the evolution of others, Mr Lyon said, PPPs would continue to be the most efficient model to harness private capital and innovation.
“When you have a $700bn backlog of projects in Australia that need to be done and you are in a world where there are stretched government balance sheets, it means PPPs are really here to stay and will continue to be an important part of the way governments deliver infrastructure projects,” he said
SARAH-JANE TASKER |From:The Australian |January 29, 2011